Stargazing at the yellow earth
Cave culture strikes entrepreneurship
Author: Zhu Haijiang (Professor, Zhejiang Gongshang University)
Source: This article is the translator's foreword to the book "Austrian Investment", recently published by Chinese Minmin University Press
Investing has become an important skill for ordinary people in modern society, as everyone faces the question of how to protect their hard-earned wealth. In the era of inflation, in the face of the erosion of inflation, savings can no longer protect wealth, and it is not easy to avoid wealth being "plundered" by inflation. In the era of rapid credit expansion, many people will choose to buy a house to preserve value, basically buying a suite of wealth will increase in value, but such an era has passed, wealth preservation and appreciation has become a very difficult thing. In this case, the only thing that ordinary people can rely on to protect their wealth is professional knowledge. This book provides this expertise, both in economic theory and investment practice.
1.
On the issue of business cycles,
The Austrian school had a very large theoretical advantage
There are many books on investing in the market. This book is unique in that it links investment and economic cycles, which is emphasized by the book's subtitle. As many friends engaged in investment recognize, the key to investment is to grasp the changes in the economic cycle, big money is earned by seizing the cycle, and only small money can be made by labor. Therefore, the ability to grasp the cycle becomes the key to determining the success or failure of investment. Knowledge of the business cycle and understanding the cyclical changes in the economy are prerequisites for making the "right" investment.
This book is designed to help readers understand economic phenomena, especially economic cycles, so that they can make better investment decisions. The economic cycle is an economic or financial phenomenon and an important issue in economic theory. On the issue of business cycles, the Austrian school has a very large theoretical advantage. As the economist Professor Huang Chunxing pointed out, the Austrian school began with finance, and Mises's earliest work was "Money and Credit Theory". The Austrian school traces the problem of the business cycle to money, and then traces money to marginal utility theory, thus linking the business cycle with the most basic economic theory, so that the investigation of this problem has a solid theoretical basis, which is different from other schools of economics, such as Keynesian economics or monetary school, which mainly examine this problem at the empirical level. The difference between theoretical knowledge and empirical knowledge is that theory provides exact or general knowledge and is principled, while empirical knowledge is not general, which is why the cycle theory of the Austrian school is relatively more important.
The Austrian school emphasized the "causal-realism" approach. This methodology means that it pursues definitive knowledge, not unrealistic or illusory knowledge, which is exactly what investors need. "Investment" is human action, and human action requires the use of knowledge about cause and effect, because such knowledge determines people's knowledge and understanding of the world. Successful investments are required with the right understanding, and achieving the right understanding requires the use of the right knowledge. Without such knowledge, investment becomes blind behavior, becomes a stroke of luck, or, like some people, tries to base investment behavior on the policy intentions of the government (including central banks such as the Federal Reserve), which brings great risks to investment. Exact economic theory provides the exact knowledge that makes actions more reliable, thereby increasing the chances of successful investing. It can be seen that the author places "investment" in a more solid intellectual context of an important intellectual tradition, namely Austrian school economics, which will make investment scientific and make investment a real science.
In this book, such knowledge includes three aspects that are related in order, namely Austrian economic theory, investment philosophy, and investment practice. The author gives the basic principles of Austrian economics and the principles of investing based on them. This raises investment to a higher level of thought and philosophy, rather than just treating it as a purely technical question.
Starting with the economic theory of the Austrian School, investment is a more "roundabout" way to expound. Similar to the production process, roundabouts can increase productivity, and the same is true for a topic discussed. In this book, the economic theory of the Austrian School emphasizes the economic cycle, while also discussing the content related to money. In the book, the author describes the "monetary revolution", simply put, the "revolution" in which currency replaces real money, which constitutes an important feature (in the negative sense) of capitalism, and the impact of this "monetary revolution" can be compared with that of the industrial revolution. It distorts the structure of production, creates economic cycles, leads to inflation, alternates stagflation with recession, and so on. Modern macroeconomics is mainly an update and iteration of the three models of boom, stagflation and recession.
2.
Explain the economic cycle in terms of money and production structure,
Reveal the logic behind it
It can be said that understanding money is the starting point of investment and the prerequisite for understanding today's society, because important economic and political issues can be traced back to money. Today, the money people use is made up of non-cashable paper money, which is also known as fiat currency and belongs to the substitute for "money" (cashable), rather than the real "money". Investments are made against the backdrop of the widespread use of this currency. This currency is injected into the economy in a forced way, causing great disturbances to the economy, and also bringing opportunities and risks to investment, and the source of economic cycle fluctuations is in the fiat currency. The author elaborates on the currency issue in depth, which is necessary even for readers who do not intend to invest. A unique point of knowledge about money that is ignored by traditional monetary theory but important for investment is the cumulative effect of money. It refers to the fact that when the accumulation of money reaches a certain threshold, the trend of inflation or deflation accelerates, and the accumulated energy is released in a form similar to a volcanic eruption or earthquake, like "crustal movement". Of course, investors can't predict when the cumulative effect will erupt, but be prepared for it.
Uncashed banknotes lead to inflation, which in turn distorts the structure of production, and the distorted structure of production leads to economic cycles, which is the basic logic of the Austrian school of cycle theory. The emphasis on the structure of production and the use of the structure of production to explain the economic cycle is the unique feature of the Austrian school cycle theory that distinguishes it from other cycle theories. The Austrian school's idea of production structure is embodied in Menger's theory of higher and lower goods, as well as in Böhm-Bawerk's concept of roundabout production, and even more embodied in the "Hayek triangle". This book uses the Hayekian triangle to illustrate how inflation affects the structure of production. The idea of production structure not only provides a powerful explanation of the economic cycle, but is also very important for investment. Because a key to investing is to grasp the structure of different commodity price changes in the cycle and adjust to this change.
For example, the author even gives some specific suggestions on how to choose stocks according to economic cycles as a question of "production structure." For example, the authors recommend that investors reallocate their money to companies in the consumer goods sector at the end of the stock market boom, as these companies tend to be less affected by capital market adjustments. In addition, in general, before the bear market ends, minimize the allocation of funds to equity investments and convert funds into cash or bond investments. For example, according to the Austrian school of cyclical theory, in the process of inflation, the price of capital goods often precedes the rise in the price of consumer goods. Views like these are valuable for investors.
Explaining the economic cycle from the perspective of money and production structure reveals the logic behind the economic cycle. Keynesian economics or the monetary school, by contrast, views the business cycle more as an empirical problem, such as the result of the Fed's monetary policy. These two different understandings also have different meanings for investment. According to Keynesian economics or the monetary school, investing is primarily about looking at policy, especially the Fed's decisions, and then making empirical judgments. The cycle theory of the Austrian School, because it does not stop at the empirical level, but reveals the essence or principle behind the phenomenon, can help investors judge the cyclical changes of the economy in advance, and even judge the response measures that the government will take, so that investors can be one step ahead. Of course, this does not mean that there is no need to focus on policy, but that such a theory can wean investors largely off their dependence on policy signals.
3.
A model of combining theory and practice
This book not only gives the economic theory required for investment, but also gives the concept and practice of investment, which can be called a model of combining theory and practice. Although there are only chapters 8 and 9, the introduction of investment philosophy and practice occupies nearly half of the book. The authors distinguish and examine the use of five assets: hoarding, investing, spending, endowments, and speculation, and give them what they consider a suitable portfolio. 30% of funds are used to hoard liquidity; 30% of the funds are used for capital investment (machinery, tools, shares of enterprises, real estate rental, etc.); 30% of the funds are spent on the purchase of consumer durables (own property, art, high-value household goods, etc.); The last 10% goes to the endowment fund (purchase of shares in enterprises involved in charitable, scientific, peace promotion, cultural and environmental projects). This combination is very valuable to investors. The author also gives advice on how to allocate funds: divide the investment funds into three parts, and use the first one when everything around is peaceful and stable; The second tranche of funds must be used with sufficient caution and conservatism; The third fund can only be used when the "red alert" is sounded.
The authors also give general, i.e., universal, advice on investing. The author believes that anyone with debts should not take further investment activities, and there is only one recommendation for action for such people: repay the debt as soon as possible! The authors believe that making investments as independent as possible from a specific event can diversify risks and obtain stable returns. In this regard, the authors give investors a very valuable "permanent portfolio": gold, cash, stocks and bonds, each with a 25% weighting. These suggestions are almost immediately available to investors.
In terms of investment practice, the author tells investors in great detail how to choose assets and the characteristics of different assets in different external environments. In this book, the author details the characteristics, investment principles and applicable situations of each investment vehicle. These investment vehicles include portfolios, stocks, bonds, precious metals, mutual funds, options, hedge funds, digital currencies, regional investments, and microfinance.
Currently, "value investing" is a popular concept. The authors also offer their own unique insight that the paradigm of value investing is largely consistent with the Austrian approach. The core of value investing is to determine the basic or "intrinsic" value of a company and discover the difference between the intrinsic value of the company and the market price. An important aspect of value investing is systematically investing in undervalued assets. So how do you find undervalued assets? The authors give 10 criteria for selecting stocks with investment value. The authors also argue that value investing needs to focus on two characteristics at all times: robust debt metrics and strong value orientation. The list of similar investment advice in this book is endless, and it is of great practical value to investors.
This book is a rare work for both readers who love economic ideas and professionals engaged in investment. As the author states in the introduction: "This book is by far the most comprehensive attempt to be made in this regard. To do this, we often shuttle back and forth between theory and current practice. "This book also makes a powerful case that successful practice—whether it's individual investment or the economic development of a society—needs to be backed by strong theory. Investment or economic development, as an action, is first and foremost "theoretical", because action is guided by theory, and the Austrian theory is the appropriate choice, as Prince Philippe of Liechtenstein said, which helps us to see a "long-term pattern". This "long-term model" can be seen as a "benchmark" and thus constitutes a corrective approach. Whether it is an individual or a society, deviations may occur in the process of development, so it is very important to have the ability to correct deviations, which requires understanding the "long-term model". This great value of the Austrian School also refutes the idea that many people have long believed that the Austrian School is only "conceptual" and of little use in guiding practice.
But it should be noted that there is no "treasure book" for investment, and this book is not such a "treasure book". The author reminds readers to be humble at all times. As the author suggests, studying Austrian economics does not guarantee that you will become a good entrepreneur or investor, nor that you will necessarily have the acumen to invest. Because entrepreneurship or investment acumen is a gift and intuition, theory comes third. The authors acknowledge that Austrian economics can only make a "relatively small" contribution to improving people's understanding of current economic events and making better investment decisions. The author's attitude of acknowledging ignorance and maintaining humility is worth learning from every reader.
Written by a theorist and three investors, this book is an example of an interdisciplinary, multidisciplinary (economics, finance, psychology, history, etc.) that greatly enhances our understanding of the real world and gives us practical help. The specific aspect of this help, in the words of the author, is how to rely on your own strength to do things well, accumulate and protect your wealth, and become an actor who combines theory and practice, a visionary entrepreneur.