Substrat: exploit systematic edges via indirect, roundabout gains through time
“Don’t just do something, sit there.”
Austrian KPIs:
Mises Stationarity index (or Tobin's Q) = present value of cashflows (= market value) / replacement cost of cashflows (= book value)
specific definition: total U.S. corporate equity / total U.S. corporate net worth
ROIC = EBIT / invested capital (operating capital required to generate that EBIT)
high ROIC firms have greater increases in invested capital (suggests more complex/roundabout capital structure)
„Siegfried“ = company with ROIC > 50%
Faustmann ratio = market capitalization (of common equity) / net worth (invested capital + cash - debt - preferred equity)
Investment strategies (intermediate advantage for final objective)
Misesian investment strategy: buy/sell when MS index is low/high (author's data scan: historically high/low was 1.6/0.7);
when selling, buy rolled one-month treasury bills until MS index is low again
more than 2% outperformance to long index over time with avg. underperformance duration of 3 years
Austrian Investing I: 99.5% long + 0.5% rolled 2-month extremely out-of-the-money puts in S&P Composite Index
advantage: no period of being uninvested in stocks; disadvantage: highly illiquid puts
exploit opportunities across time
Austrian Investing II: identify high ROIC firms with low Faustmann ratio
possible: insiders know something we don’t for a particular company; but in aggregate,
more likely that others have more immediate time horizon
„Each month I purchase the lowest Faustmann ratio firms among those with recent ROICs above 100 percent
(with further screening for size and liquidity), and I turn them over as they eventually fail to meet our criteria
(checking each year).“
exploit opportunities cross-sectionally at the same point in time
Mises’ picture of highly industrialised economy: many well-formed embedded circles,
with a width that represents the magnitude of the asset classes that built over time
capital structures are autocatalytic (what came before leads to & is contained in what comes next)
angiosperms vs. conifers
angiosperms' immediate high growth is end
conifers' growth as means to end: slow initial buildup (develop strong roots, thick bark), then explosive growth (relative to angiosperm)
small natural wildfires destroy with precision („agent of creative destruction“), great unnatural fires indiscriminately