Investment Timing and the Business Cycle (Frontiers in Finance Series)

Rating:
Summary: Founded on a misconception
Review: The purpose of the book is to set rules for successful market timing according to the stage of the business cycle. The attempt is misconceived and the result is likely to damage the economic well-being of anyone who puts it into practice.

It is one thing to say, uncontroversially, that financial asset returns are affected by business conditions. It is even plausible to say that, in certain limited respects, financial asset returns follow predictable patterns (such as return to size, or price-to-book ratio) that are not encapsulated in the standard framework of the semi-strong form of the Efficient Market Hypothesis. But the suggestion that one can derive accurate forecasts of financial asset returns from a knowledge of the business cycle (even supposing, mirabile dictu, that it is possible to forecast the business cycle) is plain wrong. Financial theory, which is largely borne out in statistical tests, stipulates that expected returns on particular assets are equal at any stage of the business cycle once you have adjusted for risk. It is shifts in *expectations* for business conditions, and hence for the net present value of future earnings, that determine asset returns, not shifts in the conditions themselves. There is such a thing as the business cycle, and there is such a thing as the interest rate cycle, but there is no such thing as an equity market cycle. Equity prices don't go in cycles.

The entire premise of the book is thus a mistake. Basing your investment decisions on a mistake is never a good idea, and basing market timing decisions (in which, because you have to time your investment behaviour correctly on two decisions - when to get out of an asset *and* when to get into an alternative asset) is an exceptionally risky strategy to found on a mistake. I give this book two stars, because the discussion of the economic indicators themselves is well-presented an informative - but as an investment book, this fails. Much better to follow the advice of Burton Malkiel, in A Random Walk Down Wall Street, or Charles Ellis, in Investment Policy.

Rating:
Summary: A superficial survey of US investment returns since 1975
Review: This book isn't worth the money. The only Frontier in Finance that I went through was my sense of value for money. I can't believe I paid US$53 inc. postage for something so superficial. Anyone who works in the dismal science or financial markets will learn nothing from this book. It's little more than a survey of US investment returns from the mid-1970s. Non-US markets get scant attention and the chapters on bonds are wearisome.

In any case, anyone running a portfolio should know by day two that commodities, cash, bonds and equities perform differently at different stages of the business cycle - and, more often than not, in ways that most people don't expect. Often, but not by any means always, it's the information that isn't publicly available that drives relative asset prices. Investors caught up in any of the recent Emerging Markets crises now know this only too well.

Taylor's main audience seems to be the small time investor who punts US stocks - i.e. the type who thinks that equities actually make you richer without upping the stakes. But that type of investor is normally into momentum trading and that has nothing to do with business cycles.

Sadly, it is rather hard to see how the information in this book would be of any value to ordinary people. Explaining economics and the meaning of economic statistics to small time punters is often like trying to teach Americans the rules of cricket.