The castle-in-the-air theory was practiced and preached by the famous economist and investor John Maynard Keynes.
Playing the market from his bedroom for around half and hour every morning, it earned Keynes millions of pounds and a tenfold increase in the market value of the endowment of his college.
So what exactly is this theory?
Well, the castle-in-the-air theory is a method of investing which takes a psychological perception of the stock market rather than a fundamental one.
Focusing on how a crowd of investors is likely to behave in the future and how during periods of optimism they tend to build their hopes in to castle-in-the-air.
The canny investor attempts to estimate what stock will be the most prone to public castle-building and then buying before the crowd.
With regards to what will influence future earning prospects and dividend payments, Keynes famously said, “many persons are largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public”.
Keynes in other words was reluctant to apply financial evaluation to the study of the stock market rather he applied psychological principles.
Keynes in more recent times has gained favourable acknowledgement from investors the like of Warren Buffet and George Soros for his investing record.
He outperformed the British equity index by an average of 8% a year for over a quarter of a century.
The castle-in-the-air theory is definitely worth a consideration for the savvy investor with a shrewd attitude.
