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Source link: http://archive.mises.org/9202/is-there-such-a-thing-as-austrian-investing/

Is There Such a Thing as Austrian Investing?

January 7, 2009 by

Equity markets have collapsed in value, bond yields are off, real-estate markets are (in many places) in a state of disarray, monetary devaluation through government inflation is a constant dilemma, bailouts occur weekly, and wars and rumors of wars seem to lurk in the distance. Investing of any sort is enough to make one’s stomach turn in times such as these. The hole in the backyard and that spot between the mattresses keeps looking better and better. FULL ARTICLE


Paul January 7, 2009 at 9:44 am

Harry Browne advocated in “When the Best Laid Investment Plans Usually Go Wrong” to have an equal amount invested in each of these four areas: gold, stocks, high quality bonds, and US treasuries. That way you can be prepared for both inflation and deflation.

That was written in 1987. I would advocate an equal amount in three areas: gold, US treasuries, and strong foreign currencies such as the Swiss Franc.

Justin January 7, 2009 at 9:46 am

I feel compelled to comment since it was Taleb that led me to Austrian Economics. Taleb in “Black Swan” wrote one thing that destroyed my faith completely in modern economics — all data sets are inherently incomplete. That statement alone invalidates most if not all of econometric methodology and economic empericism. And it makes sense, you can’t account for things that you haven’t measured and by extension you can’t measure the potential futures that never occured. As I read Hazlitt’s “Economics in One Lesson”, the same thought comes to mind: you can’t observe what never occured [the opportunity cost of your decisions].

Personally, when I think about how much money the Fed is dumping into the market and how an acute inflationary event will affect my overall wealth, it’s difficult to think of an investment that would take advantage/not destroy my wealth. Someone will invariablly say TIPS, but I think the government lies about the nominal level of inflation anyway. Buying call options isn’t a terrible idea when you think about the risk-reward payoff. If you have a 99% chance of losing $100, but a 1% chance of gaining $10,000, you’d be indifferent to making the bet. But then consider that you have a 1% chance of gaining $10,000 and a .5% chance of gaining $100,000. That’s the point of the power law. That tells you options trading wouldn’t exist under real money, but we are living under a fiat money regime where that’s capable of existing.

Byzantine January 7, 2009 at 10:05 am

Putting money you can afford to lose in high-risk/high-return investments is hardly a new idea and there’s nothing inherently wrong with it so long as it doesn’t dominate your thinking. While Taleb is rounding up the pigs and the royal retinue for the Great Truffle Hunt, Buffett and all the other boring Graham-Dodd investors can make money off all those mushrooms popping up out of the ground.

Also, Taleb is really looking at things from the wrong end. The housing bubble, for example, was entirely predictable as more and more people to the left of the Bell curve in the sand states were given mortgages they couldn’t possibly pay off, and competitive pressure among brokers inflated the bubble in the other direction too. Now, people like Taleb and Malcolm Gladwell would say this is great policy having turned up dozens of those “truffles” that so tickle the palate of the politically correct gourmand: wealthy, high IQ Mexican immigrants, just like that one they work with, and never mind the hundreds of thousands clustered several deviations below. “Outliers” and “Black Swans” are the thing, see.

Meanwhile, folks like Steve Sailer look at the data and conclude we aren’t making much of anything, we just shift lots of money around, and the place isn’t exactly filling up with biochemists and mechanical engineers. Just the opposite actually, so this thing is bound to crash. And crash it did, entirely predictably. Only clueless, politically correct buffoons like Taleb and Gladwell were shocked, shocked that homes in Compton weren’t worth $300K.

Lucas M. Engelhardt January 7, 2009 at 10:11 am

Question: how does Taleb’s strategy perform?

My experience with options is that it’s hard to make money with them. Though I did make some pretty big errors early on, and was using more conservative strategies (selling covered calls – high probability of small positive return, “low” probability of large negative return.). Could be that a straddle sort of approach might work better.

Byzantine January 7, 2009 at 10:13 am

Also, a lot of these same ideas appear in Burton Malkiel’s A Random Walk Down Wall Street.

Miklos Hollender January 7, 2009 at 10:50 am

Very good topic!

I think you can easily invest into ABCT: when the boom begins find out the current government-backed bubble, or just invest into capital goods in general, ride it to the top, when you hear the first doubts from Financial Times etc. that perhaps this may be a bubble get out and get into gold, and repeat it.

Mark Skousen wrote Austrian Economics for Investors – I was a subscriber for his Forecasts and Strategies but cancelled it because I found him too optimistic, too bullish about the current crisis. Last summer he was still convinced it’s just a fairly minor problem and the economy will be OK and stocks will go up. WTF.

Another Austrian-econ investment advisor is Peter Schiff, but I think he is the other extreme, he is predicting Armageddon, too pessimistic.

I think the current crisis isn’t just a normal recession but isn’t the end of the world either, nor 1929. It’s largely the Panic of 1873. Same stuff, look it up.

Inquisitor January 7, 2009 at 11:07 am

There’s Jim Rogers too BTW.

William January 7, 2009 at 11:44 am

Passive investing isn’t just about “diversification,” it’s about cost savings. The people who make money consistently on Wall Street are the brokers and traders who work in the financial industry, not the ordinary people buying and selling stocks or bonds or options or whatever. Passive investors tend to accept the efficient market hypothesis (if options are such a great investment, everyone will get into them, reducing their return), and thus argue that in a zero-sum game, reducing costs is the only reliable way to increase returns.

Yes, the future is uncertain, and it’s impossible to know what assets are going to do well. Diversify to reduce your risk (Harry Browne’s permanent portfolio is a good place to start), and do everything possible to cut your costs, because that’s the only thing you can control. Look up some of John Bogle’s speeches or books for more on this idea.

Joe Stoutenburg January 7, 2009 at 12:52 pm

I think that a more Austrian approach to investment would be entrepreneurial. That is, develop an expertise in the production or marketing of widgets. Forecast the market for your expertise (yes, forecasting is difficult, but entrepreneurs don’t throw up their hands and not do it), and make a go at providing a product or serve that people want. Alternatively, if you have expertise in an industry and capital to deploy, you judge among the various firms and individuals in the industry and fund the ones most likely, in your judgement, to succeed.

The problem in our capital markets is that entrepreneurship has largely gone by the wayside. Even professional money managers rarely get into the nuts and bolts of making widgets. Instead, they look at financial statements. Meanwhile, insider trading laws try to place everyone on the same footing regardless of expertise.

Market prices move like they do because few investors have the first clue of the businesses in which they are investing. They generally go up to the extent that business entrepreneurs are creating value. However, when it becomes clear to the uninformed masses that things aren’t as good or as bad as thought, they can change quickly.

I believe that large shocks would be less prevalent (though not unheard of) in a freer market. Absent insider trading laws, investors without insider information would lose their shirts. It would be unheard of to trade without insider information. And so the people who actually know what’s going on would be directing capital. In such markets, people playing Taleb’s game would lose their lunches more frequently.

charleydan January 7, 2009 at 1:04 pm

In a way, I believe there is. Elliott Wave Principles.

The difference being an analyst looks to fundamentals which are hard to get all the facts to calculate. Or looking at the chart with the facts factor in for analysis. The human nature parts seem to go hand in hand from both groups.

I prefer the basics of Elliott analysis and not all the modern research that misleads one away from Austrian.

Of course this EW fan investor believes like Schiff, Clente, and Pretcher, that the ride will be wild.

Byzantine January 7, 2009 at 1:18 pm

Investing is a matter of accounting and business analysis that has very little to do with economics of whatever school. Perhaps it might be relevant in currency arbitrage but I think it’s still way too general to be of much guidance.

Short answer, no.

mark z January 7, 2009 at 2:27 pm

Diversification is not diametrically opposed to value or growth investing in and of itself – as to whether or not to use diversification or concentration is mostly a matter of personal preference.

Index funds are not Austrian by nature, as they are a product of the Efficient Market Hypothesis (strong version) of the Chicago School and the same has come out and said the data does not support the hypothesis – that the market in the aggregate must know more than the individual and therefore no individual can consistently beat the market.

Surely, Austrian principles can be a help in investing. Warren Buffett’s success may be regarded by some (me, for example) as simply demanding a very deep discount in the present at the future value of money, and buying accordingly, a margin of safety being built in buy demanding a low price.

Too, with the Austrian understanding of the business cycle and the impending government intervention in the money supply, it should not be too difficult to determine who will benefit first from the cheap money and who will be left to suffer from the inflationary effects when they will be felt two or three years down the road, and again, invest accordingly.

The Austrian approach I would imagine would not be too keen on simply shotgunning into gold/stocks/bonds/treasuries/commodities/derivitives/cash. With a better sense of what the economy is really going to do than the average bear (no pun intended) I would say the Austrian investor would tend to take advantage of that knowledge and put it to good use, while being alert to how any change in the current situation would effect future results and quickly adapting before the non-Austrians take notice.

Ireland January 7, 2009 at 3:16 pm

There are several nice advantages for the Austrian investor. He knows where the wealth comes from (wealth generators) and how is it possible that the real improvements happen (increased investment enabled by savings, innovantion, rule of law, …). He understands the role of capital, and the tricky thing of it not being all equal.

He is also aware of the existence of Ponzi schemes, that promise returns just as investment into genuine wealth generation, but all they in fact deliver is consumption of the capital provided. When the time comes they inevitably fold, leaving their believers hosed, be it Fractional Reserve Banking, Social Security, or Madoff “Investment”.

All this knowledge is pretty strong. When compared to the “animal spirits”, “inevitable crisis” and other nonsense offered by mainstream “economists”, it’s definitely better foundation for confronting the unknowns of our future.

Eric January 7, 2009 at 4:46 pm

How is the options strategy mentioned any different than betting the lottery or playing keno in Vegas? It’s a long shot, with a small downside loss per bet that sometimes pays off big.

For the Harry Browne strategy, one can look at the mutual fund, prpfx, which is close to the 25% for his 4 areas. It mixes one quarter with gold/silver, and for cash has some Swiss francs.

As for using Austrian principles for investing, I can say that twice I made large moves in my pension funds based on information I read here (both the dot com and housing bubbles were warned about here). But the timing wasn’t all that accurate. However, I did get lucky because I paid attention to this article, at least:


I love to go back and read predictions. Contrast this story, by George Reisman with some of the rantings of say, Krugman.

For example,


where Krugman writes that all economists were blind sided by the bubble, even though the numbers were there in “real time”. Krugman obviously never reads mises.org.

fundamentalistr January 7, 2009 at 5:13 pm

I was reading something by Hayek in 2007, “Prices and Production” or “Pure Theory of Capital,” when I read something to the effect that high profits in retail are a sign of the end of the boom because the price of labor is falling relative to the price of output. That change in the relative price of labor means businesses will switch to using more labor and fewer capital goods. That’s bad for the capital goods industries where most of the employment is. So I got out of stocks and into cash. I got out before the top of 12,000 on the Dow, somewhere around 10,000, but thanks to Hayek my savings were spared the big bust.

If investors did nothing but avoid the big busts in the stock market, they could double their returns. The ABCT is a fantastic guide. But we can also use the ABCT to invest in SPDRs or ETFs in the capital goods industries in the midst of a bust like today. Relative wages and prices should tell you when to get out of those and into consumer goods. Then get out of stocks all together before the bust and into bonds, which should grow in value as interest rates fall.

If you have more nerve, you could try buying puts on stocks before the bust. Although I understand the real money is in writing the options, not buying them.

Pete January 7, 2009 at 5:39 pm

The article completely misunderstands Austrian economics and the future. Every day acting man must make predictions about the future. If the future were unknowable, how could you possibly run a business? Every entrepreneur makes forecasts in order to run a business.

The investor is simply an entrepreneur. He allocates capital in a way that he sees he will get the most return. Just as in business, there are many different ways to make money through investment. Similarly, one must know their strengths and skill.

Some look at the price of the business and examine if it will be revealed to be more valuable in the future. Some lock into short term trends and attempt to profit from them regardless of the ultimate fate of the underlying security. Others simply look at chart patterns. The good investor knows what ways will work for him, and sticks with them. And also knows when to outsource.

The simplest strategy is to buy some of everything and assume that it will grow with the economy. If you believe you have no investment skill, clearly this is the best route. However, there clearly exist better managers that can outperform. Just as there exist superior business men. To doubt this is foolish. To doubt your ability to select such people to handle your money might not be. Further, if you are confident in your own ability, invest directly yourself. However, assuming your part time investing will outperform a full time professional is a some what of a leap. Clearly you might outperform, your costs would be lower. Personally, I don’t fix my own car, nor build my own TV set.

In investing, Austrians have an edge going in, as they actually understand how the economy works. However, there are far more skills involved. Thus, Austrian economics does not provide an edge immediately. As evidenced by this article.

If one is interested in Austrian investing, one ought to look into Victor Sperendeo, who is both an Austrian and a successful money manger. His hedge fund was actually UP in the past year.

On a further note, while options are most certainly useful investment tools, just owning options and cash is hardly a smart strategy. For one, risk and return are far less correlated than academia would have you believe. Also, if you understand the options market, you realize it is negative sum. That is, if you invested in all options contracts via some sort of insane index, you would lose money due to expenses. Generally, negative sum markets are places only the brightest ought tread. Forex has similar issues.

Austrian investing, is not unlike Austrian shopping, or Austrian working. Use your understanding of the world, founded in Austrian economics, and your own knowledge. My suggestion, if you do not find yourself sophisticated at all, ask your friends, find a financial advisor you trust and charges reasonable prices or put your money in index funds in an allocation more conservative than you believe yourself to be. Division of labor is still a decent idea. If you are more sophisticated, but don’t have a lot of time, invest for yourself, with a foundation of no load active (that you have researched) and index funds through a low cost online broker. Adding in individual stocks or more active trading on your part to whatever level you feel comfortable.

Look forward to my forthcoming article, “Is There Such a Thing as Austrian Sneaker Shopping?”

Mark Knutson January 7, 2009 at 7:59 pm

If we are to have hyperinflation, is the stock market really a place to entrust one’s wealth? It strikes me that real estate and borrowing money are the best approaches to maximizing wealth.

Not having much knowledge of such things, when there is hyperinflation, do equities just inflate as well? A share of XOM going for $15,000,000,000,000 dollars? Or do they fail to keep up and all paper assets are wiped out.

Austrian economics considers the proper course of government in wonderful detail, but I have a selfish interest in minimizing my losses in the unlikely event that the american electorate doesn’t suddenly see the wisdom of the bitter medicine of abandoning creeping socialism and turning its affairs over to the marketplace.

Pete January 7, 2009 at 8:37 pm

A share of XOM remains a share of XOM. If the company continues to operate, you still own the same percentage. Businesses tend to not do so well in hyper inflation. Further, the discussion at hand is investing, not just the “stock market”. There are many things less risky than buying real estate. If the economy has gone to hell, who is going to buy your real estate, and with what?

Paul January 7, 2009 at 8:39 pm

Betting on hyperinflation when the opposite could happen can be very costly. One of the things you need to do, regardless of what happens, is get out of debt. Like I mentioned in my earlier post, I would diversify into metals and cash equivalents to prepare for either inflation or deflation. I do believe deflation will permeate our economy for the next several years, so I’m weighted towards cash. But I will be accumulating more metals as the deflationary episode unwinds and tilts towards inflation.

newson January 7, 2009 at 8:45 pm

for what it’s worth, i like steve saville (articles archived at safehaven.com) and marc faber for analysis (www.gloomboomdoom.com). both are steeped in the austrian tradition.

fundamentalist’s right, having worked in options and traded them for my own account, the money is made by the writers. time wastage always kills the little option buyer, who tends to buy way out-of-the-money series hoping to hit the big time. every now and then 1987 and 2008 episodes come along and wipe out plenty of writers, but them’s the breaks.

newson January 7, 2009 at 8:55 pm

one other trap for the little guy buying options. because the risk is limited, there’s a tendency for staying with losing trades, regardless, and not cut out and save some capital. for this reason, i think futures-trading (with good money-management) is a better proposition. one is forced to be much more hard-nosed about cutting losses in futures.

only goats should apply. sheep be honest with yourselves.

Justin January 7, 2009 at 10:26 pm

Forgive my skepticism, but I can’t for the life of me see a reason to invest in index funds if they’re so popular. Being as they are so popular should tell you that there’s something awry with them. In the end they’re just a means to attract the masses into circulating more money into Wall Street without the benefit of actually owning the shares. If you don’t actually own the shares, who is voting and what are they voting on for decisions within the company? The fund manager controls the shares and peddles that power from Manhattan to DC.

If you’re going to invest in equity shares in a public company, then don’t surrender your voting rights in the process.

Abhilash Nambiar January 7, 2009 at 11:59 pm

Malcolm Gladwell (author of the best sellers like Blink and The Tipping Point) had written an article about Nassim Taleb as early as 2002. If anyone is interested, you can find it in his website.


john snow January 8, 2009 at 12:24 am

Relative Strategies:

+10% in physical gold…

P.M.Lawrence January 8, 2009 at 6:22 am

“…bailouts occur weekly…”

And here‘s the latest.

(8?» January 8, 2009 at 3:00 pm

In this ever increasing socialist economy, “Austrian Investing” can be nothing more than the good ole black market of truly free trade.

Anything else is merely an exercise in incoherence, as Mises’ call of “Tu Ne Cede Malis” cannot be ignored by those who wear the Austrian label. Sure, you can achieve gross profit from gaming this evil system, but never net profit. The cost, the collapse of society, is simply too high.

What profiteth a man if he gains the whole world and loses his own soul?

Greg Feirman January 8, 2009 at 3:53 pm

I agree with Pete that this article shows a lack of understanding of Austrian economics.

Austrian economics doesn’t claim that the future is COMPLETELY unknowable as the article implies. If you read Mises on uncertainty or think about what is implicit in his discussion of enterpreneurship, it is clear that Austrians believe we can know SOME of the factors that will determine the future though not all.

For example, we know minimum wage laws will result in unemployment if they are set higher than the market clearing price. How much unemployment? That is a matter of judgment and not entirely predictable though informed estimates are possible.

Similarly, successful entrepreneurs capitalize on their insight into prices and the market to create a product that can be sold at a profit. Such activities require thinking, planning and forecasting that shows some insight into the future.

As an Investment Advisor heavily influenced by the Austrian School of Economics, I used their insights to see the inflating of the housing bubble, understand its causes, and invest accordingly. The magnitude and timing of the bust were impossible to predict perfectly but that it would bust was obvious. In fact, I wrote a piece at the end of 2007 “How To Invest In The Coming Bear Market” that predicted EVERYTHING that came about in 2008. It is available for free; see my website for details.

Index funds and the management of risk discussed in the article rest on The Efficient Market Hypothesis, which is equivalent to Mises’s construct of The Evenly Rotating Economy. It’s a bunch of crap as markets are not perfect and are never in a state of equillibrium – though they are always headed towards it.

The limits of Austrian Economics in investing, as I discovered, are in the timing and magnitude issue. How do you protect yourself and profit from the housing bubble and bust, for example? Many got out too early and missed gains. Many shorted too early and got hammered. The timing issue requires following the actual economy at a very high level of detail as well as understanding stock market and investor psychology. That’s the missing piece you need to add to be able to apply Austrian Economics to the real world in a profitable way. But it can be done.

Using Austrian Economics as my overall theoretical structure and applying it to the current situation, in conjunction with an understanding of market psychology, I was able to completely dodge the housing bust and return 15% in 2007 and 16% in 2008 – the major indexes were down 40% in 2008. A bunch of other Austrian investors were out in front of things as well, Peter Schiff being the most well known.

William January 8, 2009 at 4:21 pm


The answer is cheap diversification. If you owned all the stocks required to achieve a diversified portfolio, you’d be talking about owning at least scores and probably hundreds of stocks (large cap, small cap, international, etc.). Your ownership stakes in each company would be tiny (compared to the whole), and you’d have tons of reading material every time it came time to vote. You think the average investor is prepared to handle this? The expense would be outrageous compared to the 0.1-0.3% annual expense ratio that typical index funds charge.

Besides, I’m not sure that any particular mutual fund has a truly significant stake in a particular company (as a percentage of the company’s outstanding market value). One of the biggest funds, Vanguard’s S&P 500 index (VFINX), holds 4% of Exxon-Mobil. The fund size is $75 billion, so it holds about $3 billion in Exxon-Mobil. That’s less than 1% of Exxon-Mobil’s total market capitalization. So even all the tens (hundreds?) of thousands of investors in VFINX, combined, have a tiny voice. For the typical investor, the value of opportunity to vote is negligible compared to the cost.

Craigr January 12, 2009 at 7:39 pm

Harry Browne’s Permanent Portfolio is based on Austrian Economics and how the economy shifts through Prosperity, Inflation, Recession and Deflation. In 2008 when the stock markets tanked the Permanent Portfolio was UP 1-2% due to his theories in his portfolio. I run a blog that discusses his Permanent Portfolio idea extensively and I use it myself. Taleb’s approach is not only difficult to execute, but far too unpredictable to expect someone to stick to it long term. IMO. Browne’s approach has returned 9-10% a year CAGR for over 30 years with the worse losing year about minus 4-6% in 1981. It’s a good solid strategy.

Michael October 8, 2009 at 3:31 pm

Leaving the level of theory (and its practical implications) for a moment… can anyone recommend a truly Austrian principled broker or investment advisor, who has a good performance track record?

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