Damon Mcknight
Austrian investing is an investment approach based on the Austrian School of Economics, which was founded by Ludwig von Mises. The Austrian School of Economics is a 150-year-old economic philosophy that emphasizes the importance of sound economic theory, logic, and deductive reasoning in making investment decisions. It focuses on understanding money, value, interest rates, business cycles, and capital through the Austrian lens to make more informed investment choices. The Austrian School also believes that government policies, particularly those related to inflation and interest rates, have a significant impact on investing. By understanding these factors, Austrian investors aim to identify long-term patterns and opportunities in the market.
| Characteristics | Values |
|---|---|
| Philosophy | "One gains by losing and loses by gaining" |
| Economics | Focus on monetary policy, inflation, and interest rates |
| History | Austrian School of Economics founded by Ludwig von Mises |
| Books | Austrian School for Investors, Austrian Economics and the Financial Markets, The Dao of Capital |
| Authors | Ronald Stöferle, Rahim Taghizadegan, Mark Spitznagel |
| Approach | Long-term, logic-based, deductive, roundabout |
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What You'll Learn
Austrian School of Economics
The Austrian School of Economics is a school of economic thought that is grounded in verbal logic and "thought experiments". It was founded by Ludwig von Mises, who is considered the dean of the Austrian School. Mises believed that a stable value of money is essential to liberty and freedom, and that runaway inflation caused by central banking is contrary to these values. The Austrian School is thus an anti-inflationary movement that seeks to understand and predict economic booms and busts.
Adherents of the Austrian School believe that business cycles are caused by distortions in interest rates due to government attempts to control money. For instance, if a government injects money by purchasing corn, the prices of corn will increase before other goods, leading to price distortion. If interest rates are kept artificially low or high by government intervention, there will be a misallocation of capital, and the economy will eventually go into a recession.
The Austrian School of Economics has been described as providing unique insights into some of the most complex and important economic issues of our time. Its adherents believe that it is possible to discover economic truths simply by thinking aloud and assigning the correct relevance to various data. This is a subjective procedure that, according to Mises, cannot be taught but is rather a talent that some people possess.
The Austrian School has been applied to investing, with some arguing that it can help investors see long-term patterns and opportunities. For example, the book *Austrian School for Investors* provides valuable investment advice and expands the reader's knowledge of economics, explaining how government policies can affect investing. Similarly, in *The Dao of Capital*, Mark Spitznagel, a follower of the Austrian School, describes his roundabout investment approach, stating that "one gains by losing and loses by gaining".
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Ludwig von Mises
Mises was the chief economist for the Austrian Chamber of Commerce and was an economic advisor to Engelbert Dollfuss, the austrofascist Austrian Chancellor, and later to Otto von Habsburg, a Christian democratic politician and claimant to the throne of Austria. During World War I, he was drafted by the Austrian government, despite being ideologically and morally opposed to the war. He later fled Austria in 1934 for Geneva, Switzerland, where he was a professor at the Graduate Institute of International Studies until 1940. In that year, he emigrated to the United States, escaping the Nazis, who had confiscated his library and papers when they entered Vienna.
Mises received many honours throughout his lifetime, including honorary doctorates from several universities. The Mises Institute, founded in 1982, is a non-profit organization that promotes teaching and research in the Austrian School of Economics, individual freedom, honest history, and international peace, inspired by Mises and his contemporary, Murray N. Rothbard. Mises is also known for his book "Human Action", considered the best treatise on economics ever written.
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Inflation and Deflation
Austrian investing is based on the Austrian School of Economics, which was founded by Ludwig von Mises. The Austrian School is an anti-inflationary movement that believes in the importance of a stable value of money to maintain liberty and freedom. This is in contrast to the Keynesian model, which is the system we live under today, where central banking can cause runaway inflation.
Austrian economics is based on verbal logic and thought experiments, which are used to gain unique insights into complex economic issues. One of the key insights is that business cycles are caused by interest rate distortion due to government attempts to control money. This leads to a misallocation of capital and, ultimately, recession.
Austrian investing, therefore, involves understanding the underlying causes of booms and busts to predict and prepare for economic cycles. This includes tracking the economy's position in the Economic Super-Cycle to adjust investment portfolios accordingly. For example, moving from equities to fixed-income assets as monetary contraction occurs.
The book "Austrian School for Investors: Austrian Investing between Inflation and Deflation" by Rahim Taghizadegan, Ronald Stöferle, Mark Valek, and others, provides valuable investment advice from the Austrian perspective. It discusses how government policies affect investing and includes a specific focus on inflation and the effects of policies on inflation rates.
Another book, "The Dao of Capital: Austrian Investing in a Distorted World" by Mark Spitznagel, presents an investment methodology based on Austrian economics. Spitznagel's approach is described as "Daoist and roundabout", where "one gains by losing and loses by gaining". This counterintuitive strategy involves seeking intermediate positional advantages rather than immediate decisive victories.
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Monetary Policy
Austrian economics, which emerged in the mid-1800s in the Austrian Empire, is a school of thought that advocates for a free-market approach and opposes government intervention in the economy. This philosophy has implications for monetary policy, which Austrian economists view with scepticism. They argue that monetary policies aimed at stimulating the economy create economic inefficiency, waste resources, and sacrifice long-term economic stability for short-term gains.
Austrian economists criticise the use of fiat currency, which can be manipulated by central banks to adjust the money supply and manage economic downturns. They argue that this leads to currency devaluation, destruction of savings, and inflation. Instead, they propose a return to the gold standard, advocating for "sound money" that is backed by gold reserves or other tangible assets. This belief in the superiority of commodity money over fiat money is based on the idea that backing currency with a finite resource like gold prevents governments from arbitrarily increasing the money supply, thus preserving its value.
In the context of investing, Austrian economics provides a framework that focuses on long-term trends rather than short-term predictions. Practitioners of Austrian economics aim to identify companies with strong fundamental economics that the market is undervaluing. By investing in these companies and adopting a patient approach, Austrian investors aim to protect themselves from the negative consequences of monetary policy decisions and asset bubbles.
Austria, as a member state of the European Union, is influenced by EU legal acts and the decisions of the European Court of Justice (ECJ). The Austrian court system comprises general courts, which handle civil, competition, and criminal law, and public law courts, which oversee administrative procedures, acts, and decisions by the authorities. Regulatory bodies, such as the Austrian Financial Market Supervision Authority (FMA), oversee specific business sectors.
Austria's monetary policy is influenced by its membership in the Eurozone and the decisions of the European Central Bank (ECB). For example, in the context of rising inflation and economic recovery in Europe, the ECB maintained its monetary policy of keeping interest rates unchanged, which resulted in increased demand for corporate loans in Austria.
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Investment Philosophy
Austrian investing is an archetypal, counterintuitive, and proven approach to investing, derived from the 150-year-old Austrian School of Economics. It is a timeless and timely philosophy, offering unique perspectives on economic issues.
The Austrian School of Economics, founded by Ludwig von Mises, believes that a stable value of money is essential for liberty and freedom. This school of thought argues that runaway inflation caused by central banking is inherently detrimental to freedom and liberty. The Austrian School holds that business cycles are caused by interest rate distortions due to government intervention in the money supply. This intervention leads to the misallocation of capital and, ultimately, a recession.
Austrian investing, therefore, focuses on understanding the underlying causes of economic booms and busts to predict future shifts in the economic cycle. By tracking the economy's position in the Economic Super-Cycle, Austrian investors adjust their portfolios accordingly. They may shift from a higher percentage of equities to a higher percentage of fixed-income assets as monetary contraction intensifies and then reverse this position during monetary expansion.
Austrian investing also involves adding satellite positions to core equity holdings based on market trends and an individual's risk tolerance. These satellite positions are temporary and involve allocating a small percentage of the portfolio to areas such as medical devices, technology, commodities, and alternative energy.
The Austrian approach to investing is based on verbal logic and "thought experiments." It emphasizes the importance of understanding economics and applying that knowledge to investing. Austrian investing is about seeing time differently and taking a roundabout approach to gain positional advantage. It is a methodology that values long-term patterns and opportunities and is applicable to both retail investors and institutional money managers.
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Frequently asked questions
Austrian Investing is a methodology based on the Austrian School of Economics, which is grounded in verbal logic and aims to provide relief from the technical mumbo jumbo of mainstream economics.
Austrian Investing is an anti-inflationary movement that establishes liberty and freedom. It maintains that a stable value of money is essential for liberty and freedom, and runaway inflation caused by central banking is contrary to these values.
The Austrian School holds that business cycles are caused by distortions in interest rates due to governments attempting to control money. This can lead to misallocation of capital and, ultimately, a recession.
Austrian Investing can be applied to various areas of investing and financial management. For example, it can help identify monetary distortions and highly productive assets. It also provides insights into satellite positions and core equity holdings to take advantage of the Boom/Bust Super-Cycle.
Yes, there are several books on the topic, including "Austrian School for Investors: Austrian Investing between Inflation and Deflation" by Taghizadegan, Stöferle, Valek, Blasnik, and Heinz, and "The Dao of Capital: Austrian Investing in a Distorted World" by Mark Spitznagel.
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