Thoughts About Austrian Economists In The Present Context And Investing

This is part of a mail I wrote. I post it in order to keep a log of my current thoughts:

Thanks Daniel I will read those articles.

What I like about the Austrians is that they consider economy as a social science. They despise all formulas or mathematical theories as being simple and dangerous to rational thinking. They built something more like a philosophy where logical and linguistic reasoning is the thought base. The basis is individual human action and its effects on society when they act as whole with their group behavior. No ethics are involved, all is based on incentives. Men act due to certain reasons and under some circumstances they do things. All is based on motivations and incentives.

Economy is a sub science of praxeology which is the science of human action. Praxeology is what the Austrians teach. They focus on studying human actions. Economy is praxeology mixed with commerce, with price ratios and exchange of goods.

Regarding economy they mostly deduce that the more the government interferes the more harm they make. That government should be minimal and only act to protect private property, to assure security and control crime. They should absolutely not act to legalize the theft of private property. Unfortunately that’s basically what they do now and what they tend to do the bigger they get. It is normal they act like that. The bigger they get the more they have to steal from working citizens in order to maintain themselves. Austrians deduce that things such as social security, big taxes and the fixation of minimum salaries are harmful. I see their philosophy as interesting and realistic and can perfectly understand why politicians, companies, citizens or corporations act the way they do. They could not act much differently in the position they are. The government and public members try to assure their salaries, its reasonable. I also think that the USA became what it was due to the fact that it was more in the past like an ideal Austrian society, but not anymore. The government became gradually so big that it lost what it made it become what it is and should either reverse in size and behavior or collapse.

As I see it the USA is a socialist country and I believe that no socialist economy can endure. Of course they would never admit they are socialists but as I see it that’s exactly what they are. Ludwig Van Mises wrote an incredible book called Socialism. He basically deduced that any socialist society like Russia, the German Nazis, or currently the USA, is doomed to change or collapse. I include the USA today because it is incredible how it resembles a socialist society where humans are completely controlled by a planning entity. Freedom is just an illusion to support a government controlling, planning and regulating every aspect of life. Not only the USA acts like that, several countries have evolved to do the same in more or less degree. Maybe some exceptions are found in Australia, Canada, New Zeeland Chile and South Korea. Actually I see Germany as much less socialist than the USA.

The Austrian School of Thought does not offer any formula or solution. They offer a way of thinking, a framework, nothing else. Charlie Munger and Phil Carret seem fans of them. Specially Carret (that’s how I learned about them). Under that framework I understand how Munger thinks. Those investors worry more about incentives and motivations than anything else. They often say that they study incentives before anything else. Thinking that way can be extremely beneficial for investing. Austrians teach you how to think in that sense. All seems logical after you understand their philosophy. And it is quite beautiful how it all builds up.

Try to read a book about one of my favorite Austrians (Rothbard) who explains well how banks have evolved. You can understand how banks are now an extension of the government and the negative consequences that it has.

Note that one of the blessings that Europe has is that they can not easily control the money supply. Specially due to the lack of fiscal union. That’s exactly what most people see as a problem. As as I see it it is better that they cannot do things because anything they do with regards to money supply or the economy would be for the worse. No one can control price ratios better that common working citizens who act to make their life better. Humans as a group decide the value of goods. Each exerces a vote and the prices of things emerge as a consequence. Humans do not consciously fix those prices. They emerge by the actions or lack of actions of each person. By the act of choosing to buy or not to buy things and their preference ranks. The government can not optimally fix prices, including interest rates. Anything done in that sense by the government is harmful as a whole.

The problem in the USA Government is the contrary to that of Europe in the sense that the former can do whatever they want more easily, with no friction. They can print as much as they want, there is basically nothing that can stop them. They have become the biggest legalized counterfiters of the world. They can fix interest rates and control banks. While that temporarily benefits their huge government and public organizations for a while, it harms the common citizens. But the government is supported by working people. Therefore if the people are worse off the government at the end is also worse off.

I have noticed that more and more companies are running away from the USA. Two of my companies are now based in the UK. Good for me in the sense that I receive 100% of their dividends now. And many of the USA companies I have are accumulating huge cash reserves outside since already several years. Its also normal they do that. Companies also act based on incentives. They simply go where they can profit more. Robert Rodriguez, one of my favorite investors moved his fund away from his former state to another state, to avoid paying taxes. People move where they believe they are better off. It’s no wonder that immigration has fallen so much in the last years. In previous decades when the housing sector collapsed its recovery used to be substantially helped by immigrants buying. That is not the case anymore.

That’s a bit how I think but I might be wrong, I can be making mistakes. But as I said the Austrians they do not draw any conclusions or give truths about anything. Austrians just give you some basic axioms about human action and everything builds up from there.

An american citizen is controlled to the extent that even if you wish to go and work on any other country you will have to keep on paying taxes (huge taxes) to the USA. That’s why you start to see some that are applying for another nationality. If I go to live to any country I just pay taxes where I work. But If I was american I should still have to keep on paying taxes to the USA. I see that as a theft of liberty. But I understand why that was done by the government, the planning class: so that they can assure themselves more sources of income.

Please do not think that I don’t like Americans, it has nothing to do with that. I admire them in many senses. I lived in New York two full years and liked it a lot. They have great companies and workers. They are spontaneous, they are mostly not racist, they are optimists. But the government has gradually evolved to control them. It has evolved to a level that is huge and difficult to sustain. Common citizens cannot support the government easily anymore, it’s too big and interferes too much. They interfere even with interest rates which are the base of the economy. If you thought as an Austrian you would see that that can only have negative consequences. Basically because interest rates are a price ratio which relates to the preference of goods over time. And no central planning organization can control any price, specially not the interest rates which are also a price. Prices and interest should emerge based on human preferences, based on human preferences with regard to time. Only working citizens as a whole can fix them. The government interfering with them is what I see as a problem with no easy solution. Unfortunately its the common citizens that are paying the consequences and become poorer or less rich than what they could be if the government had never interfered.

Then again it does not mean at all that you are doomed to lose money if you invest in the USA, quite the contrary maybe. Government interference often shifts capital to rich people. It often shifts capital from the able to the unable. As an investor you can profit from any situation if you are more often right than wrong in your interpretation of actions and how capital flows as a consequence. In that sense the Austrians have helped me to invest. They helped me to see the world by studying incentives and motivations, by focusing on actions and why and who benefits and who does not. Studying human actions and focusing on understanding why men act as they do can be profitable. Focusing on human behavior can be beneficial in many senses and specially in the investing context.

Cheers!
jrv

PD: Interesting interview with Sam Zell. Is the USA benefited by government market interference (quantitative easing)? :

About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
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9 Responses to Thoughts About Austrian Economists In The Present Context And Investing

  1. John Sturges says:

    The Austrian School was correct and none more so than Knut Wicksell who postulated that all investment returns arbitrage about the “Natural Rate”, 1898. The economic data to show this is now available on the Internet. The concept is simple, the actual techiniques to determine value and over-value are also simple once one has the “Natural Rate” defined. Mathematics taught the past 50yrs came into being precisely because nature and humans fill in where there are no other explanations and it became part of the lexicon. The math totally misses the fundamental returns which come from business and entirely misses the fact that markets are human systems which evolve over time.
    The mathematics is now well established even though it has failed to assist in avoiding risk time after time after time. The more modern approach I call Business Cycle Value Investing. There is some math, but it is based on simple relationships. The math is not used to predict time and price on which the world seems to spend much energy. In this approach”Black Swans” do not occur to investors who can see them coming.
    By the way, you are 4yrs-5yrs too early in selling your USG position. Housing is just beginnin in the US with a min. 5yrs yet to go.
    Best.

  2. jrv says:

    Thanks for your comments John. They made me quite curious, I’ll look into the things you are mentioning right now :).

    One thing I am sure about USG is that I bought it too early the first time (2007). It ended up being one of my most profitable trades because I added more stocks and options when it tanked. But at current prices and given its huge shares dilution and the one coming from Buffett’s convertible bonds I cannot feel comfortable with it anymore. I recently sold the last bonds I had with them. But who knows maybe I buy it again. I literally made money 3 times with it. In 2010 was once of those times, it almost reached 24 due to what I think was a huge short squeeze, to fall back 50% a few weeks later.

    Cheers!
    jrv

  3. danielwebb says:

    Thanks for the thoughtful reply. My basic philosophy is also to treat everything relative to incentives. Even when people deny it (for cultural, moral, or other reasons), they seem to always act based on incentives and what is best for them personally. I also agree that the government is gradually squeezing out everything else in the US. Our founders had a lot to say about that – many of them understood that government always attempts to enlarge itself and increase its power. It has always been that way through recorded history.

    The hard sell for the Austrian philosophy is that Americans want everything they’ve been getting, but they don’t want to pay for it. The current system promises them that they can have it all, and that sounds great.

  4. MarcJoli says:

    I will start by stating I love reading your blog. Hearing the perspective from an intelligent person from Europe/South America is refreshing.

    I am a Canadian who emigrated to the USA and I am involved in an IT job in a large company, stocks and real estate investments in both countries. I have to disagree with your points about the US becoming a socialist country. It certainly looks socialist on the surface because of the government actions, policies, and the actions of the FED. And, certainly the Democrats would want it to be even more socialist than it is. If you read the financial news and watch CNN it certainly looks like it could stifle free enterprise.

    However, this country is FULL of people that are making things happen, paying their taxes, making a lot of money, and ignoring what the government is doing as it is only noise. You stated that Canada is less socialist than the US. I know first hand there is NO WAY Canada would win in that comparison.

    I will give a few examples. In Canada, seasonal workers feel ENTITLED to their unemployment pay every winter. In the US there is a sense of guilt when collecting unemployment after a layoff. In Canada, workers of all types take every vacation day they are entitled, and they take them two or three weeks at once without regard to how the boss will run the company without them. In the US, you get criticized if you take more than 5 days at a time, and it better be for a good reason like a trip to a nice destination. As a manager in a large US business, I know most people do not take every vacation day they are awarded – they have a very strong work ethic here. In Canada, everyone tries to screw around with the government entities such as medical institutions, city governments, and state insurance companies. They will steal and cheat every chance they can. Canadians cheat on taxes and buy goods in the US to save on sales taxes. In the US people are not as corrupt and pay their taxes. If there is corruption, you never hear people talking to their friends about it. Socialism and the sense of entitlement is in the Canadian fabric. In contrast Free Enterprise is in the US fabric. I love Canada and Canadians more than I love America and Americans because they tend to be less ignorant, more fun, and more tolerant but the Canadian society is more socialist for sure.

    Immigration may have slowed recently but its only because of the economy relative to other countries, not central government policies. When employment in the economy improves, immigration will return. It has nothing to do with socialism in the US or government policies. Actually, I personally know hundreds and hundreds of Canadians living and working in the US and its because they moved towards more opportunity in the US and running away from the fewer opportunities in Canada. Now that opportunity has increased in Canada relative to the US in the last 4 years, you would expect a reverse migration, but this is not happening yet because of two reasons: 1) cant afford to buy a house in Canada vs. the equity in the US house. 2) Federal and provincial taxes in Canada are still 10-15% higher than in the US.

    I cannot speak first hand about Germany but I would be interested in hearing the reasoning why Germany is less socialist than the US!

    To give another example of the Free Enterprise at work in the US, a recent survey found that 28 million Americans own real estate as an investment and that this group of investors invested $9.2 Billion PER YEAR in the US Economy by buying foreclosed and distressed properties, rehabbing them, and renting them. These 28 Million investors did this on their own, and did not wait for the government planners. 28 Million is the same number of people who own Roth IRA accounts. They are hiring local workers, supporting small business, and making a big impact on the housing market. See link: http://www.biggerpockets.com/renewsblog/2012/09/30/impact-real-estate-investors-infographic/

  5. jrv says:

    Thanks MarcJoli for considering me intelligent, I feel flattered. Thanks also for your perspective and liking my blog.

    It would be difficult to know the truth. There probably is no truth. What is Socialism would have to be defined first and there is no single or simple definition. As I see it socialism is the extreme central planning of the government which has as consequence the loss of freedom of the individual. It can be disguised in many forms and one of the worse ones I have seen is the one in the USA. Note that it is not what the USA was but into what it has gradually become.

    In that context in the USA the lives of workers are completely controlled in most every single aspect by the government. By workers I mean anyone who does not work for the government. And by government I mean the planning entity that is maintained by the workers. The control is so extreme that as you say in the USA they even feel guilt to stop working. They feel guilty to stop giving money and maintaining their government. They even feel guilty to take a vacation. As I see it they are in a state of unconscious slavery. Of course many feel they are blessed because they have money and can buy a house or an iPad or things, but it could also be that they get that as candy in order to keep the government alive. I understand they feel guilty because they are conditioned, very successfully, to feel like that.

    The government is happy to have that situation. It controls to the point that Americans when they migrate and work in another country they have to keep paying taxes to the USA. If some Canadians cheat on their taxes maybe its because they do not feel they ought to pay the government taxes. I certainly prefer to cheat on my taxes than to live in a country that forces me to pay for something I do not believe is good for me nor for the rest of the workers. Most have the chance that if they are extremely displeased in their country they can try moving to another place. Americans can also do it but they have to keep paying taxes anywhere in the world to the USA. The solution for them would be applying for another citizenship if they are tired of giving money to their government.

    I think taxes should be limited to a minimum and the government should be strictly limited to the protection of private property and security. What happens in most countries is the complete opposite. The government makes laws to steal what others are producing.

    I do not see it as something positive that most Americans are proud tax payers. Actually I think they have no option because the government has such a huge control that they can monitor very well who evades taxes. The workers should really look what is being done with their money and take the necessary actions. Maybe most think that they are helping themselves by paying taxes but I have my serious doubts. I believe they are manipulated by an immense central planning entity, mostly useless and parasitical, that tries to do everything possible to maintain it’s status quo.

    As I see it the example you give as free enterprise is a consequence of a housing collapse that was produced by the planning government. A group is now getting rich buying foreclosed properties because of past government manipulation. Maybe those entrepreneurs are not the ones that ought to profit. I believe that if there had not been past government planning and control other groups of entrepreneurs would have emerged with a better result for the society as a whole. The thing is that the government should simply stay out of the economy. Whatever economical planning it does has worse effects than what would have happened if there was no planning at all. The current crisis as most of them was an effect of economical government control and interference. My idea is that the more they keep on doing it the worse it gets on the long run.

    That’s what I mean by saying that the USA is one of the most socialist countries. Because it’s one of the countries where the government exercises the biggest control on their society. North Korea and Cuba are probably worse though.

    But please do not get offended or take what I say as a truth which I do not even think exists. It is mainly my opinion and perception of what the USA government has become.

    Cheers!
    jrv

  6. utrifin says:

    Hey jrv,

    I am planning to start reading some economics. My background in this area is quite rudimentary.

    Do you have suggestions on what books to start with ?

    Thanks,
    -Ch

  7. jrv says:

    Hi Ch !

    These two are very good and make a perfect start:

    Faustino Ballve – Essentials of Economics
    Henry Hazlitt – Economics in One Lesson

    Then you can find other ones in the list here. And at mises.org you can find all books from all of the Austrians.

    Cheers!
    jrv

  8. utrifin says:

    And if you have to recommend two books to buy, which will they be ?

    For example: even though I have read many books covering Buffett i.e., Lowenstein, Snowball, Hagstorm and a few others, if I have to recommend two then they would be Snowball and Lessons for investors/managers.

    Ideally, one would like a book which one can go back to after getting an ok understanding on the Austrian school i.e., a book which makes the most impact.

  9. jrv says:

    Hi Utri,

    Human Action is the best, from Von Mises, who is the most famous Austrian.

    The other great I would recommend, and a much easier read is Murray N. Rothbard’s – Man Economy and State

    You can get them both for free from Mises.org. Austrians do not charge for their books .

    Cheers!
    jrv

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