What Investors Can Learn from Sound Economics

Austrian School for InvestorsReaders of this blog will be familiar with the Austrian School of Economics; the school of economic thought whose name derives from the fact that many of its early scholars came from Vienna. The school adheres to the individual as the basic unit of economic analysis, and it focuses on the market process.

The Austrian School is noted for some of the fundamental concepts that endure in mainstream economics today, and one of its prominent scholars, F.A. Hayek, received a Nobel Prize in economics. But does the school have anything to offer in terms of investment advice?

Enter the recent book Austrian School for Investors: Austrian Investing between Inflation and Deflation. Continuing with the theme here at Anthem Vault of being financially responsible by reading and continuing one’s education, I was delighted to read through this book, a volume that sits at the crossroads of my two main intellectual interests: Austrian economics and investments.

If you feel like recent economic developments concerning central bank quantitative easing, negative interest rates and government stimulus programs are leaving you confused as to how to invest your money, then this book is for you.

The book is geared toward those who have a rudimentary knowledge of recent economic events and basic investment literacy. Yet it is readable for anyone who has an interest in the subject, breaking it down into understandable terms. You won’t find unintelligible equations or proofs like you see in many economic journals today, only well-placed graphs to illustrate various points.

As the Austrian School of Economics is based on sound reasoning and deductive logic, don’t expect the book to be controversial in terms of its investment advice. Examples include valuing stocks on measures of cash flow, plus advice to pay down personal debt and keep a minimum amount of liquid savings for emergencies.

However, other parts of the book will be a big wake-up call, going against what is traditionally taught in college finance classes, or considered ‘common sense’ on Wall Street. Just read the chapter on government bonds! Traditionally considered a risk-free asset in finance, the book shows how government bonds can be incredibly risky and at their heart, they are only a speculation on higher tax ratios.

The book is very timely, addressing current events and recent central bank behavior. Some may view this as a negative, since parts of the book will not be timeless. But I appreciate the authors sticking their necks out by making some concrete predictions and offering advice.

In the true Austrian tradition, the authors do not make point predictions, such as “Inflation will be 5% next year.” However, they do make logical and well-reasoned pattern predictions, such as “If central banks continue to inject more money, all else equal, we will see more inflation either in goods or financial assets.”

I also appreciate the stance and tone of the authors is not apocalyptic, fear-mongering or end-of-the-world – something that is prevalent and is used to sell investment advice from many free-market investment advisors today.

Instead, what is given is solid advice with actionable ideas and even concrete tools that regular retail investors can use. In an upcoming article I will detail one of the ideas that regular investors can put to work, called the Permanent Portfolio.

My only quibbles with the book are that it sometimes strays a bit far afield, and it is not very systematic in its approach. Instead, it reads more like a collection of essays, perhaps a product of the multiple authors. This is even noted in the conclusion, with the admission that the “breaks in this book are at times sharp.”

Some of the concepts of Austrian economics are only briefly covered. So if you do not have previous experience with these concepts, they may be hard to digest in such a short time, and you might want to supplement your reading. One such resource is Austrian Economics: A Primer, available for free.  

Overall, anyone who has even a small amount of savings or investments would do well to read this book. Even if you just put your money in index and mutual funds rather than being an active investor, there are some thought-provoking ideas here. Knowledge and prudence are especially crucial as we continue through an era of unprecedented monetary distortions and central bank experimentation.

Chris Kuiper, CFA is currently a student and researcher at George Mason University, pursuing a Master’s of Economics. His previous experience includes asset management, investing and banking.