I am often asked what does it mean to invest with “an eye toward the Austrian School of Economic Thought?” Is there a certain way that an “Austrian” should invest? Is there an “Austrian School of Investment Thought?”
In a word , no. There is no Austrian School of Investment Thought. But that doesn’t mean that adhering to the beliefs of Austrian Economics can’t have a profound impact on one’s investment philosophy.
The basic tenants of Austrian Economics that drive the Barnhart Investment Advisory, LLC (BIA) investment philosophy are as follows:
Fractional reserve banking is inherently unstable and will always lead to financial panics and crisis sooner or later.
The political or ruling class has throughout history debased/inflated their currency to hide the true cost of their actions and enact a “stealth tax.”
The very act of inflating/debasing the currency exacerbates the inherent instability of fractional reserve banking.
The inflationary policies pursued by politicians that are supposed to benefit the little guy, by inflating away the value of debt, doesn’t work. The effects of inflation are not spread out evenly over the economy. Instead bubbles are formed when newly created money rushes to “hot” investments. Those who benefit most from inflation are those that get their hands on the money first. (i.e. Banks, Wall Street and “friends” of the government).
The “hot “ investment bubble can also lead to a similar (at least price wise) phenomenon, in goods and services that become scarce, due to the amount of economic resources devoted to the bubble investments and away from more common everyday needs.
That is, if everyone spends all their time and money trying to get rich with a housing boom, but neglect to tend to the everyday necessities required for living (i.e. agriculture, consumer staples etc. maintenance of capital goods) one day someone is going to wake up and realize a shortage of “necessary goods” exists. What happens next is potentially a “run” on ordinary goods used with all the excess inflated dollars in the economy.
This type of price run up, due to scarcity of product, should be distinguished from a bubble in which an abundance of a given product (think housing, dot.com stocks) are able to maintain a soaring value due to a positive feedback loop of higher prices begetting higher prices.
On the flip side this scarcity of everyday goods could be realized through the process of deflation and credit contraction.
BIA believes that investors should remain flexible (liquid) and able to react to (or accept)rapidly changing circumstances on both the upside and the downside. Whether it be money rushing in and out of investment bubbles or truly scarce goods, investors should be prepared for significant and sudden volatility in the investment climate. This is not to say one should not expect periods of calm and dullness, just that in the current environment an investor should not be lulled to sleep by such periods, and always on the lookout for the storm on the horizon.
This can be done via a short term trading strategy that invests where the market is moving now, and manages risk via the use of a tight sell discipline on losing trades (such as the BIA Global Strategy Portfolio) or via a longer term dynamic allocation approach that utilizes various positions that would stand to benefit in various economic and financial circumstances. This approach manages risk through the use of broad diversification and consideration of risk/reward parameters (such as the BIA Core Wealth Allocation Portfolio).
The days of buy and hold (on and pray) are over.
Many of the statistics and results that support a buy and hold investment approach occurred during the unprecedented bull market that began in 1981 and was a result of unprecedented credit/monetary expansion that was made possible by the collapse of Bretton Woods and the Gold Exchange Standard in 1971. The same thing that caused the bull market was also the seed of economic and financial peril we face today.
Stay tuned…I’ll have more to say on that later.
DISCLAIMER: Nothing in this article should be construed as a personal recommendation or investment advice. Nor should anything in this article be construed as an offer, or a solicitation of an offer, to sell or buy any particular investment security. Investors should conduct their own due diligence and seek the advice of a financial and/or investment professional before making any investment decisions.