Taghizadegan et al., Austrian School for Investors

Mention the Austrian school of economics and many people flee instantly. Not only is it not mainstream, it is sometimes (quite unfairly) described as a cult. In the U.S. it is identified with the politicians and Fed bashers Ron and Rand Paul. In fact, Mark Spitznagel, whose book The Dao of Capital: Austrian Investing in a Distorted World I reviewed earlier, served as a senior economic adviser to Rand Paul’s presidential campaign. But, accept or reject its fundamental tenets (and some of those tenets actually warrant closer study than they usually get), the Austrian school’s emphasis on subjectivity and cyclicality could conceivably help inform investing decisions.

Austrian School for Investors: Austrian Investing between Inflation and Deflation by Rahim Taghizadegan, Ronald Stöferle, Mark Valek, and Heinz Blasnik is a translation from the German. Although not formally divided into two parts, the first half of the book describes the principles of the Austrian school. The second half extends them, albeit somewhat timidly, to investing in the usual sense of the term; more boldly, to investing writ large.

The authors admit they are not market timers. They also admit that investors who subscribe to Austrian economics tend to have a bearish bias, no matter what the market conditions may be. What they stress is asset allocation, and this on two levels.

First, they describe the “philosophical” portfolio. “Wealth is sustainably invested, if it is roughly distributed as follows: 30 percent in liquid hoards [cash and precious metals], 30 percent in capital (machines, tools, shares in companies, rented out real estate, …) 30 percent in durable consumer goods (owner-occupied real estate, art, high-value appliances…) and 10 percent in endowments (shares in enterprises for charitable, scientific, peace-promoting, cultural and environmental purposes).” (p. 241)

They continue, in what is essentially an inspirational manifesto: “We live in a time that is extremely unfavorable for the accumulation of wealth. However, we are still forced to make decisions against this backdrop of growing uncertainty. The best investment decisions can encompass an incredible range: 50,000 dollars in cash, which one can have at one’s disposal within a day when someone else needs to sell urgently, can be worth more than 1,000,000 dollars in shares; 1,000 dollars for a Chinese language course can be worth more than a life insurance policy; 100 dollars for software plus the time needed to learn how to operate it can be worth more than a property; coins buried a decade ago and forgotten can be worth more than a savings account filled to the brim. One needs to go through life with one’s eyes open, be active, full of zest for life, value-oriented and adopt a long-term perspective, while paying attention to liquidity, entrepreneurial opportunities, the quality of life and possible problems in one’s environment and the opportunities to fix them.” (pp. 242-43)

As for an actual portfolio, they adopt the “permanent portfolio” developed by Harry Browne, which allocates 25% each to gold, cash, stocks, and bonds. “The four economic scenarios that are covered in this manner are: inflationary growth (favorable for stocks and gold), disinflationary growth (favorable for stocks and bonds), deflationary stagnation (favorable for cash and bonds), inflationary stagnation (favorable for gold and cash).” (p. 251)

The reader who expects to find specific investing advice will be disappointed. This is more a meta-investing book than an investing book. But the reader may find a few ideas that will spark his imagination and, in the process, make him a better investor.