The Dao of Capital: Austrian Investing in a Distorted World (Amazon,) gives an overview of Austrian economics and discusses how one can use that to invest in the markets. Excerpts are here.
Thoughts
The Austrian school of economics is very similar to Ayn Rand’s laissez-faire version of capitalism. Both do not address how the less fortunate among us are supposed to survive in their version of the world. Neither do they discuss the role of policemen in society and how they get paid.
Leaving Rand aside, the biggest beef that the Austrian school has with the current version of capitalism (based on Keynesian economics) is on the role of the central bank. They don’t see a need for it because they believe that interest rates should be set by the market, not by a top-down bureaucracy. Here, I agree with the author that the Austrian school hasn’t been able to garner enough resources to push the philosophy forward in academia. Their philosophy seems frozen in time – stuck in what Mises though in the 40’s/50’s.
Keynesian economics has had the (mis?)fortune of being widely adopted. Anything that is deployed in the real world will necessarily be modified (bastardized?) to fit ground realities. This allows people in the sidelines to profess “purity” while criticizing the mainstream.
The author then proceeds to illustrate how Austrian economic philosophy can be applied to investing, mainly along:
- Credit cycles
- Buying OTM puts
- Value
None of these are particularly “Austrian.” And, I call bull-shit on buying OTM puts.
First, the author’s back-test over 100 years is meaningless. There was no practical way to implement this strategy even 10 years ago, leave alone 100. Until recently, the brokerage along would have eaten away whatever profits one might have had.
Second, it is a costly bet to go long volatility even if the world does blow up. In the low volatility decile, in order to break even on a protective put strategy with 5% out-of-the-money options, a 1987-type black swan would have to occur every 21 years. (AA)
Overall, the book was useful in filling some gaps in my knowledge of economic history. It also highlighted the need to formally keep track of the credit cycle in major economies and our own.