@Stephen: I think the general answer to your questions is, “economic ideas don’t help us predict the future, they really only help us understand what happens, in hindsight.” Now, this isn’t completely true, since we can predict that, for example, rent control measures will result in housing blight. But what we can’t predict is how market participants will respond to rent control measures, in detail. Maybe a city passes rent control but then a major real estate interest moves in and lobbies city council and repeals the portions of the rent control measure that mattered while leaving the “window dressing” to appease the masses. So, it’s not enough to look at the superficial news of the day and draw conclusions like, “San Francisco passed a rent control law, so economics tells us that we will certainly make money shorting stocks of major real estate interests in San Francisco.” It’s just not that easy.
liberty student has pointed out Taleb (I haven’t read his book Black Swan but I have watched interviews and read some of his articles) and Taleb’s diagnosis of most people’s portfolios is that they are way over-exposed to risk. As he puts it*, we have dentists who spend as much time day trading as they do drilling teeth… but dentists should be drilling teeth and leaving the day trading to day traders. If you are a professional investor, it may make sense to expose your assets to greater risk than the man on the street.
However, keep in mind that your assets are always at greater risk than they superficially appear to be. I learned this lesson at the price of about $4K back in the dot-com bubble. I invested all my assets (about $8K) into the NASDAQ in April 2000 (very tip-top peak of the tech bubble). I sold a few years later (needed the money for bills), losing about 50% of my assets. This was my first, very painful foray into the market. Not only did I overexpose myself by “going all in”, but I was exposed to risks I didn’t even know I was exposed to (inflationary bubbles).
Inflationary bubbles are far from the only “hidden risk” in the market. Take insider trading, for example. Insider trading is a chimera invented by state-monopolized stock exchanges. In reality, insider trading is a privilege enjoyed by the elite but which is denied to the common market participant. Insider trading is really the whole point of having an exchange, like a stock exchange. By using early information for profit, information is dispersed into the market as rapidly as possible. If stock exchanges were a truly competitive industry, I doubt that insider trading would get you excused from an exchange. Yet the very fact that not all participants are, in effect, prohibited from insider trading greatly increases the risks of investing in the stock market for those who are not on an inside track.
Take the BP stock, for example. Someone posted on here about a month or two back that they had $100K in assets and their stock broker had advised them to buy some BP stock. I recommended that poster fire his stock broker immediately! Look at the BP mess… you have a mysterious explosion, you have political jiu-jutsu going on between Washington and London over a connection between BP and the Lockerbie bombing (this sounds like CIA-leaked intelligence to me), and then there’s all this arm-wrestling going on in the media between two competing interpretations of the spill, one minimizing and the other maximizing the consequences of the leak. And a stock broker is recommending that a commoner buy into this stock that is obviously being played by insider Whales???
The two-tiered nature of the political/legal system creates a system of personal privilege. As George Carlin put it, “It’s a big fuckin’ club and you ain’t in it!” When you venture out into the market, you should do so cautiously and skeptically. You should assume that anything that anyone says is a self-serving pump-and-dump lie, even (or especially) if you paid for it. Remember that no other commoners have any better idea about insider actions than you do. To avoid stepping on insider landmines, steer clear of heavily politicized markets and industries except where you can logically identify a “sure thing” (and the BP disaster is an excellent example of something that is not a “sure thing”). I recommend Marc Faber’s reasoning regarding the inevitability of imminent, massive inflation as a model of this sort of reasoning. He basically looks at the economic/political situation as if he were the government and identifies all its options to get out of its current financial problems. He then eliminates each one-by-one leaving only one possibility: inflation! Betting on inflation is simply speculating that the government will predictably do what it cannot help doing. This approach is can be applied to any market situation by simply putting yourself in the shoes of the actor you are analyzing and determining his options. If you can eliminate all but one option, then it’s a safe bet he will take that action and it might make sense to bet on that, especially if you can identify a reason that other market participants are deluded (inflation is one of the best examples because of the widespread success of central bank propaganda).
You really have to be a student of all aspects human behavior, not just voluntary exchange (economics). It’s not enough to identify “one right school of economics”. I see no reason you should artificially restrict yourself to Austrian economics… the primary value of Austrian economics is in rightly understanding money and banking, in my opinion. When it comes to the rest of economics, Austrianism doesn’t say things that are that wildly different than what everybody else says. Economics provides no shortcuts… studying it will only show you that much more firmly why there are no shortcuts.
Marc Faber and Jim Rogers are two investors that epitomize the sort of “student of humanity” approach to investing that I find attractive. Rogers has personally traveled a large part of the world, on the ground (not just jet-setting through the big cities). He uses this “down in the trenches”, unvarnished understanding of the world-as-it-is-rather-than-as-it-is-presented-to-be to come to his own conclusions about who is really doing what and why. There are innumerable opportunities to make money in the market doing honest trading without “insider information”, if you are circumspect enough to steer clear of the traps and landmines that make state-monopolized exchanges far more dangerous than private, competitive exchanges would be.
Most important, stay humble and know what you know… your losses will remind you of what you thought you knew but did not. Your profits are the reward for careful study and prudent exchange.
Clayton -
Maybe it was Marc Faber… but pretty sure it was Taleb