Shouldn't Austrians make for better speculators?

Economics Economics Questions
1

I understand the official position that pure economic theory, cannot suffice on its own to produce good entrepreneurial decision making, but I’ve long suspected things are nto so straightforward. For instance,when first learning about the Austrian business cycle theory, I was struck as to how similiar their analysis was to the kind of cyclical analsis applied by fundamentals investors in the way they correlate changes in GDP, inflation and interest rates to determine the state of the cycle. Indeed, I feel there is enough to say on that I might even write a paper on that.

But furthermore take a look at the following piece:

http://news.bbc.co.uk/1/hi/8517156.stm

If you glance at the short list showing which sectors have experienced major price increases, and and which have experienced major drops I couldn’t help but wonder that any Austrian or praxeologist for that matter would be able to see easily how the top 3 were good trades. It’s strange, it’s like things that seemed like a mystery seem to be so easily brought into focus with an understanding of praxeology.

Take second hand cars. Understandably, during a recession people may be looking for budget items for the same types of purchases in general, though this has been further compounded as a result of the earlier interventions like “cash for clunkers” schemes that have been undertaken in Europe and America.

Or DVDs, considering that marginal income that might have been used to go out is reduced, people obviously may opt for cheaper substitutes, hence that is fairly ascertainable. With carrots, a similiar trend to with regard to indoor cooking can be perceived. Same goes for longet range flights in the sense they represent a “luxury” marginal good.

I think obviously as can be seen this requires more than just pure praxeology, but clearly those with a good understanding of it would have a competitive advantage over others in the sense, their “lens is more in focus”, with regard to the causal effect of interventions. Do you think this could even be a strategy for the movement? Speculate and profit on the markets and re-invest to learn more theory and fund libertarian organisations?

Or am I off my rocker, and just engaging in easy post-hoc conformational bias? This kind of stuff makes me itch to get back into trading!

2

In my opinion, economic theory is not enough, or even relevant.

There is only one tool you as a speculator should use - technical analysis. It’s about looking at price trends, taking small losses quickly, and riding gains as long as one can.

It has worked wonderfully for me and my father.

3

I used technical analysis in the past too, I think it’s best to use a combination of both, and use stop losses. It really depends on how short term/long term your focus is with technicals more focused towards the former.

4

An “Austrian” might make a better speculator, but it would not be because he/she was “Austrian” per se.

Speculating is an intuitive art, not a science.

Long time successful speculators I have been familiar with use a variety of tools/systems for their speculations, amongst them fundamental analysis, technical analysis etc., moving averages, cycles, waves etc. etc., depending on individual belief systems.

However, they also appeared to use large amounts of “gut feeling”, that is, instinct, before placing bets, and never relied on only one system [such as technical analysis] to make their decisions, as far as I could see.

The “instinct factor” is not something that can be taught. It must be learned via experience, over time.

You yourself might be able to learn to be a successful speculator [if you are not already].

Just remember to always make your speculations with money you can afford to lose [should you be lucky enough to have some ], and not with money you cannot afford to lose.

Regards, onebornfree

5

That sounds like mysticism.

6

Austrian theory is useful for stock market speculation, and several traders have used an understanding of Austrian economics to their advantage (including Peter Schiff). It gives you an idea of what type of stocks are likely to grow the fastest during a boom, et cetera.

7

I would agree with that, I think austrians make good value investors not speculators though. That said we should have all predicted netflix would rise because its rides on the back of the us postal service; a subsidy.

8

“That sounds like mysticism.”

It’s not. People know things without knowing why they know. It’s very common in all walks of life.

Take Kasparov’s Game of the Century. He writes that at one point he just “knew” that if he sacrifices his queen and rook, he will be able to drag his opponent’s King all the way to the other side of the board and checkmate him there about 16 moves later. Obviously a lifetime of chess at the highest level went into creating this “gut feeling”. But he says it was not a result of sitting there and analyzing 16 moves ahead. It just dawned on him all at once, “Do this.”

BTW experts who were watching him play, aided by computers, had no clue what he was up to.

We don’t know how the mind works,and sometimes it looks like a miracle indeed.

9

Tacit knowledge is anything but mystical. Ever read any Hayek?

10

But the fact that his subconsciousness suggested that he should make those moves does not preclude that, after it, we may figure out why he did it and teach other people how to handle similar situations. Our subconsciousness deals with patterns and associations, like our consciousness does. What made me call his post mysticism is that he said that “it cannot be taught”. But, if your subconscious gives consistent, good advice, that implies that relevant patterns exist; and, of course, those patterns are accessible to your consciousness, too. To say that something is accessible only to your subconsciousness is just mysticism. So, although, in many cases, using your consciousness to figure things out is less practical than relegating the task to your subconsciousness, it is ridiculous to assert that those things are not even accessible to your consciousness.

Not really, no. What book, article, or whatever are you referring to?

See my above response to Smiling Dave.

11

I was referring specifically to Individualism and Economic Order, but for more on the importance of tacit knowlede (especially in a scientific context) check out The Structure of Scientific Revolutions by Thomas Kuhn. I agree with your response to Smiling Dave, but would like to point out that to a certain degree it cannot be taught formally. That is to say, you can’t always learn intuition by sitting in a classroom listening to a lecture. Instead, you must see someone apply their intuition “in the real world” in order to absorb it and make it your own.

12

I think that having a little economic knowledge has made me a better investor, but I’m more of a buy and hold kinda guy. I see a general trend and I try to bet in that direction but also hedge my bets to some degree. The shorter term the bets are, the more timing matters. You can be right about what’s going to happen but wrong in the timing.

13

“but clearly those with a good understanding of it would have a competitive advantage over others in the sense, their “lens is more in focus”, with regard to the causal effect of interventions.”

The way I see it, being a good investor is like being a good athlete. A combination of genetic gift and time invested in self improvement will determine how far you can go.

The advantage of knowing AE is this: Say an athlete was taught by his basketball coach that the only way to get the ball in the basket is by sitting on it and praying. Obviously he will be at a disadvantage to someone who knows that the only way to possibly do it is to aim for the basket.

People whose heads are full of Keynseian or other nonsense are like the first player with the foolish coach. You get the idea.

14

I think it is important, as an investor, to understand how the government will respond to any given problem. Knowing Keynesian economics can be very useful for this purpose. It would be foolish to disregard government’s role in markets. Look at what happened with the big auto companies. There was a point in time where Ford was at like 2 dollars a share. Last I checked it was at 15ish.

15

Jim Rogers and Marc Faber do okay. Either way, we can’t know how prominent Austrian thought is in the entire investment community. There is every incentive to restrain from sharing important information/speculative knowledge.

Very good point, but Many Austrians are well-versed in the Keynesian framework/rationale as well as rational expectations.

16

As well they should be. “Know thine enemy” as they say.

17

A simple BA in economics essentially exposes you to the entire Keynesian framework/mind set. Graduate level courses go into the details and formal modeling, but an undergraduate degree essentially tells you everything you need to know. For example, two semesters ago I wrote a paper on Ben Bernanke’s views on monetary policy (his academic stuff) regarding the credit view as an indirect transmission mechanism. Essentially, the man believes that inflation has magical powers. Once you understand this, then you know, before the fact, that Ben Bernanke will never allow any degree of liquidation (will flood the market with reserves) and should therefore buy all financial’s during the downturn and commodities on the way up.

18

If someone traded purely from an “Austrian” standpoing, he/she would have been bankrupted a long time ago. Libertarians had been bearish on stocks for at least the last 30 years, only to see the Dow go from under 1k to over 10k during that time. Quite a few libertarians such as Doug Casey and Jerome Smith advocated loading up on gold & silver right at the peak back in 80. And those same folks told you to short bonds when rates were 20%. The “inevitable” hyperinflation never materialized like it should have.

I’ve read countless books and articles on trading. They say that investing (speculating) is 90 percent psychological. Success is almost entirely attributed to discipline and the ability to control emotions. Knowledge of some economics may be helpful, but is unnecessary to prepare you for success. Robert Prechter, who’s written a few articles for Mises, is probably the most ardent follower of technical anaylsis (using Elliot waves). He says that some of his best traders were formerly in the Marines, meaning they were very disciplined.

http://www.elliottwave.com/club/protected/pdf/8611.pdf

19

“I understand the official position that pure economic theory, cannot suffice on its own to produce good entrepreneurial decision making, but I’ve long suspected things are nto so straightforward.”

Right and wrong. The bottom line is investing is not economics, it’s investing. In the same way a PHD in human biology doesn’t mean you’d make a good surgeon or even a GP. Biology informs the practice of medicine, but there’s just more to it than that. Likewise, a sound understading of economics is likely a good thing when it comes to investing, but whether or not it’s even a significant portion of that practice is up for grabs. Plenty of people with totally loopy ideas about economics make money investing. Probably because they get people and behavior more than economics. A great mechanic can be a crappy driver, and on the other side of the coin you don’t need to be a master carpenter to spot a crappy dovetail joint.

Perhaps an application of Austrian thought could tell you what you need to be a better investor, namely insider information, plain and simple. If you know who is getting the free money and credit, and you know how they’re spending it, and who they’re friends with, etc., you could probably make some killer short and medium term moves. Maybe that’s why ‘insider trading’ is so frowned upon, because the elite know that access to inside information is one of the perks of being in the elite, and they want to keep it for themselves. Without that access you really need your gut, for lack of a better word, to guide you.

20

Yes, I suppose it does.

However, for myself, someone who incessantly pours over charts revealing alleged waves, “head and shoulder” patterns, " 30 day moving averages" , “cyclical waves”, “pennants”, “wedges”, “scallops”, “saucers” ,“gaps”, “fans”, “trend lines” etc. etc., [i.e a typical “technical analyst”], and then makes “certain , bet your money on it” predictions about future market events , is a whole lot more of a mystic.

[Mod edit: text deleted since OneBornFree’s problem has been solutionized]