Investing for the Long Term

CHAPTER 4The Austrian School of Economics

Although it was 10 years into my career as an investor before I came across the Austrian economists, discovering them was a major turning point. Their ideas on economics have gone on to provide me with an explanation for economic developments which has proven to be surprisingly coherent with my day-to-day experience in the markets and my work as an investor. They have been marvellous companions along the way. I therefore feel it's logical to devote a chapter to them, even if it may seem a little unorthodox in a book ostensibly about value investment.¹

Being an expert in economics is not an essential prerequisite for daily investment decisions, but it is definitely useful to have a sound conceptual framework to fall back on; a sufficiently nuanced understanding of economics provides us with some orientation. Indeed, nowadays, I find it very difficult to convey even basic investment concepts without having first established a robust economic framework.

Even though there are hundreds of hedge funds attempting to second guess the direction of the economy, most value investors don't think about it very much, spending practically no time on forecasting. The latter believe that they add their value through selecting companies. We could even go so far as to say that a lack of interest in the economy is a defining feature of a value investor.

And rightly so, because trying to guess what the economy will do next is tantamount to taking a stab ...