How should Austrians Invest?

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John James replied on Tue, Jun 19 2012 4:34 PM

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I have to assume by "fall off" you mean their prices would drop significantly.  I'm not sure why you think commodities would do such a thing in a recession.  Especially in this current economy (i.e. with the current state of food stock, etc.)  Why should food and natural resources get cheaper? 

I'm also curious why you would list "earnings [being] taxed" as a strike against commodities.

a) it depends on the vehicle you use

b) do you know of some other investment return (other than government bonds) that aren't subject to taxation of some kind?  If so, I'd love to hear about it.  (And no, your ETF isn't it.)

Finally, I'm curious as to why you think there is a drop in the money supply coming anytime in the future.  I'm really interested to hear a single sign that points to that (let alone enough to counter all the signs that point to the opposite).

On that note, you'll find a collection of related links here:

Practical Applications of Austrian Economics (investing)

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dude6935 replied on Tue, Jun 19 2012 4:56 PM

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Money supply is only half of the equation. The other half is the productivity of the economy. A renewed recession would cause lower prices unless a correspondingly large injection of money takes place. I think the FED would unwilling to expand enough to keep the dollar from deflating. 

The market price of commodities did drop relative to the dollar during the financial crisis in late 2008, correct?

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John James replied on Tue, Jun 19 2012 5:25 PM

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dude6935:

I think the FED would unwilling to expand enough to keep the dollar from deflating.

What in the world ever gave you that idea?  QE1?  QE2?  QE3?  The Chairman of the Board of Governors making assurances that interest rates will be kept at zero well into the near future?

The market price of commodities did drop relative to the dollar during the financial crisis in late 2008, correct?

Peter Schiff speaks on this in a lecture from 2009 here.  It'll jump to the right spot, but I highly recommend the whole lecture.

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Clayton replied on Tue, Jun 19 2012 5:48 PM

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Austrians should invest the only way that anyone should invest: Buy low and sell high!

My advice for beginning investors is to start small and trade what you know. Understand whether you're peddling or speculating.

A peddler is as a "middleman" who buys things from people who need them less and sells them to people who need them more but neither of which had the time/information/inclination to make the transaction happen. You're an enabler and you're getting existing goods from those who need them less to those who need them more and earning a profit for yourself on the way.

Speculating is like peddling over time. You're buying things now while people demand them less and selling them later when people demand them more (or buying while supply is high and selling when supply is low). This is much more difficult to get right than peddling which is why I recommend that you start by peddling then work your way up to speculating.

Start small and local. Buy/sell on CL. Swap what you have, leverage what you know, learn what will help you make more money buying/selling. If your long-term interest is in commodity trading or stock/commodity speculation, this will be good practice.

The key thing that most new investors miss is: you need to know, from the outset, why you're going to make a profit. If you don't know why you're going to make a profit, then you don't know what you're doing and you might as well take a trip to Vegas because you'll get more bang for your buck there than frittering it away in the NYSE. Buying stocks because someone said so or because the "technicals" look good or because blah blah blah are all bad reasons. Unless you have insider information or conduct corporate espionage or your Dad is a Senator, you probably shouldn't be buying/selling stocks. This is true of the so-called "professionals" too! Ask yourself why the managed funds can't beat the S&P?? They're pros and even they can't beat the S&P. Ya think that might mean the board members of S&P know something that fund managers - let alone you and me - don't?

Another investing strategy (less recommended for the US but you might move somewhere where there's good growth potential and apply this) is dividend-investing, which is closely related to investing in land, as far as the economics of it is concerned. Land speculation might seem to be just speculation and not dividend-investing but it can certainly be dividend-investing. The way to see this is to think about how the public utilities (including roads, powerlines, etc.) act as subsidies of land-owners. So you see that the Buffett investing strategy is really not about just buying "value" but buying heavily subsidized infrastructure, such as railroads. These businesses are not "free market" and will never have dotcom-style growth but they'll never* go away, either. That is, they're "plugged-in" to the tax-subsidized infrastructure grid so they're kind of like an ATM. The government collects the money in taxes, builds roads, powerlines, and so on, and the land and other industrial interests that are connected to this grid are automatically subsidized. By buying into this, you are basically buying shares in government tax revenue. But you have to buy smart and the US is not the place to buy right now - unless you're Buffett.

Basically all corporations benefit from the tax-subsidized infrastructure but some more so than others. One of the "tricks" I've learned from the 2008 collapse is that buying businesses that are synonymous with national identity in countries with reckless monetary policy is a risky but potentially very high-side investment strategy. Governments never want to admit they've gone bankrupt. And if the largest private bank in your country with a name like "Bank of America" is teetering on the edge of bankruptcy, you're likely going to bail it out rather than have newspapers around the world blaring "America Gone Bankrupt!" when Bank of America goes bankrupt. See how this works? It really is that juvenile. But learning how to peer behind the mask of "serious" investing and see the schemes and games being played by the political types is crucial to being able to survive and thrive in the market. It's not enough to just be a good businessman, you have to outwit the predators unless you want to become prey. Just don't descend into predation yourself and become a Madoff.

Clayton -

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Clayton replied on Tue, Jun 19 2012 5:54 PM

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Oh and don't try to make boots. It may look simple but I can assure you, it is not. If you're going to start a business, do it right or don't bother. If you want to do under-the-table trading, I recommend Craigslist (CL). Buy/sell whatever you know. I highly recommend this as you can earn double your money just by trading cash and avoiding taxes... but be smart, buy a real safe and don't deposit the cash in the bank! So, it's kind of like getting a full tax-break from the government while you learn how to run a real business.

Clayton -

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John James replied on Tue, Jun 19 2012 5:59 PM

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Clayton:

My advice for beginning investors is to start small and trade what you know. Understand whether you're peddling or speculating.[...]

A peddler is as a "middleman" who buys things from people who need them less and sells them to people who need them more but neither of which had the time/information/inclination to make the transaction happen. [...] Speculating is like peddling over time.

I'm glad you use proper terminology and at least identify "buy low, sell high" as speculation.  As I spoke of here, depending on whom you ask, it's different from "investing", but yes, the practices are typically conflated.

Another investing strategy (less recommended for the US but you might move somewhere where there's good growth potential and apply this) is dividend-investing

You have to move outside of the US to invest in good dividend yields?  That's news to me.  And my portfolio.

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Clayton replied on Tue, Jun 19 2012 6:06 PM

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That's news to me.  And my portfolio.

That's why I cited Buffett. But Jim Rogers's strategy is predicated on a long-term economic demise of the US/Europe and I think he's right. But I'm sure you have more insight on this topic because I don't personally do any dividend-investing.

Clayton -

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Prime replied on Tue, Jun 19 2012 7:08 PM

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What sort of time frame are you investing for? Trading, 1 year, 10 years, 30 years? According to Schiff in his newest book, if it is under 2 years you shouldn't even bother, just save.

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dude6935 replied on Tue, Jun 19 2012 8:19 PM

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John James:

What in the world ever gave you that idea?  QE1?  QE2?  QE3?  The Chairman of the Board of Governors making assurances that interest rates will be kept at zero well into the near future?

Exactly, they are already at zero. They can hardly go any lower. The FED is running out of ammo. Without demand for loans, they can't get enough money into the system to keep prices up (in the event of a recession). And I think a recession is coming.

There also won't be another massive stimulus as an outlet for money. There is no political will for it. If there is a recession, I am betting on deflation (like the market naturally demands). Only then can a real recovery take place.

BTW, QE3 hasn't happened yet.

My investment timeline is indeterminate. Longer than 2 years though.

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Prime replied on Tue, Jun 19 2012 9:44 PM

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"Exactly, they are already at zero. They can hardly go any lower. The FED is running out of ammo. Without demand for loans, they can't get enough money into the system to keep prices up (in the event of a recession). And I think a recession is coming."

Don't underestimate the FED's ability to get money into the system. After all, Bush literally mailed $600 checks to all of us. Maybe the FED will just start purchasing equities outright...who knows.

"There also won't be another massive stimulus as an outlet for money. There is no political will for it. If there is a recession, I am betting on deflation (like the market naturally demands). Only then can a real recovery take place."

If you are in the deflation camp then I would think you would be invested in bonds or treasuries.

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vive la insurrection replied on Tue, Jun 19 2012 11:02 PM

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Austrians should invest the only way that anyone should invest: Buy low and sell high!

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John James replied on Tue, Jun 19 2012 11:11 PM

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Clayton:

That's why I cited Buffett. But Jim Rogers's strategy is predicated on a long-term economic demise of the US/Europe and I think he's right. But I'm sure you have more insight on this topic because I don't personally do any dividend-investing.

My only point was that you absolutely can invest in good dividend yields without having to move to a foreign country...or be Warren Buffett.

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John James replied on Wed, Jun 20 2012 12:03 AM

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dude6935:

Exactly, they are already at zero. They can hardly go any lower. The FED is running out of ammo. Without demand for loans, they can't get enough money into the system to keep prices up (in the event of a recession).

I have no idea what you're talking about, and evidently neither do you.  First of all, it's the "Fed".  It's a abbreviation, not an acronym.  Second, I don't know what you mean "running out of ammo."  The money is created by adding zeros in a computer.  Trust me.  There is no possible way the Federal Reserve will ever run out of space to put zeros in a computer.  I'll be you all the money they create, that they will never run out of space.

Third, what in the world makes you think there is a lack of demand for loans?  The US is running a $1.3 Trillion deficit this year alone.  Again I have no idea where you're getting this.

And I think a recession is coming.

You're right about this, but your assessment of the situation is quite misinformed.  I recommend The Real Crash (purchase here).

There also won't be another massive stimulus as an outlet for money. There is no political will for it.

So you're saying there is the political will to actually do the right thing, and not print the money to buy the bonds, and bailout the banks, and basically do everything practically every government has done in the past in this situation (including our own).  You're saying the politicians in Washington, and the bankers in the Federal Reserve System just "don't have the will" to do what is in their best interest, and are essentially compelled to do the right thing.

I say again, what the hell ever gave you that idea?

BTW, QE3 hasn't happened yet.

Right.  Because the Fed doesn't buy assets unless it announces it and gives it a fancy name first.

My investment timeline is indeterminate. Longer than 2 years though.

Well hey that's easy then!  Current yield on a 5 year T-note is 0.70.  Buy away!  Wanna go for longer?  Go for the 10 year at 1.62.  According to your strategy, that's where you want to be!  And it's not even taxed on a state or municipal level!  (But the Feds still take their kickback though...so I guess you still owe me that "tax free" investment you seem to know about.  And no cheating by telling me to put it in some kind of shelter or retirement vehicle.)

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dude6935 replied on Wed, Jun 20 2012 1:03 AM

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Put simply, a given amount of money is being injected into the economy now. If a recession hits, that money injection must increase or price inflation will slow or turn negative. You seem to think that only an idiot would contemplate this turn of events. Thanks for the perspective. Given your disagreement, what investment strategy do you suggest to answer the original question? Or are you only here to be combative?