Austrian Economics Can Help Investors Look Beyond Short-Term Thinking
The most important thing is to wait, and we are qualified to wait.
~Francsico García Paramés
Francsico García Paramés — often referred to as the Spanish Warren Buffett — is a master value investor who has flown under the radar for American audiences. With his first book, Investing for the Long Term, that ought to change.
The first three chapters of the book outline García’s biography, as he went from a middle of the pack college student to his first ho-hum job at El Cortes Inglés (a large Spanish retailer) to going for an MBA 15 months later to shake things up. This path led him to his first exposure to investing and his job at the Spanish firm Bestinver where he rose from an entry level analyst to a fund manager and the eventual split from Bestinver to founding of his own fund. Throughout all of this, you gain insight into García’s intellectual development, discovering Peter Lynch’s One Up on Wall Street and the Austrian economists, as well as the decisions he made as an asset manager and how he thought about his various stock selections.
García’s investing career covers over 30 years through turbulent times, particularly while his investments focused on European companies that dealt with the 1987 crash, the fall of the Soviet Union, to the dot-com bubble and crash (which he mostly sat out), the financial crisis of ’08, and the subsequent sovereign debt crises that have plagued Spain and many Southern European countries throughout this decade. Despite all of the tempestuousness, García paints a picture of calm and patience, adroitly managing the fund according to his strict principles while pacifying investors. In this way too, García’s approach does mirror Buffett’s as he takes time to educate investors on value investing approaches to instill a sense of calm and patience and discourage those looking to make a quick buck.
The second portion of the book — comprising roughly the remaining two-thirds of the text — focuses on García’s philosophy and method. The first chapter in this section highlights the influence from Austrian economists who provided him insight and a framework that is consistent with a value investing approach. This is key because value investing does not seek to predict price movements or targets, instead its practitioners believe they can identify companies with strong fundamental economics that the market is undervaluing, purchase those at a good price and wait. Similarly, Austrians don’t seek to predict next year’s GDP growth, unemployment rate, inflation rate, or whatever economic indicator gets bandied about in the press. Instead, they use their theory to make long-term trend predictions — timing is imprecise at best, but the events do occur according to the theories laid out by Mises, Rothbard, and others. This yields a powerful intellectual framework that operates on the same time scale as the value investor, enabling future rewards to be reaped by protecting oneself from the mistakes of monetary policy and asset bubbles.
García sums up the key insights of Austrian economics as applied to investing in ten points:
- Markets work, by definition.
- Markets are never in equilibrium.
- Economic growth is based on increased productivity financed by savings.
- Investment requires savings — sacrificing consumption today — for consumption in the future and built upon increased productivity.
- Interest rate manipulation by central banks leads to the boom-bust cycle.
- The economy’s natural state is deflationary.
- The absence of a currency linked to gold — or a similar commodity free from political decisions — means that the currency will permanently depreciate in relation to real assets.
- Product prices — which depend on consumers’ willingness to pay — determine costs and not the reverse.
- Production costs are subjective, meaning that any production structure is liable to vary depending on the circumstances.
- Economic models are — for all intents and purposes — useless.
For each of these points, García provides investment applications from his experience and history. Presented in such a context, the reader is left with a deeper appreciation for how understanding economics can directly impact their savings and investment decisions.
How to Invest
Beyond the economic framework, García devotes multiple chapters to how he invests, analyzes companies and why he does what he does. An important section is his discussion and data on long-term stock returns versus other assets and how he conceives of risk. He makes the case for holding shares above all other assets by looking at data from the past 200 years and showing the regular growth of these indices versus bonds, treasuries, gold, and holding cash. While I think the 200 year view underplays gold’s current value as an investment asset, this long-term perspective is critical to return to, especially for value investors who have had a difficult decade since the financial crisis. This long-term view also aligns nicely with García’s understanding of risk, which is not tied to the volatility of an asset, rather tied to the probability that one will lose money by holding that asset. As he shows, this outlook on risk plays very favorably for stocks because the long-term returns have always been positive.
García’s strategy is classic value investing. It is informed by Austrian economics and you see a greater international focus from García than most US-based investors due to his geographic location. This does enable him to take advantage of companies working across markets because they may be headquartered in Switzerland while most of their business occurs in the US. This means they are often under-analyzed and thus undervalued by both US and European investors because of their balance sheets, which can lead to purchasing good companies at attractive valuations. Other characteristics García looks for are family ownership as they tend to have a timeline that aligns with his investment horizon, smaller companies that stand to be ignored because of their lack of name recognition and thus analyst insight, and conglomerates which can be difficult to analyze making them great pick-ups for the patient value investor.
Perhaps one of the most valuable chapters in the book comes at the end in García’s discussion of human psychology. We all have ingrained biases that we need to fight, and value investors may more than others. Our approach requires patience and objectivity. We get burned when we sell a good company too soon or when we fall in love with our picks and hold a lemon we misclassified. Simple reminders such as provided by García on psychological blind spots are critical to have before our eyes regularly to remain focused and aware of our own shortcomings as investors.
A New Addition to the Value-Investing Canon
García's book is a unique contribution to the value investing literature. While none of the value investing insights are necessarily original, he provides his own take on the principles developed by the value investing forerunners. More fundamentally, however, he incorporates an explicit Austrian perspective in his investing strategies and outlooks (something I’m aware of from only two other books, neither of which are unequivocally value approaches). This, in my opinion, has been a perspective missing from the value investment community for years. As I have written elsewhere, most follow Buffett’s view of economics — which is correct in so far as it goes — that economists are useless for investors. The trouble is, as far as he and most value investors go, they seem only to be aware of the mainstream economists focus on forecasting for the next 12 months. These mathematical models are hopelessly misguided and only serve to waste the time of the investor seeking exceptional returns over the long run.
Beyond his incorporation of an Austrian approach, García does bring into focus some of the unique opportunities available in the European markets. These often get overlooked by US-based investors who are far less familiar with the companies on the other side of the Atlantic. García provides excellent grounds to believe that, if we sufficiently expand our circle of competence, US-based investors can identify tremendous value by closely examining what’s on offer at the Deutsche Börse, Bolsa de Madrid, and their counterparts.
In short, I highly recommend Investing for the Long Term as an enlightening read suitable for beginners and experienced value investors alike, particularly those with an interest in Austrian economics and European markets.