Tuesday, April 28, 2009

The War on Drugs

Some of the most fundamental arguments for and against the War on Drugs can be concisely stated thus:

Anti-drug position: The government should outlaw certain drugs, because people often behave irresponsibly or even dangerously when they consume them, and some of those drugs can also be dangerous to one's health. Legalized drugs would impose a burden on society, the safety of our roads, the health care system, etc.

Pro-freedom position: It is a violation of a person's natural rights for the government to imprison or harm him merely for possessing, selling, or consuming a drug. A person owns his own body, and therefore any decision that only affects his body and nobody else's is purely his own. If he has violated someone's natural rights (life, liberty, or private property), whether influenced by drugs or not, then of course a crime has been committed and should be dealt with accordingly. But buying, selling, possessing, or consuming a drug in the absence of a violation of anyone's natural rights is not a crime.

A couple of obvious questions present themselves: If, say, marijuana is illegal ostensibly because it alters a person's judgment, why is alcohol legal? Alcohol certainly alters a person's judgment. Furthermore, whereas people under the influence of alcohol tend to become more aggressive and often even belligerent, people under the influence of marijuana tend to become less aggressive and more relaxed. Similarly, if some drugs are illegal ostensibly because of their negative health effects, why is tobacco legal? Tobacco, whether smoked or chewed, is strongly correlated with cancer.

I assert that existing drug laws are logically inconsistent. Logical consistency ultimately requires one of two alternatives: (a) prohibit all drugs, or (b) legalize all drugs.

Prohibiting all drugs is not possible due to the inherently arbitrary definition of the word "drug." If one defines a drug as a substance that has an effect on one's body and/or mind, then every atom, molecule, compound, or mixture in existence would have to be defined as a drug: If one were to ingest, smoke, or handle enough of anything, it would have a noticeable effect on one's body and/or mind. Some substances just happen to have more of an effect than others. The only non-arbitrary, logically consistent alternative is to legalize all drugs.

A lot of people would probably be surprised to learn that one of the most profound discoveries in the biological sciences in the history of the human race was made by a man while he was tripping on acid. Graham Hancock explains in his 2007 book Supernatural:

In late July 2004, the Nobel Prize-winning biologist Francis Crick, co-discoverer of the structure of DNA, died at the age of 88, and soon afterwards a little-known fact of his life hit the tabloid press. This was that when he was working at the Cavendish Laboratory in Cambridge in the early 1950s, he frequently used LSD (which remained legal until the mid-1960s) as a "thinking tool" to boost his mental powers. According to a report published in London on August 8, 2004 in The Mail on Sunday, Crick had privately admitted to colleagues that he was under the influence of LSD in 1953 at the moment when he "perceived the double helix shape" and unraveled the structure of DNA.

You can read the cited article here.

The fact that Crick discovered the famous double helix shape of DNA while under the influence of LSD doesn't necessarily mean that he would never have discovered it without LSD. Even if he hadn't, perhaps somebody else would have made the discovery without LSD. Independent, near-simultaneous discoveries are common throughout the history of science. Nevertheless, Crick's acid-trip discovery should at least make us pause and consider the possibility that maybe -- just maybe -- some drugs that are currently illegal can, are, and have been, used responsibly as tools for various purposes.

For ages, shamans in countless hunter-gatherer societies throughout the world have used the substances found in various psychoactive plants as the foundation of their religions. These people have claimed, and still claim, that the psychedelic substances -- ayahuasca, psilocybin mushrooms, ibogaine, mescaline, etc. -- open a gate to the "spirit world" that allows them to enter and explore. Maybe it's true, and maybe it's not. I suppose one actually must take a given drug and experience the result firsthand before one knows for sure.

Have government officials experienced each and every psychedelic substance that they have banned virtually worldwide? Of course not. Even if they had, what right does a government have to tell people which inner experiences they are and are not allowed to have?

For those who would argue that prohibiting drugs isn't primarily about banning certain inner experiences, but rather preventing people from harming themselves or others, I ask this: If that is the case, then why should people be allowed to drink alcohol? Or own knives and guns? Or drive cars?

Are we adults, or are we children? The War on Drugs is a war on natural rights. It is a war on freedom and personal responsibility.

Sunday, April 26, 2009

Brown is the New Green

My apartment manager recently left a note hanging on my doorknob informing me of an upcoming "Going Green Project." The note pointed out that Southern California is facing a water crisis, so the management company is going to be proactive rather than reactive by "providing efficiency before it is mandated by the state." It is going to be "part of the solution rather than part of the problem" by installing new "energy efficient" toilets at no charge to the tenants.

It's official: Shit has just gone green.

First, I'll just point out the note's interesting usage of the term "energy efficient" in reference to the new toilets. Until now, the toilets I've used have been plumbing fixtures hooked up only to water and sewage pipes, not electrical outlets. If these new toilets use AC power, I can't wait to try one out!

All sarcasm aside, this "going green" fad has gone way too far. It has officially joined the politically correct lexicon of overused euphemisms. Secretaries are now "administrative assistants." Trash men are now "sanitation engineers." And now, businesses no longer cut costs -- they "conserve resources" or "increase energy efficiency."

But isn't conservation of resources (energy, water, labor, materials, etc.) relative to produced output the most basic way in which a business increases its profits? Haven't businesses been pursuing increased profits -- and therefore increased efficiency -- since capitalism first came on the scene? Am I missing something here? When has waste ever been rewarded in a free market? The only institution that rewards waste is government.

Regarding water and energy, the only reason we have shortages and "crises" in the first place is because water and energy are not ruled by purely free market forces. They are heavily regulated, or completely controlled, by government, which does not allow market prices for those resources to prevail. Government keeps the prices of water and energy artificially low, and the inevitable result is that shortages occur due to overuse (i.e., waste). Market prices are part of a self-rationing mechanism. A high price for a resource sends a signal to consumers and businesses to use less of that resource, and a low price sends a signal to consumers and businesses that they can use more of it. As a resource becomes more scarce, its market price will naturally rise -- unless, of course, government intervenes in the name of "fairness" or "protection against price gouging" and thereby prevents the market price from performing its rationing function.

If we really want people and businesses to conserve energy and water, we shouldn't sanctimoniously heap guilt on them about all things "non-green" while simultaneously allowing our government to keep the resource prices artificially low. We should simply get the government out of the water and energy businesses altogether -- flush them down the toilet -- so that market prices can prevail and thereby allow people to self-ration their use of those crucial resources.

Wednesday, April 15, 2009

Happy 94th, Income Tax!

Today, April 15th, marks the 94th year that Americans have had to pay an income tax to the federal government.

I cringe whenever I think about the utterly primitive and barbaric conditions that prevailed in the United States prior to 1916, that first year of the federal income tax. No roads, no commerce, no laws, no technology, no language, no civilization of any sort. Just the law of the jungle: widespread pillage, plunder, rape, pedophilia, necrophilia... even cannibalism.

Thank God the federal government saved the day with its brilliant solution of stealing a portion of every person's income. Out of that daring, resolute action on the part of government in 1916, American civilization was born. Prior to that year, there was no America. The land was merely inhabited by godless, lawless ape-men who spent their days wallowing in the mud like pigs.

But the theft of a portion of their income changed everything. It immediately transformed the disgusting animals into decent social beings striving for virtue and the eternal glories of the State.

Happy 94th, Income Tax! We Americans obviously owe our lives -- nay, our very civilization -- to you.

Tuesday, April 14, 2009

Duck Tales Teaches Inflation

You gotta love Duck Tales.

Friday, April 10, 2009

Political vs. Economic Votes

In a democracy or any other government that utilizes aspects of democracy (such as the constitutional republic of the U.S.), there are two main types of voting: (1) political voting, and (2) economic voting.

We're all familiar with the basic idea of political voting, but what is economic voting?

Economic voting is what one might call "voting with one's money and one's feet." Whenever you choose to spend or not spend money at a particular business, you are casting a vote. Whenever you choose to patronize or not patronize a particular business, you are casting a vote. Whenever you choose to live in City A instead of City B, Neighborhood C instead of Neighborhood D, and Home E instead of Home F, you are casting a vote. Whenever you choose between net spending or net saving during a particular time period, you are casting a vote. When you choose a college and a career, which car to drive, which supermarket to shop at, where to go on vacation, which charity to donate to, what to buy or sell on eBay... you are casting a vote. Whew -- that's a lot of votes! Economic votes are the stuff of life.

So which type of voting -- political or economic -- does the State and its allies train us from birth to worship and revere in raptured awe? Political voting, of course. There is a reason for that. It is political voting, not economic voting, that strengthens the idea that initiating force against innocent people is legitimate and morally acceptable.

Allow me to offer an analogy for your consideration. It occurred to me today that political voting is to economic voting as paper money is to gold, and as words or intentions are to actions. That actions trump words or intentions is clearly observable in business, romantic relationships, and reality in general. Paper money is an IOU, merely the intention to repay a debt with real money. Gold is real money that represents action. There is no intention to make a payment in gold. One either hands over the shiny, tangible metal or one doesn't. Similarly, political voting is a type of IOU -- a lottery ticket disguised as a virtual claim to something -- that the government offers to us: it is the intention of the government to force us to do only those things that we would have freely chosen to do anyways, i.e., to "represent" us equally and fully. But that can only happen if everyone votes unanimously on every single action the government takes. Since that obviously will not happen (if it did, what would be the point of having a government?), the government cannot make good on its intention to "represent" each of us equally and fully. It must always force some people to do certain things they do not want to do. Everyone goes into the political lottery (election) thinking, Come on, baby needs a new pair of shoes!, but not everyone is holding a winning ticket.

At the end of the day, it's freedom that everyone wants. Freedom is the gold. As long as "your" elected politician is making choices that benefit you or at least don't harm you, rather than forcing you to do things you don't want to do, you are happy because you feel free. You might even feel better than free if the government is giving you freebies. By contrast, the people who didn't vote for "your" politician are probably upset because they don't feel as free as you do -- their options are more limited. So the bizarre situation seems to be that everyone ultimately wants to be free, yet rather than simply organize themselves along purely free-market lines, they would rather form a coercive government apparatus and play with political lottery tickets (i.e., cast votes) in the hope that they'll get to keep most of their freedom or hit the jackpot by taking away everyone else's.

You are given one political vote -- and that one vote is a paper IOU, a mere lottery ticket dressed up in a cheap tuxedo.

You get to choose from an infinitude of economic votes.

Even if you have little or no money, there are ways you can freely interact with people that can make a huge difference in your community. So you can always cast an economic vote with your actions, no matter what your net worth is. It is a universally recognized "currency" in human interaction. That makes the freedom to exercise human action the gold standard in the political realm. So why do we even need political votes? Insofar as "democratic" tends to connote distributed rather than centralized control, what could be more "democratic" than the gold standard of freedom?

Tuesday, April 7, 2009

TSA Detains C4L Staffer for Having Cash

Shortly after the Campaign for Liberty (C4L) regional conference in St. Louis, a C4L staffer named Steve Bierfeldt was detained and questioned for 30 minutes by airport police and Transportation Security Administration (TSA) officials. Evidently, the only reason they detained him was because he had $4,700 in checks and cash and had a variety of promotional material such as C4L and Ron Paul bumper stickers. The TSA even threatened to turn Steve over to the DEA and FBI for refusing to tell them why he had the $4,700. They eventually released him when another officer intervened.

Interestingly, Steve was able to record most of the interrogation using the cell phone in his pocket. He appeared later on "Freedom Watch," where Judge Napolitano played the recording and interviewed Steve about his experience.

Watch the "Freedom Watch" video clip here.

Some might argue that we can't see or hear anything that happened before the recording started in the interrogation room, so for all we know, Steve instigated the entire incident for publicity by being obnoxious to the TSA officers at the security checkpoint. That is a possibility, but I consider it unlikely given that none of the officers in the recording make any mention of such behavior -- only the "suspicious" nature of a preppy-looking white guy holding $4,700.

Could this incident have had anything to do with the recent MIAC "Modern Militia Movement" controversy? With such heightened publicity for Ron Paul surrounding that incident, perhaps a few officers in Missouri were simply a little annoyed when they saw Steve's stockpile of Ron Paul-related material.

Or maybe the moral of the story is this: When you carry a large amount of "anonymous" money such as cash or gold rather than keeping all of your money in Establishment bank accounts, the Establishment immediately views you as a suspicious Outsider.

Monday, April 6, 2009

Start Saving Now

I am going to be a wet blanket in this post, but I am writing this because I do not want to see anyone I know caught unprepared when the economic turd hits the fan. We may be well prepared, but if our friends and family are not, our preparation will be largely for naught. Think of how many people you know and love, and then think of how hard it is going to be just to keep yourself afloat during the coming economic turmoil. Without any preparation, those people will all be coming to you for help. Feel a fire smoldering under your rear end yet?

If Peter Schiff, other bearish investors, and most of the Austrian School economists are right, the U.S. dollar is eventually (probably sooner rather than later) going to decline severely or even hyperinflate at the same time that the U.S. economy is suffering a severe recession. Many of them think this process could begin within the next few years. Now, I will admit that every age has its false prophets and hucksters, but that does not mean we should refuse to listen to every person who is concerned about impending disaster. Written history is full of disasters; they're not exactly rare. Schiff's and others' predictions are based on sound financial and economic reasoning. The U.S. is a nation based on debt and spending, devoid of a manufacturing base -- it cannot continue with its present standard of living. It will eventually decline to a living standard in line with its level of production, which is much lower than our current standard of living implies. On the individual level, we recognize that a person cannot long enjoy a lifestyle that exceeds his income. Just extrapolate that common sense to an entire country of people.

As Schiff says, "the federal government is the biggest subprime borrower of all, and it has committed the American taxpayer to the mother of all adjustable rate mortgages."

When the decline comes and the economy readjusts itself to reality, we will most likely have to face two unpleasant situations: (1) high unemployment and lower wages, and (2) sharply rising costs for the things we pay for.

Now for the real wet blanket part: Preparing for this requires (among other things) getting out of consumer debt and saving money. And not just saving a few cents here and there. Financial planners usually say the conservative approach is to have an emergency fund of at least three to six months' living expenses. ("Emergency," of course, meaning to be set aside and not spent on cars, TVs, vacations, or any other discretionary purchases.) After you've accumulated your emergency fund, you may want to consider putting any additional savings into non-dollar denominated assets like gold, silver, stable foreign currencies, and/or non-perishable goods. Staying away from dollars will provide some protection from the rising prices that are sure to result from the Fed's massive monetary inflation over the past several months. As prices rise, so will your non-dollar savings.

I didn't come up with the preceding advice myself -- it comes from Schiff and many other Austrian School economists. If you follow these "doom-and-gloomers'" advice and they turn out to be wrong, the worst that will happen is that you will have a lot of money in savings and be better off because of it. But if they turn out to be right, your savings will provide a crucial cushion when you need it most. The earlier you start saving, the better chance you will have to accumulate your non-dollar assets before their prices really start to climb. If that is what you plan to do, spread the word to the people who matter the most to you -- one by one. This is not about distributing a chain letter, writing your congressman, or protesting in a political rally. This is simply about protecting yourself and the people you care about from the financial hardship that is coming.

Again, sorry for the wet blanket post...

Sunday, April 5, 2009

A Penny Spent Is a Penny Earned?

In this article, Peter Schiff points out that at the recent G20 summit in London, President Obama told Americans that their fears regarding the economy should not interfere with their spending. According to Schiff, here was the sage advice offered by Obama:

We must spend now as an investment for the future.

Those of you who are familiar with the Austrian School of economics know that spending on consumption is the exact opposite of an investment for the future. This destructive Keynesian fallacy that long-term economic prosperity rests on a foundation of consumption rather than saving has got to be put to rest once and for all.

We truly do exist in an Orwellian world when the most powerful and highly respected people stand before us and boldly claim that black is white, up is down, and two plus two equals five.

Friday, April 3, 2009

Service with a Smile

One of the things I admire most about free markets is that the businesses that operate within them are totally focused on making their customers happy. Service with a smile, as the saying goes.

Despite what some people seem to think, customer service is not inherently demeaning. Provided the customers are not just playing games or intentionally trying to make one's life unnecessarily difficult, listening to their concerns and doing one's best to alleviate their discomfort serves a genuinely noble end -- serving one's fellow man.

This afternoon I visited a local coffee shop/deli and was waiting in line behind a woman ordering at the counter. I couldn't help but overhear the conversation:

"Let's see... I'll have a roast beef sandwich, and--"

"--I'm sorry, ma'am, we're all out of roast beef."

"You're kidding me."

"No, I'm sorry, we're out."

"This is the second time I've come here for the sole purpose of ordering a roast beef sandwich, only to find that you're all out!"

"I totally understand; our roast beef sandwiches are really good. May I recommend our turkey sandwich instead? I think you'll like it -- it's another popular one."

"[Huffing and puffing] Unghhh... okay, fine. I'll have one of those. But I plan to come here again next Wednesday, and if you guys are all out of roast beef a third time, I'm not going to be a happy camper."

"I understand. What time do you plan on coming next Wednesday?"

"Around 7:00 PM."

"Okay, I'll personally make sure we have enough roast beef the next time you visit."

"[Still huffing and puffing, but less than before] Thanks."

Equally as important as what the girl at the cash register was saying to the disgruntled customer was how she was saying it. This girl was a pro. She said everything with a sweet, understanding smile on her face -- it didn't look fake at all -- and her voice was calm, soothing, and confident. I'm sure that underneath that professional exterior she was thinking to herself, What a bitch!, but the point is that she did not say it or act it. The customer couldn't have cared less what the cashier thought. All she cared about was that the cashier treated her like a queen. Actions trump intentions.

By no means are all private-sector employees that friendly and professional. But a lot of them are. Most of them are at least cooperative in the face of complaints and rude manners. They have to be. One way or another, in the long run their paychecks depend on it. In a free market, where you have countless people cooperating with each other with smiles on their faces out of mutual self-interest, what you have is a society based on people serving each other. By contrast, in a government-managed economy, you see far fewer smiles and far less enthusiasm since what you have is a society based on people serving abstract Authority. Apologists for State power claim that government benevolently serves man, but the crux of the matter is this: How can something be called serving man if it simultaneously steals from him by force?

Can you imagine how the exchange I witnessed today would have taken place in a government bureaucracy (think DMV)? Let's give it an Orwellian name like the "Ministry of Food":

"Let's see... I'll have a roast beef sandwich and--"

"--We're out of that. Order something else."

"You're kidding me."

"Lady, you're holding up the line. Order or I'll order for you."

"This is the second time I've come here for--"

"--Here's a turkey sandwich. Next!"

"But I didn't want a turkey sandwich! My tax dollars pay your salary, you know."

"Security! Take this anti-social troublemaker to the interrogation room. And put her on the terrorist watch list due to her suspicious behavior."

Is that fictional exchange hyperbole, or is it disturbingly accurate based on our personal experience with government "services?"

The essence of true service between individuals is free choice. Only when two people exchange voluntarily, without the use of force, can it be said with certainty that the exchange truly serves both of them. This is the philosophical beauty, the truth and ultimate triumph, of the free market.

The next time you serve a customer or any other fellow human being, try doing it with a pleasant smile and cheerful voice. If your smile is rooted in the philosophical foundation of the free market rather than merely some superficial muscle movements in your face, it will look far more genuine. It might even be genuine.

Thursday, April 2, 2009

The "Austrian" Approach to Investing

A few years ago, I started to dabble in the theory and practice of finance and basic investing. I read many books on the subject, and although it was fascinating reading, there were always some nagging doubts in the back of my mind regarding some of the key assumptions and philosophical approaches adopted by the authors of those books. Their ideas -- based heavily on the theories of mainstream academics -- seemed a little too neat and Platonic, isolated from the messy and uncertain world of human events.

Soon after being introduced to the Austrian School of economics, I began to wonder what this science of human action -- praxeology -- had to say about investing (besides the obvious and incessant two-word investment advice: "Buy gold!"). What I wanted to know was not whether there are particular Austrian tricks or tactics for investing, but whether there is an overall Austrian approach to investing. There were a couple of articles on the Mises Institute's web site that hinted at such a thing, but they weren't quite what I had in mind.

Then, about a week ago, I noticed a podcast in the Mises Institute's media section entitled "The Development of an Austrian View of Investment." Bingo! In that 30-minute podcast, Richard Grimm summarizes Ludwig von Mises's theory of investing as described in his 1957 treatise Theory and History and adds his own observations from his experience in the financial industry.

Grimm begins by pointing out the three main approaches to investing that one finds today: (1) technical analysis, (2) quantitative analysis, and (3) fundamental analysis. I will summarize what he said regarding each of these three approaches, injecting a few of my own comments along the way.

Technical Analysis

Technical analysis consists of looking at price charts to find patterns that supposedly determine the future direction of the market. Different patterns mean different things: the "dead cat bounce," the "Elliot wave principle," the "Hikkake Pattern," "oscillators," and so on. As human beings, we all tend to look for patterns, but Grimm points out that the problem with technical analysis is that it uses black-box methods that have no theory behind them. It's the modern-day financial equivalent of reading fortunes from tea leaves or oracle bones. It's numerology for investors. Those who use technical analysis often succumb to the "problem of randomness": if they are temporarily successful, they may think their approach is correct when in fact they are probably just lucky.

Mises pointed out that human action is not deterministic, but teleological -- determined by freely chosen goals and actions based on those goals. Technical analysis fits into a deterministic, not teleological, framework. Nevertheless, some Austrian economists embrace technical analysis for reasons Grimm cannot figure out. (Maybe it's just a guilty pleasure, like a world-class body builder singing Bette Midler songs in the shower.)

Quantitative Analysis

Quantitative analysis uses mathematical modeling and econometric applications to find investment opportunities. There are countless ways of quantitatively analyzing markets, but they ultimately amount to programming a mathematical model into a computer and then letting the computer make the investment decisions.

Modern Portfolio Theory (MPT), which includes the Capital Asset Pricing Model (CAPM) for estimating the prices of financial assets like stocks, is based on the assumption that the logarithm of price changes in the market follow normal distributions (bell curves). But various people, including famous mathematician Benoit Mandelbrot and financial writer Nassim Nicholas Taleb, have shown that price changes in the market do not follow normal distributions at all. Whereas normal distributions have "skinny tails," meaning the probability of a large deviation from the mean drops off rapidly with the size of the deviation, real-world asset price distributions have "fat tails," meaning the probability of extreme or even catastrophic deviations from the mean is disturbingly high. Moreover, those "fat-tailed" distributions are not well behaved. They often exhibit quasi-fractal behavior. Another failing of MPT noted by Austrian economists is that it totally ignores the role of the entrepreneur. Entrepreneurial action affects the cross-correlations between different assets, which means the MPT "optimizers" that use them can become unstable. For these and other reasons, all of the investment methods based on MPT are severely flawed.

A common practice in quantitative analysis is to "backtest" one's mechanical, model-based trading system on historical market data. The idea is that if the system is successful on past data, it is likely to be successful in the present and future as well. But Warren Buffett succinctly explained in a recent Berkshire Hathaway shareholder report why the backtesting approach is seriously flawed: "If merely looking up past financial data would tell you what the future holds, the Forbes 400 would consist of librarians."

Surprisingly, despite MPT's well-known fatal flaws, it has made its way into how a lot of financial assets are managed these days. For example:

  • Uniform Prudent Investor Act of 1992: If you're running a pension fund in a state that has adopted this act (44 of 50 have), you are required by law to use MPT to manage your assets.
  • Pension Protection Act of 2006: Businesses running pension plans or 401(k)s have two choices: They can either (a) use an advisor who has a Certified Financial Planner (CFP) credential and is paid by fee rather than commission, or (b) use an MPT optimizer model.

A popular outgrowth of quantitative analysis and MPT is passive investing, which emphasizes diversification above all else. The typical example is to buy an index mutual fund, which buys and holds hundreds or even thousands of securities to track a broad market index rather than pick or actively trade securities in an effort to "beat the market." While index funds do have some definite advantages over actively managed funds, such as low expenses, low portfolio turnover, and returns guaranteed not to be below (nor above!) average, their implicit assumption that more diversification is always better may be their Achilles' heel.

Pursuing extreme diversification assumes that the Efficient Market Hypothesis (EMH) is basically correct. The EMH says that markets quickly and accurately reflect known information, so to that extent, the asset's price is always "right" -- only unanticipated information causes prices to be temporarily "wrong." And because savvy professional investors will pounce on that unanticipated information such that the asset's price will be "corrected" incredibly quickly, ordinary investors don't stand a chance of consistently identifying and taking advantage of undervalued or overvalued assets. Some of your attempts may be successful, but most will not since your competition (the people you are trading with) are much more experienced and skilled than you are. So on average, trying to "beat the market" will in the long run result in below-market returns. Therefore, why not just guarantee oneself market returns by randomly selecting a large basket of diverse stocks and holding onto them (more or less what an index fund does)? That's the EMH-inspired Ode to Diversification.

Austrian economics is not compatible with the EMH. The big problem with EMH is its assumption that only unanticipated information presents investment opportunities. It denies the possibility that known information may not be "correctly" factored into the price of an asset. Austrian economics recognizes that people's actions are based partly on subjective valuations, not purely objective data. Different people process and react to information in different ways -- often in very different ways. People can have any number of goals, motivations, desires, preferences, fears, biases, weaknesses, etc. Because of this, it is possible that the current price of a particular asset may not be "right" at all. It could be, for example, that most people are motivated in some way to believe that its price is right, or maybe most people's understanding of economics is insufficient to allow a better estimate of its price. Austrian economics recognizes people as unique, subjective, goal-driven, acting beings. EMH assumes they are robots.

Fundamental Analysis

Fundamental analysis is stock picking. In Theory and History Mises defined the thought process of investing as thymology, the science or philosophy that underlies fundamental security analysis. Thymology is an offshoot of introspection, similar to the methods used in history and natural psychology. At its core is knowledge of human valuations and volitions. Picking stocks via fundamental analysis is the Austrian approach to investing.

Thymology, or security analysis, proceeds in four steps:

  1. Study historical data and events
  2. Identify key factors that influenced past events
  3. Integrate current information into the analysis
  4. Synthesize scenarios to evaluate future courses of action

This means an "Austrian" investor considering a given firm would attempt to gain an understanding of its business (financial statements, management, organizational structure, etc.) and the environment in which it operates (geography, competition, economic and political climate, currency, etc.) before making a decision to buy, hold, or sell. An Austrian perspective, especially knowledge of Austrian business cycle theory, should give an investor a distinct advantage here.

The wise old investors who have advocated a passive approach (including the legendary John Bogle, founder of The Vanguard Group) have been right about emphasizing low expenses and sticking to an investment plan despite temporary fluctuations, but could they have led us somewhat astray by overemphasizing diversification? In a world of general insanity, the Austrian approach to investing is about finding the opportunities that most people are too crazy to notice. Too risky, you say? Not if your view of reality is clearer than most. Gambling is one thing; taking a calculated risk based on solid economic understanding applied to a careful assessment of human motives and actions is quite another.

Investing in a broadly diversified U.S. index fund during a protracted (5+ years) U.S. bear market is like hunkering down and holding on for life while a tornado passes through the neighborhood. That's one way to do it, I guess. A better strategy might be to get out of the tornado's way.