Throughout middle school and most of high school I thought of myself as fairly well educated politically. I was a run of the mill reactionary neoconservative following 9/11. As I believe is typical among young people I had horse blinders on in anything political. The right-wing radio position at the time was the one with which I identified.
As is also typical among young people, I eventually underwent a massive change politically from what I had believed and from what my parents believed. It started with a couple books.
First, was the Politically Incorrect Guide to Capitalism. To this point my economic opinions consisted solely of: if the government cuts taxes, businesses will be able to invest more and the economy will improve – the classic supply side/Reganomics view. Robert Murphy showed how the free economy can manage the allocation of all resources and how government intervention always takes away from the natural profit/loss mechanism.
Next, was Somebody’s Gotta Say It by right-wing talk radio host Neal Boortz. Boortz’s foreign policy and immigration takes preclude him from the land of libertarianism but his was the first book I read that categorically questioned the motives, morality and effectiveness of government.
From there I started reading about free market economics, starting with Milton Freidman and graduating to what is now known as the Austrian School. The weekend before I started my freshman year of college I spent the time that I had allocated to doing an assigned college reading assignment glued to Atlas Shrugged and my neo-conservatism was history.
My college career from then on was spent arguing with Keynesian economics professors or Communist Spanish professors and my free time was spent reading every book I could find from the Mises Institute and eventually visiting it for their week long ‘Mises University,’ program.
Meanwhile, the value investing world in which I had immersed myself starting at age 13 began to slowly slip out of my grasp. Time that I had before spend reading an annual report or projecting future cash flows went to watching an economics lecture or trying to figure out what I really thought about abortion.
I did not forsake investing totally, however. I began to move into the land of shady newsletter writers and gold bugs. Gold was one of the few assets at the time (2010) that had a materially positive return over the past decade.
The arguments of luminaries such as Doug Casey or Porter Stansberry that one could effectively use good economics to predict the results of government intervention and speculate thusly made a lot of sense.
The main argument was and still is that never ending “printing” of money by the unrestrained central banks of the world would lead to inflation. This is a fairly straight forward concept which we will discuss more later on in the book: if the amount of things you can buy in an economy stays constant and the amount of money in the economy increases, the prices of things you can buy will go up.
On the face of this doesn’t seem like much of an investing strategy. However, when you can find assets who will hold their value during inflationary periods you can use them to protect against that inflation.
So I dedicated a very large portion of my portfolios and those that I managed to gold and silver and the miners of both.
This went well for a while and I thought of myself as very smart and agile as an investor. Unfortunately, I did not use many of the investing principles discussed later in this book to safeguard my assets and when the QE’s kept happening and the banks refused to lend, inflation did not happen and many investors left gold thinking it had been in a bubble.
It then collapsed from prices over $2,000/oz to less than $1,200/oz and my portfolios mostly went with it.
This book is the result of a lot of soul searching and book reading over the past five years to discover how I could have invested differently and how I could have adapted to changing scenarios while still utilizing the backbones of Austrian Economics and Value Investing.
We will start with Austrian Economics, going from the statement, ‘humans act,’ to supply and demand, interest rates, the consequences of government intervention, business cycle theory and the virtues of gold as a currency.
Austrian economists alone have predicted every major US financial crisis (and many of those in foreign markets) in advance since before the Great Depression. Austrian theory can be used to explain the fall of the Roman Empire, the Tulip Bulb Bubble, why housing prices inflated to the point of no return in the mid 2000’s and even why textbook prices and college tuition are skyrocketing.
Then we will move on to investing looking at: how to take advantage of knowledge about supply/demand both in consumer products and commodities and in stock volume, predicting which industries will benefit from free market forces and ole faithful – protecting ourselves from inflation.