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Unfortunately, politicians hold the conviction that money growth gives us economic growth. They are blind to the fact that government cannot create anything. Government cannot make man richer, but it can make him poorer.
At the outset, we must think of capital in a new way, as a verb, not a noun. Rather than an inanimate asset or piece of property, it constitutes an action, a means to an end—to build, to advance, to deploy the tools and instruments of a progressing economy. Indeed, capital is a process, or a method or path—what the ancient Chinese called the Dao.
Unseen are the teleological mechanisms behind what is seen, the “engines of the world” as it were, churning away with time.
these mechanisms are very simple at their core; moreover, they have been clearly revealed by a tradition of economic thought known as the Austrian (or Viennese) School of economics, named (somewhat pejoratively) for its birthplace, the cultural and intellectual nexus of the nineteenth century, where founders Carl Menger and Eugen von Böhm-Bawerk established a new way of thinking about capital as roundabout means to more productive ends.
The great strategists of the world did not need to be taught to train their attention on the means of their later advantages.
we find an intellectual and (far more importantly) practical discipline I call Austrian Investing, which does not directly pursue profits, but rather the roundabout means of profits.
The common thread throughout was always orienting to means, not ends—seeking harmony with the market process, not profits.
“You’ve got to love to lose money, hate to make money, love to lose money, hate to make money. . . . But we are human beings, we love to make money, hate to lose money. So we must overcome that humanness about us.”
Rather than pursue the direct route of immediate gain, we will seek the difficult and roundabout route of immediate loss, an intermediate step which begets an advantage for greater potential gain.
The central concept permeating the Laozi is referred therein as wuwei, which translates literally as “not doing,” but means so much more; rather than passivity, a common misperception, wuwei means noncoercive action—and here we see the overwhelming laissez-faire, libertarian, even anarchistic origins in the Laozi, thought by some to be the very first in world history8 (as in “One should govern a country as one would fry a small fish; leave them alone and do not meddle with their affairs”9—a cardinal Laozi political credo most notably invoked in a State of the Union address by President Ronald
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20 To guide or lure the opponent into emptiness and thus destroy his balance is the very indirect objective—to gain the position of advantage—to be followed by the direct objective of attack. This is the essential tuishou sequence of yielding, neutralizing, and sticking.
There is a definite brand of epistemology at the root of the Laozi. To the Laozi, much of the exterior world is but exterior diversion, much perception is a distraction from a hidden reality
“Venture not beyond your doors to know the world / Peer not outside your window to know the way-making. . . . The farther one goes / The less one knows.”
there is an almost antiempirical vein to the Laozi, a stand against the positivist view of knowledge as exclusively flowing from sense perceptions.
Klipp made it perfectly clear: “You’re not here to make money, you’re here to learn how to trade. If you could walk into the pit to make money, you wouldn’t even be in here. You’d be in a long line all the way down LaSalle Street, still waiting to get in.”
as Klipp said, “There’s only one thing that can hurt a trader at the Chicago Board of Trade, and that’s a big loss,” then, for God’s sake, “never take a big loss.” As his own mentor said to him some 40 years before, “Any time you can take a loss, do it, and you will always be at the Chicago Board of Trade.”
Impatience and intolerance for many such small losses, as well as urgency for immediate profits, Klipp believed, dealt a death blow to traders, an easy and common one. The well-known disposition effect in finance, an observation that goes back at least a century, states that people naturally fall victim to these tendencies, and thus do the opposite of Klipp’s approach: We sweat through large losses and take small profits quickly.
As Klipp said, “One trade can ruin your day. One trade can ruin your week. One trade can ruin your month. One trade can ruin your year. One trade can ruin your career!”
Exploiting others’ immediacy was the logic of the roundabout approach, the fundamental edge—the ultimate edge of trading and investing.
“The whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence: The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy.”33 I could not put Hazlitt’s book down (and
Understanding this process of liquidity is basically about understanding that any market exchange must be perceived as mutually beneficial to both parties.
The real black swan problem of stock market busts is not about a remote event that is considered unforeseeable; it is rather about a foreseeable event that is considered remote—which I have spent the bulk of my career exploiting (and which explains the use of this moniker in some of my current partnerships).
“Anyone can see the pinecones in the tree. None can see the trees, none can foresee the forest in the pinecone.”
Say brought the entrepreneur into the spotlight of economic thought (he is said to have invented the term, which literally means undertaker—which the Austrians call Unternehmer—with the connotation of one who undertakes an adventure1), whereas the entrepreneur had been absent in Smith.
Labor instinctively moves in the direction that promises it the best returns, and thus unfailingly brings to an end that abnormal advantage it enjoyed; so that inequality is merely a spur that, in spite of ourselves, drives us on toward equality. This is one of the finest examples of teleology in the social machine.”
Bastiat chafed at arguments that power in the hands of the state was meant for the good of all, and mocked such thinking by wryly envisioning a beneficent state to dispense “bread for all mouths, work for all hands, capital for all enterprises, credit for all projects, salve for all wounds, balm for all sufferings, advice for all perplexities, solutions for all doubts, truths for all intellects, diversions for all who want them, milk for infancy, and wine for old age—which can provide for all our wants, satisfy all our curiosity, correct all our errors, repair all our faults, and exempt us
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(Marx regarded Bastiat as “the most ‘superficial’ apologist of the ‘vulgar economy’”
“Now this difference is enormous, for it almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, at the risk of a present small evil.”
Coupled with this is the importance of deductive foresight, a “more gentle teacher” than the far rougher one of inductive experience, which “teaches effectually, but brutally.”
Further demonstrating his teleological thinking, Menger saw the inherent means-ends relationship in human choice. Jevons and Walras, however, rejected cause and effect, which then became the standard in economics—except among the Mengerians and the Austrian School.
Smith saw this progressing division of labor as the driver. However, it was clear to Menger that this was “but a single cause of progress in human welfare”—that is, a proximate cause—whereas the higher level, ultimate cause was “the increasing employment of goods of higher order upon the growing quantity of goods available for human consumption (goods of the first order).”48 This simple logic will become an essential piece of Austrian Investing.
Menger’s discovery carried a far greater weight in the simple fact that the laws of human needs, themselves, were sufficient to explain the “complex phenomena of the modern exchange economy.”
Menger, unquestionably, was the beginning, the one who planted the flag for the Austrian School and its unique methodology of a priorism, deduction, and the importance of subjective human choice and action—all set within a teleological framework of the entrepreneur who must gather the means to achieve the ends of meeting the consumer’s wants and needs.
Capital must be thought of as a temporal structure that is always dwindling away. Moreover, the advantages and gains that are realized today are due to capital that was invested previously.
Using impeccable logic, Böhm-Bawerk showed that the workers who are employed by the entrepreneur are paid immediately for the “full value” of their labor, so long as that value is correctly calculated by including the time element.
The act of organizing production is effectively the act of lending, as inputs are paid up front in order to command product for sale much later. If the profits exceed the costs of waiting, there is an intertemporal arbitrage between inputs and output to be had.
Once we take the real-world element of uncertainty into account, it’s not clear how we could even apply the Marxist prescription of paying workers the “full value” of their labor. If a firm goes out of business, should it have the right to claw back the wages it disbursed over the years, because in retrospect the workers involved were clearly overpaid?
With his wage policy, Ford also fired a shot across the bow of Roosevelt’s New Deal, which he vehemently opposed, believing that higher wages and less restriction on business, and not higher taxes, would benefit the country.
As Ford observed, “The seeds of bad times are in the mistakes which we make in the good times. Yet in the good times no one wants to hear of the mistakes we may be making. The policy then is to ‘get while the getting is good’.”
the maxim of Carl Gustav Jacob Jacobi, the nineteenth-century German mathematician, “Man muss immer umkehren,” or, loosely, “Invert, always invert”—meaning solutions to difficult problems can often be found by examining them in the inverse.
Thus, to think and act intertemporally, we must go against what our culture teaches us. Would we not want to live our lives as a complete series of moments to the best and fullest way possible?
If we extrapolate these findings, how might they apply to adults who do not have attention deficit disorder (ADD), but experience “pseudo-ADD” because of the pressure of multitasking?
Is modernity with its ubiquitous productivity-enhancing technology tools turning us into a society of hyper-hyperbolic discounters? These questions are worth considering given the findings of Edward Hallowell, a psychiatrist who, in his superb book CrazyBusy, discussed the plight of adults who did not have ADD, but for whom a “severe case of modern life” gave them ADD-like symptoms (what he calls “F-state” for “frantic, frenzied, forgetful, flummoxed, frustrated, and fragmented”).
Research is increasingly showing that a restorative for what I’m calling the shi system is time spent in the woods, particularly in children, for whom exposure to nature seems to mitigate the impact of ADHD (or, as Richard Louv calls it, “Nature Deficit Disorder”).
time inconsistency is the source of much conventional wisdom on Wall Street, from momentum investing to the merits of monetary policy.
“They feel lucky and become openhanded in spending and enjoying life. They embellish their homes, they build new mansions, and patronize the entertainment business.”
Genuine, savings-driven declines in the interest rate lead to capital accumulation, more roundabout production, and a progressing economy; artificially lower rates, driven by credit inflation, ultimately lead to naught but capital consumption and a regressing economy.
Sounding a decidedly Libertarian view, Zhuangzi (also known as Chuang Tzu, as Rothbard calls him), “was perhaps the first theorist to see the state as a brigand writ large: ‘A petty thief is put in jail. A great brigand becomes a ruler of a State.’ Thus, the only difference between state rulers and out-and-out robber chieftains is the size of their depredations.”
In addition to casting our net for firms with a high ROIC, we are also looking for firms with a low Faustmann ratio, meaning a low market capitalization (of common equity) over net worth (or invested capital plus cash minus debt and preferred equity) ratio.
All can stand in the company of Bastiat and Menger, Böhm-Bawerk and Mises (and Laozi, Sun Wu, Clausewitz, and, of course, Klipp) to gauge their approach.
