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Thursday, 17 April 2014

Austrian Economics: How Austrians Ride the Financial Bull

By Douglas French

The single most asked question I get at investment conferences is, ‘Do you have a list of money managers who invest guided by the Austrian School of economics?’ The question is a good one. After all, the Austrian School stands alone in predicting the fall of the Soviet Union and the housing and financial crash.

Anyone with a retirement account has been whipsawed by the stock market over the past few decades. Fidelity’s Peter Lynch told everyone to buy stocks and hold. Everything would work out great. Diligent savers would even end up millionaires, courtesy of an ever-expanding stock market. The efficient-market hypothesis (EMH) provided intellectual support for the idea. The market reflects all information, so there’s no way to beat it, said the economists.

Now everyone knows better. Or at least they should.

The average person’s 401(k) was turned into a 201(k) in 2000, and was destroyed again in 2008 if they were brave enough to stay or get back in the market. Many people swore off stocks after the last crash only to watch the S&P 500 triple. Now the Fed’s zero interest policy has pulled them back just in time for the next market train wreck.

Those educated in the Austrian School understand how the central bank creates the business cycle’s booms and busts. And they know there is a better way than just buying, holding, and hoping. But how does one apply it using Friedrich Hayek’s and Ludwig von Mises’ theories to make money in the market?

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