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My Current Investment Strategy and the best Austrian School Links of the Week

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November 22, 2009 – Comments (14)

The S&P 500 Index closed at 1,071.66 on Sept. 22nd. On Friday, it closed at 1,091.38 for a 1.8% gain over the last two months. That's a cherry-picked time frame, but I'm not making a bull or bear case in this post. I want to talk about what I've been doing with my money recently, a strategy (if it can even be reasonably referred to as such) that I will continue until after the holidays.

My thought process is not easy to put on paper (at least for me), but let me walk through what I see going on. Right now, there are very few great investments lying around for the taking. That's not to say there are no great investment opportunities available to any of us, merely that an average fella like myself is having difficulty spotting the companies I like at a price I find reasonable.

Stock Market

I've moved out of my only gold miner (GRZ), which I purchased and recommended at $0.50 two months ago. The stock has more than doubled while the balance sheet has gotten twice as bad! That's a sign for me to take my profit and move on.

I've picked up a couple of call options on some stocks I thought would benefit if the Senate passed the Health Care bill. (The bill cleared the Senate last night.) That was an example of a free market supporter hedging his bets. Hat tip to the great investors at CAPS who turned me on to these opportunities. You guys are the best.

I still hold a basket of stocks for the long run, mostly tech and energy stocks. I'm fairly happy with my first year performance - the first year I've taken my investing seriously and had the cash to do it right. I've now been through one of the worst bear markets and best bull markets in most lifetimes.

Gold and Precious Metals

I don't own any physical metal (other than jewelry), metal ETF's, or miners. That's not to say anyone is a fool for doing so. I do agree that buying anything at an all time high is usually a bad idea (props to dudemonkey for reminding me). I agree that gold trends with inflation (props to checklist34 for a great recent post on historical gold trends), but we normally don't agree on how to measure inflation so that gets murky. Gold miners always seem to be hanging by a thread. The best ones don't appeal to me any more than a quality company (like Amazon) if I could get in at a decent price. Just as gold will never go to $0, a good company such as Amazon won't go bankrupt any time soon.

Inflation vs. Deflation

We are already in an inflationary environment. Not only have prices in the stock market risen considerably thanks to a huge expansion of the Fed's balance sheet, but consumer prices are higher as well. As I have noted before, FDIC reporting shows buying of $80-$100 billion in equities among banks every quarter since the Fed doubled its balance sheet, and NO ONE can tell me where any of the remaining money has gone, not to mention all of the money created by foreign central banks. Meanwhile, traditional CPI calculations show inflation currently running at 5% (for more on how CPI is calculated now vs. pre-Clinton/Greenspan manipulation see Shadow Stats.)

At this pace the dollar will lose half its purchasing power in about 14 years. That's nothing to be flip about, nor is it a reasonably hopeful estimate given that a meaningful (and real) economic recovery across the board will boost that rate much higher. Unless, of course, the Fed pulls the plug again, and that will plunge us back into the abyss. They appear to have backed themselves into a corner. We'll see.

Real Estate

For the last year, I've been investigating a home purchase in southern California and an investment property in D.C. D.C. has advantages that you can only miss if you let your hatred for government blind you to reality. Every 2 and 4 years, a new crew of sycophants and suck ups rolls into town, keeping prices from bottoming. As government grows, more and more wealth disappears from middle America and heads to the Lootway. If you don't believe me, take a trip to D.C. People are doing quite well there (unless they're on the wrong end of the welfare State.) It's still not the best investment environment, but there are opportunities. I've found a few condos that would produce a cash flow at current prices, are located in decent neighborhoods, and will have no trouble renting. If I feel like taking on the headache, I may take the plunge.

Southern California (and Sacramento and San Fran) also appeals to me. For starters, I really like it there and that’s the most important valuation for me! Also, the pending California government implosion will be a long term positive for the investment environment. Any time government shrinks, it's a good thing. Should California's government finally reduce its size and scope, it will be a great thing for a private sector already blessed with a talented labor pool, great weather, and hot chicks.

Overall, the nation-wide housing market will not recover price-wise in any meaningful way for a long time. When a bubble bursts, it needs to liquidate before new wealth can be created. We are far from liquidating all the bad assets in the housing sector. I am not looking at any real estate investment, either a home for myself or a rental property, with any expectation of price appreciation.

There Is No Such Thing As Intrinsic Value

I love reading Buffett and Graham. They are right way more often than most investors. This is a sematic argument, but Buffett’s definition of intrinsic value is just another subjective evaluation as first described academically by Carl Menger in his book Principles of Economics. All prices in the market are the result of the subjective evaluations of individual actors, such as Buffett. Even the most blessed and gifted mathematician must use subjective criteria to calculate a stock price. He or she must decide what information shall be included in the calculations and what to leave out; which formulas, trends, and data points will be included and how much weight will be given to each. The savvy trader and investor may have very good reasons for every piece of information in their magical spreadsheet, but it is still based on subjective evaluation.

Intrinsic Value is just another way of saying Subjective Value. There is no real, perfect, absolute price for anything. If you find this statement controversial, let’s discuss it below in the comment section. I’d be happy to hear your opinion.

The Best Investment I Can Make

There are great investments out there for sure. However, considering my expertise (or lack thereof), my subjective evaluations of various prices available to me, and my review of the various experts I trust on economic issues I recently decided on a course of action that I believe will return the greatest investment returns for me.

I am showering my loved ones with gifts.

Normally, I'm quite frugal (and even this current strategy doesn't call for giving myself any presents!) But I've definitely bought more gifts for my loved ones in the past 2 months than I have in a long time, and I will continue to do so throughout the holidays (I haven't even warmed up yet. I still haven't started xmas shopping!). Here's my logic:

1. I don't want to be holding cash right now. It loses it's value every day.

2. I haven't found an investment I like (again, that doesn't mean there are no good ones, only none that meet my admittedly strict criteria.)

3. Inflation next year and the year after that will raise prices higher than ever. If I want to buy new earrings for my fiancé or a new watch for my father, why wait for the coming 10% jump in price?

4. Buying gifts for those that love you always gives you a nice return. If it doesn't, you or they are doing something wrong.

5. I already have a rainy day fund, zero debt, and a stable job. If you don't have those things, my best advice to you is to make them your top priorities.

So that's what I'm going to do for the next two months. I'll keep looking at opportunites to invest but in the meantime, it's a bull market in presents if you're on my list (applications to be on that list can be submitted in the comments section.)

Everybody Love Everybody.

Austrian School Links of the Week

The Austrian School continues to grow at impressive rates. More young people are getting involved than ever, more scholars are taking its arguments seriously, and the current crop of Austrian academicians continue to explore their ideas and the ideas of their rivals. It's an exciting time to be an armchair economist. It is decidedly not exciting if you could care less about economics. There is nothing inherently wrong with that either. I feel thankful that my fiance's eyes glaze over whenever I start talking about central banking. She keeps me young.

What is Money? The Conclusion by Gary North

Austrian School economist and investor Gary North wraps up his 17 part series on money in this article. The point of interest here is his strategies for wealth protection in case of government default. He also reviews the rival theories on the nature of money.

The rival views insist that the free market is insufficient to provide a reliable monetary system. Either the national government or the nation's central bank must intervene in the free market in order to provide stability and reliability to the money system and therefore to the economy.

The logical extension of this outlook is that there is a great need for a world government and a world central bank, which together provide such stability internationally. Most economists and politicians refuse to say this in public, but this is a matter of prudence, not logic…

What is Money?

Full Article

Whole Foods CEO John Mackey On Mises and the Business Cycle

In this video with Reason.TV, Mackey explains his affinity for Mises and Hayek, as well as his thoughts on health care reform.

The Global Warming Email Scam

It gets worse for the AGW crowd every day. In case you haven’t heard, a hacker in Russia came upon over a 1,000 emails from AGW scientists. These emails have been spreading by wildfire as AGW supporters insist they prove nothing. Judge for yourself. At the LvMI forum, there is a collection of links for your further edification. With a little Google search, you find the entire database of emails and a juicy AGW pamphlet called Rules of the Game which lays out the strategy for convincing the UK public to go along with the AGW propaganda.

Obama is too Misesian!

At least one Left writer has decided its never too early to start rewriting history. "Obama's metamorphosis into Ludwig von Mises sends a disturbing message to working people as well as to foreign creditors" – Mike Whitney

Um, ok. Looks like they are ramping up for the Hoover defense, i.e. claiming that the first intervention failed because it was just too lassie-faire. Rothbard crushed the Hoover myth in America’s Great Depression. The Left, however, never read Rothbard. Pity for us all.

Robert Murphy takes on Efficient Market Cranks

In this article, economist and historian Robert Murphy takes on some of the less thoughtful defenses of EMH. He picked the low hanging fruit here. The best evidence that EMH is wrong is GMGMQ’s performance on the day bankruptcy was announced. Then again, I’m willing to listen to an EMH proponent if my understanding of the subject proves to be incomplete. Comments and thoughtful discussion are welcome below.

An Austrian Scholar on Good Inflation

Austrian professor Joseph Salerno explains his belief that certain types of inflation are beneficial. Careful with this one. Salerno’s definition of inflation (monetary vs. price) is muddled, but his arguments are interesting and thought provoking. His discussion of free banking needs more room than a daily article but I enjoyed it. The free banking argument among Austrian scholars is a source of great tension in the school and occasionally resemble the slap fights I get into here 

Keynes the Man

It’s strange (perhaps not) that the foremost research on Keynes’ work and life comes from a rival school. Here is a great overview of Keynes’ values, life, education, family, and more.

Krugman’s Magic Solution to Budgetary Woes

What would a week in the Austrian School be without a joke or two at Paul Krugman’s expense? Here, Robert Murphy takes one of Krugman’s policy recommendations to its logical conclusion and has a little fun at a Nobel Laureate’s expense.

Random Will Ferrell reference:

”Mr. Krugman, with all due respect, and I mean ALL DUE RESPECT, that idea ain’t worth a velvet painting of a donkey and whale gettin’ it on.”

The Federal Reserve’s Waterloo

Saving the best for last! In case you live on another planet (or don’t troll CAPS blogs on a daily basis), there is currently a battle brewing between a Libertarian/Progressive alliance (led by Ron Paul and Trey Grayson) and the Federal Reserve. Most recently, the Paul/Grayson amendment to H.R. 1207, an effort to remove Mel Watt and Barney Frank’s gutting of the original bill, passed by a 43-26 vote. This was a devastating blow to the Federal Reserve and its cabal of secret bankster gangsters. The Fed has pulled out all the tricks to defeat this bill, but so far has been unsuccessful. A House vote on H.R. 1207 is now eminent, and with over 300 co-sponsors, passage is a lock. Only the Senate and a looming Obama veto (so much for transparency) stand in the way.

Glen Greenwald at Salon.com and Ryan Grim at Huffington Post have all the juicy details of the backroom alliances, backstabbing, and the unlikely coalition between Labor Unions and Libertarians in their effort to open the Fed’s books. (Historical note: Labor Union opposition to inflation is neither unlikely nor surprising and has been a vocal concern for them in Europe and America for a century. Be careful not to confuse Syndicalism [worker ownership of the means of production] with other forms of Marxism, like Lenin’s purposeful inflation under War Communism.)

Enjoy your weekend!

David in Qatar

14 Comments – Post Your Own

#1) On November 22, 2009 at 2:16 AM, Tastylunch (29.26) wrote:

Personally I think DC is an easier bet than SF or SoCal at the moment.

although like any RE deal, it really depends deal to deal, neighborhood to neighborhood. 

The best estimates I've seen for CA real estate is two more years to the bottom, but after that Bay area real estate should/could be quite a steal.

What I've been buying is farmland and select agriculture plays. Jim Rogers has got me convinced on that one.

Infaltion/deflation (at the omment I see no infaltion on main street but I see plenty at the Wall Street asset level), people got to eat and the rising wealth of the BRIC countries is stressing food resources...

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#2) On November 22, 2009 at 2:27 AM, Tastylunch (29.26) wrote:

FWIW

I do run some retail stores and our repurchase costs for merchandise is a lot less than last year. The price wars should be intenses this year

If inflation is going to come to Main street you'll likely never get a better xmas to spend on money gifts than this one.

So I think you hae a good plan.

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#3) On November 22, 2009 at 2:42 AM, stocki711 (98.79) wrote:

"There Is No Such Thing As Intrinsic Value

I love reading Buffett and Graham. They are right way more often than most investors. This is a sematic argument, but Buffett’s definition of intrinsic value is just another subjective evaluation as first described academically by Carl Menger in his book Principles of Economics. All prices in the market are the result of the subjective evaluations of individual actors, such as Buffett. Even the most blessed and gifted mathematician must use subjective criteria to calculate a stock price. He or she must decide what information shall be included in the calculations and what to leave out; which formulas, trends, and data points will be included and how much weight will be given to each. The savvy trader and investor may have very good reasons for every piece of information in their magical spreadsheet, but it is still based on subjective evaluation.

Intrinsic Value is just another way of saying Subjective Value. There is no real, perfect, absolute price for anything. If you find this statement controversial, let’s discuss it below in the comment section. I’d be happy to hear your opinion."

 

I am quick to think your wrong. There must be a intrinsic value because every security has an underlying risk. The expected value of the security based upon returns over various scenarios and the likelihood of the scenario to occur. Then this expected value is the intrinsic value of the security (the price you would not care whether you purchased or not). This expected value is impossible to calculate accurately at the moment but the fact that it exists means a formal is available. This is not quantum physics where it relies on your relative position since an entity involved with a security (such as a company and its common stock) is disconnected from any individual investing in the entity.

Therefore I feel there must be an intrinsic value formula...and it would be nice to figure it out... 

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#4) On November 22, 2009 at 2:43 AM, whereaminow (20.57) wrote:

Tastylunch,

Awesome! Thanks for your thoughts.

I recognize that it is possible I'm practicing some form of fooling myself, basically being too lazy to find a great investment in the market and creating a clever excuse that I'll just go on a shopping spree instead.

I've been putting off the SoCal property for a long time. It's a home purchase, so picking the right time to move back to the States has a lot more to it than finding the right price.

Question:

I enjoy Rogers commentary as well. If I'm not buying farmland, what is the best way to profit from a rise in agricultural prices?

David in Qatar

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#5) On November 22, 2009 at 3:05 AM, whereaminow (20.57) wrote:

LOL, I just realized that I wrote "Ron Paul and Trey Grayson." It should be Ron Paul and Alan Grayson of course. I hope that was not a Freudian slip! Trey Greyson is Rand Paul's main opponent in the Kentucky Senate primary.

stocki711,

I only have a beginner's understanding of option pricing, but doesn't binomial pricing using historical volatility in its price calculations. Don't remember about Black-Scholes and will look it up.

If so, the selection of including historical volatility, even if widely agreed, is still subjective. Individual options actors deciding that it was the best way to judge future volatiltiy (and it may be, not denying that), but the selection to include it and exclude other factors is still subjective.

David in Qatar

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#6) On November 22, 2009 at 3:23 AM, sleepreading (< 20) wrote:

Great post david. I paticularly like the obama is now the new Mises. I told everyone here before that Obama is the Magic Man. Now you see him; *wave of the hands in front of his face* Now you don't. Perhaps he can work something out with David Copper field so that when he gives speeches his telepromter can poop out little rabbits all over the stage.

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#7) On November 22, 2009 at 3:53 AM, whereaminow (20.57) wrote:

I see my links got all jacked up. Let me get that fixed and I will post all the links again in the comment section. Damn!

David in Qatar

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#8) On November 22, 2009 at 4:13 AM, whereaminow (20.57) wrote:

http://blog.mises.org/archives/011075.asp

Mackey Video

http://mises.org/Community/forums/t/12162.aspx

Global Warming Email Links

http://blog.mises.org/archives/011072.asp

Obama as Mises

http://mises.org/daily/3835

Murphy on Efficient Markets

http://mises.org/daily/3874

Salerno on Inflation

http://mises.org/daily/3845

Keynes

http://mises.org/daily/3832

Murphy on Krugman

http://www.salon.com/news/opinion/glenn_greenwald/2009/11/20/transparency/index.html

Salon article

http://www.huffingtonpost.com/2009/11/19/fed-beaten-bill-to-audit_n_364546.html

Huffington Post article

Sorry for that. Don't know what happened there. Hope that helps.

David in Qatar

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#9) On November 22, 2009 at 5:43 AM, 1315623493 wrote:

As much as I am practically diametrically opposed to everything you stand for in economics, I'll give you a rec. I still think we'r in a deflationary environment based on CPI figures (which I haven't checked for a few weeks so they may have changed), but on the verge of entering back into an inflationary atmosphere, and I welcome it. 

My investment strategy entails mining for the highest quality, lowest valued stocks, like panning for gold in a river. I pick out these stocks using a proprietary financial model, rate it, figure a target price, and write a full report on it.

http://www.betapeg.com/stock_picks__reports

Check it out. My report's performance as of November 16, 2009.

http://www.betapeg.com/BetapegHoldings.html 

Intrinsic value or target price, whatever you want to call it, is very much subjective. As we all know, economics is a social science, and nothing is absolute. I use target price as an indicator of value. And also a valuation as if I am going to buy the entire company myself. Combine a stock far below my calculated target price, with a high rating indicated by my financial models, and I have a stock which has a high probability of returning me some fat capital gains. Rinse, and repeat. It has been working for me so much so, I started a company for stock research, based on my models. 

www.betapeg.com 

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#10) On November 22, 2009 at 5:52 AM, whereaminow (20.57) wrote:

BetapegLLC,

"diametrically opposed"

I'm reminded of a scene from "A Few Good Men"

Lt. Weinberg: "I strenuously object?" Is that how it works? Hm? "Objection." "Overruled." "Oh, no, no, no. No, I STRENUOUSLY object." "Oh. Well, if you strenuously object then I should take some time to reconsider."

As for all that other stuff between us, see here.

Thanks for you thoughts on investing. Your beliefs are similar to mine, but far more well defined. Good luck with your company.

David in Qatar

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#11) On November 22, 2009 at 1:28 PM, ttboydxb (29.09) wrote:

Both Betapeg, and whereamI,  I am always educated by both your posts, and I find the differences of opinion between the two of you absolutely necessary for someone trying to make wise choices in these crazy times.  To both of you, keep up the good work, and Nathan, I'll be sending you an email soon!

 

Thanks always to the both of you for the hard work!

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#12) On November 22, 2009 at 6:36 PM, lucas1985 (< 20) wrote:

@whereaminow,
"Robert Murphy takes on Efficient Market Cranks

In this article, economist and historian Robert Murphy takes on some of the less thoughtful defenses of EMH. He picked the low hanging fruit here."

He didn't pick low hanging fruit. He misinterpreted other people's statements and rebutted from there. This isn't a way to construct a serious argument. He should have acknowledged their opponents properly, present contradictory evidence and formulate new theoretical frameworks.
- Theoretical background on EMH [1, 2]
- Evidence contrary to EMH [3, 4]
- Alternative theoretical framework [5]

"Keynes the Man

It’s strange (perhaps not) that the foremost research on Keynes’ work and life comes from a rival school. Here is a great overview of Keynes’ values, life, education, family, and more."

Wow, attacks on Keynes can get pretty shrill. Selective reading of the evidence doesn't make you a great scholar.

"Even the most blessed and gifted mathematician must use subjective criteria to calculate a stock price. He or she must decide what information shall be included in the calculations and what to leave out; which formulas, trends, and data points will be included and how much weight will be given to each. The savvy trader and investor may have very good reasons for every piece of information in their magical spreadsheet, but it is still based on subjective evaluation."
Reasonable assumptions and sound mathematical modelling is not subjective evaluation. You can subjectively evaluate management and others things but financial statements are hard data.

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#13) On November 22, 2009 at 10:58 PM, rexlove (99.43) wrote:

Gotta agree with you on the whole notion of 'intrinsic value' of a stock. It's clearly subjective. I remember hearing someone say that the market us neither under-valued or over-valued but always corrrectly valued.  

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#14) On November 22, 2009 at 11:32 PM, 1315623493 wrote:

I have no trouble agreeing to disagree because really, we can debate all we want, in reality, our opinion is moot. Whatever we believe as individuals changes little in the actual order of things. But it doesn't take away from the fun!

I'll be waiting for that email Phillip!

Rexlove, there is a saying, "The market is a voting machine short-term, but a weighing machine long-term." In my opinion, the market is just a huge herd led by "smart money", with everyone else following after them. That is why I make investment decisions completely independent of any other analyst, talking head, or market action. 

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