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Economics is not about material things and objects. It is about human beings, their appreciations and, consequently, the human actions that derive from them.
—Ludwig Von Mises
Many modern disciplines studied separately today were already implicit in the Austrian School of Economics. Complex Systems Theory has recognized that Friedrich von Hayek anticipated many of its discoveries and conclusions in the mid-20th century. The now-trendy Behavioral Finance was already considered by Ludwig von Mises in his 1949 work “Human Action.” Also, both Mises and Hayek recognized the teachings of the ancient Stoics when they emphasized that we must focus on what is under our control, accept reality as it is and self-control ourselves.
After 20+ years of experience in the markets, I’ve concluded that there are few truths about the nature of the markets that endure —all implicit in the Austrian School of Economics:
- Human nature never changes
- Nobody knows what’s going to happen in the markets
- There will always be cycles of boom and bust
- The bulk of our investment results depends primarily on our behavior
What if we took these commonsense truths seriously?
What would be the consequences when it comes to investing? My conclusions —the investment portfolio I propose— are the result of accepting these truths as investment Principles.
1. Human nature never changes
Today’s investors are the same human beings —subjected to the same fears, desires, and bias— as centuries ago. The only things that change are the clothes and gadgets.
This gives the stoic investor —the one who remains sober in the face of intoxicating euphoria and fear— an edge: Letting the biases and emotions of most investors work in our favor instead of against ourselves.
2. Future is unpredictable
From Complex Systems Theory, we learn that the impossibility of predicting the future of hypercomplex systems like markets or the economy is not due to a lack of means or intelligence, but rather an intrinsic property of the markets themselves. In fact, the impossibility of predicting the future of markets was something the Austrian School of Economics understood long before Complex Systems Theory gained traction in the 1980s.
Think of it this way: even something as basic as the three-body problem in physics —predicting where three objects in space with gravity will end up— is mathematically impossible to solve perfectly. Now imagine trying to do that with the financial markets, which have tons of different and evolving forces acting on them and millions of people involved. It’s a pointless endeavor: it’s wiser to focus resources and energy in a direction other than trying to “forecast better.”
3. There will always be cycles
From the Austrian School of Economics, we learn that the economy can never be in perfect balance. This means that economic ups and downs —booms and busts— are just part of how things work. We can’t predict exactly when these changes will happen or how long they’ll last, but we know that good times eventually lead to tougher times, and then things get better again. It’s a constant cycle.
Traditional approach to invest having in mind cycles usually involves forecasting future scenarios and its effects in the asset classes. But no matter how appealing the narratives about what might happen are, this approach is a dead end because, as we stated int the first Principle, no one can forecast the future consistently.
4. The main factor of success is your own behavior
From the Stoicism of the ancient Greeks, we learn that the main factor for success in investing is self-control. And not, as many believe when they approach investing, being right about what the markets will do.
Not falling prey to the forces of our emotions or the biases that lead us to make mistakes is what separates successful investors from those who, despite having a lot of knowledge about investing, harm themselves along the long road.
There’s always a bull market somewhere in the world
Finally, a glimmer of hope for all investors.
Overwhelmed by the daily noise of bad news, we tend to believe more easily in pessimistic scenarios and remain fearful of the future. We easily forget that maybe things are gray around us, but the world is actually very big, and there will always be a bull market somewhere in the world capitalizing on its economic situation.
In summary, if you take these hard truths seriously as Principles for investing…
…Their consequences will lead us to define an investment process (AMAP) that is profitable, robust, and consistent with the nature of the markets and human beings.
AMAP aims to provide equity-like returns over the long term, but with half their volatility and drawdowns. Built with ETFs and easy to implement just once a month.
Do you want to know more? Feel free to explore the different concepts and sections of the web through their key concepts and sections, and do not hesitate to contact me if you have any questions.