Value investing and the Austrian School of Economics

Price versus value

A value investor invests his money only if (1) he can come up with a reliable estimate of the true economic value of a company and (2) there is a sufficient discount between the company’s intrinsic value and the current market price (which is called the margin of safety). Value investors therefore take advantage of situations in which assets are mispriced in the market place.

The founding father of value investing is Benjamin Graham (1894 – 1976). He primarily concentrated on investing in undervalued assets. Warren E. Buffet developed Graham’s strategy further, investing in those companies that (1) enjoy a sustainable competitive advantage (market entry barriers) and (2) are in a position to compound their profits at high returns on capital.

Austrian School of Economics

The Austrian School of Economics is a comprehensive economic school of thought, which studies economics from the viewpoint of purposeful action of individual actors. It originated around the end of the 19th century in Vienna, Austria. The insights of the “Austrians” stand in sharp contrast to today’s mainstream economics. Interestingly, the ”Austrians” foresaw the current crisis whereas mainstream economists have not.

The methodology of the “Austrians” provides a theoretically sound explanation of the root cause of the current financial and economic crisis. Furthermore, the Austrian methodology allows one to identify economic regularities and deriving robust structural forecasts, especially as a result of government market interventionism.