Now, related to a libertarian philosophy is an acceptance of the precepts of Austrian economics and, in particular, the predictions with regards to the activities of markets and groups of people that was evidenced by Ludwig von Mises in “Human Action.” I would say, in that sense—the understanding of economic cycles and the understanding of the impact of cycles on human action—that that part of my investing philosophy has been absolutely instrumental to my success.
Von Mises points out that although all of us believe ourselves to be rational fact-gatherers, that’s not what we are. We have a view of ourselves as impartial observers that gather information, hither and yon, and process it in a rational fashion. But that’s not what we do, in fact. We gather information that is convenient to our prejudices and our paradigms, and we use the information that we gather to support those same prejudices and paradigms.
Von Mises also points out that our expectation of the future is set by your experience in the immediate rather than the distant past, which is why bull markets go on longer than they should and why bear markets go on longer than they should. If you have done lots of work around an investment or speculation and you’re attracted to it, but your experience in the last five years has been that you get spanked for all your hard work, you tend to be cautious and conservative in bear markets—which is precisely when the markets are cheap—because your most recent experiences have been bad rather than good.
Conversely, in bull markets where stocks are doubling and tripling for no reason, you do two things. You confuse a bull market with brains. That is, you assume that your good performance is in some way, shape or form due to your own efforts. And you also become less cautious. Your expectation for the future being set in the immediate past means that you’re irrationally bullish. Even in a market that’s up 400% or 500%, which is, as you know by now, Maurice, something that’s not an uncommon phenomenon in our sector. Yeah, I’ll leave it there."
- Source, Rick Rule of Sprott
