# Investing for the Long Term **Francisco Parames** | [[Prediction]]  --- > "Product prices—which depend on consumers' willingness to pay—determine costs and not the reverse, as many people think." This line flips conventional thinking. Most people (especially investors) assume costs are fixed and prices follow. But Parames, grounded in Austrian economics, shows that **demand determines costs**. Prices are set by what customers will pay. Costs adjust to meet that demand—or the business fails. **Real assets (equities), not monetary assets, preserve and grow wealth.** Governments inflate currencies to avoid defaults. Bonds and cash erode purchasing power. Equities—ownership of productive enterprises—compound returns and protect against monetary depreciation. The bulk of savings should sit in real assets run by competent, aligned managers. Monetary assets are for short-term liquidity only. > "The primary objective of any company or venture is survival; after that we can talk about profits." This prioritises durability over optimisation. Invest in businesses with sustainable competitive advantages, run by entrepreneurs (not hired managers), that generate more cash than their P&L suggests. --- ## Core Frameworks ### [[Austrian Economics]] – Action, costs, and opportunity Economics and investing are about **understanding human behaviour**, not numbers. The Austrian paradigm is based on a **'theory of human action'**—an ongoing, dynamic, creative process. Objectives and means are not given; they continually change as agents act and react. **Costs are subjective**: "Cost is the subjective value the actor attaches to those ends they give up when they decide to pursue a certain course of action" (Huerta de Soto). Costs are discovered through action and vary depending on circumstances and alternatives. Ultimately, it's **opportunity cost**. **Prices determine costs, not the reverse.** Product prices—based on consumers' willingness to pay—determine the costs necessary to meet that demand. Don't take costs as given. A commodity producer that looks "cheap" based on current costs may be vulnerable, because costs and margins are dynamic, not given. ### [[Real Assets vs Monetary Assets]] – Goods vs promises **Real assets** reflect ownership of underlying assets that create income for the services they provide: shares, real estate, commodities, art, unique talents. **Monetary assets** are promises to pay, backed by paper money: cash, bonds. Real assets are payment rights deriving from ownership. Monetary assets are promises backed by depreciating currency. Over the long term, owning a diversified portfolio of shares produces greater returns and larger increases in purchasing power than any other investment—especially versus monetary assets. **The bulk of savings should be invested long term in equities.** Monetary assets should only cover occasional cash needs. ### [[Time Preference and Savings]] – Sacrifice for future gain **Economic growth is fundamentally based on increases in productivity resulting from division of labour, financed by savings.** Time is essential: make an immediate sacrifice for the development of greater future productive capacity. Saving is key to investment and the ultimate source of future wealth. Without savings, there can be no healthy investment or general well-being. Investors should look beyond immediate consumption and sacrifice immediate returns when beginning to invest. Rewards come later. ### [[Risk as Purchasing Power Loss]] – Not volatility Risk = the possibility of a **permanent loss of purchasing power** from an error of judgment. Volatility is not risk. For long-term investors, equities are paradoxically **less risky** than monetary assets because they compound returns and preserve purchasing power. Purchasing power is destroyed by currency depreciation (from increasing money supply). The elimination of the gold standard facilitated monetary inflation as a form of non-payment. --- ## Key Insights **The Austrian paradigm is based on a 'theory of human action', which is understood to be an ongoing dynamic and creative process.** Entrepreneurs make general predictions based on a priori analysis—inward-looking reflection on how reality works based on a small number of irrefutable axioms. Steer clear of economies whose growth is based on credit creation under low interest rates established by central banks. **The economy's natural state is deflationary.** Productivity increases enable more goods for the same money. Inflation is the result of artificial money creation. **Artificial credit creation with low interest rates drives unchecked economic booms, which inevitably end in painful recessions.** The greater the intervention, the less economic growth and legal security, leading to greater reluctance to invest. In an economy subject to state intervention, **high inflation** is the most likely outcome. The government is judge and jury and rules in its own interest. Best to be prepared by investing in real assets: shares, houses, commodities. Always. **Investing in stocks is not easy.** You have to buy what nobody else wants and sell what everyone else is trying to buy. It's a fight against our nature. Study the company first; only then look at the share price. "I don't think I have ever tried to buy a stock valued by the market at over 15× earnings." The multiple to apply to normalised earnings depends on business quality. 15 is a reasonable baseline (equivalent to a 6.6% earnings yield). Outstanding businesses can justify 15–20. Mediocre businesses with limited barriers: 10–15. **The goal is to find companies with high returns from competitive advantages**, and understand where those returns come from and whether they can be sustained. The ideal company generates **more cash than implied by its P&L**—a sign of conservative accounting and that earnings are understated. **"The true value investor, who deserves my utmost respect, is somebody who devotes their life to their passion of reading."** A passion for reading is vital for a good analyst or fund manager. Nobody can study for 50 years unless they enjoy it. **Getting the valuation right is key.** First study the company, then look at the share price. If assessment and valuation are correct, the investment will be profitable—provided you are patient. Time plays in your favour. --- ## Connects To - [[7 Powers]] – Hamilton Helmer on sustainable competitive advantages complements Parames on durability - [[How Finance Works]] – Mihir Desai on capital allocation and valuation - [[Prediction Machines]] – Agrawal, Gans, Goldfarb on judgment in decision-making pairs with Parames on subjective costs - [[Everything Is Predictable]] – Tom Chivers on Bayesian reasoning and priors --- ## Final Thought Parames doesn't forecast GDP, interest rates, or election outcomes. He focuses on what he can control: understanding businesses, assessing competitive advantages, and valuing companies conservatively. His discipline is Austrian economics, but his method is simple: find businesses that survive, generate cash, and compound—then buy them when they're undervalued. Hold for decades. Ignore currency fluctuations, political cycles, and market sentiment. **Time plays in your favour.** **Prices determine costs.** This inverts how most people (and most analysts) think. They assume costs are fixed and margins follow. But costs are subjective and dynamic. They're discovered through action, and they vary with market conditions. A commodity company that looks cheap based on current costs may be a value trap, because costs can collapse if demand falls. **Real assets vs monetary assets.** This distinction clarifies investment strategy. Monetary assets (cash, bonds) are hostage to currency depreciation. Governments inflate to avoid defaults—it's a hidden tax. Real assets (equities, property) represent ownership of productive enterprises that serve actual human needs. Over decades, equities compound returns and preserve purchasing power. Volatility is noise. **The risk is holding monetary assets long-term.** **Survival first, profits second.** Most investors optimise for ROE, growth, or margins. Parames starts with survival: can this business endure through cycles, disruptions, and competitive attacks? Only then does he ask about profitability. This prioritises durability over optimisation. Parames rarely buys above 15× earnings. That means sitting out bull markets. It means watching competitors chase momentum. It means accepting that most of the time, there's nothing to do. But over decades, this discipline compounds. Study the business. Wait for the right price. Buy. Hold. Let time do the work. It's simple, but not easy. And that's why it works.