Tuesday, September 3, 2013

Spitznagel, The Dao of Capital

The Dao of Capital: Austrian Investing in a Distorted World by Mark Spitznagel (Wiley, 2013) is a beautifully crafted book, one I can recommend to readers of all political/economic persuasions. Yes, Ron Paul wrote the foreword and the book will undoubtedly appeal to Fed bashers, but its main line of reasoning transcends ideological divides.

Spitznagel advocates a roundabout (shi, Umweg) approach to investing, which involves “waiting and preparing now in order to gain a greater advantage later.” (p. 3) Admittedly, waiting and preparing can be, and usually is, a painful process. Think of Robinson Crusoe who sacrificed time that could have been spent catching fish by hand or with a crude spear in order to build a simple boat and a fishing net. He went hungry for weeks in order to position himself for a larger catch later on. “This is Umweg: Crusoe ultimately catches more fish by first catching fewer fish, by focusing his efforts in the immediate toward indirect means, not ends.” (p. 110)

Spitznagel develops his thesis by drawing on the wisdom of the Laozi (“the advantage comes not from applying force but from circular yielding”), the paradox of his mentor at the Chicago Board of Trade (“You’ve got to love to lose money, hate to make money, love to lose money, hate to make money…. But we are human beings, we love to make money, hate to lose money. So we must overcome that humanness about us.”), the military strategies of Sunzi and Clausewitz, and—most fully—the writings of the Austrian School.

Spitznagel’s strategy reveals “a clear, systematic source of investment mispricing, ripe for intertemporal arbitrage (a term synonymous with Austrian Investing itself). But this bias of intertemporal inconsistency is not, and for the most part cannot, be arbitraged away, because of the simple reason that the arbitrageurs are the ones most inflicted by the bias.” (p. 158) The problem is that “on Wall Street, roundabout investing—acquiring later stage advantage through an earlier stage disadvantage—is irrational, and acting as if there is no future is perfectly rational” … “No matter how large the ‘later’ might be, the ‘sooner’ is all there is.” (pp. 162-63)

The author devotes two chapters to applied roundabout investing, which in the first instance profits from distortions in the economy and the markets through tail hedging (or at least tips off the retail investor to stay out of the market). He explains how to gauge such distortion using a measure he calls the Misesian Stationarity index. In the second instance he looks for companies that have a high ROIC “where these superior efficiencies at turning invested and reinvested capital into future earnings are apparently not priced in.” (p. 259) The latter is not value investing. “Between Austrian Investing and value investing is again the difference between depth of field and the telescopic long term. … Both require discipline and patience, but Austrian Investing is concerned with the intertemporal process at work, rather than just the endpoint.” (p. 272)

The Dao of Capital is a consistently thought-provoking book. Well, perhaps that’s the wrong adjective since it seems to entail a use of force—and this book aims to twist neither arms nor minds. But it is impossible not to be shaped by its carefully presented history and logic.

No comments:

Post a Comment