money-making ideas: avoid the desire for instant wins to win the investment battle: Mark Spitznagel

If investors are looking for a unique approach to investment management, they may consider Mark Spitznagel’s investment style.

Spitznagel isn’t as popular or a household investment name as Warren Buffett, but his unique investment approach surely has investors sitting up and noticing his investment exploits. His fund posted a staggering return of 4,144% in the first quarter of 2020.

The skilled money manager says accepting risk and some loss in good times is the way to thrive in an investment crisis.

Mark Spitznagel is a hedge fund manager, founder, president and chief investment officer of Universa Investments LP, an investment management firm specializing in risk management since its inception in 2007.

Spitznagel was introduced to the world of investing through a family friend who worked at the Chicago Board of Trade.

Spitznagel created Empirica Capital in 1999, with Nassim Taleb, one of his professors at NYU. Later, Spitznagel launched Universa but retained the relationship with Taleb, who would remain an advisor.

Investment philosophy

Spitznagel and his company Universa Investments employ certain investment techniques that may seem unreasonable to the average investor. His company, which trades options, aims to achieve spectacular returns in times of market crisis.

When the coronavirus pandemic sent financial markets plummeting, Spitznagel had one of its most profitable periods ever.

Spitznagel encourages his clients to take more systematic risks because his portfolio is constructed to mitigate risk.

The Dao of Capital

Spitznagel is also the author of some best-selling investment gems. In one of his books, The Dao of Capital, he supports a long-term approach to investing rather than a desire for immediate gains.

In the book, he explains how his approach to investing is similar to that used by societies and ancient species in nature for success and survival.

Elaborating further, he says that just as a forest is cleared of small fires to pave the way for new growth, markets can become unstable due to a variety of factors.

According to Spitznagel, while most investors are looking for immediate gains and instant gratification, investors should be looking in the opposite direction.

Investment strategy

Using ancient Chinese Taoist concepts and Austrian investment techniques, Spitznagel defines his approach to investing as taking the road less traveled or following a “backdoor” path.

According to Spitznagel, his strategy is to take small losses for long periods of time when markets are bullish and then make huge returns during very occasional market slippages.

“It’s almost the mirror image of what most investors have been taught to do: make steady gains most of the time, but accept huge, occasional losses. When someone wants to bet against a crash, I’ll take the other side. I can’t get everyone to agree with me. I must be the contrarian and crazy guy that everyone makes fun of,” he says in his book “The Dao of Capital”.

Spitznagel says his investment theory uses logic, probability and history and aims to justify and show that the safe havens most sought after by investors, such as bonds, hedge funds or extreme risk funds , do not work.

“The investment industry regularly smokes people with complicated, tamper-proof (and therefore pseudoscientific) theories and hand-picked market data,” he says in the book.

While Spitznagel’s strategy is designed to hedge against a market drop, Spitznagel often distances himself from the hedge fund industry, which he says doesn’t hedge properly and is expensive.

“The term ‘hedge fund’ is completely misleading. I can’t give you a reason why the hedge fund industry should exist. What hedge funds have going for them is that they lose less in a crash and earn less [in normal markets]. It just makes people poorer. Another popular safe haven, bonds offer only “low crash returns” and investors need to “invest a lot” in their portfolios. The rest of the time, underperformance is expensive,” he says.

The way to the roundabout

Spitznagel says that by focusing on the long term and avoiding the need for immediate gains, investment battles are won, capital is allocated more responsibly.

Spitznagel gives many examples of the use of a devious way of thinking.

“Once you fully understand the concept of the circuitous route, it’s hard not to find its existence all around you,” he says.

Spitznagel says nature provides wonderful examples of long-term circuitous paths, as entire forests are constantly growing and competing for survival by applying circuitous methods.

Spitznagel uses the example of how conifers compete with angiosperms, a faster growing flowering plant. By their slow initial growth compared to the angiosperm, conifers fall behind in size but develop strong roots and thick bark in the process.

Additionally, the conifer’s ability to grow on rocks and areas where other plants cannot survive gives the species a defensive stance. Then, when a forest fire hits, the evergreens send their seeds into the wind to claim the newly cleared ground.

“It’s nature’s way of using devious methods to fight for survival and it explains many reasons why conifers (firs, pines and spruces) are the oldest tree species on earth. With such strong roots and their protective bark, conifers eventually grow taller and live much longer than competing angiosperms.By taking the circuitous route, conifers benefit from an advantageous position in the forest where they can not only access sunlight sun and water, but also favorable positioning when the opportunity arises to spread their seeds,” he said.

Be prepared to accept short-term losses for long-term gains

Spitznagel says investors shouldn’t be afraid to take short-term losses to gain a much better position in the future.

Spitznagel says that by accepting initial losses and setbacks to progress in the distant future, the circuitous route can be applied to business, economics, and investing.

Extreme risk coverage

Spitznagel says investors should try to avoid the risks associated with markets that have been distorted by central banks and other outside forces.

Knowing that the natural effects of distorting systems lead to instability and eventually a crisis or crash, Spitznagel argues that investors need to be clear about what actions to take to manage that instability.

Spitznagel says one of the main goals for investors should be to focus on a risk-mitigation strategy to avoid large losses from unforeseen events, or “black swans.”

“What matters most to the cap rate is not the small losses, it’s not the small gains, it’s not even the big gains, it’s the big losses. In terms of risk mitigation, these are the biggest losses; they are basically all that matters,” he says.

Spitznagel says that to avoid this problem of potentially large losses, investors need what he calls “explosive downside protection” in stock market investments.

Spitznagel says he measures risk mitigation performance by the impact on the compound growth rate of an entire portfolio.

Spitznagel emphasizes that its risk mitigation goal is not to negatively impact the overall performance of the end user’s entire portfolio, but to improve it.

“If a risk mitigation strategy simply reduces a portfolio’s risk at the expense of that portfolio’s capital growth…then it is simply ineffective and probably not worth undertaking. After all The objective of risk mitigation should be to achieve the portfolio effect of increasing the compound annual growth rate (CAGR), and therefore the wealth of the entire portfolio of the l end user, mitigating the risks of this portfolio,” he says.

Therefore, Spitznagel’s investment approach can help investors build a more robust and solid framework that can be applied not only in the markets but also in other aspects of life.

(Disclaimer: This article is based on Mark Spitznagel’s book, The Dao of Capital)


Comments are closed.