Safe Haven E-Book

Mark Spitznagel

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 330

Veröffentlichungsjahr: 2021

Beschreibung

What is a safe haven? What role should they play in an investment portfolio? Do we use them only to seek shelter until the passing of financial storms? Or are they something more? Contrary to everything we know from modern financial theory, can higher returns actually come as a result of lowering risk? In Safe Haven, hedge fund manager Mark Spitznagel--one of the top practitioners of safe haven investing and portfolio risk mitigation in the world--answers these questions and more. Investors who heed the message in this book will never look at risk mitigation the same way again.

Leseprobe

SAFE HAVEN

Investing for Financial Storms

MARK SPITZNAGEL

Copyright © 2021 by Mark Spitznagel. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging‐in‐Publication Data is Available:

ISBN 9781119401797 (Hardback)

ISBN 9781119402527 (Epdf)

ISBN 9781119402510 (Epub)

Cover Design: Paul McCarthy

Cover Art: © Annabelle Breake / Getty Images

Author Photo: Courtesy of the Author

I was burned out from exhaustion, buried in the hail

Poisoned in the bushes an’ blown out on the trail

Hunted like a crocodile, ravaged in the corn

“Come in,” she said, “I'll give ya shelter from the storm”

Bob Dylan

Foreword

Nassim Nicholas Taleb

SANTA MARINA

In my ancestral village in the Northern Levant, on top of a hill, stands a church dedicated to Santa Marina. Marina is a local saint, though, characteristically, some other traditions claim her—such as Bithynia or other Anatolian provinces of the Eastern Roman Empire.

Marina grew up in a wealthy family, in the fifth century of our era. After the death of her mother, her father decided to turn his back on civil existence and embrace a life of monasticism. His aim was to spend the rest of his life in a cell carved in the rocks, in the Connubium (Qannubin) valley, at the base of Mount Lebanon, about eight miles from my village. Marina insisted on joining him and faked being a boy, Marinos.

About a decade later, after the death of her father, a visiting Roman soldier impregnated the daughter of a local innkeeper and instructed her to accuse the defenseless father Marinos of having committed the deed. The innkeeper's daughter and her family complied, fearing retaliation by the Roman soldiers.

Marina took the blame—yet she did not need a tough litigator to prove her innocence. She refrained from revealing her biological gender, to remain true to her monkhood identity and what she perceived to be the holiness of her mission. So Marina was forced to raise the child, and to make penitence for an act she never committed, she lived for a decade the life of a beggar outside the walls of the monastery.

Marina faced daily contempt from her peers and the local community. Yet she stood firm, never giving into the temptation to reveal the truth.

After she died prematurely, her gender was revealed during the purification rituals. The iniquity of the accusers was exposed posthumously, and she was venerated into Greek Orthodox sainthood.

The story of Hagia Marina shows us another variety of heroism. It is one thing to commit spontaneous grandiose acts of courage, risk one's life for the sake of a grand cause, become a hero in battle, drink the hemlock for the sake of the philosophical death, become a martyr by standing tall while being maimed by lions in the Roman Coliseum. But it is much, much harder to persevere with no promise of vindication, while living the daily grind of humiliation by one's peers. Acute pain goes away; dull pain is vastly harder to bear, and vastly more heroic.

SPITZ

I have known Mark Spitznagel for long enough (more than two decades) to remember that he was once, briefly, a vegetarian, perhaps after reading Herman Hesse's Siddhartha in which the protagonist claims: “I can think, I can wait, I can fast.” My suggestion to follow the Greek Orthodox fast, where one is vegan two‐thirds of the year (and aggressively carnivore on the other third, mostly Sundays and holidays), failed to convince. It seemed too much of a compromise.

He finds ways to furtively inflict his musical tastes on his coworkers (Mahler, mainly, with performances by von Karajan) and in the early days, as in a ritual, the conversations used to start and end with Karl Popper and central (Black Swan) asymmetries in the scientific method. There is this insistence that we are not in the business of trading, but partaking of an intellectual enterprise, that is, both applying proper inference and probability theory to the business world and, without any modesty, improving these fields according to feedback from markets. And there is all this German terminology, such as Gedankenexperiment. I suspect that there was a nonrandom geography of origin for the authors and topics that have invade the office: prewar Vienna and its Weltanschauung.

Spitz has always been hardheaded; perhaps a good excuse is that it came with a remarkable clarity of mind. I must reveal that while I am far more diplomatic and less obstinate in person than I am in print, he is the exact reverse, though he hides it remarkably well to outsiders, say journalists and other suckers. He even managed to fool the author Malcolm Gladwell, who covered us in the New Yorker, into thinking that he would be one breaking up a fight at a bar while I would be one to initiate it.

The atmosphere of the office has been playfully unique. Visitors are usually confused by the sprawl of mathematical equations on the board, thinking our main edge is only mathematical. No. Both Mark and I were pit traders before doing quantitative stuff. While our work has been based on detecting mathematical flaws in existing finance models, our edge has been linked to having been in the pit and understanding the centrality of calibration, fine‐tuning, execution, orderflow, and transaction costs.

Remarkably, people who have skin in the game, that is, self‐made successful people with their own money at risk (say a retired textile importer or a former shopping center developer), get it right away. On the other hand the neither‐this‐nor‐that MBA in finance with year‐end evaluation filed by the personnel department needs a helping hand—they can neither connect to the intuitions nor to the mathematics. At the time when I met Mark, we both were at the intersection of pit trading and novel branches of probability theory (such as Extreme Value Theory), an intersection that at the time (and still, presently) included no more than two persons.

MUTUA MULI

Now what was the dominant idea to emerge?

There are activities with remove payoff and no feedback that are ignored by the common crowd.

With the associated corollary:

Never underestimate the effect of absence of feedback on the unconscious behavior and choices of people.

Mark kept using the example of someone playing piano for a long time with no improvement (that is, hardly capable of performing Chopsticks) yet persevering; then, suddenly, one day, impeccably playing Chopin or Rachmaninoff.

No, it is not related to modern psychology. Psychologists discuss the notion of deferred payoff and the inability to delay one's gratification as a hindrance. They hold that people who prefer a dollar now versus two in the future will eventually fare poorly in the course of life. But this is not at all what Spitz's idea is about, since you do not know whether there might be a payoff at the end of the line, and, furthermore, psychologists are shoddy scientists, wrong almost all the time about almost all the things they discuss. The idea that delayed gratification confers some socioeconomic advantage to those who defer was eventually debunked. The real world is a bit different. Under uncertainty, you must consider taking what you can now, since the person offering you two dollars in one year versus one today might be bankrupt then (or serving a jail sentence).

So what this idea is about isn't delayed gratification, but the ability to operate without external gratification—or rather, with random gratification. Have the fortitude to live without promises.

Hence the second corollary:

Things that are good but don't look good must have some edge.

The latter point allows she or he who is perseverant and mentally equipped to do the right thing with an endless reservoir of suckers.

Never underestimate people's need to look good in the eyes of others. Scientists and artists, in order to cope with the absence of gratification, had to create such a thing as prizes and prestige journals. These are designed to satisfy the needs of the nonheroics to look good on the occasion. It does not matter if your idea is eventually proved right; there are intermediary steps in between that can be won. So “research” will be eventually gamed into some brand of nonresearch that looks cosmetically like research. You publish in a “prestige” journal and you are done, even if the full idea never materializes in the future. The game creates citation rings and clubs in fields like academic finance and economics (with no tangible feedback) where one can BS endlessly and collect accolades by peers.

For instance, the theory of portfolio construction (or the associated “risk parity”) à la Markowitz requires correlations between assets to be both known and nonrandom. You remove these assumptions and you have no case for portfolio construction (not counting other, vastly more severe flaws, such as ergodicity, discussed in this book). Yet one must have no knowledge of the existence of computer screens and no access to data to avoid noticing that correlations are, if anything, not fixed, changing randomly. People's only excuse for using these models is that other people are using these models.

And you end up with individuals who know practically nothing, but with huge résumés (a few have Nobel Prizes). These citation rings or circular support groups were called mutua muli by the ancients: the association of mutually respecting mules.

COST‐EFFECTIVE RISK MITIGATION

Most financial and business returns come from rare events—what happens in ordinary times is hardly relevant for the total. Financial models have done just the opposite. A fund miscalled Long Term Capital Management that blew up in 1998 was representative of such decorated mutua muli misunderstanding. The Nobel‐decorated academics proved in a single month the fakeness of their models. Practically everyone in the 1980s, particularly after the crash of 1987, must have known it was quackery. However, most if not all financial analysts exhibit the clarity of mind of a New York sewer after a long weekend, which explains how the mutua muli can take hold of an entire industry.

Indeed the investment world is populated by analysts who, while using patently wrong mathematics, managed to look good and cosmetically sophisticated but eventually harm their clients in the long run. Why? Because, simply, it is OPM (other people's money) they are risking while the returns are theirs—again, absence of skin in the game.

Steady returns (continuous ratification) comes along with hiding tail risks. Banks lost more money in two episodes, 1982 and 2008, than they made in the history of banking—but managers are still rich. They claimed that the standard models were showing low risk when they were sitting on barrels of dynamite—so we needed to destroy these models as tools of deception.

This risk transfer is visible in all business activities: corporations end up obeying the financial analyst dictum to avoid tail insurance: in their eyes, a company that can withstand storms can be inferior to one that is fragile to the next slight downturn or rise in interest rates, if the latter's earning per share exceed the former's by a fraction of a penny!

So the tools of modern finance helped create a “rent‐seeking” class of people whose interest diverged from those of their clients—and ones who get eventually bailed out by taxpayers.

While the financial rent seekers were clearly the enemies of society, we found actually worse enemies: the imitators.

For, at Universa, Spitz built a structure that tail‐hedged portfolios, hence insulated him from the need for delayed random gratification. As introduced (and formulated) in Safe Haven, risk mitigation needs to be “cost‐effective” (i.e., it should raise your wealth), and to do that it needs to mitigate the risks that matter, not the risks that don't.

It was the birth of tail risk hedging as an investable asset class. Tail risk hedging removed the effect of the nasty Black Swan on portfolios; cost‐effective tail risk hedging obliterated all the other forms of risk mitigation. Accordingly, the idea grew on people and a new category was born. This led to a legion of imitators—those very same mutua muli persons who had previously been fooled by modern finance tools, finding a new thing to sell.

Universa proved the following: not only is there no substitute to tail risk hedging, but, when it comes to tail risk hedging, simply—as per the boast in the Porsche advertisement—there is no substitute.

For when you go from a principle to execution, things are much more complicated: the output is simple to the outsider, the process is hard seen from the inside. Indeed, it takes years of study and practice, not counting natural edges and understanding of the payoffs and probabilistic mechanisms.

I said earlier that Mark's edge came from pit trading and a natural (noncontrived) understanding of the mathematics of tails. Not quite. His edge has been largely behavioral, and my description of hardheaded was an understatement. Perhaps the most undervalued attribute for humans is dogged, obsessive, boring discipline: in more than two decades, I never saw him once deviate a micro‐inch from a given protocol.

This is his monumental f*** you to the investment industry.

Part OneWhat Comes First

At War with Luck

WRITTEN IN BLOOD

In the words of the nineteenth‐century German philosopher Friedrich Nietzsche, thus spoken by his ancient Persian prophet Zarathustra, “Of all that is written, I love only what a person hath written with his blood.”

If so, Nietzsche would have loved this book.

It was written with the blood of war against luck, fought over the last more than a quarter century in my life as a trader. It grew organically out of an investing and risk‐mitigation practice as a hedge fund manager and professional safe haven investor. The message of this book has been and will always be lived by me and my hedge fund firm, Universa Investments. (It is our manifesto.)

Talk is cheap. Ideas and commentary are just that. Significance only comes from the doing, from action within the arena. It is not my business, like Sherlock Holmes, “to know what other people do not know.” It is my business to do what other people do not and cannot do (as well as, just as importantly, to know what I do not know). Doing and demonstrating effective safe haven investing is far, far more important than arguing about what it should be. And even among most of those who claim to do it, they neglect those pithy words from Hemingway to “never confuse movement with action.”

This book tells of the foundation and methodology behind how, as of this writing, Universa risk‐mitigated portfolios have, over their decade‐plus life to date, outperformed the S&P 500 by over 3% on an annualized, net basis. More to the point, this performance is a direct consequence of having far less risk. This level of outperformance is rare in the hedge fund industry and among risk‐mitigation strategies in general, which have pretty much all underperformed the S&P 500 during this and most periods. The markets have been good to us because we haven't tried to cheat them; we haven't tried to predict or outsmart them. We have only aligned our investing, in a focused way, with our beliefs about the way they work.

People think of risk mitigation as a liability, as a tradeoff against wealth creation, because it usually is. Universa is, if nothing else, a real‐life case study and out‐of‐sample test that unequivocally proves the point that risk mitigation doesn't have to be viewed that way. Risk mitigation can and should be thought of as being additive to portfolios over time—with the right risk mitigation, that is. This is the mark that I want Universa to make in the markets.

Writing this book has been a labor of love, though it has had a difficult time competing for my attention, which is consumed by Universa. But the book has provided very important opportunities for introspection. It has also made me think more deeply about questions that I am always asked by people about what small “lay” investors can do to protect their portfolios.

As this book is, in part, a response to those questions, I do want to ensure that expectations are set appropriately at the start. This is not a “how‐to” book, but it is a “why‐to” as well as a “why‐not‐to” book. Let's be clear: What I do specifically as a safe haven investor is not to be attempted by nonprofessionals (nor—perhaps even especially—by most professionals). Nothing that I could tell you in a book will change that.

So, I will not be holding your hand and teaching you how to do it; I will not be revealing much in the way of trade secrets, and I have no interest in selling you anything as an investment manager. This book is not about the workings of a specific safe haven strategy, per se; nor is it an encyclopedic survey of all the major safe haven investments. Moreover, it has little if any current market commentary—as this would be entirely unnecessary to the book's point.

That said, there are big investing problems to be solved, and I do explicitly employ at Universa their conclusive solution that will be found over the course of this book. Surely, that's a good thing. After all, if it's such a great solution, wouldn't it be a big red flag if I didn't put it into practice?

My intention in this book is to present the basic concepts underlying my approach in a straightforward manner. One‐eighth of the iceberg is above water, and that's all we need. (While I am forced into the mathematical weeds at times, believe me, I tried my best to stay out of them.) I offer a logical and practical analytical framework to demystify safe havens, for viewing and thinking about their value in mitigating systematic risk, and what that even means in the first place. That is to say, I offer a framework for rigorously testing hypotheses about safe havens and their very existence.

If the only things readers get out of this book are a more realistic and rational premise of safe haven investing and a foundation from which to assess and tackle it—and thus avoid its traps—then the book will have achieved its purpose. It should help the reader and pay back their expense of buying this book manyfold. You will make money investing and you will lose money investing, but, when you look back at it all, what really will have mattered is getting that foundation right.

Investing is a deceptive, uneven playing field for many reasons, and I aim to help level it out a little. (To show you the honor of my intentions, I pledge all of my proceeds from the sales of this book to charity.)

PROBING BETS

This book is the result of a discovery process and problem‐solving effort that began many years ago. I grew up a scrappy, poor kid in the Chicago commodities trading pits, back when they were the center of the financial universe. As a mere teenager, I learned from my mentor, Everett Klipp (“the Babe Ruth of the Chicago Board of Trade”), who told me over and over that “a small loss is a good loss,” and that risk mitigation and survival are everything in trading and investing. His words still ring true today: Take care of the losses; the profits will then take care of themselves. Profits matter only relative to the losses; stay in the game by protecting your capital base, your means of playing the game. Don't predict.

Pretty obvious stuff, except people don't really focus on losses, especially the potential for big ones. In all my experience, most investors don't think about the impact of the downside the way they need to; they just don't.

For me, it began with hands‐on, trial‐and‐error experiments in my twenties as a “local” (or independent) trader in the bond pit in Chicago. (I earned much of my stake in college by writing and then selling the first portfolio management handheld computer program on the trading floor.) It continued in my thirties as a bank proprietary and hedge fund derivatives trader in New York, and even a bit in the hallowed halls of New York University's Courant Institute of Mathematical Sciences. I hashed it out in endless discussion‐walks through the streets of Manhattan with Nassim Nicholas Taleb, in the days when we started the very first formal tail hedging program, and he would later become Scientific Advisor at Universa. These ideas were the point of every conversation during countless, reckless longboard skateboard cruises up and down the treacherous hills and dales of Central Park with Brandon Yarckin as we plotted the launch of Universa, where he would become COO. (I still blame Brandon for my separated shoulder.)

And it goes without saying that I have not made these observations from scratch. I owe an enormous gratitude to the explorers who plumbed the depths (“the triad”).

These were the formative years of probing bets, of bold conjectures and refutations, and finding answers to how things worked through success and failure—of a bloody war against luck. The conclusion was my decision to start Universa in 2007, where we have taken our discoveries and solutions and transformed them into a formal, rational, and practical investment approach that solves the big problems and moves the needle for my investment partners.

By opening this book and, I would hope, opening your mind to the ideas it contains, you will have the opportunity to change your perceptions about investing and risk mitigation. These pages will present a fundamentally different, unconventional perspective that I firmly believe is the most effective one for successful investing. It opposes so much of what is hailed as gospel within the collective that is the investment profession. So, we need to think objectively about the orthodoxy and dead‐end dogma of modern finance. We need to be the uncarved block.

To be sure, I have no interest in changing the existing investing paradigm by making it obsolete. I'm no pied piper, and I harbor no delusions of grandeur that the message of this book will ever become “the new gospel according to Mark.” I do not expect for one moment that my approach will ever become another cookie‐cutter, rubber‐stamped strategy of the investment consultant herd. And that's important. Becoming conventional is self‐defeating in this business. It's the kiss of death. We take the road less traveled by, and that has made all the difference.

I have often exclaimed to my team at Universa, plundering the words of Steve Jobs, “We are pirates! Not the Navy!” (Mine are the smartest, savviest, and most experienced Great Pirates in the derivatives world.)

WHAT'S A SAFE HAVEN?

Everyone has some intuitive understanding about what a safe haven is and why we would invest in one. Most likely, it would go something like “a place of refuge for when things go bad” or, more specifically, “an asset that provides safety from risk.” These are spot on. The term risk would likely mean scary things like stock market crashes, financial and banking crises, pandemics, monsters hiding under the bed, and so forth. Risk, then, is circularly defined as that equivocal thing we need safety from.

Plain and simple, risk is exposure to bad contingencies. Most of these bad contingencies will likely never happen, but they can happen. In investing, the bad contingencies have financial consequences of economic loss within a portfolio. Investment risk isn't just some theoretical and spurious numerical value, like volatility or correlation or whatever. It is the potential for loss, and the scope of that loss. Nothing else.

We have many diverging roads ahead, many potential paths forward with so many twists and turns, more than we can ever count. Some of those potential paths will be very pleasant, and some of those potential paths won't be. Of all the potential paths, we don't know which is the one and only path that we will actually traverse. Now, that's risk!

A safe haven is an investment that mitigates risk, or the bad potential economic contingencies in your investment portfolio. That is a necessary condition for safe haven status. It protects against consequential loss that happens to everyone, everywhere, all at the same time, because that loss is tied to the cycles of broad macroeconomic growth and contraction. Because of its ubiquitous and systematic nature, you can't just diversify that risk away with groupings of things that supposedly won't experience such loss simultaneously.

And remember this: A safe haven isn't so much a thing or an asset. It is a payoff, one that can take many different forms. It might be a chunk of metal, a stock selection criterion, a crypto‐currency, or even a derivatives portfolio. Whatever forms they may take, it is their function that makes safe havens what they are: They preserve and protect your capital. They are a shelter from financial storms.

So safe haven investing is risk mitigation. To me, these two terms are synonymous, and I will be using them interchangeably throughout this book. (The former made for a catchier title.)

What's more, risk mitigation is investing itself. Treat this as a fundamental premise. Even the most renowned proponent of the bottom‐up approach to investing, Benjamin Graham, the “father of value investing,” declared: “The essence of investment management is the management of risks, not the management of returns. Well‐managed portfolios start with this precept.” Moreover, “Confronted with a challenge to distil the secret of sound investment into three words, we venture the motto, Margin of Safety.” Truer words have never been written on the subject. For Graham, “safety of principal” is what separates investing from speculating. It makes investing—investing! (He learned the hard way, in the 1929 stock market crash, that all great ideas can be dashed, simultaneously and systematically.)

But this is the pretty obvious part. It still misses what's so special about what a safe haven should be. Any punter can devise something that does well in a financial crash. Safe haven investing is so much more. And this is where they start to look really different from each other—so different that our classification that would put them all in the same category starts to lose its meaning. Often, they are more different than they are alike. We run into issues similar to what biologists encountered when trying to define what a species is. We will need a specific safe haven concept—like their species concept—in order to classify them and evaluate if they are even what they claim to be. This will be a major line of inquiry in this book: Are safe havens a classifiable thing? And can they really add economic value?

THE GREAT DILEMMA

There is a monumental problem facing investors, the great dilemma of risk. If you take too much risk, it will likely cost you wealth over time. And at the same time, if you don't take enough risk, it will also likely cost you wealth over time. You are trapped in a “Catch‐22”: damned if you do and damned if you don't. Pick your poison. You can try calibrating between these two bad choices in hopes of finding a happy medium, but this still leaves you with a bad choice—it is still poison. Modern finance is really all about the quest for this theoretical happy medium, the supposed “Holy Grail of investing.” Despite this valiant quest and lofty name, the results have shown that this Holy Grail is a myth; the happy medium is not so happy, and it can even provide the worst of both worlds. And so, with this thinking, you are left with only one real choice: to make bold predictions and then roll the dice on them.

This great dilemma is the most important problem in all of investing; it is one that desperately needs solving. It is also the rationale for what I do as a hedge fund manager, and the reason for this book. Thanks to the sheer scale and scope of the problem, the stakes have never been higher. In particular, the broader problem is of liabilities exceeding assets, and this applies to mammoth pools of capital and even to individuals with small investment accounts. Just think of the massively underfunded public and private pension funds today, which must generate specific, high‐target rates of return over many years or else face insolvency as their liabilities consume their capital. They can't just hide away, idling in less risky assets in an impaired portfolio, or try to diversify away their risks; and yet investing in riskier assets brings, by definition, acute risks of unrecoverable loss. The standard approach to risk mitigation has really failed them—just as it has failed everyone. And the problem is only going to get worse. It is a looming, ticking time bomb.

The consequences of failing to solve the great dilemma of risk won't just appear as some abstract figures in the newspaper. They are all too real: people's savings wiped out, governments that must tax or inflate their economies to death—human tragedy with real economic consequences. This is not my opinion. It is just simple math.

This monumental problem is further complicated today by the massive distortions built up in global financial markets from years of hubristic monetary interventions by global central banks, enabling the reckless accumulation of debt and leverage. Though these distortions are on an unprecedented scale and are intricately related to the underfunding problem itself, they are nonetheless beside the point. They are both beyond the scope of this book (I have already written plenty about them elsewhere) and, most importantly, completely unnecessary to the book's message. I don't need to convince you of any ideological, Cassandra‐like premise that markets are risky so that you will accept my conclusions about safe havens. It will not matter to our methodology. We can and will remain agnostic, not roll the dice, and, most important, not predict.

To find a solution to this monumental problem, we need to reduce the costliness of risk—specifically the costliness of losses—and do so in a way that does not end up costing us even more. In other words, we need a cure that is not worse than the disease. Risk mitigation must be cost‐effective.

In this book, we will learn how finding that solution comes from recognizing that not all risks are created equal—because not all losses are created equal. They don't all add up cleanly in an accounting ledger. Therefore, we need to think about losses and our investment returns differently, through a different lens and a different framing.

As in all things, “the good God is in the details.” And in our case, these details, while not terribly complicated, often appear counterintuitive and paradoxical. As we will see, there are emergent dynamics at play here that make cost‐effective risk mitigation extremely challenging, perhaps more so than anything else in the realm of investing. We need to proceed cautiously.

The problem is that investing is approached by most professionals and academics (and even the reigning PhD quants of modern finance) in a highly reductionist way. But, as we will see throughout this book, in safe haven investing the whole is, indeed, not the same as the sum of its parts—and it is often much greater.

Cost‐effective safe haven investing will turn out to be an awesome variation on the theme from my first book, The Dao of Capital. It's an idea that has perhaps become my shibboleth: roundabout investing. That is, the indirect approach, seeming to go backwards in order to go forwards, as in Sun Tzu's and von Clausewitz's approaches to “lose the battle to win the war.” What will look like a bad idea for one roll of the dice strangely becomes the best idea over many.

But how is successful investing possible without predictions? It sounds too good to be true. That investing is about forecasting returns is a tenet of the industry. As such, most people think they need to look very far ahead in investing and risk mitigation—with a magic crystal ball; they think that they need to see around corners. Not only is that pretty much impossible, it is actually a misconception about investing. Investing really needn't be about making grandiose forecasts, any more than it is in, say, sports or other games like poker or backgammon—though one could easily make that mistaken assumption from the outside looking in. It isn't even necessarily about getting the probabilities right. You can get the probabilities right all day but still do very poorly. It's really about getting the payoffs right. Playing good defense that leads to good offense. So there's more room for error, more room for being right, more room to get it right after getting it wrong. This is cost‐effective risk mitigation. You look and feel like you can see around corners, even though, in actuality, you can't.

As an archer, you don't try to forecast or pinpoint exactly where your arrow will hit once it leaves your bow. That would be an unproductive way to approach it—leading to target panic. Once you shoot the arrow (and even as you shoot the arrow), it is out of your control and susceptible to endless perturbations. So, instead, as in Herrigel's Zen in the Art of Archery, you aim by deliberately not taking aim—you hone your process and structure (focusing “behind the line” rather than down range) with the intent to specifically tighten your shot grouping around your target. There is this ancient Stoic notion of a dichotomy of control