The Dao of Capital E-Book

Mark Spitznagel

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

Seitenzahl: 601

Veröffentlichungsjahr: 2013

Beschreibung

As today's preeminent doomsday investor Mark Spitznagel describes his Daoist and roundabout investment approach, "one gains by losing and loses by gaining." This is Austrian Investing, an archetypal, counterintuitive, and proven approach, gleaned from the 150-year-old Austrian School of economics, that is both timeless and exceedingly timely.

In The Dao of Capital, hedge fund manager and tail-hedging pioneer Mark Spitznagel—with one of the top returns on capital of the financial crisis, as well as over a career—takes us on a gripping, circuitous journey from the Chicago trading pits, over the coniferous boreal forests and canonical strategists from Warring States China to Napoleonic Europe to burgeoning industrial America, to the great economic thinkers of late 19th century Austria. We arrive at his central investment methodology of Austrian Investing, where victory comes not from waging the immediate decisive battle, but rather from the roundabout approach of seeking the intermediate positional advantage (what he calls shi), of aiming at the indirect means rather than directly at the ends. The monumental challenge is in seeing time differently, in a whole new intertemporal dimension, one that is so contrary to our wiring.

Spitznagel is the first to condense the theories of Ludwig von Mises and his Austrian School of economics into a cohesive and—as Spitznagel has shown—highly effective investment methodology. From identifying the monetary distortions and non-randomness of stock market routs (Spitznagel's bread and butter) to scorned highly-productive assets, in Ron Paul's words from the foreword, Spitznagel "brings Austrian economics from the ivory tower to the investment portfolio."

The Dao of Capital provides a rare and accessible look through the lens of one of today's great investors to discover a profound harmony with the market process—a harmony that is so essential today.

Leseprobe

Contents

Foreword

Introduction

Chapter One: The Daoist Sage

The Old Master

The Soft and Weak Vanquish the Hard and Strong

Into the Pit

The Privileges of a Trader

Robinson Crusoe in the Bond Pit

Fishing in “McElligot’s Pool”

Enter the Austrians: A von Karajan Moment

A State of Rest

Guiding into Emptiness . . .

Moving On

The Wisdom of the Sages

Chapter Two: The Forest in the Pinecone

The Forest and the Tree

The Slow Seedling

Wildfire and Resource Reallocation

The Conifer Effect

A Logic of Growth

Chapter Three: Shi

The Dao of Sun Wu

Shi and the Crossbow

Li—The Direct Path

Shi and Li at the Weiqi Board

A Common Thread, from East to West

An Attack of Misunderstanding

On War—An Indirect Strategy

Shi, Ziel, Mittel, und Zweck

Chapter Four: The Seen and the Foreseen

That Which Must Be Foreseen

At the Viennese Crossroads Between East and West

The Teleology of Baer’s Butterfly

Menger Establishes the Austrian School

Tutor to the Prince

Methodenstreit

Österreichische Schule

Chapter Five: Umweg

Postulating the “Positive”

Produktionsumweg

Böhm-Bawerk, the Bourgeois Marx

Faustmann’s Forest Economy

Rings of Capital

Henry Ford: The Roundabout Unternehmer

The Roundabout of Life

Chapter Six: Time Preference

“Radical” Böhm-Bawerk and the Psychology of Time Preference

The Curious Case of Phineas Gage

The Shi and Li Brain

The Subjectivity of Time

The Trade-Off of an Addict

No Zeal for Ziel on Wall Street

Adapting to the Intertemporal

Chapter Seven: “The Market Is a Process”

The Man Who Predicted the Great Depression

Fleeing the Nazis

Human Action

Unternehmer in the Land of the Nibelungen

Genuine Change Is Afoot in Nibelungenland—A Market-Induced Drop in Interest Rates

Distortion Comes to Nibelungenland—The Central Bank Lowers Rates

Time Inconsistency and the Term Structure

The Day of Reckoning Comes to Nibelungenland

The Austrian View

The Market Process Prevails

Chapter Eight: Homeostasis

The Teleology of the Market

The Yellowstone Effect

Lessons from the Distorted Forest

Market Cybernetics

How Things “Go Right”

Spontaneous Order

Distortion

The Sand Pile Effect

Distortion’s Message: “Do Nothing”

The Shi of Capital

Chapter Nine: Austrian Investing I: The Eagle and the Swan

Homeostasis en force

Witness to the Distortion

An Initial Misesian Investment Strategy

The Eagle and the Swan

Case Study: Prototypical Tail Hedging

The Ziel and the Zweck: Central Bank Hedging

The Roundabout Investor

Chapter Ten: Austrian Investing II: Siegfried

Siegfried, the Dragon Slayer

Case Study: Buying the Siegfrieds

Value Investing: Austrian Investing’s Estranged Heir

A Zweck Finally Attained

Epilogue

Acknowledgments

About the Author

Index

“At last, a real book by a real risk-taking practitioner. You cannot afford not to read this!”

—Nassim Nicholas Taleb, Author of The Black Swan

“Investors of all kinds will find immeasurable value in this convincing and thoroughly researched book where Mark champions the roundabout of Austrian capital theory. Using thought-provoking examples from both the natural world and the historical world, The Dao of Capital shows how a seemingly difficult immediate loss becomes an advantageous intermediate step for greater future gain, and thus why we must become ‘patient now and strategically impatient later.’”

—Paul Tudor Jones II, Founder, Tudor Investment Corporation

“A timely, original, right-economic principles and history-based approach to investing. Drawing on impressive philosophical building blocks, The Dao of Capital illuminates the wellsprings of capital creation, innovation and economic progress. It also makes the point that government intervention to ‘help’ the economy is as destructive as the now-discredited policy of suppressing forest fires. Dazzling!”

—Steve Forbes, Chairman and Editor-in-Chief, Forbes Media

“This is a magnificent, scintillating book that I will read over and over again. It provides a theoretic and practical framework for understanding the insights of all the greats that a student of markets will encounter—Soros, Baldwin, Klipp, Buffett, Cooperman (albeit these greats might not realize or acknowledge it). It teaches you things about war, trees, martial arts, opera, baseball, board games. Every page is eye-opening, with numerous areas for testing and profits in every chapter. I will share the book with all my traders, friends, and circles of influence. Here’s an unqualified, total, heartfelt recommendation, which coming from me is a rarity, and possibly unique.”

—Victor Niederhoffer, Author of The Education of a Speculator

“The Dao of Capital is an impressive work. Spitznagel’s approach is refreshing—scholarly without being tedious. What a broad look at economic history it provides!”

—Byron Wien, Vice Chairman, Blackstone Advisory Partners LP

“Wall Street gamblers who believe the Fed has their back need to read this book. Mark Spitznagel provides a brilliant demonstration that the gang of money printers currently resident in the Eccles Building have not repealed the laws of sound money nor have they rescinded the historical lessons on which they are based.”

—David Stockman, Former U.S. Congressman, Budget Director under Ronald Reagan, and Author of The Great Deformation

“We live in a world warped by faulty assumptions and bad policies. Conventional wisdom explains very little because it’s more convention than wisdom. Mark Spitznagel assembles the best insights in human nature and economics to bring order out of the chaos. Economists, investors and lay persons alike will find abundant treasures in The Dao of Capital, one remarkably useful and exciting book!”

—Lawrence Reed, President, Foundation for Economic Education and President Emeritus, Mackinac Center for Public Policy

“Spitznagel’s excellent book is a powerful presentation of how monetary policy deceives entrepreneurs and investors into making poor investing decisions. I highly recommend The Dao of Capital as a guide to avoiding these deceptions and thus to better investment results. As Mark says, in my native tongue, ‘Wir sind jetzt alle Österreicher.’”

—Marc Faber, Publisher of The Gloom, Boom & Doom Report

“In The Dao of Capital, Mark Spitznagel stresses sound analytical foundations combined with shrewd strategic thinking to provide the reader with a broad philosophy of investing, where understanding the process that puts you in a position to win is more important than simply stating the goal of winning. The Austrian economics he employs unlocks not only the mystery of market coordination, but explains clearly the distortionary consequences of the manipulation of money and credit. Spitznagel guides the reader, not with point predictions, but with pattern predictions and strategic positioning for long run success in wealth creation. I greatly recommend this book.”

—Peter Boettke, Professor of Economics and Philosophy, George Mason University

“Mark Spitznagel has done a remarkable job summarizing, synthesizing, and extending the great Austrian tradition, and weaving it into a wonderful set of practical lessons. What’s more, he is a great writer and storyteller in the tradition of Bastiat, Hazlitt, and Rothbard, bringing subtle and sometimes complex ideas to life with memorable examples and sparkling prose. Highly recommended!”

—Peter Klein, Professor of Applied Economics, University of Missouri and Carl Menger Fellow, Ludwig von Mises Institute

“In The Dao of Capital, Mark Spitznagel has undertaken a sweeping study of the Austrian School and its correlative thought throughout history. A highly successful investor, Mark brings Austrian economics from the ivory tower to the investment portfolio, by demonstrating that its principles of capital, roundabout production, and free markets can and indeed should be applied to entrepreneurial investment.”

—Ron Paul, Former U.S. Congressman (from the Foreword)

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Copyright © 2013 by Mark Spitznagel. All rights reserved.

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

Published simultaneously in Canada.

Artwork by Tim Foley.

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To my Kinder, Edward and Silja—My Grand Shi Strategy

Foreword

In 1971, in the midst of a busy day in my medical practice, I took a long lunch to drive 60 miles to the University of Houston to hear one of the last formal lectures given by the great Austrian School economist Ludwig von Mises. He was 90 at the time, but still as passionate and articulate as ever. Here was the man whose writings had been my main inspiration to absorb and champion Austrian economics, which has dominated my thinking ever since.

I had been first introduced to the Austrians while I was a medical student at Duke University and came across a copy of F. A. Hayek’s The Road to Serfdom. After that, I spent much of my free time reading everything I could find from the Austrian School. Along with Hayek and Mises, the works of Murray Rothbard and Hans Sennholz gave me a “new” view of economics.

Before discovering the Austrian School, I did not fully understand the process of how free markets work. The Austrians illustrated for me the benefits of free market economies relative to interventionist, centrally planned economies. The more I read, the clearer it became to me that this was how truly free individuals living in a truly free society should interact with one another. Austrian economists were also arguing for free markets at a time when the majority of intellectuals were praising collectivism and socialism. To this day, I owe the Austrians a debt of gratitude.

What I had thought were new ideas about the relationship between economic and personal liberties had, in fact, been around long before I discovered them for myself. Rothbard stated in his work An Austrian Perspective on the History of Economic Thought that the ancient Daoists “were the world’s first libertarians,”1 making Daoism and Austrian economics two bookends, spanning over two millennia, in the history of liberal economic and political thought. In The Dao of Capital, my friend and fellow Austrian Mark Spitznagel makes Rothbard’s insightful connection a uniquely important theme.

More recently, the Austrian School’s central principles—of private property, free markets, sound money, and liberal society in general—can be traced back centuries to classical liberalism, centered on the simplest tenets of all free societies. As economist Ralph Raico wrote:

Classical liberalism—which we shall call here simply liberalism—is based on the conception of civil society as, by and large, self-regulating when its members are free to act within very wide bounds of their individual rights. Among these, the right to private property, including freedom of contract and free disposition of one’s own labor, is given a very high priority . . . Austrian economics is the name given to the school . . . (that) has often been linked—both by adherents and opponents—to the liberal doctrine.2

Over the years, I became closely associated with many friends and students of Mises, and to all of us his example remained paramount. He never attempted to soften his stance nor mute his philosophy to become more acceptable to the conventional economic community. If he had chosen to do so, no doubt he would have received greater recognition during his lifetime. But rather than recognition, his goal was the pursuit of economic truth.

Mises was also a gentleman, kind and considerate, and in many ways I have tried to emulate him. I have always turned to Mises’s wise words whenever the world (and economists in particular) seemed the most insane: “No one should expect that any logical argument or any experience could shake the almost religious fervor of those who believe in salvation through spending and credit expansion.”3

The core of the Austrian School is the unpredictability of human action and the enormous influence individual choice wields in how economics works. It recognizes the subjectivity of value, the role of the entrepreneur, and the pursuit of capital creation to advance society itself. These truths are as essential to grasp today, and perhaps even more so, as they were when the school first emerged in the mid-nineteenth century.

In The Dao of Capital, Mark Spitznagel has undertaken a sweeping study of the Austrian School and its correlative thought throughout history. A highly successful investor, Mark brings Austrian economics from the ivory tower to the investment portfolio, by demonstrating that its principles of capital, roundabout production, and free markets can and indeed should be applied to entrepreneurial investment. Mark’s “Austrian investing” is fascinating in its clarity and practicality, and points out just how difficult it is to go against the grain of interventionism, mainstream economics, and Wall Street culture.

As an adherent of the Austrian School, I have been frustrated by constantly being forced to watch what the centralizers and government planners have been doing to our economy—contriving recipe after recipe for disaster. We must understand that markets are naturally resilient. As The Dao of Capital illustrates, without the distorting effects of central planning and interventionism, natural market forces achieve homeostasis on their own—an idea anathema to today’s bailout culture.

Rather than calming the markets by their actions, central banks create ever-mounting levels of distortion. Grasping at straws, they believe that flooding the world with money will somehow solve the very problems that such interventionism created in the first place.

People deserve better than this. Let capitalism function as it should without the manipulation of bureaucrats. As a doctor who practiced for a total of nearly 35 years, I abided by the Hippocratic Oath that charged me to do no harm and not get in the way of the body’s natural ability to heal itself. The government must do the same and allow the market’s natural homeostatic process to work. This goes to the heart of the message of The Dao of Capital, which shows people how to achieve harmony with the market process, distorted or not.

Over the years, deepening my understanding of the significance of free markets helped me see the need to fight for them through political action. Such action can take various forms, from education to revolution. In the United States it is possible to accomplish necessary change through education, persuasion, and the democratic process. Our rights of free speech, assembly, religion, petition, and privacy remain essentially intact. But before our rights are lost, we must change the policies born of decades of government interventionism.

I always believed deeply that the Founding Fathers got it right—certainly more so than their successors, who have worked feverishly against individual rights since the day our Constitution was ratified. Our nation was founded on the value of liberty, and I have never needed to be convinced of the merits of individual freedom. Other forces challenged my natural instincts toward freedom—an education establishment, the media, and government. They constantly preached that we need government to protect us from virtually everything, including ourselves. But I never wavered in my conviction that only an unhampered market is consonant with individual liberty.

This liberty goes hand in hand with sound money, a concept that is fundamental to Austrian economics. Mainstream economists continue to downplay or dismiss its importance. The continual and never-ending bad results of these dominant economic “experts” speak for themselves.

Money, according to Mises, must originate in the market as a useful commodity in order to function properly. The most important role money plays is that of a medium of exchange. It also serves as a measurement and store of value.

Unfortunately, politicians hold the conviction that money growth gives us economic growth. They are blind to the fact that government cannot create anything. Government cannot make man richer, but it can make him poorer. It is extremely naïve to think otherwise. We should all heed the lesson of “That Which Is Seen, and That Which Is Not Seen,” the keen essay by nineteenth-century economist Frédéric Bastiat, to look beyond the immediate to the less direct results that can and should be foreseen—another of Mark’s big themes in The Dao of Capital.

The Federal Reserve can intervene in the market and meddle with interest rates, but ultimately cannot escape the immutable nature of free market economics. Politicians may warp a monetary system to their liking but they cannot repeal economic laws that determine the nature of money. As I have said in the past and stand by today, distortion and corruption through monopoly control can benefit the few at the expense of the many for long periods of time, but eventually the irrefutable laws of nature will win. Free choice in the market is the only way economic calculation can come about.

Money had always been viewed as neutral. The supply of money was not thought to play a critical part in determining specific prices. Rather, it was accepted as fact that the price of a product depended only on the supply and the demand of the goods sold. This was tacitly accepted by even the early Austrian economists, but it took Mises to prove the nonneutrality of money. As he wrote in his masterful book, Human Action:

As money can never be neutral and stable in purchasing power, a government’s plan concerning the determination of the quantity can never be impartial and fair to all members of society. Whatever a government does in the pursuit of aims to influence the height of purchasing power depends necessarily upon the ruler’s personal value judgments. It always furthers the interest of some groups of peoples at the expense of other groups. It never serves what is called the common wheel or the public welfare.4

To tamper with a nation’s money is to tamper with every economic aspect of people’s lives: earnings, savings, how much one pays in nominal terms for every purchase made. When money is manipulated at will by politicians, it always leads to chaos, unemployment, and political upheaval. For this reason it is imperative that we identify a money that cannot be abused, that prohibits inflation, and allows responsible working citizens to prosper.

As The Dao of Capital clearly shows, with an inflating fiat currency, capital investment in a market economy becomes very difficult. As money is destroyed, there is an increase in government power and interference in the markets to attempt to maintain order. Government officials throughout history have refused to admit that economic planning does not work until it’s too late. And then when governments have tried to compensate for “printing too much money” it has only made things worse. This should sound all too familiar to Americans concerning the functions of the Federal Reserve.

Ironically, there is a consensus in America against government price controls in favor of free markets, until it comes to the most important price of all—the price of time, or interest rates. This is how the government controls the value of money. Through this price control, the government also distorts the market’s elaborate coordinating function between consumers and producers. Thanks to the work of the Austrian economists, we know that the loss of this coordination gives us boom and bust cycles—due solely to the manipulation of the supply of money and credit by the central bank. Therefore, the rate of unemployment and the general standard of living are all a reflection in large part of the monetary policy a nation pursues.

Mises understood how money becomes as much a political issue as an economic one. His insights helped me to oppose excuses for deficits coming from both the left and the right. Regardless of their rhetoric, both factions depend on a fiat money system and inflation to continue government financing while serving their respective special interests.

The Austrians explain thoroughly why government intervention is the enemy and why individual liberty is key to realizing true freedom. The assurances I gained from these ideas and the example of Mises’s character have enabled me to tolerate my time in Washington, DC and in Congress.

The phrase “Austrian economics” is not something I ever expected to come into widespread use. But since 2008, it has permeated our political vocabulary at a popular level that continues to thrill me as a longtime student of the Austrian School. Although these teachings have gloomy implications for today, we have much reason to be optimistic—namely the traction and potential gained among the younger generation. It has given me tremendous pride to see the thousands of young people who come to my rallies, a reflection of how the youth of America are embracing freedom, economic and otherwise.

To the degree that these principles become even more popular and others discover the economic truths espoused by Mises and his students, including through The Dao of Capital, we will finally be able to put our country on sound financial footing.

Freedom is indeed popular. But fully realizing it also means fully embracing Austrian economics.

RON PAUL

Notes

1. Murray N. Rothbard, An Austrian Perspective on the History of Economic Thought, 1995, Edward Elgar Publishing Ltd.

2. Ralph Raico, Classical Liberalism and the Austrian School, 2012, The Ludwig von Mises Institute, Auburn, AL.

3. Ludwig von Mises, Planning for Freedom, 1974, Libertarian Press, South Holland, Illinois.

4. Ludwig von Mises, Human Action, 1998, The Ludwig von Mises Institute, Auburn, AL.

Introduction

At the outset, we must think of capital in a new way, as a verb, not a noun. Rather than an inanimate asset or piece of property, it constitutes an action, a means to an end—to build, to advance, to deploy the tools and instruments of a progressing economy. Indeed, capital is a process, or a method or path—what the ancient Chinese called the Dao.

Capital has an intertemporal dimension: Its positioning and advantage at different points in the future is central. Time is its milieu—defines it, shapes it, helps it and hinders it. As we think of capital in a new way, we also must think of time in a new way as we engage this process—our path, our Dao of Capital.

This path is notable in that it is exceedingly and purposefully circuitous—the keyword throughout this book is roundabout—the “going right in order to then go left” that leads first to the means, those strategic intermediate waypoints from which it becomes all the more possible and effective to arrive at the ultimate ends. As evident and ubiquitous as this process is all around us, from the natural world of the boreal forest to the business world of the entrepreneur, all too often we fail to perceive it. We tend to see the destination, but somehow often miss the path. So, we end up playing the wrong game.

This is a lesson that runs deep through many areas of life’s strategic thinking and decision making. But this is a book about investing and, as such, this is my focus. Though I hope to make the point clearly in these pages that investing is an innate human action not distinct from others, nonetheless investing is perhaps where the lesson is most acute. The flashing lights of Bloomberg terminals and brokerage screens, with their allure of immediate profits, distract us such that they are all we can see. Unseen are the teleological mechanisms behind what is seen, the “engines of the world” as it were, churning away with time. Even Wall Street, that great sideshow with its temporal constraints shackling it to the urgent present, is blind to these mechanisms of the economy and can only chase the shadows of what is actually happening.

The good news, however, is that these mechanisms are very simple at their core; moreover, they have been clearly revealed by a tradition of economic thought known as the Austrian (or Viennese) School of economics, named (somewhat pejoratively) for its birthplace, the cultural and intellectual nexus of the nineteenth century, where founders Carl Menger and Eugen von Böhm-Bawerk established a new way of thinking about capital as roundabout means to more productive ends. Their intellectual progeny, the great Ludwig von Mises, did more to advance the Austrian School than any other and in whose name the torch is still carried today.

The Austrians, though, are not our only forebears. Indeed, in the roundabout we find a pillar of strategic thought that goes back some 25 centuries, to ancient China and the Daoists who in their concept of reversion saw everything as emerging from—and as a result of—its opposite: hard from soft, advancing from retreating. From these roots, both eastern and western, we learn to intertemporalize across slices of time, never focusing solely on the objective of our desire. In pursuit of circuitous means we assume a whole depth of fields.

The great strategists of the world did not need to be taught to train their attention on the means of their later advantages. The quintessential roundabout entrepreneur Henry Ford knew it in his gut. But as investors, we are completely separated from the means-ends process of production and economic progress, succumbing instead to what seems an endless complexity. Calling to mind the words of Finnish composer Jean Sibelius, rather than “manufacturing cocktails of every hue and description,” I hope to offer here the “pure cold water” of this unadorned, archetypal approach.1

Following The Dao of Capital, we will build new habits of awareness regarding the mechanisms of capital and of capitalistic investing—the means and methodology of the market process itself. By aligning ourselves with these mechanisms, we find an intellectual and (far more importantly) practical discipline I call Austrian Investing, which does not directly pursue profits, but rather the roundabout means of profits.

When I was first approached by my publisher and finally convinced to write a book, I launched an arduous campaign of introspection and organization, and then eventually writing (the former was pure joy, the latter not at all—I am a professional investor, not a professional writer). In trying to explain and illustrate my central investment methodology I undertook a circuitous journey that spanned the coniferous boreal forests, Warring States China, Napoleonic Europe, burgeoning industrial America, and, of course, the great economic thinkers of nineteenth and twentieth century Austria. The common thread throughout was always orienting to means, not ends—seeking harmony with the market process, not profits. The result of my endeavors over the past two years, slipped in between, first and foremost, running hedge funds, is The Dao of Capital. (As a side note, I might observe that the worst thing about having written a book is ever being accused, quite literally—and fairly—of “talking your book.” While I do describe here, in general terms, what I practice as an active investor and hedge fund manager, I hope to mitigate some of this first by stating that my partnerships are effectively closed and second by pledging any and all book profits to charity. And, think about it, anyone who writes an investment book and cannot say likewise should, in my view, be largely disregarded.)

This book offers, eventually, an introduction to Austrian Investing. I will marshal data to illustrate the effectiveness of my approach. However, these revelations will occur in the final two chapters of the book. The bulk of my discussion will focus on the all-important thinking behind Austrian Investing. It is fitting that I structure the book in this fashion, for as we’ll see, the whole point of my approach to investing is that we must be willing to adopt the indirect route to achieve our goals.

Let me provide an overview of our journey. We begin in Chapter 1 with my own introduction to the market process through the careful tutelage of a wise old grain trader at the Chicago Board of Trade, Everett Klipp, whose teachings unknowingly echoed the ancient wisdom of the Daoists and the seminal book known as the Laozi (or Daodejing); I continue to learn from my recollections of “Klippisms” to this day. From there, we move to the natural world and central pedagogy that builds on nature’s strategy and logic of productive and opportunistic growth—the leitmotif of the conifer that, as we will see in Chapter 2, is intergenerationally roundabout, by retreating first to the rocky, inhospitable places where competitors cannot grow, and from there seeds the fertile areas cleared by wildfire. This strategy of the conifers was evident in the canonical military strategists—the original strategic thinkers and decision makers—as we will see in Chapter3, starting with Sun Wu or Master Sun, whose often superficially quoted teachings in the Sunzi provide us with the core concept of shi, which has multiple meanings but can be thought of as strategic positional advantage. The same thinking is also found within Vom Kriege (On War), the often misinterpreted writings of Carl von Clausewitz, who advocated going for the means of key strategic points at which to weaken the enemy and thus better achieve the final objectives of victory and peace more expediently. In Chapter 4, we find roundabout strategic thinking in those who fought ideological battles: proto-Austrian economist Frédéric Bastiat, who challenged the Marxists and gave us the seen and the foreseen, and Austrian School founder Menger, who took an a priorist stance as he jousted with the German Historicists who held a slavish attachment to empiricism.

From Menger, we move in Chapter 5 to the man who put the Austrian School on the map: Böhm-Bawerk, who gives us insights on the relationship between saving, investment, and capital accumulation, thus providing today’s investor with a theoretic understanding of the market process. His capital theories illustrate the roundabout of Produktionsumweg to amass deeper and increasingly efficient and productive capital structures (as exemplified by Ford, who turned coal and steel into cars for the masses). The difficulty of the roundabout cannot be underestimated, as we will see in Chapter 6, because of our inherent time preferences and myopic time inconsistencies (which might be summed up here as impatience now/patience later). In the real world, people seem to exhibit a much stronger discount (per unit of time) in the immediate future, compared to the distant future, a phenomenon sometimes called “hyperbolic discounting.” This feature of the world plays a crucial role in my understanding of asset prices, but here Böhm-Bawerk was a man ahead of his time, writing on these topics more than a century ago. Because of the quirks of our human eagerness for the immediate reward, we are forewarned that what seems easy and straightforward is deceptively so; the roundabout is in practice a counterintuitive path—of acquiring later stage advantage through an earlier stage disadvantage—nearly impossible to follow. As the Laozi says, “The bright path seems dim/Going forward seems like retreat/ The easy way seems hard/The highest Virtue seems empty . . . Great talents ripen late.”2

In Chapter 7, the great Mises teaches us that “the market is a process,” drawing from his insights from the early and mid-twentieth century when he explained real-world entrepreneurship and the booms and busts of the business cycle. Mises’s work centered on the actions of the “acting man,” reflecting, as Austrian economist Murray Rothbard observed, “the primordial fact that human beings have goals and purposes and act to attain them. And this fact is known not tentatively and hesitantly, but absolutely and apodictically.”3 It was Mises’s focus on this crucial aspect of social affairs—that humans adopt means to achieve their subjective ends—that guided his interpretation of the market process as well as broader trends in history. Mises argued that without first constructing a solid body of economic understanding, the economic historian would be at a loss when analyzing empirical evidence, seeing spurious “relationships” everywhere.

As we will see in Chapter 8, the distortion of interventionism short-circuits the natural governors within systems, whether forests or markets; and yet, the forces that return the system to homeostasis persist and will eventually prevail, although reversions will be, almost by definition, extremely messy. Thus, we can view the market process as a grand “teleological” mechanism, which exhibits negative feedback loops as it gropes back toward a natural equilibrium after the central bank distorts its natural movements.

Across the span of these eight chapters, we establish the foundation of The Dao of Capital, the roundabout means toward our desired end. Only someone who is willing to defer the immediate objective, and read on topics that at first may seem only tenuously related, can benefit from the last two chapters and the discussion of capitalistic investment strategies known as Austrian Investing. This is new and important territory from an Austrian perspective. The Austrian tradition has confined itself largely to academic analysis of the economy and related policy recommendations, explaining what should be—and more to the point should not be—done to allow the free and full functioning of the entrepreneurial and market processes. In the last two chapters of this book, we move from government policy to investment practice, as we navigate a highly distorted and very real world. I call my approach Austrian Investing because it relies so heavily on the insights I have gleaned over the years from these great economists. A primary purpose of this book is to explain their importance to other investors so they, too, might benefit from the Austrian perspective.

Now more than ever, investors need to recognize the distortion in the system, which has reached near unprecedented proportions. Unhealthy growth of assets that would not exist without the deadly fertilizer of intervention is creating a tinderbox that will, in the not so distant future, erupt in massive wildfire. Given the visible distortion in the equity market (as I will discuss in Chapter 9) we should absolutely expect severe stock market losses to come—quite possibly within the next year or so. (That’s an easy thing for me to flippantly say, and I spend a significant chunk of this book explaining, among other things, why it is so.) This urgency brings a somber yet critical note of warning to these pages.

In Austrian Investing I (Chapter 9), we learn how to gauge the distortion in the system using a measure I call the Misesian Stationarity index, after the principles of Mises, to protect ourselves from the distortion by knowing when to stay out of the market and when to stay in, or to profit from that distortion by using a sophisticated strategy (alas, well beyond the capability of retail investors, and even many professionals) known as “tail hedging.” (Although I am known for this investment approach, let me tip my hand right now: When it comes to market events, there have been no impactful black swans—the so-called unexpected “tail events.” What were unseen by most were, indeed, highly foreseeable.) In Austrian Investing II (Chapter 10), we employ Böhm-Bawerkian principles as we pursue roundabout capital structures in which to invest, looking at companies that are not part of the Wall Street shadow play because they exhibit promise though not immediately surging profits. (Austrian Investing is an older and more gestalt version of what has come to be known as value investing; Austrian Investing not only predates it, but also refines and focuses it.) In the Epilogue, I sum up the roundabout by homing in on a key ingredient in its arduous pursuit, a lesson straight from the boreal forest—sisu.

Besides incorporating Austrian theoretical insights into the nature of the market process, my approach mirrors the Austrian approach to economics itself. Unlike most mainstream economists, who desire to model their own discipline after the pattern of physicists, the Austrians in the tradition of Mises do not find much use in curve-fitting and econometric back-testing.

If we appreciate the power of Mises’s arguments, we will understand that we can’t just “let the facts speak for themselves” when it comes to understanding economic phenomena (such as the business cycle)—particularly in trying to predict the movements of stock prices. We need an antecedent theory to guide us, to pick out which facts are relevant and which can safely be ignored, to focus only on what matters. After our logical deductions lead us to an investment philosophy, we can of course use empirical investigation to “check our work”—and indeed we will do so.

In The Dao of Capital, I invite you into my process, not with a plug-and-play strategy, but, more importantly, with a way of thinking that can be applied to investing and, indeed, many other important activities in life in which one must choose wisely across slices of time so as not to jeopardize or bankrupt opportunities (often better ones) that arise later. Without the thinking, though, the acting is baseless. The reasoning is paramount, first and foremost.

When I was a young trader starting out in the pit (in fact the bond pit’s youngest), Klipp made sure I understood why I was at the Chicago Board of Trade—which was not to learn how to make money (as I relate in Chapter 1). If that were the case, he told me, “you wouldn’t even be in here. You’d be in a long line all the way down LaSalle Street, still waiting to get in.” And so I say the same to you: If there were a book that could teach you how to make money, you would be at the end of a long line down the street from any bookstore (what few still exist).

The intention of this book is to teach you how to think and provide you the discipline of the roundabout. Like learning as an adult to swing a golf club or to ski, the intention is to understand the underlying mechanisms in order to coordinate our actions with them. With that foundation, you can engage in the necessary circuitous aspects required by this strategy and the intimately related roundabout process of capital. If and when we lose our way, we reorient ourselves with our Austrian compass that leads us right to go left, along a circuitous path as old as strategic thought itself.

In the words of the Laozi, “A journey of a thousand miles starts under one’s feet.”4 And so we begin, with our first step along The Dao of Capital.

MARK SPITZNAGEL

Northport, Michigan

July 2013

The Sage and the Apprentice—at the Chicago Board of Trade with Everett Klipp (c. 1994)

Notes

1.Walter Legge: Words and Music, Alan Sanders, ed., 1997, Routledge, New York.

2. Gia-Fu Feng, trans., Lao Tsu, Tao Te Ching, 1972, Alfred A. Knopf, New York.

3. Murray Rothbard, Preface to Theory & History by Ludwig von Mises, 1985 (reprint 2007, Ludwig von Mises Institute, Auburn, AL).

4. Gia-Fu Feng, Lao Tsu, Tao Te Ching.

Chapter One

The Daoist Sage

Klipp’s Paradox

“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.”

This is “Klipp’s Paradox”—repeated countless times by a sage old Chicago grain trader named Everett Klipp, and through which I first happened upon an archetypal investment approach, one that I would quickly make my own. This is the roundabout approach (what we will later call shi and Umweg, and ultimately Austrian Investing), indeed central to the very message of this book: Rather than pursue the direct route of immediate gain, we will seek the difficult and roundabout route of immediate loss, an intermediate step which begets an advantage for greater potential gain.

This is the age-old strategy of the military general and of the entrepreneur—of the destroyer and of the very creator of civilizations. It is, in fact, the logic of organic efficacious growth in our world. But when it is hastened or forced, it is ruined.

Because of its difficulty it will remain the circuitous road least traveled, so contrary to our wiring, to our perception of time (and virtually impossible on Wall Street). And this is why it is ultimately so effective. Yet, it is well within the capability of investors who are willing to change their thinking, to overcome that humanness about them, and follow The Dao of Capital.

How do we resolve this paradox? How is it that the detour could be somehow more effective than the direct route, that going right could be somehow the most effective way to go left? Is this merely meant to confuse; empty words meant to sound wise? Or does it conceal some universal truth?

The answers demand a deep reconsideration of time and how we perceive it. We must change dimensions, from the immediate to the intermediate, from the atemporal to the intertemporal. It requires a resolute, forward-looking orientation away from what is happening now, what can be seen, to what is to come, what cannot yet be seen. I will call this new perspective our depth of field (using the optics term in the temporal rather than the spatial), our ability to sharply perceive a long span of forward moments.

This is not about a shift in thinking from the short term to the long term, as some might suppose. Long term is something of a cliché, and often even internally inconsistent: Acting for the long term generally entails an immediate commitment, based on an immediate view of the available opportunity set, and waiting an extended period of time for the result—often without due consideration to or differentiation between intertemporal opportunities that may emerge during that extended period of time. (Moreover, saying that one is acting long term is very often a rationalization used to justify something that is currently not working out as planned.) Long term is telescopic, short term is myopic; depth of field retains focus between the two. So let’s not think long term or short term. As Klipp’s Paradox requires, let’s think of time entirely differently, as intertemporal, comprised of a series of coordinated “now” moments, each providing for the next, one after the other, like a great piece of music, or beads on a string.

We can further peel away Klipp’s Paradox to reveal a deeper paradox, at the very core of much of humanity’s most seminal thought. Although Klipp did not know it, his paradox reached back in time more than two and a half millennia to a far distant age and culture, as the essential theme of the Laozi (known later as the Daodejing, but I will refer to it by its original title, after its purported author), an ancient political and military treatise, and the original text and summa of the Chinese philosophy of Daoism.

To the Laozi, the best path to anything lay through its opposite: One gains by losing and loses by gaining; victory comes not from waging the one decisive battle, but from the roundabout approach of waiting and preparing now in order to gain a greater advantage later. The Laozi professes a fundamental and universal process of succession and alternation between poles, between imbalance and balance; within every condition lies its opposite. “This is what is called the subtle within what is evident. The soft and weak vanquish the hard and strong.”1

To both Klipp and the Laozi, time is not exogenous, but is an endogenous, primary factor of things—and patience the most precious treasure. Indeed, Klipp was the Daoist sage, with a simple archetypal message that encapsulated how he survived and thrived for more than five decades in the perilous futures markets of the Chicago Board of Trade.

THE OLD MASTER

Daoism emerged in ancient China during a time of heavy conflict and upheaval, nearly two centuries of warfare, from 403 to 221 BCE, known as the Warring States Period, when the central Chinese plains became killing fields awash in blood and tears. This was also a time of advancement in military techniques, strategy, and technology, such as efficient troop formations and the introduction of the cavalry and the standard-issue crossbow. With these new tools, armies breached walled cities and stormed over borders. War and death became a way of life; entire cities were often wiped out even after surrender,2 and mothers who gave birth to sons never expected them to reach adulthood.3

The Warring States Period was also a formative phase in ancient Chinese civilization, when philosophical diversity flourished, what the Daoist scholar Zhuangzi termed “the doctrines of the hundred schools”; from this fertile age sprung illustrious Daoist texts such as the Laozi and the Sunzi, the former the most recognized from ancient China and one of the best known throughout the world today. Its attributed author, translated as “Master Lao” or “The Old Master,” may or may not have even existed, and may have been one person or even a succession of contributors over time.

According to tradition, Laozi was the keeper of archival records for the ruling dynasty in the sixth century BCE, although some scholars and sinologists maintain that the Old Master emanated from the fourth century BCE. We know from legend that he was considered to have been a senior contemporary of Kongzi (Confucius), who lived from 551 to 479 BCE, and who was said to have consulted Laozi and (despite being ridiculed by Laozi as arrogant) praised him as “a dragon riding on the winds and clouds.”4 Furthermore, written forms of the Laozi, which scribes put down on bamboo scrolls (mostly for military strategists who advised feuding warlords), are likely to have been derivatives of an earlier oral tradition (as most of it is rhymed). Whether truth or legend, flesh and bones or quintessential myth, one person or many over time, the Old Master relinquished an enduring, timeless, and universal wisdom.

To most people, it seems, the Laozi is an overwhelmingly religious and even mystical text, and this interpretive bias has perhaps done it a disservice; in fact, the term “Laoism” has been used historically to distinguish the philosophical Laozi from the later religious Daoism. Recently, new and important translations have emerged, following the unearthing of archeological finds at Mawangdui in 1973 and Guodian in 1993 (which amounted to strips of silk and fragments of bamboo scrolls), providing evidence of its origins as a philosophical text5—not mystical, but imminently practical. And this practicality relates particularly to strategies of conflict (specifically political and military, the themes of its day), a way of gaining advantage without coercion or the always decisive head-on clash of opposing forces. The Dao of Capital stays true to these roots.

The Laozi, composed of only 5,000 Chinese characters and 81 chapters as short as verses, outlines the Dao—the way, path, method or “mode of doing a thing,”6 or process toward harmony with the nature of things, with awareness of every step along the way. Sinologists Roger Ames and David Hall describe the Dao as “way-making,” “processional” (what they call the “gerundive”), an intertemporal “focal awareness and field awareness”—a depth of field—by which we exploit the potential that lies within configurations, circumstances, and systems.7

The central concept permeating the Laozi is referred therein as wuwei, which translates literally as “not doing,” but means so much more; rather than passivity, a common misperception, wuwei means noncoercive action—and here we see the overwhelming laissez-faire, libertarian, even anarchistic origins in the Laozi, thought by some to be the very first in world history8 (as in “One should govern a country as one would fry a small fish; leave them alone and do not meddle with their affairs”9—a cardinal Laozi political credo most notably invoked in a State of the Union address by President Ronald Reagan). The Laozi also has been deemed a distinctive form of teleology, one that emphasizes the individual’s self-development free from the intervention of any external force. This leads to the paradox of what has come to be known as wei wuwei (literally “doing/not doing,” or better yet “doing by not doing,” or “do without ado”10). “One loses and again loses / To the point that one does everything noncoercively (wuwei). / One does things noncoercively / And yet nothing goes undone.”11

In wuwei is the importance of waiting on an objective process, of suffering through loss for intertemporal opportunities. From the Laozi, “Who can wait quietly while the mud settles? Who can remain still until the moment of action?”12 It appears as a lesson in humility and tolerance, but, as we wait, we willingly sacrifice the first step for a greater later step. In its highest form, the whole point of waiting is to gain an advantage. Therefore, the apparent humility implied in the process is really a false humility that cloaks the art of manipulation; as French sinologist François Jullien noted, “the sage merges with the manipulator,” who, in Daoist terms, “humbles himself to be in a better position to rise; if he withdraws, he does so to be all the more certainly pulled forward; if he ostensibly drains away his ‘self,’ he does so to impose that ‘self’ all the more imperiously in the future.”13 This is the efficacy of circumvention camouflaged as suppleness. And in this temporal configuration is, in the words of Ames and Hall, the Laozi’s “correlative relationship among antinomies”:14 With false humility we deliberately become soft and weak now in order to be hard and strong later—the very reason that, in the Laozi, “Those who are good at vanquishing their enemies do not join issue.”15

In this sense, the Laozi can simply be seen as a manual on gaining advantage through indirection, or turning the force of an opponent against him, through “excess leading to its opposite.”16

THE SOFT AND WEAK VANQUISH THE HARD AND STRONG

Perhaps the most tangible representation of wuwei can be seen in the interplay of softness and hardness in the Chinese martial art taijiquan—not surprising as it is a direct derivative of the Laozi. According to legend, taijiquan was created by a thirteenth-century Daoist priest, Zhangsanfeng. Cloistered on Wudang Mountain, he observed a clash between a magpie and a serpent, and suddenly fully grasped the Daoist truth of softness overcoming hardness.17 The serpent moved with—indeed, complemented—the magpie, and thus avoided its repeated decisive attacks, allowing the snake to wait for and finally exploit an opening, an imbalance, with a lethal bite to the bird. In this sequential patience, retreating in order to eventually strike, was the Laozi’s profound and unconventional military art:

There is a saying among soldiers:

I dare not make the first move but would rather play the guest;

I dare not advance an inch but would rather withdraw a foot.

This is called marching without appearing to move,

Rolling up your sleeves without showing your arm,

Capturing the enemy without attacking,

Being armed without weapons.18

Like Daoism itself, taijiquan has drifted into the more mystical and new age, but its roots remain in its martial application; this is clear today in the powerful blows of the original Chen style taijiquan form, as still practiced in Chen Village (located in Henan province in central China). According to Chen Xin (among the lineage of the eponymous Chen clan) in his seminal Canon of Chen Family Taijiquan, a deceptive rotational and circular force—known as “silk reeling”—is “the main objective of Taijiquan moves, which work on the centrifugal principles of a ‘roundabout’.”19 The rotation is between retreating and advancing, between soft and hard. (When performed by a master, such as my teachers Qichen Guo and Jwing-Ming Yang, of whose qinna maneuvers I have oft found myself on the wrong end, it is most unsettling, almost deplorable in its artful deceitfulness.)

Taijiquan is a physical manifestation of the importance of waiting and exploiting another’s urgency through softness in a clash. This is most apparent in the two-person taijiquan competitive exercise known as tuishou, or “push hands,” in which two opponents engage in what looks to the casual observer like a choreographed series of synchronized movements. In actuality tuishou is a cunning contest with highly constrained rules, in which each tries to throw the other to the ground (or outside a boundary) during a sequence of subtle alternating feints and attacks. The real force is not in the pushing, but in the yielding. (In tuishou is an ideal roundabout and investing metaphor, one that I will return to again and again.)

The “Song of Push Hands,” in its oral transfer of the art over centuries in Chen Village, instructs the competitor to “guide [the opponent’s] power into emptiness, then immediately attack.”20 To guide or lure the opponent into emptiness and thus destroy his balance is the very indirect objective—to gain the position of advantage—to be followed by the direct objective of attack. This is the essential tuishou sequence of yielding, neutralizing, and sticking. Yielding and neutralizing—zou or zouhua, “leading by walking away”—is the sneaky retreating rout, followed by converting and redirecting a force to advantage; that advantage is exploited by sticking and following—nian or niansui—and thus eventually advancing back in a decisive counterattack. (Taken together, as we will see in Chapter 3, this sequence describes shi, the strategy of wuwei.)

Tuishou: Zouhua and Niansui

The competition is a subtle interplay of delusive complementary—not opposing—forces between opponents, between hard and soft, each seeking the shrewd strategy of patiently attacking the balance rather than the force, of going right in order to ultimately go decisively left.

This is also the insidious strategy of guerilla warfare. While used effectively, for instance, by the scrappy American colonists against the British in the eighteenth century, it was later used deftly against the mighty United States by the far weaker and smaller Vietcong in the twentieth century, the very same alternating intertemporal softness and hardness: When the U.S. troops surged, the Vietcong retreated in a rout into the mountains (zouhua), drawing the U.S. troops out until overextended; then the Vietcong counterattacked, following the U.S. troops (nian) in a destructive counterrout. The great frustration—the unfairness—is that the harder you push, the harder you fall. Chairman Mao knew these words from the Laozi: “If a small country submits to a great country / It can conquer the great country. Therefore those who would conquer must yield / And those who conquer do so because they yield.”21(We will encounter this again with the guerilla warriors of the north in the Epilogue.)

In the wuwei of taijiquan, the advantage comes not from applying force but from circular yielding, from directing the course of events rather than forcing them; from the Laozi, “Hence an unyielding army is destroyed. An unyielding tree breaks.”22 The patience of the intermediate steps of loss and advantage defeats the impatience of the immediate gain; the direct force is defeated by the counterforce. Thus there are always two games being played in time, one now and one later, against two different opponents. As the great tuishou practitioner Zheng Manqing observed, one must first “learn to invest in loss” by leading “an opponent’s force away so that it is useless,” and which will “polarize into its opposite and be transformed into the greatest profit.”23 In taijiquan is the essence of The Dao of Capital.

So much of waiting and ignoring present circumstances, of willingness to be in an uncomfortable place, is understanding the sequential instead of only seeing the immediate. There is a definite brand of epistemology at the root of the Laozi. To the Laozi, much of the exterior world is but exterior diversion, much perception is a distraction from a hidden reality—though one which requires diligent attention. It states this most succinctly in “Venture not beyond your doors to know the world / Peer not outside your window to know the way-making. . . . The farther one goes / The less one knows.”24

Paul Carus, in his definitive 1913 The Canon of Reason and Virtue: Being Lao-tze’s Tao Teh King, went so far as to relate this epistemology of the Laozi to eighteenth-century German philosopher Immanuel Kant: The Laozi “endorses Kant’s doctrine of the a priori, which means that certain truths can be stated a priori, viz., even before we make an actual experience. It is not the globe trotter who knows mankind, but the thinker. In order to know the sun’s chemical composition we need not go to the sun; we can analyze the sun’s light by spectrum analysis. We need not stretch a tape line to the moon to measure its distance from the earth, we can calculate it by the methods of an a priori science (trigonometry).”25

Indeed, there is an almost antiempirical vein to the Laozi, a stand against the positivist view of knowledge as exclusively flowing from sense perceptions. As Jacob Needleman interprets the Laozi, “We see only things, entities, events; we do not directly experience the forces and laws that govern nature.”26 Similarly, Ellen Chen says the Laozi “is not pro-science in spirit,” “repudiating the knowledge of the many as not conducive to the knowledge of the one”27 (thus invalidating induction). Truth is learned from understanding basic natural and logical constructions, a tree that bends to the force of a wind, pent-up water that eventually destroys all in its path, the interplay between snake and bird. There is much deception in appearance, the tyranny of the senses, of empirical data—wisdom that gains particular context and meaning in investing.

INTO THE PIT

My exposure to investing came quite by accident. As a 16-year-old (whose only previous experience with markets was through a share in the Rochester Red Wings minor league baseball team, passed down proudly for three generations) I tagged along with my father when he paid a visit to his good friend (and corn futures trader, whatever that was) Everett Klipp at the Chicago Board of Trade. I stood in the visitors’ gallery overlooking the grain trading pits, gaining a bird’s-eye view over a kaleidoscope of bright trading jackets, flailing arms, and lurching bodies. I was expecting some kind of swanky casino (perhaps out of a James Bond film), but this was different than that. I was mesmerized. It reminded me of watching a flock of birds, a cloud of countless individual parts appearing as a single fuzzy organism, seemingly resting, hovering in midair, until something unseen starts to ripple through it like a pulse of energy, causing a sudden jolting turn in a burst of speed. The flock swoops and dives, rests, and then rises again, with a mechanical yet organic coordination and precision, while the outside observer can only marvel at its driver. In the pit was the same mystery, with pauses interrupted by sudden cascades of noise and energy driven by something imperceptible. It was a financial Sturm und Drang, but within it was an unmistakable, intricate communication and synchronization. In an instant, I scrapped my hard-won Juilliard plans (needless to say, my mother was horrified) and wanted nothing more than to be a pit trader.