The Dao of Capital: Austrian Investing in a Distorted World

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.

Table of Contents:
Foreword xvii Introduction xxiii Chapter One: The Daoist Sage Klipp’s Paradox 1 The Old Master 3 The Soft and Weak Vanquish the Hard and Strong 6 Into the Pit 9 The Privileges of a Trader 12 Robinson Crusoe in the Bond Pit 15 Fishing in “McElligot’s Pool” 18 Enter the Austrians: A von Karajan Moment 18 A State of Rest 21 Guiding into Emptiness 23 Moving On 26 The Wisdom of the Sages 29 Chapter Two: The Forest in the Pinecone The Roundabout and the Logic of Growth 33 The Forest and the Tree 36 The Slow Seedling 39 Wildfire and Resource Reallocation 41 The Conifer Effect 43 A Logic of Growth 49 Chapter Three: SHI The Intertemporal Strategy 51 The Dao of Sun Wu 56 Shi and the Crossbow 58 Li—The Direct Path 59 Shi and Li at the Weiqi Board 60 A Common Thread, from East to West 64 An Attack of Misunderstanding 68 On War—An Indirect Strategy 70 Shi, Ziel, Mittel, und Zweck 74 Chapter Four: The Seen and the Foreseen The Roots of the Austrian Tradition 75 That Which Must Be Foreseen 78 At the Viennese Crossroads Between East and West 85 The Teleology of Baer’s Butterfly 88 Menger Establishes the Austrian School 89 Tutor to the Prince 93 Methodenstreit 97 Österreichische Schule 101 Chapter Five: UMWEG The Roundabout Path of the Unternehmer 103 Postulating the “Positive” 105 Produktionsumweg 108 Böhm-Bawerk, the Bourgeois Marx 113 Faustmann’s Forest Economy 116 Rings of Capital 122 Henry Ford: The Roundabout Unternehmer 125 The Roundabout of Life 134 Chapter Six: Time Preference Overcoming That Humanness About Us 139 “Radical” Böhm-Bawerk and the Psychology of Time Preference 145 The Curious Case of Phineas Gage 149 The Shi and Li Brain 151 The Subjectivity of Time 153 The Trade-Off of an Addict 158 No Zeal for Ziel on Wall Street 161 Adapting to the Intertemporal 164 Chapter Seven: “The Market is a Process” 167 The Man Who Predicted the Great Depression 169 Fleeing the Nazis 173 Human Action 175 Unternehmer in the Land of the Nibelungen 179 Genuine Change Is Afoot in Nibelungenland—A Market-Induced Drop in Interest Rates 187 Distortion Comes to Nibelungenland—The Central Bank Lowers Rates 190 Time Inconsistency and the Term Structure 194 The Day of Reckoning Comes to Nibelungenland 198 The Austrian View 199 The Market Process Prevails 201 Chapter Eight: Homeostasis Seeking Balance in the Midst of Distortion 203 The Teleology of the Market 205 The Yellowstone Effect 207 Lessons from the Distorted Forest 209 Market Cybernetics 213 How Things “Go Right” 216 Spontaneous Order 217 Distortion 219 The Sand Pile Effect 220 Distortion’s Message: “Do Nothing” 222 The Shi of Capital 223 Chapter Nine: Austrian Investing I: The Eagle And The Swan Exploiting Distortion with Misesian Tools 227 Homeostasis en force 229 Witness to the Distortion 231 An Initial Misesian Investment Strategy 236 The Eagle and the Swan 240 Case Study: Prototypical Tail Hedging 244 The Ziel and the Zweck: Central Bank Hedging 248 The Roundabout Investor 251 Chapter Ten: Austrian Investing II: Siegfried Exploiting the Böhm-Bawerkian Roundabout 253 Siegfried, the Dragon Slayer 255 Case Study: Buying the Siegfrieds 263 Value Investing: Austrian Investing’s Estranged Heir 269 A Zweck Finally Attained 275 Epilogue: The SISU Of The Boreal Forest 277 The World Learns Sisu from the Victorious Finns 278 Sisu—Of Character and Character-Building 284 Notes 293 Acknowledgments 309 About the Author 311 Index 313

About the Author :
Mark Spitznagel is the founder and President of Universa Investments, an investment advisor that specializes in equity tail-hedging—or profiting from extreme stock market losses as a means of enhancing investment returns. In addition to hedge fund investing, Spitznagel's twenty-year investment career has ranged from independent pit trader at the Chicago Board of Trade to proprietary trading head at Morgan Stanley. He also owns and operates Idyll Farms in northern Michigan.

Review :
"Spitznagel has written an essential new book. Indeed, might be one of the most important books of the year, or any year for that matter." —Forbes "The Dao of Capital: Austrian Investing In A Distorted World by Mark Spitznagel (Wiley, 2013) is a beautifully crafted book, one I can recommend to readers of all political/economic persuasions… it is impossible not to be shaped by its carefully presented history and logic." —Seeking Alpha "There is no shortage of market bears who take a grim view of the stock market. But Mr. Spitznagel has gained credibility in the investment world by predicting two market routs in the past decade, first in 2000 and then in 2008. Still, Mr. Spitznagel's approach is unusual for a money manager." —The New York Times "A fascinating and radical break from the investment dogma of the past several decades" —Fortune "While The Dao of Capital makes for demanding reading, it repays the effort as a heady historical and intellectual feast." —Barron's "Spitznagel could simply have written that investors need patience and must avoid the temptation of the quick profit; that building a successful strategy, and life, involves a longer-term approach foregoing instant gratification; that establishing a solid foundation while appearing not to create progress puts you in position for much greater success later on. He did not do that. Instead, he takes you on a tour of history and nature that illuminates these long held truths. In the end his message is simple, but by providing the historical underpinnings he brings them to life in a much more vibrant way." —Futures Magazine Among the "12 Books That Every Investor Should Read... deeply informative and will leave an impact on you." —Business Insider "A memoir and free market manifesto... that bring(s) theoretical concepts down to the practical?level." —Institutional Investor "I applaud the book as a look into the thinking process of a great investor, especially one that has a clear and consistent understanding of the market process, the dangers of government intervention, and the benefits of Austrian economics." —Ludwig von Mises Institute