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.

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

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.