Book-review: The Dao of Capital, Spitznagel

Focusing on the long-term, roundabout strategies and patience, and probabaly much more which escaped me …

If you prefer to read the pdf version click here. (links may not work in pdf)

I liked the book very much. Though, I would not claim to have understood every detail and concept.  

  • I loved the analogies from nature: frequent naturally occurring smaller fires are important for a forest’s long-term health, growing where others don’t, gives an advantage to the conifer later. 
  • The book teaches patience. We overvalue immediacy, and tend to focus on current returns.  
  • The more philosophical contents and their meaning most certainly escaped me more than once. 
  • The last two chapters, actually about investing came about a bit disappointing and other books might be more helpful  

Some notes I deemed worthy to write down: 

Surviving the first 30 years as an investor is the key goal. Or so Tom Gayner’s mentor told him according to an interview I recently watched. The statement can seem funny but I think it holds much truth. Fittingly I copy thi section from the book: “Guys who know where the market is heading are no longer at the board of trade. They are either retired or broke. And I can’t think of any that are retired.”  

We are not standing in a long line to get into the market. Thus, the markets probabaly do not offer easy money. Otherwise, there would be a long line to get in and we would still be waiting outside.  

Loving to lose money can be interpreted as taking many small losses early. The power law dictates that small profits occur often and very big profits seldomly. 

Encounter with Nassim Taleb. Just when I thought the authors focus on big assymmetric payoffs (ie profiting from volatility via options) reminds me on Taleb (see my Book-review: Fooled by Randomness) I read that they used to work together and formed a partnership.  

Strategy = means of gaining greater superiority. Besides this pointy definition we learn that ‘Invert, always invert’ popularized by Munger results from a German mathematician, in The Roundabout of Life we learn about roundabout analogies in  

  • sailing (not taking the direct and shortest route from A to B but taking into account the wind and thus the best angles),  
  • golf (Woods once only used irons instead of making use of one long-shot with the driver as preparation to place the ball perfectly (precision) for the put), and  
  • baseball (waiting for the fat pitch, and otherwise practicing patience – popularized by Buffett).  

The easy with which we expect to manage known adverse consequences is an illusion.’ This apply for addicts, and postponers of unpleasant tasks. It also apply to me if I buy offensive or cyclical stocks. Sitting still during a downturn and cycle troughs is not as easy as expected. Our emotions interfere with our initial plan. 

Wall Street traders are let go if they aren’t profitable, and they are measured on small increments of time, years or shorter. Thus, for them there is no possibility to act strategically. Earnings less today or even losing now for much higher profits in the future is not practicable. There is only sooner.  

Our time preferences change with the period of delay. We might strongly prefer one apple today instead of two tomorrow, but we care little for the one apply in one year if we can get two apples in one year plus one day.  

Time preferences and attention deficit disorder or ADD was an interesting aspect within time preferences. Indeed, people without ADD might actually have Hyper-ADD symptoms in our modern multi-tasking world and drift into the f-state: frantic, frenzied, forgetful, flummoxed, frustrated, and fragmented. 

Do I take the intermediate perspective, here? That is more indirect and strategic shi, to gain a more superior position. Or do I merely give in to the immediate, direct, and decicivr, the more tactical li? This often results from the human intrinsic time preference for immediacy. 

Our time preferences reside in our brains. A man survived an iron rod flying through his brain and was changed the next day: he merely lived in the here and now, whereas he was a balanced man before, and  for example, did save some money. 

Growing up, might mean mostly to depress our childish desires for immediacy. Then again, what is life about and didn’t we have a lot more fun as childs? The German book Cafe am Rande der Welt argued for preserving some childish traits in us. 

Interest rates and time prefenreces are interlinked, affecting macro economics. Artificially low interest rate levels set by central banks result in mis-allocation of capital. Smaller crisis can be mitigated but ultimately results in bigger crashes,just as attempts to stop forest fires ultimately result in much bigger catastrophic fires that really hurt the trees instead of merely clearing the underbrush. It is like foxes managing a population of rabbits and vice versa.  

Austrian investing I & II 

After introducing shi, roundabouts, strategy, etc in the first eight chapters, chapters nine and ten finally treat Austrian Investing.  

Austrian investing one describes strategies to hold cash/treasuries if equities are expensive and buy equities if they are not expensive. Many years of underperformance is the price one had to pay for strong outperformance in the long term (as with so many ‘value’ strategies). Thing is, what if markets rebound just before reaching a pre-defined level of cheapnes calculated from historic data…  

Tail hedging is a strategy to invest a small portion of the portfolio, say half a percentage point, into far out of the money puts. Thus, if the markets sell off strongly which they do from time to time, one makes big profits on the put optikns which is then available for deployment into equity when it is trading cheaply. (I wanted to do this with my Flow Traders investment. Unfortunately, Flow traded lower in 2022 with the market)  

Austrian investing II zooms in on individual firms and their heterogenous capital, thus from the macro to the micro. Companies earning high ROIC are a special breed, and we can earn superior returns if we buy at good prices, ie low-ish P/B (how ordinary this book might end).  

Going right, to go left.  


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