Safe Haven Investing For Financial Storms Pdf

[Lacy Tortelli]

Forinstance, a simple 60/40 stocks/bonds portfolio underperformed the S&P 500 alone by over 250 per cent cumulatively over the past 25 years. What was the point of those bonds again? Cassandras typically and ironically lose more in their safety interventions than they would have lost to that which they seek safety from.

Most investor interventionism against looming market crashes ultimately lead to lower compound returns than those crashes would have cost them. Markets have scared us far more than they have harmed us.

While Cassandras may make great career politicians and market commentators, they have proven very costly in public policy and in investing. We know that times are fraught with uncertainty, and the financial markets have perhaps never been more vulnerable to a crash. But should we seek safety such that we are worse off regardless of what happens?

We should aim our arrows such that we mitigate our bad potential shots and, as a direct result, raise our chance of hitting our bullseye. Our risk mitigation must be cost-effective. This is far easier said than done. But by the simple act of recognising the problem of the deceptive, long-term costs of risk mitigation, we can make headway. If history is any guide, this might just be the most valuable and profitable thing that any investor can focus on.

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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.

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.

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.

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).

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) 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 rsums (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.

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!

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.

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.

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.

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.

When Elon Musk was a kid in South Africa, he was regularly beaten by bullies. One day a group pushed him down some concrete steps and kicked him until his face was a swollen ball of flesh. He was in the hospital for a week. But the physical scars were minor compared to the emotional ones inflicted by his father, an engineer, rogue, and charismatic fantasist.

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