It’s a Silicon Valley truism that there’s little point to patenting a good business idea. If it’s truly good, it will be roundly rejected. More specifically, the potential of what’s great likely won’t be understood. Think about it. If a good idea were already understood, it would no longer be an idea. It would instead be an existing business concept.
This basic truth is too often forgotten vis-à-vis China. Supposedly the Chinese are “stealing” our intellectual property, but what could they take? The greatest commercial leaps of tomorrow are concepts wholly dismissed in the present. As for copycatting, what’s easily reproduced probably isn’t very valuable in the first place.
When it comes to genius, we insult it when we pretend that it can easily be imitated. Furthermore, what’s genius is generally only apparent well after the fact. See the first paragraph.
All of this and much more came to mind while reading Safe Haven: Investing for Financial Storms, Mark Spitznagel’s very excellent follow up to his very excellent 2013 book. The Dao of Capital. While it’s probably true that “brilliant” and “genius” are words too frequently used in modern times, thus inflating away their meaning, it’s safe to apply both of the adjectives to the Universa Investments founder and CIO while wholly confident that neither is excessive.
Spitznagel is quite simply fascinating, and his mind full of what’s endlessly interesting. Though his knowledge of investing could surely fill a library-size collection of books, the relatively slim (in length) Safe Haven is Spitznagel’s effort to better understand how he and his Universa colleagues invest by explaining the philosophy to those who can’t. And won’t.
Yes, you read that right. Per the author himself, the lessons within Safe Haven are “not to be attempted by nonprofessionals.” More importantly, he’s clear that he’s not even conveying an approach to investing that could be attempted “by most professionals.” As Spitznagel sees it, “professionals” would likely struggle with his approach the most precisely because it’s so unorthodox.
Spitznagel can write a book meant to shed light on how he invests, and he can do so comfortably precisely because he needn’t fear others “stealing” his system. How could they or would they copycat what runs counter to conventional wisdom? Not only is it pointless to patent truly good ideas, Spitznagel’s book reminds us that it’s a waste of time. What’s really good can’t easily be mimicked, and Universa is quite good. According to the author, Universa’s “risk-mitigated portfolios have over their decade-plus life to date outperformed the S&P 500 by over 3% on an annualized, net basis.” Try as they wanted to, Michael Jordan’s peers couldn’t be him, neither could Steve Jobs’s, nor it seems could those aiming to be Mark Spitznagel.
The previous paragraph is a long way of saying what Spitznagel is up front about: Safe Haven is not a “how to” book. Instead it’s a “why-to” book, or better yet a “why-not-to” book. He has no illusions about teaching you to be a genius, nor does he have any “interest in selling you anything as an investment manager.” Your reviewer’s view of the why behind Spitznagel’s excellent book is that he wrote it to better understand his own capacious mind.
After which, Spitznagel is way too honest with himself and you the reader to pretend that you can be him if you read him. It’s the equivalent of reading Phil Knight’s endlessly excellent Shoe Dog on the assumption that doing so will make you a capable entrepreneur a la the Nike co-founder. Lots of luck there. Knight is sui generis. So is Spitznagel. He can talk about his craft without fear of being eclipsed with the information he provides. Entrepreneurialism cannot be taught. Neither can investment acumen.
What’s challenging about Spitznagel’s confident belief in himself is that as a reviewer, how do you critique an expert investor who has written a book on investing? More challenging is how to do this as a commentator when the author makes plain in the opening chapter that “Talk is cheap,” and “Ideas and commentary are just that.” Ok, but your reviewer writes commentary for a living, and communicates those ideas for a living. What to do?
The answer is to comment on an excellent piece of work despite Spitznagel’s disdain for commentators, all the while laying out likes, questions, and presumed dislikes. Up front, Spitznagel’s book is very easy to like. A lot.
That is so because in addition to a head for numbers, the author is a storyteller. He explains his investment philosophy through the brilliant mathematical minds of the Bernoullis, through Nietzsche, Albert Einstein, the SS Eastland is used to showcase the frequently cruel results of good intentions, his Burmese Water Dog is featured as a way of vivifying the simplistic nature of correlations, etc. etc. Though Safe Haven is full of charts and numbers, it reads as though it’s written by a poet. The author has a very interesting mind.
What makes Safe Haven even more appealing than the stories of remarkable people who shaped Spitznagel’s investment worldview is that the book is so unabashedly contrarian. Spitznagel plainly disdains conventional wisdom and feels the investment business is overly populated by conventional, intensely fallacious thought. Universa is in the business of making money for its investors via rejection of what’s thought to be known. In the author’s words, “It is my business to do what other people do not and cannot do.”
What’s fascinating about Universa’s investing style is that it seemingly mocks every other one as the above quote alludes. Diversification is to the unoriginal one of the most obvious risk-mitigation strategies. Don’t you know, don’t put all of your eggs in one basket. Spitznagel has no time for such simplistic thinking. In his words, “Diversification is a confession that you don’t care about cost-effectiveness in your risk mitigation. You want less risk, no matter the cost.” But if it’s expensive to avoid what you deem risk, you can obviously kiss off quality returns.
Ok, but isn’t risk avoidance or the laying off of risk an implicit acceptance of lower returns? According to conventional wisdom, yes. “Risk mitigation” is a cost that investors pay for through lower returns. “Safe havens” in an investing sense are various asset classes we park a portion of our wealth in as a form of protection against bigger risks we take in our portfolios. Not so with Universa.
While traditional investors think of “risk mitigation as a liability,” Universa proves that “risk mitigation doesn’t have to be viewed that way.” Instead, risk mitigation “should be thought of as being additive to portfolios over time.”
Spitznagel learned this opposite approach from Everett Klipp, “the Babe Ruth of the Chicago Board of Trade.” He instructed Spitznagel that “a small loss is a good loss.” Yes, embrace the small losses. Make sure they’re small. More on this in a bit.
Other investors aim to play the market through their understanding of the economy. Call them “macro” investors. Spitznagel scoffs at the notion of macro types who would have us believe they can see around the proverbial corner. As he sees it, “Investing really needn’t be about making grandiose forecasts.” The great Ken Fisher would thoroughly agree. Really, what can one individual seriously presume to know that the markets don’t already know? In other words, macro investors who claim returns based on a vision about the economy’s future are probably lying, or at the very least making false correlations that fit what happened in hindsight. About what’s happening in the world and what it could mean for markets, Spitznagel is blunt: “Don’t predict.” Amen.
Yet it’s easier said than done. It’s ingrained within us to have feelings. This reader knows from Spitznagel’s views on macro matters that he too has feelings, but it’s apparent he doesn’t let them seep into how he puts money to work. Ever. As his Universa partner, Nicholas Taleb, puts it in his very enjoyable foreword to Safe Haven, “In more than two decades, I never saw him once deviate a micro inch from a given protocol.” Imagine that. Imagine being able to routinely tune out the outside noise, but more importantly the noise, emotions and political feelings within us that might cause one to deviate.
Yet, Spitznagel by all accounts doesn’t deviate. Safe Haven was “written with the blood of war against luck.” Emotional investors sometimes get lucky, so do forecasters, but this isn’t how Universa allocates. The discipline is impressive.
Yet at the same time necessary. Spitznagel doesn’t deviate presumably because he’s as much a student of human behavior as he is of investing. At war with luck, he doesn’t trust the emotional plays that might occasionally prove lucky for the wrong reasons. Enough rolls of the dice like this, and soon enough you’re out of capital.
Ok, but what about pessimists? Can’t pessimists avoid the big losses precisely because their pessimism has them well-situated for market storms? Spitznagel thinks not. Emotion is emotion. “Cassandras make very bad investors.” Spitznagel adds that “Cassandras typically and ironically lose more in their safety from looming crashes than those crashes would have harmed them.” Emotion once again getting the best of us. Both the optimists and pessimists. Either way, feelings are being allowed to rule what should be “agnostic” allocations of precious capital. As the author explains it as a caution against those who think “feel” can make them rich, markets “are very, very good at making us feel safe when we shouldn’t and scared when we needn’t.”
So forget about what you think or feel and recognize that per Klipp, “A small loss is a good loss.” That’s the case because “a big loss today will impact your ending wealth decades from now, just as if it happened decades from now (affecting a much higher wealth). It doesn’t matter when it actually happens, it reverberates like ripples on the water, and for eternity.”
So, what is Spitznagel’s investing strategy? It’s a bit daunting to presume to describe what cannot be imitated, and what even most professional investors couldn’t or can’t understand. About this, Spitznagel is clear: he doesn’t expect his book or his returns based on a different approach to change how investors do what they do. Conventional is conventional for a reason. It’s what people do. As someone who agrees with very few “economists” on just about anything economic, what the author says makes sense.
It seems Spitznagel’s approach is to always, always, always be protected against big losses. “A small loss is a good loss” means he’s not making money in up markets, but he’s also not letting what’s going up mess with his mind. Instead, Spitznagel is taking small losses that come when his low-cost insurance against market storms in bull markets proves unnecessary. In other words, it’s less expensive to protect one’s downside when markets are going up. One example of this would be how inexpensive it was for John Paulson when he purchased insurance on mortgages that were so heavily demanded.
The guess is that Universa takes routine losses as emotional bulls are taking great gains. The low-cost insurance purchased expires worthless, and small amounts of capital are lost. That’s ok, because a Universa that is always protected against big losses is waiting for those “once-a-century stock market crashes” that make low-cost insurance very valuable. As Spitznagel notes, those “once-a-century stock market crashes have happened quite often.” Yes, they have. Wondrous as bull markets are for the conventional in thought, there are generally lots of reversals on the way up. So while Universa isn’t necessarily profiting from the up, it never suffers the “big losses” that will reverberate for decades. It will lose over and over again in small amounts, but when an impossible-to-forecast surprise hits, the safe haven investing style meant to protect the downside in low-cost fashion pays off big time.
About what’s been written, it’s just a speculation. As the author makes clear, readers would be wise to not try the lessons learned in Safe Haven at home.
Were there questions? Of course there were many. Probably the biggest for me is, why the author’s focus on the Fed? About the latter, it’s apparent from the book that he doesn’t let his feelings (including macro feelings) get in the way of how he invests. It all makes sense. But just as he rejects so much conventional thought about investing, why does he seemingly accept so much conventional babbling about central banks? Indeed, early in Safe Haven Spitznagel briefly becomes the commentator as he writes of “massive distortions built up in global financial markets from years of hubristic monetary interventions by global central banks.” Oh come on. In the real world of credit it’s as though the Fed doesn’t exist. “Easy money?” Where? In Silicon Valley it’s so expensive that you have to give up a big portion of your business in order to attain capital, Hollywood is the “land of No” to even the best movie and television makers, banks for years turned their backs on Donald Trump, and then Michael Milken’s fortune was rooted in the truth that the banks the Fed projects its well-overstated influence through generally only lend to those who don’t need the money. The Fed is a legend in its own mind, and in the minds of conventional investors. Why does someone as wise as Spitznagel think it matters?
Of course, that’s a small question. It’s one meant to find out if even the best minds are susceptible to conventional thinking. On the subject of investing, Mark Spitznagel certainly is not captive to convention, which is why Safe Haven is such a joy. To the author, “becoming conventional is self-defeating in this business.” Amen to that. The world needs more people like Spitznagel, and more books like the one he’s written.
Reprinted from RealClearMarkets