The Dao of Capital: Austrian Investing in a Distorted World

Praise for The Dao of Capital "A timely, original, right–economic principles and history–based approach to investing. Drawing on impressive philosophical building blocks, The Dao of Capital illuminates the wellsprings of capital creation, innovation and economic progress. Dazzling!" —Steve Forbes, Chairman and Editor–in–Chief, Forbes Media "This is a magnificent, scintillating book that I will read over and over again. Every page is eye–opening, with numerous areas for testing and profits in every chapter. Here′s an unqualified, total, heartfelt recommendation, which coming from me is a rarity, and possibly unique." —Victor Niederhoffer, Author of The Education of a Speculator " The Dao of Capital is an impressive work. Spitznagel′s approach is refreshing—scholarly without being tedious. What a broad look at economic history it provides!" —Byron Wien, Vice Chairman, Blackstone Advisory Partners LP "Wall Street gamblers who believe the Fed has their back need to read this book. Mark Spitznagel provides a brilliant demonstration that the gang of money printers currently resident in the Eccles Building have not repealed the laws of sound money nor have they rescinded the historical lessons on which they are based." —David Stockman, Former U.S. Congressman, Budget Director under Ronald Reagan, and Author of The Great Deformation "Mark Spitznagel assembles the best insights in human nature and economics to bring order out of the chaos of our world. Economists, investors and lay persons alike will find abundant treasures in The Dao of Capital , one remarkably useful and exciting book!" —Lawrence Reed, President, Foundation for Economic Education and President Emeritus, Mackinac Center for Public Policy

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.

“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.”