The Dao of Capital: Austrian Investing in a Distorted World

by Mark Spitznagel

The core of the Austrian School is the unpredictability of human action and the enormous influence individual choice wields in how economics works.

As a doctor who practiced for a total of nearly 35 years, I abided by the Hippocratic Oath that charged me to do no harm and not get in the way of the body’s natural ability to heal itself.

As The Dao of Capital clearly shows, with an inflating fiat currency, capital investment in a market economy becomes very difficult.

we must think of capital in a new way, as a verb, not

Given the visible distortion in the equity market (as I will discuss in Chapter 9) we should absolutely expect severe stock market losses to come—quite possibly within the next year or so.

“You’ve got to love to lose money, hate to make money, love to lose money, hate to make money. . . . But we are human beings, we love to make money, hate to lose money. So we must overcome that humanness about us.”

Rather than pursue the direct route of immediate gain, we will seek the difficult and roundabout route of immediate loss, an intermediate step which begets an advantage for greater potential gain.

To the Laozi, the best path to anything lay through its opposite: One gains by losing and loses by gaining; victory comes not from waging the one decisive battle, but from the roundabout approach of waiting and preparing now in order to gain a greater advantage later.

So much of waiting and ignoring present circumstances, of willingness to be in an uncomfortable place, is understanding the sequential instead of only seeing the immediate.

“The market is a completely subjective thing, it can do anything. And it is always right, yet always wrong!”

How could he have done so well as a speculator without knowing—or even caring—where the market was heading?

If trading wasn’t about predicting price movements, then what was it all about?

We sweat through large losses and take small profits quickly. Going for the immediate gain feels so right, while taking the immediate loss feels so wrong.

All is decisive when all is at stake, whether through an excessive loss (because of too much leverage)—a loss that you can’t afford to take immediately—or an insufficient gain (because of too much debt).

As Klipp said, “One trade can ruin your day. One trade can ruin your week. One trade can ruin your month. One trade can ruin your year. One trade can ruin your career!”

Expect to lose first, the first loss is a good loss; from that comes greater gain later.

He explained the size of a “good loss,” but said nothing about the size of a “good profit.”

This was about the size of profits relative to the size of losses, the payoff.

Henry Hazlitt titled Economics in One Lesson—and if I am able to get my children to read only one economics text in their lifetime,

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or

Human Action by Ludwig von

Herbert von Karajan had described upon first hearing the great Arturo Toscanini conduct.

when market interest rates are artificially set through monetary intervention, would mislead production and would result in an imbalance and distortion in the economy.

The information conveyed by historical experience cannot be used as building material for the construction of theories and the prediction of future

Option contracts are a means of gaining immediacy (though conditional on a price threshold, the “strike price”); owning them provides immediacy in the routs, and hedging them (what option traders call “long gamma hedging”) can often pay for that privilege (and then some) by providing liquidity in the pit (thus earning back the price of immediacy).

“Anyone can see the pinecones in the tree. None can see the trees, none can foresee the forest in the pinecone.”

The more disparate these means and ends, the more roundabout and circuitous the route as opposed to direct, often the more efficient and efficacious—a fundamental conviction and investment theme of this book.

Entrepreneurial competition betters the world (though, paradoxically, most often at the expense of most of the competitors); warfare destroys the world (also at the expense of most if not all the competitors).

Bastiat was elected to the National Assembly and became vice president of the finance committee. There, he was remembered as “a stooped, thin figure sitting on the left, among the liberals and radicals, opposite the conservatives on the right” (the origin of right and left in

it almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal, and the converse.

bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, at the risk of a present small

“we always want to give complicated explanations to the most simple facts, and we think we are clever only by looking for difficulties where there are none”; he believed simplicity to be the “touchstone of

As Menger observed, “Our well-being at any given time, to the extent that it depends upon the satisfaction of our needs, is assured if we have at our disposal the goods required for their direct

one cannot study the science of human action using the same approach that applies to physics and natural science.

Neither experimental verification nor experimental falsification of a general proposition are possible in this

The German Historical School in prewar Imperial Germany, comprised of the leading German economists, historians, and political scientists, sided with the socialists and upheld the belief that an unregulated free market would result in exploitation of workers and run counter to national interest.

Moreover, the advantages and gains that are realized today are due to capital that was invested previously.

If a firm goes out of business, should it have the right to claw back the wages it disbursed over the years, because in retrospect the workers involved were clearly overpaid?

Ford’s autobiographical My Life and Work was translated into German in 1923 (Mein Leben und Werk) Ford was hailed as an American industrialist

Although he was one of the greatest entrepreneurial capitalists of all time, Henry Ford preferred the simple pleasures of rural life.

Finally, in 1903 Ford Motor Company was incorporated, and its prototype Model A went into production in a 50-by-250-foot assembly plant, using parts bought from suppliers.

He completed the third mile in 36 seconds, for a speed of 100 miles per hour, shattering the previous record of 77 miles per

as annual output of the Model T rose from 585,000 vehicles in 1916 to 1 million in 1921, and then doubled to 2 million just two years later.

As Ford observed, “The seeds of bad times are in the mistakes which we make in the good times. Yet in the good times no one wants to hear of the mistakes we may be making.

Moreover, the roundabout route may very well be overlooked because all we tend to see is the final product, the ultimate end—while we are blind to what came before, the remote means to that end.

But, as Klipp always said, “This is easy for me to say, very difficult or even impossible for you to do.”

what we today know as Austrian Business Cycle Theory (ABCT), which explained the booms and busts that heaved the landscape of his times into peaks and valleys, destructive forces that continue to this day.

Credit expansion, with its artificially low interest rates, distorts the capital structure, fostering an unsustainable boom followed inevitably by a crash—whether or not the public perceives an “inflation problem.”

When Ludwig von Mises stood at the front of that lecture hall in 1954 to proclaim “the market is a process,” he labored under no delusion that we lived in a natural system, free of the distortion of intervention.

We have thus succumbed to a blind faith in bureaucratic authority over natural processes.