The Dao of Capital

Mark Spitznagel and his investment firm Universa Investments captured my interest when they generated a 3,612 percent return in March 2020.

They were able to do this using a technique known as tail hedging, essentially buying deep out of the money options on the market in anticipation of large drops in the market.

If you want to cut to the chase and learn exactly how they do that as well as how you can do it, I detailed it here.

I bought Spitznagel’s book The Dao of Capital to learn the technique, and I wasn’t disappointed. But I was pleasantly surprised at his underlying philosophy, too, which is based in deep patterns of nature.

This link to nature is a recurring theme I’ve found in many of the more original and insightful books I’ve read.

Ray Dalio in his book Principles professed to being fascinated by the workings of nature, evolution in particular, and he used those insights as part of a personal philosophy he credits for his success.

Benoit Mandelbrot, too, looked to nature for his insights into fractals, a fundamental pattern that is found in forests, star clustering, and financial markets.

Forests, for example, form a leitmotif for Spitznagel’s book. They’re a fundamental theme or pattern he returns to regularly.

Spitznagel describes the way a forest works as one example of an even deeper pattern, which he calls the “roundabout” approach. Meaning: much in life cannot be achieved directly. Rather, goals require a roundabout approach—one in which a proximate goal is achieved before the ultimate goal is achieved.

The idea of the “roundabout” approach is embedded throughout Spitznagel’s book. He references it in everything from how trees “battle” for dominance in the forest to strategy in war.

Spitznagel describes the competition between two types of trees in forests: conifers (e.g., pine, cedar, hemlock, spruce, and fir) and angiosperms (e.g., maple, oak, ash, birch, and willow). Conifers are slower-growing relative to angiosperms. Angiosperms tend to “win” initially, covering wide areas of the forest. But their overgrowth invites fires, a natural and recurring event in forests.

Conifers have a few factors that allow them to thrive in this environment—but in an unexpected, roundabout way. Conifers can survive on the “edges” of the forest, in the less desirable, windier rocky outcrops. Their seeds are wind borne. This allows them to spread widely to the edges of the forest in the first phase, as the angiosperms are “winning." Then, when the fire comes, it allows them to quickly return to forest center as fire “pulls” their seeds back into the center of the forest. Finally, certain cones open only in intense heat and flame, allowing them to emerge quickly after a fire.

All of this means that over the long-term conifers “win” over angiosperms, even though they initially “lose,” ceding the forest to them.

In war, this initial loss for an ultimate win may be a retreat. Incidentally, I was finishing up Tolstoy’s War and Peace as I started Spitznagel’s book. I was amazed to see that this same philosophy was central to War and Peace.

War and Peace centers around Napoleon’s invasion of Russia in 1812. The Russians, commanded by General Kutuzov, technically “lost” the Battle of Borodino and then “gave up” Moscow to Napoleon. But the impact on Napoleon’s army was immense and unexpected, certainly for Napoleon.

Napoleon’s soldiers, upon entering Moscow, became undisciplined. Moscow burned, preventing them from gathering proper rations for their return journey. The Russian winter arrived, hindering their return. The Russian roads were more difficult to travel than they expected, slowing their return. And Russians attacked them throughout their journey, whittling down their numbers.

Of the 685,000 soldiers that comprised Napoleon’s Grande Armée at the start of the invasion, about 100,000 returned to France.

Russia ultimately won the war, but initially it looked like they had lost.

This is the heart of Spitznagel’s strategy: lose initially to win in the long-term.

As I said above, you can read more about one specific application of this philosophy to investing in his use of tail hedging for extreme market events. But the book as a whole is very much worth reading for the rich philosophy that underlies his investing strategy.

War and Peace

This post is intended for those that haven’t read War and Peace. If you have read it, you may be more interested in this list of my favorite details from the book.

I just finished War and Peace, and it is, quite simply, the best book I’ve ever read—the story, the writing, the images, the characters, everything. Here’s why:

1. It’s very readable. Make sure to get the translation by husband-wife team Richard Pevear and Larissa Volokhonsky. The language is beautiful and flows. Yes, the book is long, but it progresses steadily. You won’t find yourself mired in boring language or parts of the story that drag endlessly.

2. The book actually has three different layers: war, peace, and philosophy. There are war scenes, as you’d expect. Then, there’s peace. Or, more specifically, the everyday experiences of a few wealthy, aristocratic Russian families—the pursuit (and loss) of wealth, love, power, and respect; envy, jealousy, kindness, forgiveness, and so on. And then, as the book progresses, there’s philosophy. Tolstoy explores philosophical questions about history. The question being: What force moves people? Why do events happen? Specifically, why did the events of 1812—Napoleon’s invasion of Russia—occur and unfold as they did? Do powerful people cause events to happen, or are they swept along, like everyone else, in the powerful waves of those events, which are caused by some other force?

3. Tolstoy creates incredible characters. There’s a saying: “If the world could write itself, it would write like Tolstoy.” I was astonished by the economy and ease with which Tolstoy could create a rich character. It’s like magic. Within a page of meeting Princess Marya, I felt like I had met not just a real person but someone with nuance, depth, a rich inner life. And this happened over and over again. I felt I lived a life with the main characters. I felt that I knew them as real people, with desires, fears, values, strengths, and faults.

4. Even more incredible is Tolstoy’s ability to craft a story in a room. While Tolstoy’s ability to create rich characters is amazing and unsurpassed, it’s still a matter of degree. In other words, he does what other writers do; he just does it far, far better. What I felt was truly unique—something I’d never experienced in all my readings to date—was how Tolstoy brings a room to life. In the “peace” portions of the book, a lot happens in rooms, such as salons (the gathering spaces for the aristocratic elite in the homes of particular pillars of society), balls, and, in one particularly vivid and memorable scene, an opera. How Tolstoy orchestrates these scenes is breathtaking, almost mathematical in its precision. You don’t just see the room and the people; you know exactly where everyone is, and how they’re moving. You know what they’re thinking, what they want to achieve in that room, and what they want to do next. It’s not just three dimensional but rather six dimensional, adding in not only the dimension of movement through time and space of every body in that room but also the dimension of each characters’ thoughts and desires.

5. The battle scenes are breathtaking. Particularly memorable is the Battle of Austerlitz, when a key character, Nikolai Rostov, has to travel from one side of the battlefield to the other to deliver an important message to the commander in chief. This allows Tolstoy to describe the full battle scene, and I saw it as a slow motion visual of two massive forces colliding. It’s poetic—beautiful and horrific at the same time.

6. They’re also realistic. A key theme throughout the war portion of the book is that battles and wars unfold very differently than people, particularly leaders, intend. Tolstoy captures the confusion of war (and apparently soldiers have validated his renditions as accurate).

7. Military strategy plays a prominent role. A key element of the book is Tolstoy’s portrayal of Mikhail Kutuzov, the Russian general that was commander in chief of the Russian military during Napoleon’s invasion. Tolstoy depicts Kutuzov as a hero, certainly for the end achieved (saving Russia) but also the means (wisdom). Kutuzov was wise because he understood the nature of men, battles, and war. Napoleon did not. A very hard decision in the book was the decision to give up Moscow to Napoleon. Everyone—Kutuzov’s senior commanders and the emperor, Alexander—opposed the decision. Yet, Kutuzov’s argument was that it was preferable to lose Moscow while saving the army rather than losing both. How Kutuzov does this—retreating multiple times, from Borodino, from Moscow, so that the natural course of events would decimate Napoleon’s army—is described in vivid, memorable detail.

8. Death and life interplay beautifully. There’s literal death and life, and there’s also death and rebirth of souls, people’s spirits. I can’t describe it without giving away key elements.

9. The humanity is achingly beautiful. There are multiple scenes in which important characters have to choose between selfish goals and dramatic kindness, and the way the scenes and decisions unfold is beautiful. There are particular characters that, while imperfect, have a strong moral character that carries them through difficult situations.

10. The philosopher Isaiah Berlin’s essay about War and Peace, “The Hedgehog and the Fox,” is worth reading, too. I actually decided to read War and Peace after learning about and reading Berlin’s beautiful essay about Tolstoy and the book. The essay sets up a playful construct: the hedgehog knows one thing and the fox knows many things. Some famous writers are hedgehogs, and some are foxes. Tolstoy was a fox that wanted to be a hedgehog. He was searching for a fundamental truth about history, but he didn’t find it. In fact, his gift was observing and detailing the small things, the things he claimed didn’t matter. This was the sad fate of Tolstoy. The essay is a work of art worth appreciating on its own.

I very much recommend worth reading War and Peace. The experience for me was similar to how I felt after finishing One Hundred Years of Solitude. I felt I had been given the gift of being allowed to trade a small portion of my life to live another lifetime.

The Flood

I was stunned to learn the geologic origin of the Biblical flood from Jeff Goodell’s book The Water Will Come and (Goodell’s source) Noah’s Flood by Walter Pitman and William Ryan.

The story of Noah’s Ark is widely accepted to originate with a similar story of a flood in the Epic of Gilgamesh, a poem from Mesopotamia that is about 4,000 years old, predating the Bible.

And the flood in the Epic of Gilgamesh, according to Pittman and Ryan, originated itself from an actual event that took place about 7,000 years ago as follows:

• Variations in the angle of the earth’s tilt and the shape of the earth’s orbit around the sun cause ice ages and rising and falling sea levels. The last interglacial period was 120,000 years ago. Then, sea levels were 20 to 30 feet higher. The peak of the last ice age was 20,000 years ago, when sea levels were about 400 feet lower.

• As the last ice age receded, the water from the melting ice caused sea levels to rise over the next 13,000 years. About year 7,000 years ago, the sea level had reached just about today’s level.

• At the time, the Black Sea was a freshwater lake separated from the Mediterranean Sea by a land bridge. Small settlements existed around the Black Sea, fishing and farming for sustenance.

The Black Sea today (light blue) and in 5,600 BC (dark blue)

• The land bridge separating the Black Sea and the Mediterranean Sea was under incredible pressure. Sea levels had been rising on one side of it for 13,000 years, until the water was 500 feet higher than the Black Sea. One day, the land bridge collapsed.

• The magnitude of this event is hard to comprehend. The water created a massive path—what is today the Bosphorus strait. According to Pitman and Ryan, ten cubic miles of water rushed through each day. That’s enough water to cover Manhattan each day with water a half mile deep. The level of the lake rose six inches a day and moved upstream in the rivers by a half mile each day. As Pitman and Ryan state:

It’s hard to imagine the terror of those farmers, forced from their fields by an event they could not understand, a force of such incredible violence that it was as if the collected fury of all the gods was being hurled at them. They fled with family, the old and the young, carrying what they could, along with fragments of other languages, new ideas, and new technologies gathered from around the lake.

• By two years later, the level of the lake had risen 330 feet and was about level with the sea. The people that had been living around the Black Sea had fled in every direction. Over time, these people and the story of what happened, made it to Mesopotamia, where the epic story they shared became legend and inspired stories in the Epic of Gilgamesh and later the Bible.

Hokusai

We spent last winter vacation in Washington, DC. There, Neval and I took the kids to the National Museum of Asian Art to see the exhibit “Hokusai: Mad About Painting.”

The Japanese artist Katsushita Hokusai is most famous for his wood block print The Great Wave off Kanagawa, or simply The Great Wave.

A key theme of the exhibit was that Hokusai’s best work was created late in his life. The Great Wave is part of a series of prints called Thirty-six Views of Mount Fuji, which Hokusai completed in his early seventies.

Another incredible work that Hokusai completed late in life, as he approached 80, was his depiction of the Thunder God of Raijin

The color and mood is striking, even more so seeing the much larger actual print. But what I really loved—what the kids enjoyed, too—was the playfulness in the picture.

Zooming in:

The facial expression is hard to pin down. Is the thunder god old and tired? Is he an unwilling servant? Is he someone that wants to have fun and be pleasant but is forced to be imposing and fear-inducing? All of the above?

I was struck by how the painting changed as you looked at it. I was surprised by its impact, both at the time and as I thought about it later. The painting is dark, ominous, funny, and sad. But not at the same time initially. The emotions surface at different times at first viewing. And then once you see them, the effect is a bit like one of those optical illusions, where once you see both illusions, your brain starts to switch between them. The painting would cycle between the emotions in different ways, and you’d have to consciously try to focus on one and minimize the other.

I wondered if everyone experienced the same emotions and in the same order on first viewing. (We found that we did.) I wondered how much of that Hokusai anticipated, whether that was his goal. I wondered how the painting revealed itself to Hokusai over time. Did he aim to paint what we saw at the outset? Or, did he start off aiming to paint a simpler, fiercer thunder god and then later—as he reflected on the thunder god, getting to know him in the process of painting him—found himself drawing the expression that he did?

We had a lot of fun exploring this painting and talking about it for a while. In fact, we spent a good chunk of our entire time at the museum at this painting.

I walked away with a deep appreciation of and respect for Hokusai’s craft—the numerous layers in his paintings, his use of space and just a few rich colors to create a mood, and how he mixed seriousness and playfulness.

Books to Reread

Vladimir Nabokov in his essay “Good Readers and Good Writers” says:

Curiously enough, one cannot read a book: one can only reread it. A good reader, a major reader, an active and creative reader is a rereader.”

He goes on to explain why. In short, unlike a painting, which can be grasped in its totality in the first experience with it, a book requires first an active effort to consume it. This effort stands in the way of fully appreciating it. Only once that task is done, in rereading can you really appreciate what the author aimed to convey.

On that note, here’s my list of books to reread:

• One Hundred Years of Solitude by Gabriel Garcia Marquez

• Solaris by Stanislaw Lem

• War and Peace by Leo Tolstoy

• Ada, or Ardor by Vladimir Nabokov

• Remembrance of Earth’s Past by Liu Cixin (also known by its first and most famous book The Three-Body Problem)