Safe Haven. Mark Spitznagel

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СКАЧАТЬ 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”) à 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 résumés (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.

COST‐EFFECTIVE RISK MITIGATION

Most financial and business returns come from rare events—what happens in ordinary times is hardly relevant for the total. Financial models have done just the opposite. A fund miscalled Long Term Capital Management that blew up in 1998 was representative of such decorated mutua muli misunderstanding. The Nobel‐decorated academics proved in a single month the fakeness of their models. Practically everyone in the 1980s, particularly after the crash of 1987, must have known it was quackery. However, most if not all financial analysts exhibit the clarity of mind of a New York sewer after a long weekend, which explains how the mutua muli can take hold of an entire industry.

      Indeed the investment world is populated by analysts who, while using patently wrong mathematics, managed to look good and cosmetically sophisticated but eventually harm their clients in the long run. Why? Because, simply, it is OPM (other people's money) they are risking while the returns are theirs—again, absence of skin in the game.

      Steady returns (continuous ratification) comes along with hiding tail risks. Banks lost more money in two episodes, 1982 and 2008, than they made in the history of banking—but managers are still rich. They claimed that the standard models were showing low risk when they were sitting on barrels of dynamite—so we needed to destroy these models as tools of deception.

      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!

      So the tools of modern finance helped create a “rent‐seeking” class of people whose interest diverged from those of their clients—and ones who get eventually bailed out by taxpayers.

While the financial rent seekers were clearly the enemies of society, we found actually worse enemies: the imitators.

      For, at Universa, Spitz built a structure that tail‐hedged portfolios, hence insulated him from the need for delayed random gratification. As introduced (and formulated) in Safe Haven, risk mitigation needs to be “cost‐effective” (i.e., it should raise your wealth), and to do that it needs to mitigate the risks that matter, not the risks that don't.

      It was the birth of tail risk hedging as an investable asset class. Tail risk hedging removed the effect of the nasty Black Swan on portfolios; cost‐effective tail risk hedging obliterated all the other forms of risk mitigation. Accordingly, the idea grew on people and a new category was born. This led to a legion of imitators—those very same mutua muli persons who had previously been fooled by modern finance tools, finding a new thing to sell.

      Universa proved the following: not only is there no substitute to tail risk hedging, but, when it comes to tail risk hedging, simply—as per the boast in the Porsche advertisement—there is no substitute.

      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.

      I said earlier that Mark's edge came from pit trading and a natural (noncontrived) understanding of the mathematics of tails. Not quite. His edge has been largely behavioral, and my description of hardheaded was an understatement. Perhaps the most undervalued attribute for humans is dogged, obsessive, boring discipline: in more than two decades, I never saw him once deviate a micro‐inch from a given protocol.

      This is his monumental f*** you to the investment industry.

Part One What Comes First

At War with Luck

      WRITTEN IN BLOOD

      In the words of the nineteenth‐century German philosopher Friedrich Nietzsche, thus spoken by his ancient Persian prophet Zarathustra, “Of all that is written, I love only what a person hath written with his blood.”

      If so, Nietzsche would have loved this book.

      It was written with the blood of war against luck, fought over the last more than a quarter century in my life as a trader. It grew organically out of an investing and risk‐mitigation practice as a hedge fund manager and professional safe haven investor. The message of this book has been and will always be lived by me and my hedge fund firm, Universa Investments. (It is our manifesto.)

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.”

      This book tells of the foundation and methodology behind how, as of this writing, Universa risk‐mitigated portfolios have, over their decade‐plus life to date, outperformed the S&P 500 by over 3% on an annualized, net basis. More to the point, this performance is a direct consequence of having far less risk. This level of outperformance is rare in the hedge fund industry and among risk‐mitigation strategies in general, which have pretty much all underperformed the S&P 500 during this and most periods. The markets have been good to us because we haven't tried to cheat them; we haven't tried to predict or outsmart them. We have only aligned our investing, in a focused way, with our beliefs about the way they work.

      People think of risk mitigation СКАЧАТЬ