One of the aspects of trading I learned from interviewing so many successful traders is that often the simplest of strategies are the most effective. But getting to simple can sometimes be complex.
That is the message imbedded in this month’s cover Q&A with hedge fund manager Mark Spitznagel (see “The roundabout path to profits,”).
Spitznagel’s book, “The Dao of Capital: Austrian Investing in a Distorted World” takes the reader on a long winding path — a roundabout if you will — back to some simple logical truths about investing and life.
It is the ultimate counterintuitive argument. Spitznagel could have communicated the essence of his philosophy in the space of this Editor’s Note but , “The Dao of Capital” attempts to prove the point by going deep into history and science to show why it is so relevant and valid.
We all know — or should know — that much of our problems in business, politics and society come from the human tendency to look for the quick fix, the most convenient answer, the fast money. Intuitively we know real success and progress take time and hard work but we defer to the easy answer. And there are countless examples around us that show the easy answer can be lucrative.
How can you fight the crowd that demands easy answers and quick fixes? The only way is to study and look for a better opportunity — a more lucrative opportunity — down the road. It is something we know but gets harder to reach. The entire dotcom boom is an example of this, as is perhaps our current six-year Federal Reserve inspired odyssey of putting off the pain as a result of the financial collapse of 2008. Spitznagel proposes a longer-term solution that may require accepting some pain in the present to prevent greater pain down the road. It is a tough argument. After all, many people became rich by touting a new paradigm, if they were smart enough to cash out before reality set it.
While attending the recent Futures Industry Association’s annual conference in Boca Raton, Fla., I had the privilege of sitting down with Robert J. O’Brien, Sr. to talk about the 100th anniversary of futures commission merchant R.J. O’Brien. Bob O’Brien Sr. recently turned 96-years-old and the longevity of the firm that started out as a broker for dairy farmers more than a half-century before the onset of financial futures is an example of the principles put forth in Spitznagel’s book. They didn’t even become a member of the Chicago Board of Trade until 1990, instead focusing on eggs and then the livestock market. But they understood their business and chose to serve their customers instead of looking for the hot industry or hot money. One of the rules O’Brien Sr., who served as Chairman of the Chicago Mercantile Exchange in 1967-68, established in the early days of John V. McCarthy & Co. (the forerunner to RJO)—he took over in 1959—is that the firm and its brokers would not engage in trading. He thought it would cloud their judgment and affect the service they were delivering.
The firm’s longevity is a testament to his wisdom. As other FCMs grew larger and more profitable RJO chugged along earning a nice living and servicing its customers. And slowly as other firms looked for the “li” instead of the “shi” —as Spitznagel would explain it—RJO moved along as those seeking the hot money had their day in the sun and inevitably grew too close to it and burned up.
The firm sold a majority stake in the family business at the peak of the valuation hysteria in 2007, and was able to buy it back three years later, reportedly for much less. There may not be a better example of the Eastern principle of shi — the ability to withdraw in battle and conserve your strength for a better opportunity — than the way The O’Brien Family handled its family business. RJO is now the largest independent FCM with customer assets of $3.8 billion as of January 2014.
Trading is ultimately about winning but it is not always about making every trade a winner. Spitznagel’s mentor Everett Klipp told him, “You’ve got to love to lose money.” Our new Managing Editor and former Associate Editor Yesenia Duran talks to Thomas Stridsman (ironically also a former Futures editor) about how it is not winning every trade but identifying the times to press your advantage and times not to (see “Stridsman: Size matters,”). This too is an example of the principles discussed by Spitznagel as is John Kicklighter’s analysis of forex markets in, “The return to honest carry…and volatility,” page 18.
What I enjoyed about the book and talking to Mark is the simplicity but also the work to get to simplicity. It reminded me of the principle of the Fibonacci sequence. To really believe it matters you have to see how this number sequence appears all around us. Spitznagel’s book takes you down a path of history and nature to validate what we already know but desperately need reminders of in our “show me the money” culture.
Finally and more practically, Spitznagel talks about common sense ways you can protect yourself from a potentially catastrophic event while not having to stay home while the rest of the world is living the high life.
His tail hedging trading methodology allowed him to participate in the over-indulgence of the past decades while being prepared to exploit the inevitable consequence of our short sightedness.
For the past several years, there has been an unease in the markets. What happened in 2008 was bad—real bad—and many of us have had the feeling that another shoe would drop. Spitznagel believes one will and whether or not our Federal Reserve policy was the right one or not (as he believes) his investors will be prepared.
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