The DAO of Capital: Austrian Investing in a Distorted World
by Mark Spitznagel
30 popular highlights from this book
Key Insights & Memorable Quotes
Below are the most popular and impactful highlights and quotes from The DAO of Capital: Austrian Investing in a Distorted World:
What we have here is a clear, systematic source of investment mispricing, ripe for intertemporal arbitrage (a term synonymous with Austrian Investing itself).
The key is to free oneself from a tyranny of first consequences, overvaluing what comes first at the expense of what inevitably comes later. As Bastiat warned, “The sweeter the fruit of habit is, the more bitter are the consequences.”16
Thus, the stock market tends to be about immediate bets (or expectations) on distant outcomes—yet all that matters to the bettors tends to be the immediate outcomes.
All that wisdom—indeed, the summation of every word on these pages—is contained in a deceptively mundane object that weighs but a few ounces and through which, in the words of William Blake, you “hold infinity in the palm of your hand”: a humble pinecone. Worth nothing, neither rare nor unusual, it is like the Dao itself, failing to catch the eye or interest; to most, its meaning remains unseen. Yet to those who know what they are beholding, it is nothing less than a marvel. In the pinecone is a visible reminder of a practical discipline, the tenacious, unyielding pursuit of intermediate means as strategic advantage for achieving the ultimate ends—a quest only possible for those who dare to take the roundabout route.
it was Böhm-Bawerk who defeated them so effectively with economic theories and critiques such that Marxism did not take root in economics to the degree that it has in other professions, such as sociology and history.10 Using impeccable logic, Böhm-Bawerk showed that the workers who are employed by the entrepreneur are paid immediately for the “full value” of their labor, so long as that value is correctly calculated by including the time element. After all, in most production processes the input of labor hours doesn’t immediately yield a finished good.
Because of the quirks of our human eagerness for the immediate reward, we are forewarned that what seems easy and straightforward is deceptively so; the roundabout is in practice a counterintuitive path—of acquiring later stage advantage through an earlier stage disadvantage—nearly impossible to follow.
To model procrastination—where someone really does intend to do something, just not right now—involves not merely a discount on future enjoyments, but a more subtle problem of time inconsistency, of thinking that what is too onerous in the present will somehow be easier to endure in the future.
Although the future remains uncertain, the entrepreneur relies on “specific anticipative understanding,” which “can be neither taught nor learned”; he does not focus on what was or is, but acts upon what he expects the future to be.
The real black swan problem of stock market busts is not about a remote event that is considered unforeseeable; it is rather about a foreseeable event that is considered remote—
The shi of Sun Wu was to “make the most of the strategic advantage” and “if there is no advantage, do not move into action.
Those who studied human action would start from the premise that there is a purpose behind our behavior, which in this instance was to commute from home to work via the train in the morning and then the return trip in the evening. However, the opposite approach by the “truly scientific” behaviorist, who uses only empiricism, would merely see people rushing around randomly, without any particular aim, at certain times of the day. By this example, Mises showed which of the two approaches to human behavior would be most meaningful—clearly the deductive.20
we are decidedly inconsistent in our time preferences—that is, our preference for delay reverses as the delay period changes; and we are certainly not well-described by a single (or perhaps by any) static parameter.
Mark Spitznagel, “Christmas Trees and the Logic of Growth,” Wall Street Journal, December 22, 2012.
Our live-for-today culture has been invaded, like a deadly virus, by an insidious attitude that teaches this moment is all that matters just because it is all we see and experience—right now. The symptoms of this affliction can be found in the chronically low savings rate in our culture (ranging from financial to even fresh water, soil, and, of course, forests) and, analogously and most incredibly, governmental fiscal deficits that deviously and increasingly rob future generations—our helpless intergenerational forward selves.
Impatience now with the belief that we can and will be patient later is the way of all flesh.
The key is to free oneself from a tyranny of first consequences, overvaluing what comes first at the expense of what inevitably comes later. As Bastiat warned, “The sweeter the fruit of habit is, the more bitter are the consequences.
This ability to look beyond the obvious of the immediate seen and to foresee its later outcomes was, in Bastiat’s view, the true differentiator. “Now this difference is enormous, for it almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal, and the converse. Hence it follows that the 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 evil.
We look to the conifer and its logic of growth, and we learn from one of the truly great success stories of natural history. Through its adaptive strategy that has allowed it to survive over hundreds of millions of years, the patient and persistent conifer teaches us that it is far better to avoid direct, head-on competition for scarce resources and, instead, to pursue the roundabout path toward an intermediate step that leads to its eventual position of advantage.
The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy.”33
Consumers and producers, with their subjective expectations and preferences, do not conform well to mathematical models.
Mises, perhaps the greatest economist of all time, broadened the thinking among his students; the market could not be viewed as or contained by a mere static thing or physical location, but rather as the actions of countless people
Anyone can see the pinecones in the tree. None can see the trees, none can foresee the forest in the pinecone.”)
Mechanical equations can be used to solve practical problems through the introduction of empirically acquired constants and data; but equations of mathematical catallactics cannot in the same way be of service to practical problems in the area of human action where constant relations do not exist.”22
The Land of the Nibelungen, just like the real world under such intervention, is a frightfully distorted place. It is physically impossible to devote more land to timber production because all the pastureland currently in use appears to be quite profitable and, indeed, deserving of expansion, as well.
To be clear, it is the abnegation of interest rates as an information and control parameter in the economy that creates the distortion, not just inflation per se.
They do not become more roundabout, because they refrain from investing in capital that will not show returns for a period of time (or a period when the interest rate has not been lowered as much as shorter-term rates). Thus there is a hyperfocus on—and even addiction to—the yields of stocks and other risky and high-duration securities (a “maturity-mismatch”); there is an irrepressible allure to the steep yield curve.
Interestingly, this increased temporal myopia under artificially lowered rates is the very opposite effect of naturally (savings-driven) lower rates. Genuine, savings-driven declines in the interest rate lead to capital accumulation, more roundabout production, and a progressing economy; artificially lower rates, driven by credit inflation, ultimately lead to naught but capital consumption and a regressing economy.
We have thus succumbed to a blind faith in bureaucratic authority over natural processes.
Feedback is crucial, and must be continuously given by and within the system in order to make the necessary, typically small corrections to keep on course.
Within the economy, as Hayek stated, the “mutual adjustments” of individual participants occur through negative feedback.11 Government and central bank interventions can at best postpone the negative feedback mechanisms; they can’t repeal them.
