Founders - #70 Mark Spitznagel: The Dao of Capital

Episode Date: May 6, 2019

What I learned from reading The Dao of Capital: Austrian Investing in a Distorted World by Mark Spitznagel.Klipp's Paradox (0:01)the whole point of my approach to investing is that we must be willing to adopt the indirect route to achieve our goals (14:00)finding his life's work (19:00)if my children will only read one book on economics I would be Economics in One Lesson (25:30)why it is always possible to start new, successful companies (30:00)the point is not to go slow to stay glow. it is to go slow now so you can go faster later (34:15)Robinson Crusoe and roundabout production (39:30)Henry Ford as the quintessential roundabout entrepreneur (45:00)how Mark uses roundabout in his investing (54:00) ----Founders Notes gives you the ability to tap into the collective knowledge of history's greatest entrepreneurs on demand. Use it to supplement the decisions you make in your work.  Get access to Founders Notes here. ----“I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — GarethBe like Gareth. Buy a book: All the books featured on Founders Podcast

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. This is Clip's paradox, repeated countless times by a sage old Chicago trader named Everett Clip, and through which I first happened upon an investment approach, one that I would quickly make my own. This is the roundabout approach, indeed central to the very message of this book. 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 even greater potential gain. This is the age-old strategy of the military general and of the entrepreneur. Because of its difficulty, it will remain the circuitous road least traveled, so contrary to our wiring and to our perception of time. And this is why it is ultimately so effective. To Klipp, time is not exogenous, but it is an endogenous primary factor of things and patience the most precious treasure. Indeed, Klipp, with a simple message that encapsulated how he survived and thrived

for more than five decades in the perilous future markets of the Chicago Board of Trade. Okay, so that's an excerpt from the book that I want to talk to you about today, which is The Dow of Capital, Austrian Investing in a Distorted World by Mark Spitznagel. Okay, so today's going to be a little different. Normally, I try to focus just on a biography, like the life story of somebody that founded a company. And this isn't really that, but it is, I think, worth time because the time to talk to you about it. Because it's one of the most strange and unique books that I've ever come across. So much so that I've probably listened to the audiobook by now probably five times. I was listening to it 30 to 45 minutes before I went to bed every day for quite a while.

I think I've been working on this book for about six weeks, which is much longer than I normally do. And I'm still not, I was a little unsure one, if I want to do a podcast on it, because I don't know if I fully understand everything the author is saying. And so it's a little, for lack of a better word, scary to talk about something where I don't even know if I'm grasping it. But I think that's, that's like a, an emotional response I'm having that's important because it means like the messages I've come across are so distinct that I should spend the time. So just a fair warning.

I hope this podcast is going to be good. And the ideas that Mark has are so far, they're such like an outlier from normal people, like the way other people think, that I don't even know if I'm smart enough to grasp what he's saying completely yet. Even after devouring it, reading it twice, and listening to it at least five times. But I am going to try, and hopefully you get value from that. And before I jump into the rest of the book, I want to tell you a little bit about Mark Spitznagel and why I think it's worth that we listen to him. First of all, he's the founder of the Universal Hedge Fund. And he's widely known, if you're familiar with the work of Nassim Taleb, the author of The Black Swan, Anti-Fragile, Fool by Remnus, somebody I tell you, I've, you know, recommended all those books to people constantly, because I think they're just really, really important to understand

to survive in a very complex world like the one we live in. He was, first of all, and I'll talk a little bit about that once we get to the book, but Mark and Nassim used to be partners. Mark still is a practitioner of basically his hedge fund specializes in tail risk hedging or what Mark later calls in the book, central bank hedging. And so what that means is undoubtedly over the last few years, you've probably seen headlines such as, oh, hedge fund makes a billion dollars in a day.

And if you click on that article and read it, it's usually this guy because he profits when there's like missed price drawdowns in the market, which happen, as he says, they're not even, they shouldn't even be called black swans because they're completely predictable. So I don't know how much of today's podcast I'm going to spend talking to you about that, but it is, he talks about that at length in the book. So that's just a little bit about, that's a strange, you know,

niche to carve out for yourself. It's a strange way to make a living because it's so counterintuitive. Like he was just saying Eclipse Paradox, it goes against our wiring. It goes against our humanness. And I'm fascinated by people that arrive at vastly different conclusions than the rest of us.

I can call them misfits, as you've heard. Outliers, whatever you want to call them. And so I think they're worth studying because there's a value in not thinking like everybody else does um so i just want to tell you about because you know i didn't know even though i'm familiar with teleb's work i didn't know um who mark spitzninger was until i actually saw a tweet from Taleb about a video that he tweeted out a link that was a video of Mark talking about his approach to the market. And it was by watching that video, I started researching Spitzanego that led me to this book. So anyways, let me jump into it because I think his ideas are interesting and I just want to share as many of them with you as possible. All right, it says, at the outset, we must think of capital in a new way, as a verb, not a noun. Rather than

an inanimate asset or piece of property, it constitutes an action, a means to an end, to build, to advance, to deploy the tools and instruments of a progressing economy. Indeed, capital is a process or a method or path, what the ancient Chinese called the Tao. Capital has an intertemporal dimension. Its positioning and advantage at different points in the future is central. Time, this is such an important part of the book, time defines it, shapes it, helps it, and hinders it. So he's talking about capital. I would also say there, think about the time

defining, shaping, helping, and hindering the different stages of a business. Because he's going to talk a lot about entrepreneurship in the book. He talks a great deal about Henry Ford. In fact, before I decided to do the podcast the way I'm doing it today I almost thought I could make this like another series because I think I've done two or three books on Henry Ford for the podcast I think this I could take out the highlights because he mentions Ford in the book probably 50 times if not more so I was thinking oh maybe I'll just do a podcast on Henry Ford based on how Mark sees him. And then the more I try to digest the ideas and what Mark is trying to teach us, I'm like, oh,

you know what? No, let me, these ideas need to stand on their own. But we are going to talk a lot about Ford today. Okay. So again, just think of capital. His tool for building a business just happens to be money, but he does talk about the entrepreneur taking different resources in different stages, putting together in a way to serve the end consumer. So you can think of when he says capital, you can also think of business. As we think of capital in a new way, we also must think of time in a new way. And as we engage in this process, our path will be the Tao of capital. This path is notable in that it is exceedingly and purposefully circuitous. That word, the word circuitous, the word roundabout, he's going to mention that again,

like probably a hundred times in the book. That is his central message. And what I like about Mark, because I feel like he was talking directly to me when I was reading the book, because sometimes I'm lost. I'm like, wait, I think I kind of get it. Like, you ever have that feeling where you're like the edge of an idea, you kind of have an understanding, but it's not fully there. And then he's like, listen, this is the main point. And he says it over and over again. This is the central theme. This is the main point. Pay attention. I feel like he was talking directly to

me. Okay. So it says, the path is notable in its exceedingly purpose and its purposefully circuitous. The key word throughout this book is roundabout. In fact, he calls Henry Ford the quintessential roundabout entrepreneur. And I'm calls Henry Ford the quintessential roundabout entrepreneur. And I'm going to talk a lot about that. The going right in order to then go left, that leads us first to the means, which are the strategic intermediate waypoints, from which it becomes all the more possible and effective to arrive at the ultimate ends. As evident and ubiquitous as this process is all around us from the natural world of the boreal forest, which he talks a lot about. In fact, my favorite chapter in this book is all about,

it's chapter two. One of my favorite chapters in the book is chapter two. It's an entire chapter on conifer trees and it's fascinating. Okay, so that's what he means by boreal forest. To the business world of the entrepreneur, all too often we fail to perceive it. And a good part of this book is also about the psychology of human beings, which he seems to echo, if you're familiar with Danny Kahneman's work, a lot of people have read that book, Thinking Fast and Slow. A lot of entrepreneurs have read that book, Thinking Fast and Slow. He definitely talks about what is it about our humanness that causes us to make these repeatable mistakes.

They're repeatable so much that they're predictable that we're going to make them. Okay, it says we fail to perceive it. We tend to see the destination but somehow often miss the path, so we end up playing the wrong game. This is a lesson that runs deep throughout many areas of life's strategic thinking and decision making. But this book is about investing, and as such, this is my focus. Though I hope to make the point clearly in these pages that investing is an innate human action, not distinct from others. That's a really important point. Nonetheless, investing is perhaps where the lesson is most acute.

And again, you could substitute the word investing for entrepreneurship. Regardless of the different political structures and governments, entrepreneurship is an innate human action. Okay, let's keep going. Even Wall Street, that great sideshow with its temporal constraints shackling it to its urgent present, is blind to these mechanisms of the economy and can only chase the shadows of what is actually happening. The good news, however, is that these mechanisms are very simple at their core. So then he's going to reference some people that have heavily influenced him. I'm going to skip

over their names, even though we might talk about some of them later. But these people that he's influenced by establish a new way of thinking about capital as a roundabout means to a more productive end. That's why he calls what he does Austrian investing. It comes from Austrian or the Viennese School of Economics. Some of those people are like Karl Menger, Bob Bauer. He talks about a lot of them. And so much, he mentions a bunch of books. Something I think is fascinating. So I always talk talk about this idea or we talk about together this idea that um books are the original links they lead us to an idea from idea to idea from person to person right and i think one of the best things you could do is if you admire somebody whether the work they do

or the way they think try to study the people that they admire. And then that'll lead you to the people that they admire as well. And it kind of builds out this tree and you kind of understand why that person made the decisions they make. If you see it as like a part of a whole. So the classic example I always use in the podcast is it's really hard to understand Steve Jobs without understanding Edwin Land. And then you see the people that that influence edwin land so same thing um with this book he's now because he's mentioned all these other books that that kind of um contributed to the way he thinks i've added

probably i don't know five or six other books to my queue in amazon now that i have to then i'm gonna have to buy and eventually work my way through because i do do think this is a, this might, we'll have to see because time is the best filter, but I have a feeling this is going to make it in one of the most 10 important books that I've read so far. And I'm not trying to rank books. There's just some that grab you

and kind of shift your worldview to Lab's work that I previously mentioned being in that collection as well. Okay, we'll just have to see. All right, so, okay. Indeed, in the roundabout, we find a pillar of strategic thought that goes back some 25 centuries to ancient China and the Taoists, who in their concept of reversion, saw everything as emerging from and as a result of its opposite. So hard from soft, advancing from retreating. From these roots, both Eastern and Western, so he spends a good

amount of time talking about what he learned from the East, so he's already mentioned China and a few times, and then the West, which comes from mainly Vienna. We learn to inter-temporalize across slices of time, never focusing solely on the objective of our desire. In pursuit of securitous means, we assume a whole new depth of field. The great strategists of the world did not need to be taught to train their attention on the means of their later advantages. The quintessential roundabout entrepreneur, Henry Ford, knew it in his gut. So I just want to say, like, if you're, if we're a few minutes into the podcast, if you're a little confused, just hold on.

Because I was extremely confused too as I'm reading the book. Because I'll get, I'm going to, there's going to be two stories I'm going to tell you. One about Robinson Crusoe and one about Henry Ford. And it'll crystallize what he's saying here. But I can't just jump right there. I think you have to understand some of his ideas first, and then we're going to see how other people in history, one fictional, one not, applied that. And it'll sink in, I promise. Okay.

The reason I'm reading this part to you, the part I just read, is it's really important to understand that these are not new ideas. They may not be common ideas, but they're certainly not new. And then here is just a one sentence, his main point. The whole point of my approach to investing is that we must be willing to adopt the indirect route to achieve our goals. So he talks about the next, on the next page, I left a note to myself. It says, our nature fails us, and this applies to many domains. 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 near, and this is nearly impossible to follow. The reason it's possible to follow, because we, we like the, what he's just saying, we focus on the immediate reward. So you have to overcome part of Clip's paradox, which is a mentor. And we'll go more into Clip, Clip earlier, later is the fact that you have to overcome your humanness. Okay. So now we're still, he says, I invite you into my process, not with a plug and play strategy, but more importantly, with a way of thinking that can be applied to investing and indeed many other important activities in life in which one must choose wisely across slices of time so as not to jeopardize our bankrupt opportunities,

often better ones, that arise later. That is a hugely important point, okay? So he's like, I'm not giving you a plug and play strategy. You have to understand that this is a way of thinking and you need to apply it to whatever it is that you're doing. Just understand that you have to, you cannot focus on the immediate time.

Like this whole idea, he criticizes it. It's like, oh, live in the moment. He's like, no, no, time doesn't just exist in the moment. What happened in the past is important. What happens in the future is important. You have to be able to navigate and to think across all different dimensions of time. Now, this is going to sound a little funny, but this also applies to other domains. So although, so I grew up loving hip hop, right?

And I still listen to it to this day, although not like the new stuff, mainly like the people that can tell stories and stuff like that. So although I listen to way less music now because, you know, podcasts and audio books and other things and having a child and being married and all this other stuff occupies more of my time, there are certain people that I've learned a lot from. And this is funny because this talks about hey think about time Costs he uses the word slices of time right and you don't want to jeopardize our bankrupt opportunities Often better ones that arise later. Well, one of my favorite hip-hop artists is Jay-z. He released an album called 444

Pray a year or two ago and he has in this store in on the album, he has a song called the story of OJ and he's, and he, he's basically telling this, this exact, um, an example of this, right. In that song, he's like, listen, uh, you know, 10 years ago, whenever it was, I forgot the timeframe. He was like, I could have bought this building in this neighborhood. I lived in, in Dumbo, Brooklyn. I don't even know if he lived there, but in Dumbo, Brooklyn for $2 million, right? Today, so he's saying, I didn't. Instead, I spent the money on cars. He talks about, I spent the money on dumb stuff. Exactly what, he embraced his humanness, right? He spent it on cars, going out, jewelry, immediate returns. So instead of spending $2 million and investing it for a later return, overcoming his humanness, he gave in and he squandered it.

And now he says that building is now worth $25 million. And he has a line in the song. He says, guess how I'm feeling? Dumbo. Jay-Z is echoing in that song the same exact message that Mark Spicknagle sang, that you must choose wisely across slices of time so you don't jeopardize or bankrupt opportunities, often better ones that arise later. So this is not, like I said, this is not really a biography of his life, but it does, he is going to tell us a little bit about his early working career. And it's more accurately

categorized as like a synthesis of the lessons that he's learned throughout his life that he applies to his work. So I think that's equally as valuable. So this is how he finds his life's work. My exposure to investing came quite by accident. As a 16-year-old, I tagged along with my father when he paid a visit to his good friend. The guy was a corn futures trader, and we've already met him. His name is Everett Clipp at the Chicago Board of Trade, and he talks about what he saw there. He says, I was mesmerized. It reminded me of watching a flock of birds,

a cloud of countless individual parts appearing as a single fuzzy organism, seemingly resting, hovering in midair until something unseen starts to ripple through like a pulse of energy, causing a sudden jolt turn and a burst of speed. In an instant, I wanted nothing more than to be a pit trader. After that fateful trip, I became obsessed with the grain futures markets. Price charts soon lined my bedroom walls. From then on, whenever I would see Clip, I always peppered him with questions on price trends, world grain supplies, Soviet demand, Midwest weather patterns, basically on where the markets were headed.

Now, his response is very, like, it's going to be surprising. His response was always a variation on the market is a completely subjective thing. It can do anything. And it is always right, yet always wrong. His abject disdain for data and information left me bemused, even skeptical of this stubborn old Chicago green man with his gravelly voice ever speaking in fortune cookie prose. How could he have done so well as a speculator without knowing or even caring where the market was heading? How could it be that the guy who knows where the market is heading? I'm sorry.

Let me back up. This is a quote from Everett here. Guys who know where the market is heading are no longer at the board of trade. They are either retired or broke, and I can't think of any that are retired. This was classic clip. This is also cookie fortune prose, right? If trading wasn't about predicting price movements, then what was it all about? The answer which took this teenager some time to understand was the edge to pitch trading was in the order flow and in the discipline. It was in a patient response to someone else's impatience, someone else's urgency. So this is another example of something I always

bring up that there's a very big difference between people that are good in school and people that are good at life. Now, sometimes they overlap. Sometimes you can be good at both, but a lot of times they don't, which is why you see so many of the entrepreneurs and company builders on the featured in this podcast will either have never had any school or they dropped out at eighth grade or whatever the case was they're they're never academics um but they do know people and they do know human nature and that is way way way more important to succeed in life which is an equ and Clip being an example of that. So he says, he's basically saying, I don't need to know what the Midwest weather patterns are. So he says, the edge was a process, an intermediate step to gain an advantage,

rather than any direct analytical acumen or information, and its monetization required time. Okay. When it came to time to ask Clip what to study in college to best prepare me for a career in the bond pit, he advised anything that won't make you think you know too much. That's really interesting advice. At age 22, I became its youngest trader. So he starts going to work under the tutelage of Everett Clip. So I'm not going to go in too much into the actual mechanic. I will actually, there's a few paragraphs I'll share with you that go into actual mechanics of what Mark does for a living. But think of it very much,

have you ever read the big short by Michael Lewis, why I was talking about ad nauseum? It's very similar to that. He buys out of the money options Most of them For rather For not too much money Most of them expire and wind up being worthless Every so often they have a massive Massive asymmetric payoff Okay so Everett's doing something Very similar in grain trading Many small immediate losses

Delayed gratification and then a big win So that's how to think about it Impatience and intolerance for many such small losses As well as urgency for immediate profits, Clip believed, dealt a death blow to traders. And this is such an important sentence, an easy and common one, meaning that people grabbed onto it because it was easy. And then their demise happened all the time. It was so common. So again, human nature does not change. It's just the same people coming and going, making the same dumb mistakes, not learning.

Okay, so people naturally fall victim to these tendencies and thus do the opposite of Clip's approach. 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. The pressing need for consistent and immediate profits is hardwired into our brains. We humans have a shallow depth of field. Okay. So Clip, Mark, other traders that use this method are doing the opposite. They're taking a bunch of tiny losses. They may make no money for five years, 10 years, whatever the case. But when they do, when they have the large gain, it's usually enough money to last a lifetime. So it's the opposite of how most of us

think about making money. And we're going to see how this applies to building businesses soon. Don't give up on me yet okay i always find this this very interesting and i ordered this book because now this is like the 10th person that's recommended it um but i like this idea i told you before about when you have conversations with people design your conversation within constraints so instead of saying hey tell me some of your favorite books say if you can only read one book what is that or in the case of mark if he can only tell his kids to read one book, which is even better, what would that be? And, you know, supplies.

If you can only visit one city for the rest of your life, what would it be? If you can only listen to one album, what would it be? This forces people to really think about the question and then, therefore, reveals the way they think. Okay, it says, I discovered a book by Henry Hazlitt titled Economics in One Lesson. And if I'm able to get my children to read only one economics text in their lifetime, God forbid, it would be Hazlitt's. Economics in One Lesson is an expansion on the essay, That Which is Seen and That Which is Not Seen, by 19th century French economist Frédéric Bastiat.

I would swap the words economics with investing. The whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate, but at the longer effects of any act or policy. The closing verse of Hazlitt's book was an auspicious directive. The reader who aims at a thorough understanding and feels prepared for it should next read Human Action by Ludwig von Mises. It's funny, I still, even after listening to the audiobook so many times, I'm not going to

be able to pronounce anything. It just does not register in my brain. I also have this book in my queue now too, because Mark is telling us, hey, this is the human action book. It was like fundamental to how he thinks about his business and coming across that. Oh, let me back up. So this human action book, he gets it on tape and he's driving every day to the Chicago Board of Trade as as a young trader and he's listening to it over and over and over and over and over again so the point where tape some of you might be listening to this maybe too young to remember this but there used to be these things called cassette tape they had you'd put them into your car and or you'd play them in a boom box or whatever a walkman and eventually you could play it so many times that

the tape would uh either get tangled or just stop. Okay. So it says, he calls it a lecture, but it's a book. Lecture, Mises, that's how you pronounce it. Mises' lecture concluded. I immediately started over and over again. Mises' worldview, the aim of which was the removal of future uneasiness, says acting out was to relieve, talking about the impatience of human beings here, acting was to relieve our insatiable impatience and the pains caused by waiting. And overcoming this natural urge was the necessary key to productivity, or what we're going to call roundabout production, which is the harvesting of the physically more abundant fruits of production processes consuming more time and thus the significant role played by taking account of waiting time.

This was Clipp's paradox writ large on the grandest scale. So again, impatience and the pains caused by waiting. Think about Mark's day to day. Most of his day, he loses a small amount of money as his options expire. And he might be waiting for two years, for three years, for five years, whatever it is, and then boom, huge payoff. That is not, again, it's the pain. I like how they use that word. Impatience and the pain caused by waiting. And you can see this in human nature on a smaller scale. Just go anywhere where there's a line,

whether you're at a theme park, grocery store, anywhere there's a line, and you immediately see how humans react to the pain of waiting. They'll pick up and immediately try to distract themselves, usually with a cell phone, a smartphone. I see this sometimes. I walk to go pick up my daughter from school,

and I'll pass a long line of cars, and to every single one without exception. Let's say I pass 30 cars. Every single one, they're waiting maybe 5, 10, 15 minutes for their child to come out. They're not looking ahead. They're not looking around. They're neck down looking at their phone. Oh, this is important.

So he's talking about Clips Lectures. I'll tell you my note after. It says, Clips Lectures to me as a teenager were spot on. In ever searching for and finding a new state of rest, this is a weird thought, so hopefully, I might have to read it twice, come on. In ever searching for and finding a new state of rest, the market was always intermittently and provisionally right in correcting an error,

though in never arriving at a final state of rest and in never achieving a synchronized balance in all orders for immediacy, it was always wrong. And the greater the imbalance, the more wrong it was. So that's what Clip meant by saying the market is always right why it is always possible to start new successful companies because of this imbalance. The opportunity is always there. You just have to find it. Okay, so after a while as a trader, he starts his own company. And now he's going to focus on option trading, which is what he does to this day. He says, I joined Nassim Taleb in 1999 as he was

launching Empirica Capital, a mutually obvious relationship from our shared pit trading background and shared view on the certainty of an eventual collapse in the then bubbly U.S. stock market. And to this day, there's no one with whom I more enjoy and benefit from sparring about tails. We called ourselves crisis hunters. We were indeed the first formalized tail protection firm ever. See, that's also the importance of just not copying what everybody else is doing, of thinking for yourself and finding your own niche. Okay, so it says, which we duly snagged in the 2000 equity collapse.

We parted ways in 2005 and I went on to form my own investment firm, Universe Investments, moving beyond the basic mandate at Empirica. After I started, Nassim joined me again, but in a strictly hands-off passive capacity. So he's just an advisor to the fund. So it says, and then most people call him, say he's like a black swan hunter, but he has a different view on black swans. He says, the real black swan problem of stock market busts is not about a remote event that is considered unforeseeable.

That's how most people see them, right? It is rather about a foreseeable event that is considered remote. Interesting how the definition, the understanding of the definition changes when you just switch the order, which I've spent the bulk of my career exploiting. Okay, so now I'm going to get into a quick metaphor that explains the message of the book. So first he says, and this is something I agree with, nature is our greatest teacher. Indeed, a major theme inseparable from the totality of its message is to observe and learn from nature and mainly the the fact that because nature's existed for

a much longer time period than humans that's why you learn from them and one of the reasons you learn from that should say and so although my favorite um i'm in the favorite my favorite one of my favorite chapters of the book i'm not going to talk too much about it because you have to read the whole chapter in whole, but this is like a one paragraph, I would say summary, to give you a good idea. It says, we look to the conifer tree 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, estimated about 300 million 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. So it's much better to just be different than to compete with everybody else. Okay, so this whole idea, this paragraph is important. The point is not to go slow to stay slow. It's to go slow now so you can go faster later. And he says, some have compared the roundabout strategy of the conifers. That's exactly how they spread their seeds and continue to grow and survive. And so he says, some have compared this roundabout strategy of the conifers to the old fable, the race between the tortoise and the hare. But it is really, and he's saying, that's a misunderstanding of what the conifers are doing. He's saying but it's really a refined version.

Call it the tortoise that morphs into a hare. In our fable. The tortoise doesn't remain slow. But rather builds his strength. And gradually accelerates. That is the strategy of the conifer. And now he explicitly states. This is the main point in how it. And now he explicitly states, like, this is the

main point in how it applies to entrepreneurship. So it says, the gospel of this book is the strategic positional advantage gained in the roundabout way in the relation of indirect means and conditions to ultimate ends and consequences. That is, in intentionally and counterintuitively going right in order to go left rather than taking the direct route, what he also calls the false shortcut. He's saying like most of the greatest opportunities in the world, they're unavailable to people that just go the straight path. You have to go to the roundabout path. And so I'll give you an example of a modern day entrepreneur at the very end of the podcast who utilizes this. And I think it will enhance your understanding of what he's saying here.

Like the idea that, oh, no, you don't understand. To get to the very best opportunities, you have to do this, even though most people will never do it. It's very counterintuitive. It says Unweg. So he uses a ton of non-English words. I think he speaks like German. He may speak Finnish or just a lot of them. Solish work words i think he speaks like german he may speak finnish or just a lot of them so one of these is unweg it's but this one um is important because unweg is uh

it's a staying for the roundabout path of the of of the entrepreneur so it says unweg is a lowly and mundane term which disguises its philosophical and practical significance. It translates literally as detour, indirect, or roundabout route. So now let's go into how this applies to entrepreneurship. So too is the path of this book, spanning miles and millennia, militarists and economists, conifers and and entrepreneurs circuitous yet calculated in our intended direction that's why i mean you kind of have to read the whole book because he's he's taking the roundabout path as he to explain his idea uh in his writing too but this is an important one important part by exploring universal strategic thinking we build

a structure of understanding from many sources and thus mimic how capitalists layer their tools in intermediate stages of production. The protagonist of the Austrian narrative is the entrepreneur who assembles the necessary inputs, the factors of production, into a temporal capital structure. So that means over time. Capital accumulation is a sequential production process accomplished through stages to produce final consumer goods more efficiently and time for when they will be demanded the constantly stocked strategic advantage toward the ultimate end of satisfying the consumer. I love that he's not even talking about the end being the final factor form of the that, because that's in his own thinking, like that's more of a means than an end. The end is the final satisfying consumer.

So think about how much you might love your smartphone. Like iPhones are great, right? That could be thinking, okay, think about all the different materials and all the different supply chains and all the different processes Apple has to get, including the software and the operating system and everything else to get it into its final form.

But that's not where it stops. It stops when you're actually consuming it, when you're using the device. You've given them the money already, but then after you open it, after you start using it, and the end result for any successful business is the consumer should be satisfied. I like that idea. Okay, so now I'm going to read a good amount here. This is the story that finally made Roundabout Production click for me. Okay. So now this is good. I'm going to read a good, good amount here. This is the story that finally made roundabout production click for me. Okay. This is roundabout production.

It is important to understand that the, that roundabout production is not simply about having production take longer. It's not just indirectness for the sake of it. Taking the roundabout route is not the same as merely taking more time. There is no advantage or virtue in delays, procrastination, meandering, or going out of one's way for no reason. One amasses the tools of one's trade, the intermediate goods that will add proficiency and efficiency to the pursuit, the result of which is realized in the future. That roundabout methods lead to greater results than direct methods is one of the most important and fundamental propositions in the whole theory of production. It's kind of what I was just mentioning, how even though most people take the direct route,

the greatest opportunities in life and in business you can only arrive at by taking the roundabout way. To illustrate, he's going to give an example of the parable of the shipwrecked Robinson Crusoe. And so this is like the most simplest way to outline his idea because it's literally a one-man economy. Okay, so Crusoe's very survival, in case you don't know, it's a fictional character. He's stranded on a desert island, so he needs to survive. Crusoe's very survival depends on him moving beyond the hand-to-mouth direct satisfaction of his needs to become ever more roundabout. Crusoe's first priorities are the basics of life. To obtain food, he begins with the most primitive of approaches. He goes after what he needs with his hands. Standing in water, Crusoe tries to snatch fish as they swim by,

but these slippery and fast-moving creatures are hard to catch. And so he upgrades his approach with a primitive tool, his first attempt at an intermediate good, a branch that he shapes into a spear. Although he misses frequently, he manages to catch five fish a day. But when the last bone is picked clean he must rest up for another day of labor. Thus Crusoe's quandary is how to catch the same amount of fish in less time and with less labor or a greater number of fish in the same amount of

time. The answer to both is to become more roundabout. The problem, however, is that even with his spear, Crusoe spends so much time trying to catch five fish for the day that the only way he can invest in better tools, think of these as improved intermediate goods, is to cut back on current production. In other words, he has to save some of his effort instead of expending it all on catching fish. This requires him to decrease his fishing time and catch perhaps only three fish a day, which means he's going to be hungry. So he can spend the remainder of his day making a simple boat and a fishing net. The process takes weeks, all the while Crusoe forgoes full satisfaction of his current wants, which is a stomach full of fish, so that he can position himself for future advantage with the intermediate

goods of a boat and net. Hungry, he labors upstream for more fish downstream. Putting it in economic terms, he makes use of his meager surplus time now in order to create a more productive means for later. This is ennui, that word I was telling you about. Crusoe ultimately catches more fish by first catching fewer fish, by focusing his efforts in the immediate toward indirect means, not ends. It is highly strategic yielding or losing now to realize an advantage in the future. So Crusoe hopes that this more than justifies the setback and waiting to be paid for the fruits of one's labor and investment. If indeed there ever is a payoff, entrepreneurial ventures naturally do not come with any guarantees of feasibility or profitability.

It's an important statement. Now, so we have Crusoe, he's hungry, he's catching five fish a day, but at the end of the day, he's gotta do the exact same thing tomorrow. He's not making any progress. He's only able to focus on his immediate needs. He takes, what, two months off,

whatever the timeframe was, builds this, builds a boat, whatever the timeframe was, builds this, builds a boat, gets the tools, gets a net. And his idea is like, hey, I'm going to starve a little bit now, but this is going to make me yield to greater results in the future. That is the literal definition of the roundabout process. Okay. And here's the result. At last, the boat and net are ready. The hungry Crusoe takes to the water and in less than two hours catches five fish now with his daily needs met he can invest in other roundabout production such as in addition to repairing his boat net a rack for drying fish and evaporating seawater to collect salt to preserve them uh etc etc soon Crusoe has an exceedingly efficient fishing operation, catching far more fish than he can consume and accumulating a stockp it costs, how many resources must be invested to get increased output, and how long one has to wait for a payback.

Okay, so now we understand how it looks with a one-person economy. Let's jump up to Henry Ford and see how Henry Ford applied roundabout production to yield greater returns in the future. And in doing so, he was one of the only car manufacturers at the time to be able to actually reap those benefits, if not the only one, actually. Okay, so this is Henry Ford as a quintessential roundabout entrepreneur. Here we recognize him, meaning Ford, as the embodiment of the roundabout entrepreneur who created a new paradigm of production, the assembly line,

as the culmination of vertical integration that depicts the improved efficiency and productivity gained by spanning factories and power plants to turn coal, iron ore, and steel into automobiles. He is the quintessential roundabout entrepreneur in the Austrian tradition. So it says he wrote this book, which I just ordered.

I didn't even, I missed this. I don't know how I missed this. But he wrote a book in 1926 called Today and Tomorrow. And this is a quote from Ford. The time element in manufacturing stretches from the moment the raw material is separated from the earth to the moment the finished product is delivered to the ultimate consumer.

The Austrians described what the undertaker knows in his gut. That was not a quote from him. That's Mark writing, obviously. Ford held similar Austrian views on such things as profits as a source of productive capital that must be reinvested to the ultimate benefit of consumers and a loathing for the actual operation of the banking and monetary system,

which he famously said, if people understood, there'd be a revolution before tomorrow morning. All right, Ford had a natural fascination for all things mechanical. As a boy, he fashioned for himself a set of tools with which to repair watches, perhaps foreshadowing the entrepreneur who would invest in a tremendous amount of time and effort

to assemble the tools of production in order to improve speed, efficiency, and output in his manufacturing processes later. His obsession with the horseless carriage intensified. By 1892, he had built his first motor car. By the time Ford built a second car, he had already faced a competitive market. In 1986, Ford sold his car and like the roundabout entrepreneur he was at heart, invested the proceeds in research and development. Indeed, over the course of his lifetime, Ford Motor Company would not have prospered had the founder not committed to continuous long-term investment in improvements and roundabout production.

Although his name is synonymous with automotive manufacturing and entrepreneurial success, Ford failed in his first two ventures. Some of the greatest entrepreneurs have suffered such setbacks. Often these experiences pave the roundabout routes to crazy and obsessive goals. Ford's true vision, which sometimes put him at odds with his business partners, was not to make roadsters for the rich, but to produce modest, reliable, high-quality cars for working people of more modest means, such as the iconic Model T. The Model T was introduced in 1908 to an enthusiastic public that just a few years before did not even know they craved cars.

As Ford once said, if I'd asked people what they wanted, they would have said faster horses. Led by Ford's vision, the company made the roundabout transition from assembler to manufacturer in every process along the way in order to reduce costs, gain more control over supplies, and eliminate unnecessary inventory, thus making huge gains in efficiency and innovation. So what he's talking about there,

if you remember from some of the previous podcasts I did on Ford, they used to just kind of like hand make cars in this like big warehouse so supplies would come in one end and out the other end would uh come a car this obviously took way more time and way more labor than uh what he eventually makes it's like a fully vertically integrated um system that winds up producing cars in mere minutes and we're going to get into that which because that's an illustration of the roundabout process and the benefits that you derive from that process in the future it says the decision was driven by economics with with mass production ford could make parts at a lower cost and more quickly than buying them from suppliers the flagship for his roundabout production was the

river rouge plant which included a port a shipyard steel making steelmaking, a foundry, a bodymaking plant, a sawmill, rubber processing, a cement plant, a power plant, and an assembly plant. It was the epitome of roundabout production, which at the outset literally consumes time and requires great capital expenditures to be, in Ford's words, turned back into the business so that it may be still better fitted to serve and in part passed on to the purchasers, the customers. The roundabout paradox is that the process of becoming more circuitous takes a tremendous amount of time during which there is little to show for the sacrifice, but at the end results in significant time savings.

Like the conifer, it is slow at the start so that it can accelerate at the end. So he's building cars, basically let's call it handmade for lack of a better term before this, and his competitors are building cars handmade where's your advantage ford realizes that takes a step back looks like he's making going backwards or making no progress wise and foregoing immediate profits that other car makers are getting to to build this system because he knows that this system is going to give him an advantage that the other people that are taking direct routes and not the roundabout route cannot match in the future that's a that that when i got to this part on ford mark's ideas really started sinking in for me okay it says um after showing extraordinary

patience during the building of the roundabout production processes once it was in place ford switched gears temporarily and became obsessed with timing the car making production process to see how he can make it faster. And so now we're going to see, remember he talked, Mark used the example. He's like, listen, it's not about the tortoise versus the hare. It's about the tortoise turning into the hare and going even faster. So we're going to see that. Annual output of Model T rose from 500,000 vehicles in 1916 to 1 million in 1921, right? So double amount five years later to 2 million a year later.

So the rate of growth is accelerating. He now has an advantage that his competitors could never match. Now, eventually we obviously see, this is at the beginning of an industry, right? Now I think almost all car industry manufacturers use relatively similar means of production. So it's not like these advantages last forever. And he talks about this.

He says, my note is if it were easy, everyone would do it. Something I remind myself constantly. He says if roundabout were easy, then everyone would do it. And no doubt the strategic advantage derived from it would be eliminated altogether so what at once was rare and a novelty has kind of been uh you know 100 years later kind of par for the course in um in the automobile industry but again could be applied to any craft that you're doing oh so this is more about the psychology the reason why you know the once you're explaining these ideas they so this is more about the psychology, the reason why, you know,

once you're explaining these ideas, they make sense, but why do not, why are they so rare? And this reminds me of, I always talk about when the founder of Atari, Nolan Bushnell, he hired like a 19 year old Steve Jobs. He said, you know, Steve Jobs had one speed go. And I think having that one speed is how you overcome short-term self-deluding procrastination. So it says this, now we're skipping ahead in the book, talking about, you know, why are people so focused on the immediate? This pattern, present in all of us and distorted to extreme and even dangerous levels in the case of addictions, is to be impatient now, all the while holding fast to the self-delusion of being able to be patient later. And of course, when later becomes now, we are just as impatient. We're just playing a mind game on ourselves. We expect to act very differently

through time than we actually do, predictably throwing a wrench in our best laid plans. We always want to do something a bit onerous that will shower us with long-term benefits, but we never want to do it today. So the last two chapters of the book are about, the first 10 chapters are all about this idea. The last two is how he applies it in his own practice. So that's what I'm going to focus on now. So he, like I said before, he uses options. That's his tool. So he says the real black swan problem of stock market busts is not about a remote event that is considered unforeseeable. Remember, he repeats himself a lot, but that's not a bad thing. I actually think it's really smart because it's like you have to

constantly remind yourself. If you look at, think about your memory, not so much as like a video recorder, but as like a process that takes photographs. A lot of stuff is left out. Therefore, the need to reread or re-listen to or rethink about things that are important to you. Rather, it is about a foreseeable event that is considered remote. So I've already read that to you.

The vast majority of market participants fail to expect what should be, in reality, perfectly expected events. That's partially what he built his business on. If the market perceives our prices, a large loss in the stock market, as very unlikely, even when such perception and pricing are unwarranted, obviously tremendous opportunity exists. That's how you get these headlines where he makes a billion dollars in a day. It's not necessarily he made a billion dollars in a day. He may have waited three years for that, but he reaps all the benefits in one day. Even if only to protect a portfolio against such deleterious losses.

I think a lot of people invest with him because they look at it as a form of insurance. He says, I moved from the commentator I was in the previous chapters to the practitioner. Tail hedging is at the center of what I practice in my investment partnerships. So he says, and intention of this book. It bears repeating. I am not telling anyone to run out and do this as described. Even the very generic version of tail hedging is very hard and involves options that are very illiquid, which makes pricing and taking profits very difficult. It is meant to serve as a case study to demonstrate Austrian tools and the application of the roundabout approach through the conditional historical outperformance generated by adding extremely out-of-the-money options to the S&P composite index. Let me just read this part to you in case, you know, options, not everybody

knows what they are. So it says, to begin with, a little basic knowledge for readers who are not familiar with options. A put is a derivative instrument that gives the holder the right, but not the obligation, to take a short position in the underlying security at the strike price. Example, an equity index such as the S&P composite. With tail hedging, the puts involved are necessarily, by definition, extremely far out of the money, meaning the strike price at which they become exercisable is very far below the current market price, meaning they don't think it's a remote possibility.

And he's saying fundamentally these things are mispriced and that's how I make my money. Each month, and then he talks about some way in which he organizes some of his funds. He says each month the portfolio spends one half of 1% on puts, and the remaining 99.5% stays invested in the S&P index. No leverage is employed. And in fact, typically, when the market is down by not even 20%, the entire portfolio is actually net profitable.

He says, investors have indeed encountered surprising and pernicious events. So he's talking more about black swans. But the fact is those who were surprised have been those in the extreme majority with either a blind or brazen disregard for the crucial concepts of Austrian capital theory and monetary credit expansions and the corollary understanding of capital goods and the time structure of production. So he's saying like, yeah,

just because a lot of people don't think it's remote and it's unforeseen doesn't mean that that's actually true and that you should actually be expecting them. And then he's going to wrap here about his own thing. He says, it seems that tail hedging, as I've been explicitly practicing for about 15 years now, should be called central bank hedging. Because he's saying the distortions that allow him to make these profits are caused by people that are trying to interrupt the natural market process. And then he's going to summarize what roundabout investing is, which is what he's

engaged in, a version of it rather. Roundabout investing is all about temporal structure of productive capital, meaning the changes in value of money over time. As we recall from the slow growing at first conifers and Henry Ford's capital structure extending from raw materials to automobiles, production by its very nature takes time, much time. Roundabout production therefore cannot focus myopically on the immediate profit. Rather, it invests teleologically, building the indirect means, which is also known as the positional advantage, toward the end of profits that will not materialize in the near term. In fact, as we will see, it is all the better for us that such evidence is hidden from the rest of the investing public

who focuses on the scene, also known as the immediate, right? Their impatience makes them blind to the future potential, which are tomorrow's profits that are yet unseen, but this is really important, but can, if we know where to look, be foreseen. Therefore, it's all about the straightforward plan of attack compromised in this book, which here's a summary. Being patient now in order to be strategically impatient later. So he uses an example like Henry Ford was willing to forego profits for a few years to build his plant to get his production up. But once the production was up, they would have people in his factory going around with stopwatches,

trying to measure how fast cars were being produced and then to optimize it to keep decreasing that. I think they got it down to producing a car every two and a half minutes or something like that, something crazy like that. And then this is a really good summary about why is this so important? Why are you spending hundreds of pages talking about this? Because we know that the most productive capital is also the most roundabout capital.

And again, he's talking investing, entrepreneurship, same thing. We know that the most productive businesses are the most roundabout businesses. And I'm going to close here, and this is going to give you a summary. The entrepreneur who foresees a profit opportunity in the distant future and who patiently reinvest earnings into his business year after year in anticipation has a much greater opportunity for eventually posting an enormous return than entrepreneurs who are engaged in short-term projects. I'm going to read that to you one more time, and then I'm going to tell you who did this, and we just lived through this happening. Actually, let me tell you who I'm

talking about. I'm talking about Jeff Bezos. Jeff Bezos did this, literally did this. So let me, now that you know that's the entrepreneur that I'm referencing, even though it's not the one he's referencing, let me read that to you again with Jeff Bezos in mind and Amazon. The entrepreneur who foresees a profit opportunity in the distant future and who patiently reinvests earnings into his business year after year in anticipation has a much greater opportunity for eventually posting an enormous return than entrepreneurs who are engaged in short-term projects. And to that end, I'm going to close here. But seeing as this is the Misfit Feed, I'm also going to tell you a secret. Next week's podcast is going to be very bizarre because next week's podcast is also about Jeff Bezos, but it's not about a book. I'm reading, taking notes and analyzing on all, every single investor letter that Jeff Bezos has written about Amazon since it was public.

And it's going to illustrate this exact idea. So make sure you don't miss next week's podcast. It's going to be really, really interesting. If you want to read this book and I would recommend it, I've recommended it to almost everybody I've had a conversation with since I've started listening to it and then eventually reading it, just because I don't even think I understand it completely yet, but I think there's jewels and there's value in here. Even if you listen to the audiobook, I mean, do whatever you want, but I'm going to leave a link in the show notes below. If you click that link and purchase it through that link, it's another way to support the podcast. Amazon will send me a small amount of the sale

at no additional cost to you. Okay, and that's it. Hopefully you found this podcast. Hopefully the risk I took in making this podcast, because I think it was a little weird, and I felt normally I'm not, when I sit down to record, I'm normally not nervous.

Today I was nervous, because I think down to record, I'm normally not nervous. Today I was nervous because I think the information in this book is valuable and I don't know if I'm good enough to relay that information. So hopefully you got some value out of it. Thank you again for listening and I'll talk to you next week.