[The Typing Baker] How to Dance Amid Risks

How Mark Spitznagel Turns Crisis into Opportunity

'Low Risk High Return'?the idea of lowering risk while increasing returns?is the ideal for all investors. Because it is an ideal, it is also difficult to achieve. It can even seem contradictory. For this reason, it has often been used as a typical line by fraudsters. In reality, not an ideal, 'High Risk High Return' has been common sense.

However, author Mark Spitznagel has intensely pursued this ideal. Since his twenties, he has worked as a floor trader and prop trader, combining probability theory and reasoning to develop a methodology called 'Safe Haven.' He describes this book as "a work written with the blood shed fighting against luck over more than 25 years as a trader." It is the result of his accumulated experience in investment and risk mitigation as a hedge fund manager and Safe Haven specialist investor. The author asserts, "I have invested according to the contents of this book and will always do so in the future." The risk-mitigated portfolio of Universa Investments, the hedge fund company he founded in 2007, has an annualized net return more than 4 percentage points higher than the S&P 500 index's growth rate. In the first quarter of 2020, Universa reported a 4144% return to its investors.

'Safe Haven' refers to investments that mitigate risk or potential economic emergencies within a portfolio. It is a necessary condition for Safe Haven. Its essential characteristic lies in preserving and protecting capital. It serves as a refuge when storms hit the financial markets. Safe Haven investing is, in essence, risk mitigation. However, it does not stop at merely reducing risk. The author emphasizes that it must be done cost-effectively, that is, in a way that grows assets. Common diversification is ultimately not risk resolution but risk dilution and risk avoidance, and it is a confession that risk mitigation is not done cost-effectively.

First, the author focuses on the power of compounding. He also points out that ordinary investors do not properly understand compounding. The concept of compounding itself is simple enough for anyone to know?it is 'multiplication' and 'repetition.' However, the author believes that because people experience profits, losses, and all accounting records sequentially and arithmetically throughout life, they find it difficult to feel or tend to ignore the true nature of compounding. They recognize only that high returns are possible but do not understand the real nature of compounding. If compounding is understood superficially, one may overlook the fact that the more severe the loss, the much greater the damage compared to the same scale of gain that can offset it.

The author follows the ideas of mathematician Daniel Bernoulli to explain the concepts of geometric mean and geometric return, contrasting them with arithmetic mean and arithmetic return. Through this, he reveals the fact that "profits are limited, but risks are infinite." At this point, he finds the clue to Safe Haven investing that pursues low risk and high return. Thereafter, the author explains the concept and logic of Safe Haven by traversing mathematics, philosophy, sociology, and history. Although complex charts and calculations appear, if followed carefully, they can shift one’s thinking. Properly understanding the concept of risk mitigation and changing perception?that is the main reason the author wrote this book. Nassim Taleb, co-founder of Universa and author of 'The Black Swan,' also described this book as "Mark’s monumental middle finger to the investment industry."

Investors Holding Umbrellas | Mark Spitznagel | Translated by Kim Kyungmin | Waterbear Press | 300 pages | 19,500 KRW