Book review, The Dao of Capital

I really enjoyed reading The Dao of capital. It's a bit of a slow build up but well worth the time.

Apart from all the austrian wisdom, the two key concepts of the books are The roundabout and hyperbolic discounting.

Those two concept are the reason what I would call time arbitrage works.

The roundabout basically means that it's sometimes better to go right first in order to go left later and is really well visualized as the difference between a roundabout and a four stop. The roundabout is actually much more efficient from a time / energy perspective and it's a good metaphor of scarifying a bit now in order to get a hedge and momentum later (or accepting volatility for higher return).

Now on to hyperbolic discounting.

Basically hyperbolic discounting is the fallacy of thinking you'll have more discipline in the future. Ex I won't study now but tomorrow morning I will wake up early to do so ... People prefer to make a bit of money steadily (procrastination) but are setting themselves up to take a huge loss in the future (failing the exam) instead of paying a little every day in order to set the field for a huge win.

The consequence of those 2 key principles is that investor are looking for immediate yield, and in doing so make some weird investment & capital allocation ex; increasing stock buyback instead of long time investment when the discount rate should be at high time low.

This allow patient and disciplined capital allocator to trounce index long term.

From a strategical point of view the application of the roundabout tactic in Spitznagel investment is via the use of deep out of the money put option on the s&p 500 wich allow him to lose a bit now (the premium) in order to gain a lot in the future by providing liquidity in a time of crisis.

In summary a pretty good book linking austrian economics, value investing, psychology and a good understanding of market risk.

Vincent Thibault


http://daoofcapital.com/