The Dao of Capital Book Summary - The Dao of Capital Book explained in key points

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The Dao of Capital summary

Name: The Dao of Capital
Rating: 4.3 (86 reviews)
Author: Mark Spitznagel

Mark Spitznagel

Austrian Investing in a Distorted World

4.3 (86 ratings)

18 mins

Brief summary

The Dao of Capital by Mark Spitznagel is a thought-provoking book on investing based on the principles of Austrian economics. It offers a unique perspective on understanding market crashes and how to profit from them.

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Table of Contents

The Dao of Capital
Summary of 8 key ideas

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Key idea 1 of 8

What’s in it for me? Learn what Daoism can teach you about wise investing.

In the late 19th century, The Austrian School of Economics established a revolutionary new way of thinking about capital as a roundabout means to more productive ends. This idea didn’t originate in Austria however; its roots are found in Ancient China, in the wisdom of Daoism.

Daoists saw everything as a result of its opposite: hardness from softness, strength from withdrawal, advancement from retreatment. Though it seems counterintuitive on the surface, this wisdom can also be applied to markets: profiting by not investing. In these blinks, you’ll learn how withholding your investments until the right moment is better than directly pursuing profits, like most people would do. You’ll learn how you can approach the market like a Daoist, to gain more money in the long-run.

You’ll also learn:

why Robinson Crusoe was a great investor;
what a marshmallow has to do with unwise, hasty investments;
how the market functions like a natural forest;
why central banks should allow small market crashes from time to time;
how Daoism made China’s military so strong; and
how Ancient Chinese wisdom was relevant to nineteenth century Vienna and is relevant today.

"Austrian investing" means applying the Chinese philosophy of Daoism to markets.

The concept of Austrian investing starts with a paradox: you've got to love to lose money, and hate to make it. The wisdom of this paradox reaches back more than two and a half millennia to the Chinese philosophy of Daoism.

In Daoism, the best path to anything is through its opposite. So you gain by losing and lose by gaining.

Daoism emerged in ancient China during a time of heavy conflict. One of its central concepts is wei wuwei, which literally means “doing by not doing.” In warfare, that meant not attacking until you could secure a position of advantage, and turn the opponent's own force against him.

You can see this concept at play in the Daoist martial art tuishou, or “push hands.” In tuishou, two opponents try to throw each other to the ground by going through a sequence of very subtle alternating feints and attacks.

The tuishou exercise is a physical manifestation of the idea of waiting and exploiting your opponent's urgency. The real force in tuishou isn't in pushing; it's in yielding.

Austrian investing follows the Daoist model of pursuing a roundabout route to market success. Instead of following a direct route towards immediate gain, Austrian investing takes the more roundabout path towards immediate loss. This pursuit of loss is similar to the yielding in tuishou: you pull back and experience short-term loss, so you can gain a more advantageous position in the future.

Like the Daoist concept of wei wuwei, the idea is to profit from other investor's impatience and intolerance of small losses, as well as their urgency to get immediate profits. Patience is key.

Robinson Crusoe and Henry Ford are prime examples of how Austrian investing can lead to success.

You've got to tolerate initial setbacks to make gains using the strategy of Austrian investing. Let's look a bit more at what this means.

The Robinson Crusoe parable illustrates this principle well. When Crusoe gets stranded on his remote island, his first priorities are the basic necessities of life. To feed himself, he first tries to catch fish using his bare hands, which is clumsy and rarely works well.

Daoist concepts can be found in nature, especially in the forest system.

Nature is our greatest teacher. It’s also an important part of Daoism: a major Daoist theme is to observe and learn from nature, from things like the growth of conifers.

Conifers (also called pines, spruces and firs) illustrate the Daoist indirect path that leads to a position of advantage. They’re also the oldest tree species on the planet, having first appeared roughly 300 million years ago.

Daoist concepts were used in the military strategies of ancient China and 19th century Prussia.

Ancient China and nineteenth century Prussia might seem worlds apart, but they have an important commonality: in both regions, wars gave rise to canonical texts on war strategy. In Ancient China, it was Sunzi, by the general Sun Wu. In Prussia, it was Vom Kriege (On War), by the general Carl von Clausewitz.

Sunzi applies the Daoist indirect approach to military strategy. It’s one of the most important works on the topic, and has greatly influenced both Eastern and Western military thinking.

The market is an ongoing process and cannot be considered empirical.

Austrian investing originated from a new school of economic thought, the Austrian School, in late nineteenth and early twentieth century Vienna. The economist Ludwig von Mises, one of the school’s pioneers, famously proclaimed, “The market is a process!” which has become a tenet in Austrian investing.

His statement is true; the market can only be understood as a process. In Daoism, this process or path is called the Dao.

The market is naturally self-correcting, and intervention from outside weakens its balancing forces.

A system should naturally achieve balance through internal guidance. Any attempts at intervention are typically counterproductive. The Austrian School teaches this in regard to markets: government intervention doesn’t balance markets – it distorts them.

The market is like a forest: it has natural regulators that keep it balanced. A forest is kept in balance by the constant battle for resources among the creatures that live there.

Austrian investing is difficult to implement because it goes against our instinct to seek immediate gratification.

We can only succeed with Austrian investing if we can stop being so focused on the moment. This is extremely challenging, however. Why exactly is this so hard for us?

Well, humans are simply designed to prefer things that are immediate and direct, rather than intermediate or indirect. We want things that benefit us now.

You have to be patient and seek out highly productive capital to benefit from Austrian investing.

So how can we go about implementing Austrian investing? How do we set up for the moment when our patience can pay off? How do we know in which firms to invest?

The first step in Austrian investing is to stay out of the market when distortion is high.

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What is The Dao of Capital about?

The Dao of Capital takes the reader on a journey from ancient China to nineteenth and twentieth century Vienna, to modern, globalized markets. Using a multitude of examples, it outlines the approach of “roundabout investing” or “Austrian investing,” which is based on ancient Daoist wisdom of “gaining by losing.” See how strategic investing, rather than rapid and rushed investing, can lead you to great financial success.

The Dao of Capital Review

The Dao of Capital (2013) by Mark Spitznagel is an insightful exploration of the principles behind successful investing and capital allocation. Here's why this book is worth reading:

Offers a contrarian approach to investing that challenges conventional wisdom and provides a fresh perspective on capital markets.
Emphasizes the importance of understanding economic cycles and how they impact investment decisions, helping readers navigate market fluctuations.
With its engaging anecdotes and clear explanations, the book manages to make complex economic concepts accessible and interesting, ensuring readers stay engaged throughout.

Best quote from The Dao of Capital

The whole point of my approach to investing is that we must be willing to adopt the indirect route to achieve our goals.

—Mark Spitznagel

Who should read The Dao of Capital?

Anyone interested in economics
Anyone interested in wise investing
Anyone who wants to see how Daoist wisdom can be applied to markets

About the Author

Mark Spitznagel is the founder and President of Universa Investments, an investment advisor that specializes in profiting from extreme stock market losses as a means of enhancing investment returns. In addition to hedge fund investing, Spitznagel’s roles in his twenty-year investment career have ranged from independent pit trader at the Chicago Board of Trade to the proprietary trading head of Morgan Stanley.

Categories with The Dao of Capital

Money & Investments

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