The DAO of Capital: Austrian Investing in a Distorted World by Mark Spitznagel | Goodreads
This is a very unique book. The focus is to build the framework for Austrian Investing, which makes it a very dense read. Perhaps prior reading of the Austrian Economists is a must for reading this book.
Market is viewed as a process of price discovery which is essential to establish coordination among large number of workers. The main actor is the entrepreneur who tries to build better capital structure with the aim of earning profits. However a distinction is made between those who focus on short term profit versus those who forgo present profit so as to build competitive advantage for themselves and larger profits in the future. Humanity progresses due to the roundabout capital building leading to greater productivity by this Austrian hero. I can’t help but think of many of my investments, for example, Dmart which chose to buy large plot of land and slowly build their network of large format stores with the focus on low prices which becomes their competitive advantage and source of larger future profit.
The last two chapters suggests two complimentary trading strategies. The first is to exploit the distortion in market produced by money printing. The idea is to buy out of money put options when the Mises index (also known as Tobin’s Q ratio is significantly above equilibrium (at 1), say 1.7. Market return in such cases have been poor and in the event of market crash, the put becomes the source of capital for investing in low Mises index environment. The second strategy selects which stocks to invest in. The ideal stock to invest in has a high ROIC and low Faustmann ratio.
A sustainably high ROIC is an indicator of competitive advantage, therefore applying an ROIC threshold in stock selection removes those which do not have any competitive advantage. A low Faustmann ratio then ensures that we don’t overpay.
The edge of the first strategy comes from the market distortion caused by FED intervention. The edge of the second comes from the entrepreneur forgoing the present profits to build more efficient capital structure, competitive advantage, and higher future productivity.