Special Research


Safe Haven Investing - Part Four
The Volatility Tax (February 2018)
Mark Spitznagel, Chief Investment Officer

The volatility tax is the hidden tax on an investment portfolio caused by the negative compounding of large investment losses. We can make progress just by being better aware of this hidden and destructive tax and the hefty costs it extracts from investment portfolios, especially in environments like the current one.


Safe Haven Investing - Part Three
Those Wonderful Tenbaggers (December 2017)
Mark Spitznagel, Chief Investment Officer

Effective risk mitigation needs to be able to add value within a broad spectrum of very general and logical parameters. Observing how well our safe haven prototypes, particularly the insurance prototype, have held up under these requirements has led us once again, in a highly transparent fashion, to the ways that risk mitigation can go right and how it can go wrong, and the margin of error between the two.


Safe Haven Investing - Part Two
Not All Risk Is Created Equal (November 2017)
Mark Spitznagel, Chief Investment Officer

With today’s equity valuations solidly in their upper historical quartile, risk mitigation strategies are a particularly strong value proposition. But adding very high crash convexity, specifically, takes much of the thinking and timing skill out of the decision-making process and allows for effective risk mitigation while remaining largely agnostic to potential (and even likely) systemic crises. Of course this is a tautology, as such agnosticism is the very point of effective risk mitigation in the first place.


Safe Haven Investing - Part One
Not All Risk Mitigation Is Created Equal (October 2017)
Mark Spitznagel, Chief Investment Officer

The goal of risk mitigation is achieving an optimal protection-cost tradeoff, and this is done through an effective savings in volatility tax, or minimizing negative compounding. The tradeoff greatly favors maximal convexity.


Capital Asset Pricing Mistakes: The Consistent Opportunities in Tail Hedged Equities (January 2015)
Chitpuneet Mann, Mark Spitznagel, and Brandon Yarckin

The introduction of asymmetric beta to the CAPM framework can allow an investor to construct a portfolio with expectations well above the security market line. Incorporating asymmetric beta provides evidence of a mispricing in certain payoff profiles, namely tail hedged equities, that can be analyzed by using variants of the CAPM type of framework. CAPM based asset allocations are misspecified and ill-equipped to handle asymmetric returns.


The Austrians and the Swan: Birds of a Different Feather (May 2012)
Mark Spitznagel, Chief Investment Officer

What is a black swan event, or tail event, in the stock market?
- It depends on who’s asking.
- To those familiar with Austrian capital theory, the impending U.S. stock market plunge (of even well over 40%)—like pretty much all that came before in the past century—will certainly not be a Black Swan, nor even a tail event.
- Nonetheless, the black swan notion is paramount—in perception: Market participants’ failure to expect a perfectly expected event—that is, they price in only Anglo swans despite the Viennese bird lurking conspicuously in the weeds—much like what is happening today, brings tremendous opportunity.


The Dao of Corporate Finance, Q Ratios, and Stock Market Crashes (June 2011)
Mark Spitznagel, Chief Investment Officer

This white paper provides clear and rigorous evidence of a direct relationship between overvaluation and subsequent extreme losses in the aggregate stock market.
Of equal importance is the use of the Q ratio as the most robust aggregate overvaluation metric, which isolates the key drivers of valuation.
At current valuations (Q ≈ 1.04)—and if this 110-year relationship continues—there is an expected (median) drawdown of 20%, and a 20% chance of a larger than 40% correction in the S&P500 within the next few years; these probabilities continually reset as valuations remain elevated, making an eventual deep drawdown from current levels highly likely.