Safe Haven by Mark Spitznagel;

Author:Mark Spitznagel; [Spitznagel, Mark]
Language: eng
Format: epub
ISBN: 9781119402510
Publisher: John Wiley & Sons, Inc. (trade)
Published: 2021-07-14T00:00:00+00:00

RISK‐MITIGATION IRONY

The big problem with safe havens is they aren't necessarily all that cost‐effective. Just because an asset or strategy made the safe haven cut, doesn't necessarily mean that you would have been glad to have it in your portfolio. They are more different than alike, even within each variety.

Safe havens can be exceedingly costly, so much so that, as a cure, they can be worse than the disease. Nietzsche said it best: “Whoever fights monsters should see to it that in the process he does not become a monster.” This is the risk‐mitigation irony (and fate loves irony).

Such ironies are a cliché. Take the case of the SS Eastland. In response to the tragedy of the Titanic in 1912, safety regulations were imposed on passenger ships, such as requiring them to carry more lifeboats. This mandatory extra cargo made the SS Eastland exceedingly top‐heavy, which caused it to suddenly capsize and sink in the Chicago River in 1915, killing 844 passengers. Ironically, these fatalities exceeded the number of passengers who perished on the Titanic (although the Titanic had many more crew). It is a well‐intentioned though myopic and narrow view that we naturally expect from politicians and bureaucrats. (In The Dao of Capital, I spent a lot of ink on this mistake made by forest rangers and central bankers.) But it's even a common mistake among investors as well. Do something—anything—to mitigate risk, even if it impairs and defeats the purpose; at least you can then say: “Well, I tried.”

The vast majority of presumed safe havens suffer from this same irony. They involve much movement, with little action. And they even do more harm than good—as monsters in disguise fighting monsters. They simply do not provide very much (if any) portfolio protection at all when it matters; therefore, the only way for them to ever provide meaningful protection is by representing a very large allocation within a portfolio. The problem, then, is that this very large allocation will naturally create a very large cost, or drag, when times are good—or most of the time—and even on average. After the dust has settled, you would have likely been safer with no safe haven at all.

Here we see the fundamental difference between a tactical versus a strategic investment, particularly in the context of safe haven investing. A strategic safe haven is about mitigating systematic risk in a portfolio through asset allocations that are more fixed in nature and then letting the dynamic interplay between its parts create the portfolio effect. A tactical safe haven, on the other hand, is about mitigating systematic risk in a portfolio by periodically and actively moving in and out of certain “safe” allocations, with the well‐intentioned purpose of saving on the high cost of that safety when times are good. Such a tactical approach to risk mitigation is a very binary one, meaning either “on” or “off.” Doing this cost‐effectively, by definition, requires timing and short‐term forecasting skill—you need a magic crystal ball.

But this is an internal contradiction.

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