BackHow to survive the next market crash
Fund manager Mark Spitznagel, who earned a fortune when stocks cratered in 2008 and 2020, has some surprising advice for investors
PremiumJerome Powell and the Federal Reserve might be in the process of driving the stock market over a cliff by tightening into a recession.
That is one potential scenario envisioned by fund manager Mark Spitznagel, who actually thinks the Fed will blink soon on rate increases. He isn’t explicitly betting on either outcome, but would likely find himself in the headlines again if the more dire one comes true: The last time there was a contraction in the U.S. economy his firm, Universa Investments, earned an astounding 4,000% return in a matter of weeks. The time before that, during the financial crisis, he more than doubled clients’ money even as the value of stocks was cut in half. In between those two downturns, Universa made $1 billion in a single day during the “flash crash."
Individual investors would love to buy the sort of crash protection that Mr. Spitznagel, a protégé of “Black Swan" author Nassim Nicholas Taleb, sells to his sophisticated clients. But they can’t and, in their attempts to re-create it and gain some peace of mind, they wind up hurting their returns. Techniques range from chronically wrong attempts to read the economic tea leaves and time the market to the use of products or investments touted as hedges.
For example, exchange-traded notes that rise in value on down days for the market have become some of the most-traded instruments on U.S. stock exchanges since the pandemic began. The ProShares UltraPro Short QQQ, which delivers three times the daily inverse return of the tech-heavy Nasdaq 100 Index, has shined, rising 32% over the past 12 months. But many of its fans fail to grasp how awful it is to own in the long run, having lost 99.9% of its value since its 2010 inception. Getting the timing slightly wrong during the past year has stung too, with 45 days when the note’s price fell by 5% or more and seven days when it fell by at least 10%.
Even the classic 60/40 stock/bond portfolio, meant to smooth out returns in choppy markets, has disappointed this year with inflation surging, losing about 16% through Friday—nearly as bad as owning a total stock-market index fund. Gold, a traditional inflation hedge, has lost 9% this year, and “digital gold" bitcoin has done far worse, falling 57% through Friday.
Risk and reward are traditionally seen as a trade-off—a smoother return means settling for a lower one. Mr. Spitznagel’s book “Safe Haven: Investing for Financial Storms," published a year ago, argues that it needn’t be. A leaked copy of his fund’s returns over its first decade through mid-2018, which predates its pandemic bonanza, does too. A portfolio with 3.3% in Universa, which uses sophisticated derivatives to profit from extreme market moves, and the rest in an S&P 500 index fund, turned $10,000 into $31,900. One that just owned the index grew to $25,307. Other portfolios with traditional hedges such as gold and Treasury bonds did even worse.
In an interview last week, Mr. Spitznagel said that individuals just can’t replicate that result. His answer as to the next best thing for individual investors is what Warren Buffett would recommend: Just buy and hold stocks for the long run.
That is surprising because Mr. Spitznagel is at heart a pessimist. While his mathematically driven fund constantly rolls over doomsday bets and doesn’t rely on short-term predictions, he sees the Fed being backed into a corner with long-term consequences. The size of its balance sheet and the buildup of debt in the economy overall leave it with the choice of continuing to try to crush inflation, thus pushing the U.S. into a downturn, or else giving up on tightening as it did in December 2018 when it sent stocks back from the brink of a bear market.
Unless the Fed acts wildly out of character and keeps tightening, inflation will stick around and bonds are no place to hide. A long-term bet on stocks, even if a crash lies in the near future, is the way to maximize wealth. Universa’s clients rely on his fund to feel comfortable staying invested in risky assets, willing to put up with months or years of small, steady losses on that small part of their overall portfolio. California’s huge public employee pension fund infamously lost its patience with Universa’s strategy shortly before the pandemic crash and that 4,000% return.
Individual investors who can keep their nerve better than a board of bureaucrats have the best chances of navigating future financial storms. The strategy is simple, but it sure isn’t easy.
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