Spitznagel - A Rich Guy Explains How to Make a Fortune (or Go Broke)

by the editors of Men's Health
January 2, 2015

It's a new year, and a new opportunity to get rich. Or at least start making better financial choices.

But where to begin? You could seek guidance from your uncle, who swears he has investing ideas that could make you a small fortune. You could watch that Mad Money CNBC show, where Jim Cramer smashes red buttons and pretends he has any idea what he's talking about. You could find a broker who hopefully isn't a crook, or a penny stock investment guru who hopefully isn't full of shit. Or you could skip the middlemen and just ask a billionaire.

Let's try the billionaire approach.

Mark Spitznagel is the founder of Universa Investments, a Miami-based hedge fund that specializes in profiting from stock market crashes. He also owns and operates Idyll Farms in northern Michigan, and he's the author of The Dao of Capital: Austrian Investing in a Distorted World, which Forbes Magazine called "one of the most important books of the year, or any year for that matter."

We're not entirely sure of Mr. Spitznagel's net worth, but it's a lot. It's reportedly in the billions, but we can neither confirm nor deny this. Which is weird, because this story was edited by his older brother, who just so happens to be a full-time employee of Men's Health. All he could tell us is that his brother once lived in a house with a moat—a freaking MOAT, like it was a castle that was constantly invaded by Spanish conquistadors—and now he lives in a different, slightly larger house, which has no moat but is surrounded by hedge mazes so big you can see them from space.

We asked Spitznagel the questions you want to know. We also asked him the questions you didn't know you wanted to know, but you really should know if you're serious about making a lot of money in 2015. And of course, we asked him at least one question about the likelihood that we'd ever own a private island, because how cool would that be?

What's the easiest, fastest way to get rich in 2015?

Here's a better question: What's the easiest, fastest way to get very poor in 2015? Answer: Going for the easiest, fastest way to get rich in 2015—or punting on what's worked in the recent past.

Don't fall for the trap of myopically following yesterday's winners. Protect yourself, keep your powder dry (meaning, the cash you’ve set aside for investing), and wait for a better day. Think more about getting rich in 2020 or beyond.

How do I decide whether a stock is a bargain?

If you’re searching for stock-market bargains, this is the wrong time to be looking. The Federal Reserve has been single-handedly setting interest rates at essentially zero and purchasing everything from government debt to mortgages—all of which has turned the entire investing population into zombies (with a gambling addiction, I might add) wandering aimlessly in search of any tiny extra return to ravenously consume.

This has left stock markets as elevated and overvalued as they’ve been since the dot-com mania (and more than they were in 1929 and 2007), which history has shown will likely lead to significant declines ahead.

I’m not saying the market is going to drop like a stone tomorrow (although with each passing day, the odds of that happening increase), but these aren’t ideal conditions for investing, to say the least.

I want to be a hedge fund manager. Should I bother with college, or should I be out in the real world, getting first-hand experience?

Hedge fund management is essentially a rather sophisticated form of casino-like gambling. College would be a good way to learn the financial tools to play that game.

But why do you want to be a hedge fund manager so badly? There are far more important (and likely more lucrative, in the future) real-world things to do for a career in this life than waste your time punting on irrelevant financial variables (most of which are controlled by the Federal Reserve). Try medicine, medical research, manufacturing, or farming and make something new and more efficiently that people really need.

But if you still insist on becoming a hedge fund manager, the most valuable things you'll need to learn to be good at investing are patience, resilience, and self-discipline. You aren't just going to learn these in school. My best financial advice: practice yoga.

You built a goat farm. Are you just being quirky, or is this some genius investing plan that's going to make you another billion? Should I be investing in goats too?

C’mon, there’s more to life than just money! My farm, Idyll Farms, is all about sustainable agriculture, making delicious goat cheese in a natural, healthy and ecologically sustainable way—that is, through pasture management rather than the use of factory-like monoculture feed.

But, to answer your question, I’m a firm believer that agriculture is going to be a great investment and entrepreneurial opportunity for the next generation. Farming is headed for a sea-change: farmers are getting old, we’re depleting the fertility of our topsoil, creating highly susceptible GMO monocultures, and we don’t fully appreciate the implications of water—just to name a few.

So in that sense, yes, it wouldn’t be a terrible idea to start investing in goats. But my motive is to change the way that we approach agriculture in this country, not just profit.

What's the worst investment you've ever made? How about the best?

The worst investment I ever made (other than when I acquired my pug Papageno, who constantly uses my kitchen floor as his personal toilet—especially when I’m eating breakfast) was a derivative contract (a financial instrument that’s based on the value of something else, such as a stock option that derives its value from the stock itself) where I lost 100% of my capital investment. And, I’ve done this countless times.

You see, this has been both my worst and my typical investment. But, as they say, the poison is in the dosage. Each time, I only invested a tiny amount of capital—not enough to hurt me.

In fact, I love to lose small amounts frequently and then occasionally score big. (Every so often, these derivative contracts turn out to be huge winners.) I call this my “roundabout” strategy, which is also the subject of my book The Dao of Capital.

The best investment I ever made (surely in October 2008) was on a derivative contract where I made thousands of percent more than I lost on my worst investments.

I’m approaching 40, and my savings is pathetic. Am I doomed, or is there still hope that I can retire on a tropical island?

Sounds like you aren’t all that unusual. After all, why should anyone save when the Fed has set interest rates at zero?

One word of encouragement I can give is that I am certain that there will be generational investment opportunities to come in our lifetime. Fortunes will be made by those with the dry powder of capital to invest when everyone else is stampeding for the exits and trying to sell their investments—because few others will have kept their powder dry.

Most everyone is all-in today. So, despite the markets’ run-up, you aren't necessarily really missing much. As has always been the case when Federal Reserve monetary policy creates asset bubbles, these bubble profits are ephemeral.

So let this light a fire under you to start socking savings away, starting now. Every dollar saved will be worth many multiples later if you have the stomach to wait while the market keeps going up and invest them once all the zombies have finally been obliterated in the next crash.

You’ll know when that happens, because everyone will be crying over their losses, and the TV pundits will be wearing signs that say “the end is near.”