“Because of the quirks of our human eagerness for the immediate reward, we are forewarned that what seems easy and straightforward is deceptively so; the roundabout is in practice a counterintuitive path—of acquiring later stage advantage through an earlier stage disadvantage—nearly impossible to follow.”

― Spitznagel, Mark, The Dao of Capital: Austrian Investing in a Distorted World

Swinging For The Fences. The only constant thing these days is change; the best way through is “above”. A lot of trading and investing is based on the best risk-to-reward dynamics (fair enough), but little emphasis is put on the best mental capacity-to-reward ratio, which is the shadow alpha that drives long-term success. If high portfolio churn generates costly fees due to transaction costs, then high mental churn creates mental friction when we constantly swing for the fences. The solution alludes to our previous article on why First Principles thinking is essential to lasting peak performance. First Principles, in this case, is asking ourselves what is “absolute” about markets, not what is “transitory”. Although the most dangerous thing in the world is what you know that just ain’t so (quoting Mark Twain), we can make an intelligent guess that inflation in this decade or the times ahead will remain elevated compared to previous cycles. This transition to embedded higher rates is a natural function of massive fiscal policy, and it would be counterintuitive to conclude otherwise. Such structural cycles would mean we should focus on attributes that will remain robust, antifragile or benefit from higher capital costs (Long Short Duration, Short Long Duration, Long FCF, Short Promises). This deductive reasoning (or, as Karl Popper termed falsification) narrows the universe of choices to what matters in this capital and economic cycle.