'Black Swan' investor Mark Spitznagel says the crash of a lifetime is coming after one more 'euphoric rally'

By

Theron Mohamed

You're currently following this author! Want to unfollow? Unsubscribe via the link in your email.

Mark Spitznagel says the AI boom likely has further to run, but a monumental crash is coming.

The founder and chief of Universa Investments, a "Black Swan" fund that aims to win big from catastrophes, shared his stock-market outlook and reflected on his investing style in a recent interview with Business Insider.

Spitznagel said Universa's signature tail-hedging strategy has enabled him to be "extremely bullish" for the past four years, despite his hedge fund being "certainly the most bearish vehicle you'll ever find."

He flagged signs of excessive leverage and "hubristic, humongous bets," but said he didn't see anything likely to cause an imminent stock-market crash.

However, he warned the economy is "rolling over" as the aftershocks from interest-rate hikes in recent years haven't yet fully materialized.

Spitznagel said that Michael Burry, the investor of "The Big Short" fame, is right to worry about AI hyperscalers' overinvestment in microchips and data centers, circular financing deals, and hidden liabilities. Yet Burry is "going to get the timing wrong," he said.

"I will be the biggest bear that you'll hear from in the months ahead," Spitznagel said. "I'm just not right now."

He predicted "one more really big, risk-on, insane, euphoric rally to come across risk assets."

"But once that's over, and it could be sooner than later, I think we're going to get a bigger crash than we've seen in our lifetime," he added.

Tough trading

"It's like you're playing the piano for 10 years and you still can't play 'Chopsticks,' and the only thing you have to keep you going is the belief that one day you'll wake up and play like Rachmaninoff."

That's how Spitznagel described his investing approach to journalist Malcolm Gladwell for a 2002 article in The New Yorker. Spitznagel was then head trader at Empirica Capital, a hedge fund he launched with "The Black Swan" author Nassim Taleb in 1999.

The pair specialized in protecting portfolios against extreme, rare, and unpredictable events. Their approach meant losing money on almost every trading day, as they wagered the huge gains they'd reap when disaster eventually struck would more than offset the day-to-day pain.

"It's the hardest thing," Spitznagel — who left the now-defunct Empirica to launch Universa in 2007 — told Business Insider. Taleb serves as Universa's scientific advisor.

The psychological and structural difficulty of chasing large, lumpy returns instead of modest, regular gains is a big part of the appeal to Spitznagel.

"One way to have real alpha is to go after a return stream, or a type of payoff, literally nobody else wants to do," he said.

Universa's signature tail-hedging strategy — which centers on buying "out-of-the-money" options that pay off if prices move dramatically — returned 4,144% in the first quarter of 2020, when the COVID-19 pandemic tanked markets.

Spitznagel told his clients at the time that if they'd allocated 3.3% of their portfolio to Universa and the rest to an S&P 500 tracker fund, they would have been in the green in March, whereas the index was down 12%.

By allocating a small amount to Universa, investors can make their portfolios less risky while also boosting their returns, Spitznagel told Business Insider.

They can be more bullish knowing they won't blow up, and when Universa's insurance-style hedge pays off in a crash, they can take those gains and reinvest them to capitalize on a subsequent rally, he said.

Spitznagel drew a parallel to Warren Buffett using insurance float — the funds left over after his insurance companies collected premiums and paid out claims — to scoop up bargains during market downturns, as he famously did during the 2008 financial crisis.

Read next

Theron Mohamed

You're currently following this author! Want to unfollow? Unsubscribe via the link in your email.

Theron Mohamed is a London-based correspondent on the International team at Business Insider. His coverage spans finance, investing, wealth, markets, and the economy.Theron joined BI in 2019 as a reporter at Markets Insider and rose to the rank of correspondent before moving to the Trending team then the broader International team. He previously covered tech, media, and telecom stocks for Investors Chronicle magazine and had a brief stint on the Financial Times' Data team. He interned at the Wall Street Journal in New York where he primarily wrote for Heard on the Street.Theron has freelanced for The Independent, The Telegraph, WIRED, and several smaller publications. He holds an undergraduate degree in geography from the London School of Economics, and a master's degree in journalism from Columbia University.Theron often covers Warren Buffett, Michael Burry, and other elite investors. He also writes about the world's wealthiest people and shares financial advice from all manner of rich and successful people.Email Theron at [email protected] and follow him on X @theron_mohamed.