Mark Spitznagel, founder and chief investment officer of Universa Investments, is known for having a different way of looking at risk mitigation. And when he took the stage at the SALT New York asset management forum this morning, he did not disappoint.

“I liken risk mitigation to looking out on cloudy day,” he said. “If you see it’s a cloudy day, do you just stay inside? Or do you go out with an umbrella that can pop up the second you need it? Risk mitigation is the umbrella that pops up. It needs to already be with you, and it needs to open explosively to protect you.”

The right kind of risk mitigation—the cost-effective kind—explodes in value in a crash but costs a small amount of money over time, and that allows investors to take on more exposure, he said at the session called "Investing for Financial Storms: Safe Havens and Equity Tail Hedges."

The biggest hurdle when valuing risk mitigation is understanding the cost of that mitigation over time, he said. That cost includes both the outlay and the loss of growth on that outlay had it been invested elsewhere during a defined time period, and then those costs need to be compared to the cost of a big loss should there be a catastrophic event in the overall portfolio.

“If you don’t take enough risk, it costs you wealth over time. If you take too much risk, it costs you wealth over time,” he said. “One way people tend to look at it is if your risk-adjusted returns are going up, you’re doing OK. That’s modern finance," he said. "And people assume it’s going to cost to do that. But it doesn’t have to be that way.”

What a risk mitigation strategy should not do, Spitznagel insisted, is drag down the performance of a portfolio. The traditional allocation to bonds to mitigate exposure to equities is a prime example, he said, as are holdings in gold. “When you hold gold, you need to hold a lot for it to give you the hedge you need. And that amount, when it’s not protecting you [in a crisis], is such a drag on your portfolio it’s not worth it. This is the risk-mitigation irony: We mitigate the risk, but that costs more than the risk ever would have cost us.”

In April 2020, a letter to Universa investors, who are primarily institutional investors, outlined the hypothetical one-month return in March of a hypothetical portfolio, one with a 96.67% allocation to the S&P 500 and 3.33% to Universa’s tail risk strategy. That hypothetical portfolio grew 0.4% when the S&P 500 lost 26.2%. And during non-crisis times, the 96.67% exposure to equities would provide further upside.

Of course, few financial advisors would recommend that kind of portfolio allocation to clients, and standard approaches to diversification probably are the way to go for most people, Spitznagel admitted, though he still doesn’t like it. “The common man is kinda of screwed by the dilemma set by the central banks,” he said. “That cost is something you could never make up. So why do you do it?”