This is a summary of the book titled “Chaos Kings” written by Scott Patterson, a seasoned financial reporter and author who talks about how Wall Street traders make billions in the New Age of Crisis. The book revolves around the theme of “black swan” investing, a pessimistic brand of trading, that seems to have worked very well for a few during the pandemic.  Market crashes and political chaos are growing more common. The pandemic showed that an always pessimistic portfolio offers downside risk protection.

The coronavirus pandemic has highlighted the importance of "black swan" investing strategies, which involve unexpected events that create volatility. The concept was popularized by Nassim Taleb, who believed that unknown threats lurk at all times and investors should be prepared. In early 2020, the pandemic spread, creating a black swan for Universa Investments, a Miami investment firm that operates the Black Swan Protection Protocol Fund. The fund reported a gain of 4,144% in three months, generating outsized profits in case of a crash. However, the market bust quickly reversed itself, setting the stage for future black swans. The era of instant communication and porous borders has created a breeding ground for conspiracy theories and contagions, with the pandemic-era disruptions to the supply chain illustrating the fallout from seemingly far-off risks. Climate change is leading to more dangerous extreme weather, affecting property owners and insurers. Political extremism is also on the rise, with the US electorate's mood swings indicating a rise in "polycrisis," characterized by uncertainty, instability, and dangerous feedback loops.

Mark Spitznagel, a renowned trader, learned trading discipline at a commodities exchange and worked for Everett Klipp, a star trader. Klipp taught Spitznagel the counterintuitive strategy of loving to lose money and hate to make money, which meant never holding onto a position after it took a small loss. Spitznagel became a trader on the Chicago Board of Trade (CBOT) at age 22, trading his own money and focusing on Treasury bonds. He survived the bond crash of 1994 and switched to a hedging strategy, performing well during the Asian crisis of 1997 and the 1998 blowup of Long Term Capital Management. Nassim Taleb, a Wall Street trader, also faced challenges as a trader, growing skeptical of Wall Street's theories of financial engineering. In the late 1990s, Taleb met Spitznagel and decided to go into business together. Their firm, Empirica Capital, could have hugely profited after the September 11, 2001, attacks, but clients were reluctant to gain from the crisis.

Taleb, a contrarian investor, gained media attention with his book Fooled by Randomness and met French mathematician Benoit Mandelbrot. However, Empirica was losing money in a market without volatility, leading to Taleb's departure in 2004. He later wrote The Black Swan, which became a bestseller. Despite skepticism, Universa Investments became extremely profitable during the 2008 stock market crash, making $1 billion and outperforming the market by 115%. Universa's success was due to its larger bet against the overall market, which allowed it to replicate its gains in the future.

Despite the pandemic, this firm struggled to attract investors, but in 2017, it landed a $1.5 billion investment from the California Public Employees Retirement System (CalPERS). In 2018, Volmageddon hit, and CalPERS ramped up its investment to $5 billion. However, in 2019, CalPERS closed out its investment with Universa just before the coronavirus first appeared in Wuhan, China. As the pandemic took hold in China, Universa managed to recruit new clients and snap up S&P 500 puts and VIX call options on the cheap.

The pandemic exposed the importance of a pessimistic portfolio for protection against downside risks. Universa, a hedge fund, demonstrated its hedging strategy effectively, despite the coronavirus market crash. Spitznagel's wealth soared to $250 million, and CalPERS's decision to withdraw funds before the crash led to internal disputes. Meanwhile, Taleb argued that bitcoin was worthless, as it had no intrinsic worth and needed constant attention from miners. Despite the crypto crash, stock investors were still high, with the Dow Jones Industrial Average reaching 36,000. Geopolitical minefields, such as Russia's invasion of Ukraine and Putin's war, were also a concern. Both investors had misread the situation, highlighting the need for a balanced approach to risk management.

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