Survey Results: A Little Bit About You

Let’s review December’s Moontower reader survey. For context, this letter went out to ~ 9k recipients and has an open rate of 50%. 180 readers responded, or about 4% of the typical number of readers who open the letter.

[The actual views of the letter are 2x that number routinely and for a popular issue I’ve seen as high as 5x that number as it gets passed around by men who stare at computer screens all day. More on that ahead.]

My guess, based on how the responses rolled in, is that it mostly represents subscribers as opposed to people who clicked on the Twitter link. 180 responses was about 2/3 of what I was hoping for, but based on Zoho’s survey math it’s not a terrible sample — 95% confidence, 7% margin of error — which feels like a decent enough resolution. The bigger question, as is the case with any survey, is whether the sample was representative. My gut says yes because I wasn’t too surprised by the results.

We’ll start with numbers before getting to the provocative part — the answers to the open-ended questions. The anonymity brought out honest, vulnerable answers.

Demographics

  • 2/3 in US
  • 20% non-white (Indian and Asian most common minority)
  • 70% b/t 25 and 45 yrs old
  • 45% have children (90% of parents have kids college-aged or younger)
  • 95% male (Male heavy, not surprising but 19 to 1?! Can’t say this didn’t rattle me)

Politics and Education

  • 85% moderate to progressive political leaning
  • More than 1/3 have a graduate degree
    • 1/3 of the grad degrees are a terminal degree (MD, PhD, JD)

Industry

  • >50% in finance
    • 50% of these are in asset management front offices (risk/trading)
    • 14% of these are advisors or allocators
  • 25% software

Title

  • 40% director/founder/c-suite
  • 12% entry level

Income

  • 50% > $250k annual household income
  • 11% > $750k annual household income (concentrated in asset management/front office/securities brokerage)
    • 50% of this cohort >$2mm annual household income

Investing/Giving

  • 50% self-report as “accredited investors”
  • Only 15% have more than 40% of wealth in home equity
  • 50% could estimate the annual volatility of their portfolio (this percentage is also true for the people with > $750k income)
  • 50% of respondents give more than 1% of income to charity;
    • Of the people who give more than 1%, 30% give more than 5%

Open Ended Questions

Some preamble:

  • Thanks for the honesty
  • I took liberties in the name of summarization by assigning most of the responses into general categories but I’m no doctor.
  • Percentages won’t add to 100% b/c some responses included multiple answers and some responses went uncategorized
  1. What personal shortcoming/insecurity comes to mind? (116 responses)
  • Half of the reported shortcomings revolve around some version of low confidence or fear.
  • A quarter of the responses are matters of self-control whether it’s ADD, listlessness, a lack of discipline, or indecisiveness. An answer I didn’t see that could fit either next to or envelop many of these —”lack of meaning”. It can be hard to motivate unless the reason seems urgent or at least worthwhile. Kind of like the dizziness of freedom I mentioned last week.
  • The remaining balance of insecurities are directly framed as difficulties in handling our own perceptions of others or being competitive (ie vanity/status games). The low confidence categories also have an interpersonal aspect but they are not framed directly in that way. They seem to have more of a component of self-esteem. It’s all interrelated but I tried to find a distinction. Basically “Am I frustrated with others or myself?”
  • Imposter syndrome is one of those fears that we hear a lot about. Like many fears, it’s adaptive to a point. One of my heroes (we are going to get to that word later), Sal Khan, has a brilliant framing of it you can borrow:

    [That blurb is from my notes from one of the best interviews I listened to recently: Sal Khan On The Finding Mastery Podcast]


    The idea of healthy imposter syndrome is best captured in Bardo during the hallucinogenic bathroom scene when the protagonist’s father advises: “Take a swig of success, swish it around and spit it out, otherwise it will poison you.”

  1. If you had no money concerns and purchased all the things you wanted and checked off every place on your travel bucket list (like imagine you won the lotto and several years have elapsed since), what would you do with your time?
    (150 responses)

    Other than the 5 people who want to specifically design houses, this was not shocking. Sadly, but also not shocking, only 3% answered, “what I’m doing now”.

    The only thing I’ll say here is if you say you want to garden when you retire, and you don’t garden now, you are fooling yourself. Your actions reflect priority. Sure there are some things which money is a prerequisite for, but I’m just a seller of the idea that your current self arrives at some mental projection of your future self where you will do the things you think you like. Look at the first question — half of the responses are fear. Look at the demographics. Most of you are less than 45 years old and by the standards of geography and history — rich. (I get that nobody ever feels rich — hedonic treadmill, the banana republic parody we seem to live in, egg prices. But the material reality is, as Jack Raines points out, that you have already won.)

    If this is the wrong language to speak to you, consider the outside view. What do half of the rich boomers you see do as they travel around the world on cruise ships or finally get the value out of those timeshares they’ve been roosting on? They complain about money and inflation instead of all these amazing aspirations they had about what they’d do when they had money or time.

    Or they spend their time in doctors’ offices. I’m not saying this to be mean. (I have aging parents and these are not personally easy times…but they do cultivate perspective). I’m saying this to merge this question and the one before it with a blunt solution at least a few of you might need — start living right now. Every week I hear of a friend of a friend dropping dead. That’s something that you hear more of in your 40s. It’s counterintuitive…but I hope that it kills your fear.

    3. What’s stopping you from being more like your hero? (83 responses)

    I will start by admitting that this question is poorly posed. The word “hero” conjures worship, cults, Aquaman. There were only 83 real responses because “I’m an adult — I don’t have heros”. Fair enough. Yinh had the same reaction and I projected my own connotation of that word on everyone else.

    We have all heard the expression “don’t meet your heros”…those on a pedestal can only fall down. But I’m not talking about a person I want to wholesale exchange my life with or even be handed their superpower.

    A hero is someone who embodies a personal aspiration. It’s someone who I keep in mind as a model for behavior. A teacher with a loving but firm demeanor. A parent that stays calm when the children turn the living room into a winter wonderland out of tiny cut-up styrofoam (this happened in December. I wish I kept a picture but I was too busy overreacting with the giant a-hole daddy voice).

    Visualizing heroes is how I hack our preloaded “mimic others” bloatware for good use. Where did your own aspirations come from? You’re not Buffalo Bill trying to wear their skin. You’re trying to channel inspiration. “How might X approach this? How would X react to this situation?” You can have a stable of heroes for different situations. They can be celebrities, people you know, or even fictional.

    Ultimately, I blame myself for the poor wording. I could have used “role model” or just “someone you admire”. Semantics aside, I hope the visualization hack, should you try it, is useful.

    And one last thing…look at those responses — from “welp” to “selfish” to “low priority”, those of you who responded did so with deep self-awareness. Y’all are clearly familiar with the Kipling quote:

    If you don’t get what you want, you either didn’t really want it, or you tried to negotiate over the price

    [In our house there’s no such thing as “I didn’t have enough time”…it’s always “I didn’t prioritize it”. Be responsible or get help. There are definitely victims in the world — but we are not them]

Amusing Bits

  • 2/3 of you can drive stick (I actually never tried)
  • 40% played a sport in college (nearly 20% of the NCAA athletes were basketball players)Book recs that showed up more than once:

And to wrap this up, you should know that 45% of you have seen Dazed & Confused and the rest of you buried a dagger in my heart.

It’s paywalled, but Freddie deBoer did an awesome ranking of Linklater films. D&C is #2. Its spiritual sequel, Everybody Wants Some!!, was #3.

Moontower #177

Friends,

Let’s review December’s Moontower reader survey. For context, this letter went out to ~ 9k recipients and has an open rate of 50%. 180 readers responded, or about 4% of the typical number of readers who open the letter.

[The actual views of the letter are 2x that number routinely and for a popular issue I’ve seen as high as 5x that number as it gets passed around by men who stare at computer screens all day. More on that ahead.]

My guess, based on how the responses rolled in, is that it mostly represents subscribers as opposed to people who clicked on the Twitter link. 180 responses was about 2/3 of what I was hoping for, but based on Zoho’s survey math it’s not a terrible sample — 95% confidence, 7% margin of error — which feels like a decent enough resolution. The bigger question, as is the case with any survey, is whether the sample was representative. My gut says yes because I wasn’t too surprised by the results.

We’ll start with numbers before getting to the provocative part — the answers to the open-ended questions. The anonymity brought out honest, vulnerable answers.

Demographics

  • 2/3 in US
  • 20% non-white (Indian and Asian most common minority)
  • 70% b/t 25 and 45 yrs old
  • 45% have children (90% of parents have kids college-aged or younger)
  • 95% male (Male heavy, not surprising but 19 to 1?! Can’t say this didn’t rattle me)

Politics and Education

  • 85% moderate to progressive political leaning
  • More than 1/3 have a graduate degree
    • 1/3 of the grad degrees are a terminal degree (MD, PhD, JD)

Industry

  • >50% in finance
    • 50% of these are in asset management front offices (risk/trading)
    • 14% of these are advisors or allocators
  • 25% software

Title

  • 40% director/founder/c-suite
  • 12% entry level

Income

  • 50% > $250k annual household income
  • 11% > $750k annual household income (concentrated in asset management/front office/securities brokerage)
    • 50% of this cohort >$2mm annual household income

Investing/Giving

  • 50% self-report as “accredited investors”
  • Only 15% have more than 40% of wealth in home equity
  • 50% could estimate the annual volatility of their portfolio (this percentage is also true for the people with > $750k income)
  • 50% of respondents give more than 1% of income to charity;
    • Of the people who give more than 1%, 30% give more than 5%

 

Open Ended Questions

Some preamble:

  • Thanks for the honesty
  • I took liberties in the name of summarization by assigning most of the responses into general categories but I’m no doctor.
  • Percentages won’t add to 100% b/c some responses included multiple answers and some responses went uncategorized
  1. What personal shortcoming/insecurity comes to mind? (116 responses)
  • Half of the reported shortcomings revolve around some version of low confidence or fear.
  • A quarter of the responses are matters of self-control whether it’s ADD, listlessness, a lack of discipline, or indecisiveness. An answer I didn’t see that could fit either next to or envelop many of these —”lack of meaning”. It can be hard to motivate unless the reason seems urgent or at least worthwhile. Kind of like the dizziness of freedom I mentioned last week.
  • The remaining balance of insecurities are directly framed as difficulties in handling our own perceptions of others or being competitive (ie vanity/status games). The low confidence categories also have an interpersonal aspect but they are not framed directly in that way. They seem to have more of a component of self-esteem. It’s all interrelated but I tried to find a distinction. Basically “Am I frustrated with others or myself?”
  • Imposter syndrome is one of those fears that we hear a lot about. Like many fears, it’s adaptive to a point. One of my heroes (we are going to get to that word later), Sal Khan, has a brilliant framing of it you can borrow:

    [That blurb is from my notes from one of the best interviews I listened to recently: Sal Khan On The Finding Mastery Podcast]


    The idea of healthy imposter syndrome is best captured in Bardo during the hallucinogenic bathroom scene when the protagonist’s father advises: “Take a swig of success, swish it around and spit it out, otherwise it will poison you.”

  1. If you had no money concerns and purchased all the things you wanted and checked off every place on your travel bucket list (like imagine you won the lotto and several years have elapsed since), what would you do with your time?
    (150 responses)

    Other than the 5 people who want to specifically design houses, this was not shocking. Sadly, but also not shocking, only 3% answered, “what I’m doing now”.

    The only thing I’ll say here is if you say you want to garden when you retire, and you don’t garden now, you are fooling yourself. Your actions reflect priority. Sure there are some things which money is a prerequisite for, but I’m just a seller of the idea that your current self arrives at some mental projection of your future self where you will do the things you think you like. Look at the first question — half of the responses are fear. Look at the demographics. Most of you are less than 45 years old and by the standards of geography and history — rich. (I get that nobody ever feels rich — hedonic treadmill, the banana republic parody we seem to live in, egg prices. But the material reality is, as Jack Raines points out, that you have already won.)

    If this is the wrong language to speak to you, consider the outside view. What do half of the rich boomers you see do as they travel around the world on cruise ships or finally get the value out of those timeshares they’ve been roosting on? They complain about money and inflation instead of all these amazing aspirations they had about what they’d do when they had money or time.

    Or they spend their time in doctors’ offices. I’m not saying this to be mean. (I have aging parents and these are not personally easy times…but they do cultivate perspective). I’m saying this to merge this question and the one before it with a blunt solution at least a few of you might need — start living right now. Every week I hear of a friend of a friend dropping dead. That’s something that you hear more of in your 40s. It’s counterintuitive…but I hope that it kills your fear.

    3. What’s stopping you from being more like your hero? (83 responses)

    I will start by admitting that this question is poorly posed. The word “hero” conjures worship, cults, Aquaman. There were only 83 real responses because “I’m an adult — I don’t have heros”. Fair enough. Yinh had the same reaction and I projected my own connotation of that word on everyone else.

    We have all heard the expression “don’t meet your heros”…those on a pedestal can only fall down. But I’m not talking about a person I want to wholesale exchange my life with or even be handed their superpower.

    A hero is someone who embodies a personal aspiration. It’s someone who I keep in mind as a model for behavior. A teacher with a loving but firm demeanor. A parent that stays calm when the children turn the living room into a winter wonderland out of tiny cut-up styrofoam (this happened in December. I wish I kept a picture but I was too busy overreacting with the giant a-hole daddy voice).

    Visualizing heroes is how I hack our preloaded “mimic others” bloatware for good use. Where did your own aspirations come from? You’re not Buffalo Bill trying to wear their skin. You’re trying to channel inspiration. “How might X approach this? How would X react to this situation?” You can have a stable of heroes for different situations. They can be celebrities, people you know, or even fictional.

    Ultimately, I blame myself for the poor wording. I could have used “role model” or just “someone you admire”. Semantics aside, I hope the visualization hack, should you try it, is useful.

    And one last thing…look at those responses — from “welp” to “selfish” to “low priority”, those of you who responded did so with deep self-awareness. Y’all are clearly familiar with the Kipling quote:

    If you don’t get what you want, you either didn’t really want it, or you tried to negotiate over the price

    [In our house there’s no such thing as “I didn’t have enough time”…it’s always “I didn’t prioritize it”. Be responsible or get help. There are definitely victims in the world — but we are not them]

     

Amusing Bits

  • 2/3 of you can drive stick (I actually never tried)
  • 40% played a sport in college (nearly 20% of the NCAA athletes were basketball players)Book recs that showed up more than once:

And to wrap this up, you should know that 45% of you have seen Dazed & Confused and the rest of you buried a dagger in my heart.

It’s paywalled, but Freddie deBoer did an awesome ranking of Linklater films. D&C is #2. Its spiritual sequel, Everybody Wants Some!!, was #3.


Money Angle

Byrne Hobart is one of these alien finance writers like Matt Levine who I just marvel at. Geniuses that dazzle with both quality and quantity. One of the differences is Byrne presumes a bit more financial knowledge from his audience. I was stoked to see he launched a second letter, Capital Gains, that breaks down one financial concept a week. It’s more basic than his regular writing making it a great resource to forward to learners as a reference or simply see a new way of communicating something you already know. Even for you, Byrne will make you see in a fresh way.

For example, this bit at the end of his recent Capital Gains post:

  • Money Manager Fees: Who Gets Paid How? (6 min read)Understanding why different types of funds charge different fees

    The thing for investors to watch out for is not the total fee load, but to look at what they’re paying for compared to what they’re getting. A multi-strategy fund can plausibly be undercharging if the pass-through fees and performance fees eat half the gross return, if what’s left is an uncorrelated return that beats other alternatives. And a mutual fund can be overcharging when it asks for 50 basis points a year if it claims to be offering stock-selection alpha but is really delivering market-tracking beta at a high markup.

    And this applies to individuals, too: you can decompose your own compensation into the beta-like returns from what line of work you’re in, what your educational background is, and your location. But it’s hard to get upside trading one kind of beta for another; for example, if you move somewhere for a high-paying job, you’ll make more, but a lot of that extra income compensates for a higher cost of living.

    Alpha is whatever value you add on top of what’s expected based on superficial and commoditized traits. Selling beta at a markup can be a very good living, but delivering alpha is more lucrative and ultimately more satisfying.

Money Angle For Masochists

On August 5th 2022, this tweet appeared on my timeline:

Twitter avatar for @jaym217

J @jaym217
CVNA Leaps are priced for perfection. K=50 Straddle can potentially be sold for ~50$ if you can hedge upside blowout risk

The tweet asserts that the LEAPs are expensive or “priced for perfection”. The next part of the sentence is shaky if you take it literally — “if you can hedge the upside blowout risk”. You “can” sell the straddle for about $50 whether or not you can hedge the upside, but the author is prudently demonstrating where the risk resides. I give a total hall pass to the writing as my own tweets are often thrown together while standing in line at Trader Joe’s.

Allow me to re-word the tweet without worrying about character limits and without feeling rushed.

“Optically, the CVNA LEAP straddle is expensive because it’s trading for the same premium as the strike price. I can’t get burned on the downside so my only concern is the unbounded upside of the call option I’m short, so if I can truncate the potential loss there, this straddle is a good candidate to sell”

The original poster exhibits a solid understanding of options. But…markets are hard. They don’t leave free or near-free money laying around. It turns out, with 5 months of hindsight, this is a good case study in the limits of optically attractive trades.

By dissecting what has happened we can learn about how to think of options “dynamically”.

I’m going to try a rhetorical approach to this lesson to make it more interactive. If you want to continue strap in:

A Socratic Dissection Of An Option Trade


Last Call

This is the last “Last Call”. Your feedback indicated the main body, Money Angle, and my personal life were your favorite parts.

I suspect curated links are still useful because I appreciate them in letters I sub to but I decided to just send a 2nd email every week. Here’s the description from my re-written About page:

Moontower Munchies (Wednesdays)

This is a lightweight email.

It could be a few links I found interesting. I focus on productivity, self-hacking, modernity, finance, learning tools, and sometimes philosophy or culture.

Or

It could be one link to a piece of content with my notes. I’m a compulsive note-taker and often scribble my own comments into them connecting ideas to something else in my grey(ing) matter.

 

Happy Lunar New Year rabbits…stay groovy!

The Dizziness of Freedom

In 2021, Tim Ferriss interviewed George Mumford. Mumford has been a mindfulness coach to MJ, Kobe, and countless other elite performers. Mumford’s personal story is as inspiring as any. And if your life has been touched by the darkness of addiction it will be extra relatable.

There was a particular excerpt that resonated that I included in the Meaning Section of my Affirmations and North Star page. It reminded me of the proverbial donkey placed equidistant between 2 troughs of food who starves to death.

On the “dizziness of freedom” (all emphasis mine):

Freedom is not free. The dizziness of freedom is because you’re on a road less traveled, you’re on shaky ground. The ground you’re on is moving to the degree that — I’m going back to 1846, Søren Kierkegaard, and he said that one side of the coin is freedom or potential. The other side is anxiety or uncertainty. So he called it the “alarming possibility of being able.” So when you grow, when you change a behavior or a habit, you have to experience anxietyYou have to experience uncertainty. You have to experience discomfort.

You get comfortable with being uncomfortable. Before you have freedom, you don’t have to think. You don’t have to reflect. You don’t have to take a risk. You don’t have to be vulnerable. Now you’ll be in freedom and you’re going through a different door. You’re trying something else. Then the dizziness is you do this thing, you can do that thing.

So you start understanding there’s no meaning in the universe other than what you give it, that when you do one thing you lose something else. If I have five choices and I make one, I lose four. So now I’m in here, now I’m worrying about, did I make the right choice? The uncertainty is a military term they use, VUCA, V-U-C-A. From moment to moment, things are volatile, uncertain, complex, and ambiguous. So you have to embrace uncertainty, ambiguity. That’s part of life. This is what life is about. It’s about saying “yes and”. Yes, it’s frustrating. It’s unpleasant, and it’s okay. This is it. When I grow, this is what comes with it. If I achieve my goals, you look at the positive, but there’s a negative.

The other side is you’re in a rowboat with people. You change, they’ve got to change. They’ve got to move. They don’t want to move. Or they got you in a box and now you’re out of the box. So now they’ve got to see who you are. They’re going to keep you in a box and get mad at you. So for whatever reason, it always comes down to discomfort, being uncomfortable. The nervous system is wired this way. If it’s pleasant, we approach. If it’s unpleasant, we avoid. And if it’s neither, we’re indifferent, we space out, because the nervous system does so.

When you impute meaning onto something, and say, “It’s going to be great. Even though it’s uncomfortable, I know on the other side, this is the only way out.” Once I commit to that and I have the experience of going through it and then coming to another level of grace, of ease, of peace, then I continue to do that. That’s what I talk about — the superpower trust. You need trust, but when you can verify it through insight, through information, through experience, now it goes from confidence to conviction, and then now, you get on a beneficial cycle where things keep getting better— the rich get richer, because you know that if you learn and you achieve, it’s going to generate enthusiasm and you’re going to want to learn more. You’re going to want to commit to it, because you know that — this is what the elite performers do. They see those things as challenges. “Oh, this is great. This is an opportunity for me to express myself.” So that mindset is the growth mindset, but it’s also pursuing excellence.

Moontower #176

I meant to put together a summary and discussion of December’s Moontower survey. There are many interesting topics, especially in response to the open-ended questions that you answered so thoughtfully and vulnerably. Alas, I spent a lot of time writing the Money Angle For Masochists section so the survey summary is delayed until next Sunday.

Instead, I’ll point you to an interview that keeps lingering for me.

In 2021, Tim Ferriss interviewed George Mumford. Mumford has been a mindfulness coach to MJ, Kobe, and countless other elite performers. Mumford’s personal story is as inspiring as any. And if your life has been touched by the darkness of addiction it will be extra relatable.

There was a particular excerpt that resonated that I included in the Meaning Section of my Affirmations and North Star page. It reminded me of the proverbial donkey placed equidistant between 2 troughs of food who starves to death.

On the “dizziness of freedom” (all emphasis mine):

Freedom is not free. The dizziness of freedom is because you’re on a road less traveled, you’re on shaky ground. The ground you’re on is moving to the degree that — I’m going back to 1846, Søren Kierkegaard, and he said that one side of the coin is freedom or potential. The other side is anxiety or uncertainty. So he called it the “alarming possibility of being able.” So when you grow, when you change a behavior or a habit, you have to experience anxietyYou have to experience uncertainty. You have to experience discomfort.

You get comfortable with being uncomfortable. Before you have freedom, you don’t have to think. You don’t have to reflect. You don’t have to take a risk. You don’t have to be vulnerable. Now you’ll be in freedom and you’re going through a different door. You’re trying something else. Then the dizziness is you do this thing, you can do that thing.

So you start understanding there’s no meaning in the universe other than what you give it, that when you do one thing you lose something else. If I have five choices and I make one, I lose four. So now I’m in here, now I’m worrying about, did I make the right choice? The uncertainty is a military term they use, VUCA, V-U-C-A. From moment to moment, things are volatile, uncertain, complex, and ambiguous. So you have to embrace uncertainty, ambiguity. That’s part of life. This is what life is about. It’s about saying “yes and”. Yes, it’s frustrating. It’s unpleasant, and it’s okay. This is it. When I grow, this is what comes with it. If I achieve my goals, you look at the positive, but there’s a negative.

The other side is you’re in a rowboat with people. You change, they’ve got to change. They’ve got to move. They don’t want to move. Or they got you in a box and now you’re out of the box. So now they’ve got to see who you are. They’re going to keep you in a box and get mad at you. So for whatever reason, it always comes down to discomfort, being uncomfortable. The nervous system is wired this way. If it’s pleasant, we approach. If it’s unpleasant, we avoid. And if it’s neither, we’re indifferent, we space out, because the nervous system does so.

When you impute meaning onto something, and say, “It’s going to be great. Even though it’s uncomfortable, I know on the other side, this is the only way out.” Once I commit to that and I have the experience of going through it and then coming to another level of grace, of ease, of peace, then I continue to do that. That’s what I talk about — the superpower trust. You need trust, but when you can verify it through insight, through information, through experience, now it goes from confidence to conviction, and then now, you get on a beneficial cycle where things keep getting better— the rich get richer, because you know that if you learn and you achieve, it’s going to generate enthusiasm and you’re going to want to learn more. You’re going to want to commit to it, because you know that — this is what the elite performers do. They see those things as challenges. “Oh, this is great. This is an opportunity for me to express myself.” So that mindset is the growth mindset, but it’s also pursuing excellence.


Money Angle

One bit of feedback I got from the survey was that Money Angle can sometimes fly over readers’ heads. I can own a share of the blame for my writing style. But also some topics are really unnecessary for the average investor or reader and by discussing them in the same section I often discuss basic topics can overwhelm someone who can’t tell what’s relevant to their current or future learning tree and what’s not.

I moved all the brain damage to the new Money Angle For Masochists section.

Today’s regular Money Angle section is a couple of links:

  • How Much Growth Can You Expect? (6 min read)
    Nick Maggiulli

    Nick is a master of making investing topics scrutable for the average person. Last year he published his first book Just Keep Buying which I recommend and buy for people. It tackles personal financial questions intelligently without overcomplicating the nature of investing.

    In this blog post, he presents realistic numbers for what investing is actually capable of in the long-term (which is much less than the financial media would like you to believe).

    If happiness is the gap between reality and expectations the post will help you calibrate to decrease your chance of disappointment. Another of his posts, his first of 2023, is in my opinion, a natural (though unintended) sequel to this calibration:

    It’s Time to Work (5 min read)

     

  • Examples Of Comparing Interest Rates With Different Compounding Intervals (2 min read)
    Moontower

    I wrote this quick post as scaffolding for the post you’ll find below in Money Angle For Masochists to build up to the idea of continuously compounded interest. If you already understand how to compute yields and various compounding intervals then you can skip this one. If you don’t then be aware of 1 of its real-life uses:

    Note in all these cases, $90 is growing to $100. We are just seeing that the implied rate depends on the compounding assumption. In real life, when you see “compounded daily” or “compounded monthly” and so on, you are now equipped with the tools to compare rates on an apples-to-apples basis. If a rate is lower but compounds more frequently than another rate the relative value between both loans is ambiguous. 


Before we continue to the masochism, let’s try a math problem:

Suppose you have an 85 average on the first 4 tests of the semester. There’s one test left. All tests have an equal value in your final score. You need a 90 average for an A in the class.

What do you need on the last test to get an A in the class?

What is the maximum score you can get for the semester?

If you are comfortable with this math then you have all the quantitative knowledge to understand the next topic. I suspect the post might still be challenging despite the math being grade school level. If you find it difficult, I’d like to know where you start to get lost. I think it’s a good topic and would like to make it accessible for anyone who was interested.

Let’s go.


Money Angle For Masochists

Understanding Implied Forwards (14 min read)
Moontower

Learn about implied forwards starting with interest rates and then moving into implied volatility. Implied forwards will help you:

  1. find trading opportunities
  2. understand arbitrage and its limits

While the post works through the dry mechanics there are wider lessons that can be applied to general pricing and reasoning that should have a larger audience than just option degenerates and the people who read footnotes (this post has many).

A few excerpts in that vein:

  • When you study asset pricing, one of the early lessons is to step through the cash flows. This is the basis of arbitrage pricing theory (APT), a way of thinking about asset values according to their arbitrage or boundary conditions. As opposed to other pricing models, ie CAPM, someone using APT says the price of an asset is X because if it weren’t there would be free money in the world. By walking through the cash flows, they would then show you the free money. The fair APT price is the one for which there is no free money.
  • Process
    Forwards vols represent another way to study term structures. Since term structures can shift, slope, and twist you can make bets on the specific movement using outright vega, time spreads, and time butterflies respectively. A tool to measure forward vols is a thermometer in a doctor’s bag. How do we conceptually situate such tools in the greater context of diagnosis and treatment?


    The post includes a discussion of my own process.

  • Meta-understanding
    This discussion of forward vols was like month 1 learning at SIG. It’s foundational. It’s also table stakes. Every pro understands it. I’m not giving away trade secrets. I am not some EMH maxi but I’ll say I’ve been more impressed than not at how often I’ll explore some opportunity and be discouraged to know that the market has already figured it out. The thing that looks mispriced often just has features that are overlooked by my model. This doesn’t become apparent until you dig further, or until you put on a trade only to get bloodied by something you didn’t account for as a particular path unfolds.

    This may sound so negative that you are wondering why I even bother writing about this on the internet. Most people are so far out of their depth, is this even useful?

    My answer is a confident “yes” if you can learn the right lesson from it:

    There is no silver bullet. Successful trading is the sum of doing many small things correctly including reasoning. Understanding arbitrage-pricing principles is a prerequisite for establishing what is baked into any price. Only from that vantage point can one then reason about why something might be priced in a way that doesn’t make sense and whether that’s an opportunity or a trapBy slowly transforming your mind to one that compares any trade idea with its arbitrage-free boundary conditions or replicating portfolio/strategy, you develop an evergreen lens to ever-changing markets.


    You may only gain or handle one small insight from these posts. But don’t be discouraged. Understanding is like antivenom. It takes a lot of cost and effort to produce a small amountIf you enjoy this process despite its difficulty then it’s a craft you can pursue for intellectual rewards and profit.


    If profit is your only motivation, at least you know what you’re up against.

 


Last Call

Interview with Bill Burnett & Dave Evans on Designing Your Life (5 min read)

Bill and Dave are at the Stanford Design School, a place that massively influenced another of my favorite online people — boardgame design teacher and middle school educator — Kathleen Mercury.

These guys apply design principles to life and decision-making (and show when not to!). It’s been almost a decade since they published their book and did the TED circuit but the material is timeless.

Here are my notes from their interview with Peter Bregman:

You are not defined by your earlier choices

  • Don’t let “dysfunctional beliefs” or sunk costs trap you (ie I studied X in college so I must practice X)
  • Humans are curiosity-driven. Life may have beaten it out of us but it just needs re-awakening.

Behavior change —> Bias to action

You can’t think your way out of a rut. To solve problems you must take action. They call experiments “life design prototypes”.

  • The answers you seek are out there in the world not in your head.
  • Expand your circle. Those in your bubble often have the same problems or thought patterns — there’s no new data there.
  • “Finite is your friend” —> lower the mental burden of novel experiments by saying you will only do the new thing 6 times, or spend 5 minutes a day doing X

Decision-Making

Large focus on awareness of the nature of the decision and the power of re-framing. Problem-solving requires applying the frame that best aligns with your need. Before you can do this, it’s critical to understand your current framing of a problem.

  • Life-design thinking with experimentation won’t help with certain types of decisions. For example, should you buy disability insurance? You can learn everything there is to know about your risks, the costs of insurance, the suppliers of insurance and so on but it’s a decision that you must make one way or another and accept the inherent ambiguity. Acceptance is the answer.

This leads to the single most common re-frame they use:

There is no single answer to your life. There is no single best “you”. There are many possible great satisfying lives that you can have and you never actually know about the ones you didn’t get a chance to try so we’re all getting partial credit on essay questions, not right wrong on true/false on all the big issues of life. Once you accept that this is the nature of being a human being you can say “how’s it going today?” and the answer is “it’s going reasonably well. And that’s fabulous because this is as good as it gets.”

  • Borrowing from decision researchers like Dan Gilbert they mention tactics like “burning bridges” by making certain decisions irrevocable. [Me: This makes a lot of sense to me bc FOMO is an energy suck. I tend to satisfice on everything that doesn’t hold major meaning to me — if I’m like 70% sure that product X will tick my boxes I just buy it and move on. I don’t care enough about my TV to spend a week in analysis/paralysis about how deep the blacks are. But if I were a cinephile I might.]
  • “Anchor problems”: These occur when you become inflexibly anchored to a single solution to a problem.For example, you say: ”I’d like to do it I’d like to be a gardener or do something in the garden but I’ve decided the only solution is moving to the Berkshires. Since we can’t move to the Berkshires, I can’t have a garden, therefore I can’t be happy”

    What you’ve done is you’ve baked the solution into the problem. The solution has been defined as the problem.

    Instead, you might notice there are community gardens in the Upper West Side of Manhattan or you could start by putting a container on the porch. There are a million different ways you can do it but people take a solution, pretend it’s the problem and then say “Oh gosh since I can’t have the thing I want, I can’t solve this problem.” They’ve mistaken a solution for a problem and now they’ve anchored on it and can’t move forward. Once we explain it to them it’s almost laughable. They go, “Oh yea I could reframe this and there are hundreds of ways to be a gardener in Manhattan. Maybe “gardener” is also an anchor problem because the reality is maybe it’s about spending time outdoors in Central Park or maybe it’s about growing something”

  • “Gravity problems”: These are unactionable problems. They are still issues but if a problem cannot be acted on it’s not so much a problem as it is a circumstance. Like gravity. As soon as you realize your problem is a gravity problem, that it’s not actionable the way it’s currently framed, you can unfixate from it. You might hate knowing you will never get rich being a poet, but can you live and write poetry? Of course.

A few lines that were dropped in passing that are actually quite poignant.

Here they are with my commentary:

I’d rather get a B on time then an A too late

Dave’s framing for how to think about optimization. Forgive yourself for being human. Any sensible approach to prioritization means you can’t turn every weakness into a strength. Again, the theme of acceptance. Or not letting perfect be the enemy of the good. I tutor 2nd graders that are far behind their grade level. Am I the best person to do this? Is this the best use of my time? Does this scale? No all counts. But it’s something that needs to be done and they still need people. If the only people who tutor are the “optimal” people to do so then what do you think is going to happen if we are already short tutors?

Some people obsess over peak performance and optimizing and so on. That’s fine. It’s a big world. In most things, I’m more concerned with the area under the curve than its peak.

Meaning comes from engagement, what you spend your time on.

I believe that there is no Meaning with a capital “M”. We create our own meaning and since I put more stock in actions than words, I think what you spend your time on is the best reflection of where you draw your meaning. This is often oblique. Maybe you spend all your time making money on something you don’t necessarily care about. This strikes me as a difficult way to live but it may reflect your value of providing for your family. There’s always a question of balance…the time spent providing is a cost to you and them as well and deciding where the diminishing returns to being at work vs being present are personal and downstream from not just our values and desires but insecurities and ego.

Figuring it out is kind of helpful but actually behaving differently is hugely helpful

Dave dropped that line in the context of therapy (he was explaining that this work is not therapy and ofc there are problems for which you should seek therapy). It reminded me of a story Slatestarcodex told about a psychiatric patient his clinic was helping. The patient was crippled by OCD. Every time she left the house she needed to go home because she thought she left the hair dryer on. The doctors racked their brains trying to get to the origin of the problem until someone suggested a highly effective but, seemingly unsatisfying solution — she could just bring the blow dryer with her:

Approximately half the psychiatrists at my hospital thought this was absolutely scandalous, and This Is Not How One Treats Obsessive Compulsive Disorder, and what if it got out to the broader psychiatric community that instead of giving all of these high-tech medications and sophisticated therapies we were just telling people to put their hair dryers on the front seat of their car? But I think the guy deserved a medal. Here’s someone who was totally untreatable by the normal methods, with a debilitating condition, and a drop-dead simple intervention that nobody else had thought of gave her her life back. If one day I open up my own psychiatric practice, I am half-seriously considering using a picture of a hair dryer as the logo, just to let everyone know where I stand on this issue.

That’s enough for this week. Go Big Blue…it’s been 7 years since they made the NFL playoffs.

Stay groovy!

Understanding Implied Forwards

These are not trick questions:

Suppose you have an 85 average on the first 4 tests of the semester. There’s one test left. All tests have an equal value in your final score. You need a 90 average for an A in the class.

What do you need on the last test to get an A in the class?

What is the maximum score you can get for the semester?

If you are comfortable with the math you have the prerequisites required to learn about a useful finance topic — implied forwards!

Implied forwards can help you:

  • find trading opportunities
  • understand arbitrage and its limits

We’ll start in the world of interest rates.

The Murkiness Of Comparing Rates Of Different Maturities

Consider 2 zero-coupon bonds. One that matures in 11 months and one that matures in 12 months. They both mature to $100.

Scenario A: The 11-month bond is trading for $92 and the 12-month bond is trading for $90.

What are the annualized yields of these bonds if we assume continuous compounding?1
Computing the 12-month yield

r = ln($100/$90) = 10.54%
Computing the 11-month yield

r = ln($100/$92) * 12/11 = 9.10%

This is an ascending yield curve. You are compensated with a higher interest rate for tying up your money for a longer period of time.

But it is very steep.

You are picking up 140 extra basis points of interest for just one extra month.

Let’s do another example.

Scenario B: We’ll keep the 12-month bond at $90 but say the 11-month bond is trading for only $91.
Computing the 11-month yield

r = ln($100/$91) * 12/11 = 10.29%

So now the 11-month bond yields 10.29% and the 12-month bond yields 10.54%

You still get paid more for taking extra time risk but maybe it looks more reasonable. It’s kind of hard to reason about 25 bps for an extra month. It’s murky.

Think back to the test score question this post opened with. There is another way of looking at this if we use a familiar concept — the weighted average.

The Implied Forward Interest Rate

We can think of the 12-month rate as the average rate over all the intervals. Just like a final grade is an average of the individual tests.

We can decompose the 12-month rate into the average of an 11-month rate plus a month-11 to month-12 forward rate:

“12-month” rate = “11-month” rate + “11 to 12-month” forward rate

Let’s return to scenario A:

12-month rate = 10.54%

11-month rate = 9.1%
Compute the “11 to 12-month” forward rate like a weighted average:

10.54% x 12 = 9.1% x 11 + Forward Rate11-12 x 1

Forward Rate11-12 = 26.37%

We knew that 140 bps was a steep premium for one month but when you explicitly compute the forward you realize just how obnoxious it really is.
How about scenario B:

12-month rate = 10.54%

11-month rate = 10.29%
Compute the “11 to 12-month” forward rate like a weighted average:

10.54% x 12 = 10.29% x 11 + Forward Rate11-12 x 1

Forward Rate11-12 = 13.26%

Arbitraging The Forward Rate (Sort Of)

It’s common to have a dashboard that shows term structures. But the slopes between months can be optically underwhelming with such a view. Seeing that the implied forward rate is 13.26% feels more profound than seeing a 25 bps difference between month 11 and month 12.

You may be thinking, “this forward rate is a cute spreadsheet trick, but it’s not a rate that exists in the market.”

Let’s take a walk through a trade and see if we can find this rate in the wild.

The first step is just to ground ourselves in a basic example before we understand what it means to capture some insane forward rate.

Consider a flat-term structure:

[Note: the forward rate should be 10.54% but because I’m computing YTM on a bond price that only goes to 2 decimal places we are getting an artifact. It’s immaterial for these demonstrations]

Now let’s look back at the steep term structure from scenario A:

With an 11-month rate of 9.10% and a 12-month rate of 10.54% we want to borrow at the shorter-term rate and lend at the longer-term rate. That means selling the nearer bond and buying the longer bond.

When you study asset pricing, one of the early lessons is to step through the cash flows. This is the basis of arbitrage pricing theory (APT), a way of thinking about asset values according to their arbitrage or boundary conditions. As opposed to other pricing models, for example CAPM, someone using APT says the price of an asset is X because if it weren’t there would be free money in the world. By walking through the cash flows, they would then show you the free money2. The fair APT price is the one for which there is no free money.

Stepping Thru The Cash Flows

Let’s see how this works:
Today

  1. We short the 11-month bond at $92
  2. We buy 1.022 12-month bonds for $90. We can buy 1.022 of the cheaper bonds from the proceeds of selling the more expensive $92 bond. The net cash flow or outlay is $0.
  3. Spend the next 11 months surfing.

At the 11-month maturity

We will need $100 to pay the bondholder of the 11-month bond so we sell 12-month bonds.

But for what price?

Well, let’s say the prevailing 1-month interest rate matched the rates we were seeing in the flat term structure world of 10.49%, the rate implied by the 11-12 month forward when we initiated the trade.

In that case, the bonds we own are worth $99.13.

[With one month to maturity we compute the continuous YTM: ln(100/99.13) * 12 = 10.49%]

If we sell 1.009 of our bonds at $99.13 we can raise the $100 to pay back the loan. We are left with .0134 bonds.
At the 12-month maturity

Our stub of .0134 bonds mature and we are left with $1.34.

So what was our net return?

Hmm, lemme think, carry the one, uh — infinite!

We did a zero cash flow trade at the beginning. We didn’t lay out any money and ended with $1.34.

That’s what happens when you effectively shorted a 26.37% forward rate but the one-month rate has rolled down to something normal, in this case about 10.50%

[In real life there is all kind of frictions — you know like, collateral when you short bonds.]

Summary table:

What if somehow, that crazy 26.37% “11-12 month forward rate” didn’t roll down to a reasonable spot rate but actually turned out to be a perfect prediction of what the 1-month rate would be in 11 months?

Let’s skip straight to the summary table.

Note the big difference in this scenario: the bond with 1 month remaining until maturity is only worth $97.83 (corresponding to that 26.33% yield, ignore small rounding). So you need to sell all 1.022 of the bonds to raise $100 to pay back the loan.

Besides frictions, you can see why this is definitely not an arbitrage — if the 1-month rate spiked even higher than 26.33% the price of the bonds would be lower than $97.83. You would have sold all 1.022 of your bonds and still not been able to repay the $100 you owe!

So the “borrow short, lend long” trade is effectively a way to short a 1-month forward at 26.33%. It might be a good trade but it’s not free money.

Still, this exercise shows how our measure of the forward is a tradeable level!

[If you went through the much more arduous task of adjusting for all the real-world frictions and costs you would impute a forward rate that better matched what you considered to be a “tradeable price”. The principle is the same, the details will vary. I was not a fixed-income trader and own all the errors readers discover.]

The Implied Forward Implied Volatility

Now you’re warmed up.

Like interest rates, implied volatilities have a term structure. Every pair of expiries has an implied forward volatility. The principle is the same. The math is almost the same.

With interest rates we were able to do the weighted average calculation by multiplying the rates by the number of days or fraction of the year. That’s because there is a linear relationship between time and rates. If you have an un-annualized 6-month rate, you simply double it to find the annualized rate. You can’t do that with volatility.3

The solution is simple. Just square all the implied volatility inputs so they are variances. Variance is proportional to time so you can safely multiply variance by the number of days. Take the square root of your forward variance to turn it back into a forward volatility.

Consider the following hypothetical at-the-money volatilities for BTC:

Expiry1 Expiry 2
Implied Vol 40% 42%
Variance (Vol2) .16 .1764
Time to Expiry (in days) 20 30

Let’s compute the 20-to-30 day implied forward volatility. We follow the same pattern as the weighted test averages and weighted interest rate examples.

The decomposition where DTE = “days to expiry”:

“variance for 30 days” = “variance for 20 days” + “variance from day 20 to 30”

Expiry2 variance * DTEExpiry2 = Expiry1 variance * DTEexpiry1 + Forward variance20-30 * Days20-30

Re-arrange for forward variance:

Fwd Variance20-30 = (Expiry2 variance * DTEExpiry2 – Expiry1 variance * DTEexpiry1) / Days20-30

Fwd Variance20-30 = (.1764 * 30 – .16 * 20) / 10

Fwd Variance20-30 = .2092

Turning variance back into volatility:

√.2092 = 45.7%

If the 20-day option implies 40% vol and the 30-day option implies 42% vol, then it makes sense that the vol between 20 and 30 days must be higher than 42%. The 30-day volatility includes 42% vol for 20 days, so the time contained in the 30-day option that DOES NOT overlap with the 20-day option must be high enough to pull the entire 30-day vol up.

This works in reverse as well. If the 30-day implied volatility were lower than the 20-day vol, then the 20-30 day forward vol would need to be lower than the 30-day volatility.

The Arbitrage Lower Bound of a Calendar Spread

The fact that the second expiry includes the first expiry creates an arbitrage condition (at least in equities). An American-style time spread cannot be worth less than 0. In other words, a 50 strike call with 30 days to expiry cannot be worth less than a 50 strike call with 20 days to expiry.

Here’s a little experiment (use ATM options, it will not work if the options are far OTM and therefore have no vega):

Pull up an options calculator where you make a time spread worth 0.

I punched in a 9-day ATM call at 39.6% vol and a 16-day ATM call at 29.70001% vol. These options are worth the same (for the $50 strike ATM they are both worth $1.24).

Now compute the implied forward vol.

Expiry1 Expiry 2
Implied Vol 39.6% 29.70001%
Variance (Vol2) .157 .088
Time to Expiry (in days) 9 16

You can predict what happens when we weight the variance by days:

Expiry1 = .157 * 9 = 1.411

Expiry2 = .088 * 16 = 1.411

Expiry 2 has the same total variance as Expiry 1 which means there is zero implied variance between day 9 and day 16.

The square root of zero is zero. That’s an implied forward volatility of zero!

A possible interpretation of zero implied forward vol:

The market expects a cash takeover of this stock to close no later than day 9 with 100% probability.

A Simple Tool To Build

With a list of expirations and corresponding ATM volatility, you can construct your own forward implied volatility matrix:

Arbitrage?

Like the interest rate forward example, there’s no arbitrage in trying to isolate the forward volatility unless you can buy a time spread for zero.4

For most of the past decade, implied volatility term structures have been ascending (or “contango” for readers who once donned a NYMEX or CBOT badge). If you sell a fat-looking time spread you have a couple major “gotchas” to contend with:

  1. Weighting the trade
    If you are short a 1-to-1 time spread you are short both vega, long gamma, paying theta. This is not inherently good or bad. But you need a framework for choosing which risks you want and at what price (that statement is basically the bumper sticker definition of trading imbued simultaneously with truth and banality). If you want to bet on the time spread narrowing, ie the forward vol declining, then you need to ratio the trades. The end of Moontower On Gamma discusses that. Even then, you still have problems with path-dependence because the gamma profile of the spread will change as soon as the underlying moves. The reason people trade variance swaps is that the gamma profile of the structure is constant over a wide range of strikes providing even exposure to the realized volatility. Sure you could implement a time spread with variance swaps, but you get into idiosyncratic issues such as bilateral credit risk and greater slippage.
  2. The bet, like the interest rate bet, comes down to what the longer-dated instrument does outright.You were trying to isolate the forward vol, but as time passes your net vega grows until eventually the front month expires and you are left with a naked vol position in the longer-dated expiry and your gamma flips from highly positive to negative (assuming the strikes were still near the money).

Term structure bets are usually not described as bets on forward volatility bets but more in the context of harvesting a term premium as time passes and implied vols “roll down the term structure”. This is a totally reasonable way to think of it, but using an implied forward vol matrix is another way to measure term premiums.

The Wider Lessons

Process

Forwards vols represent another way to study term structures. Since term structures can shift, slope, and twist you can make bets on the specific movements using outright vega, time spreads, and time butterflies respectively. A tool to measure forward vols is a thermometer in a doctor’s bag. How do we conceptually situate such tools in the greater context of diagnosis and treatment?

Here’s my personal approach. Recognize that there are many ways to skin a cat, this is my own.

  1. I use dashboards with cross-sectional analysis as the top of an “opportunity funnel”. You could use highly liquid instruments to calibrate to a fair pricing of parameters (skew, IV risk premium, term premium, wing pricing, etc) in the world at any one point in time. This is not trivial and why I emphasize that trading is more about measurement than prediction. To compare parameters you need to normalize across asset types.
    To demonstrate just how challenging this is, an interview question I might ask is:

    Price a 12-month option on an ETF that holds a rolling front-month contract on the price of WTI crude oil5

    I wouldn’t need the answer to be bullseye accurate. I’m looking for the person’s understanding of arbitrage-pricing theory which is fundamental to being able to normalize comparisons between financial instruments. The answer to the question requires a practical understanding of replicating portfolios, walking through the time steps of a trade, and computing implied forward vols on assets with multiple underlyers. (Beyond pricing, actually trading such a derivative requires understanding the differences in flows between SEC and CFTC-governed markets and who the bridges between them are.)

  2. The contracts or asset classes that “stick out” become a list of candidates for research. There are 2 broad steps for this research.
    • Do these “mispriced” parameters reveal an opportunity or just a shortcoming in your normalization?
      Sleuthing the answer to that may be as simple as reading something publically available or could require talking to brokers or exchanges to see if there’s something you are missing. If you are satisfied to a degree of certainty commensurate with the edge in the opportunity that you are not missing anything crucial, then you can move to the next stage of investigation.
    • Understanding the flow
      What flow is causing the mispricing? What’s the motivation for the flow? Is it early enough to bet with it? Is it late enough to bet against it? You don’t want to trade the first piece of a large order but you will not get to trade the last piece either (that piece will be either be fed to the people who got hurt trading with the flow too early as a favor from the broker who ran them over — trading is a tit-for-tat iterated game, or internalized by the bank who controls the flow and knows the end is near.)

3. Execute

Suppose you determine that the term structure is too cheap compared to a “fair term structure” as triangulated by an ensemble of cross-sectional measurements. Perhaps, there is a large oil refiner selling gasoline calls to hedge their inventory (like covered calls in the energy world). You can use the forward vol matrix to drill down to the expiry you want to buy. “Ah, the 9-month contract looks like the best value according to the matrix. Let’s pull up a montage and see if it’s really there. Let’s see what the open interest is?…”

As you examine quotes from the screens or brokers, you may discover that the tool is just picking up a stale bid/ask or wide market, and that the cheapest term isn’t really liquid or tradeable. This isn’t a problem with the tool, it’s just a routine data screening pitfall. The point is that tools of this nature can help you optimize your trade expression in the later stage of the funnel.

Meta-understanding

This discussion of forward vols was like month 1 learning at SIG. It’s foundational. It’s also table stakes. Every pro understands it. I’m not giving away trade secrets. I am not some EMH maxi6 but I’ll say I’ve been more impressed than not at how often I’ll explore some opportunity and be discouraged to know that the market has already figured it out. The thing that looks mispriced often just has features that are overlooked by my model. This doesn’t become apparent until you dig further, or until you put on a trade only to get bloodied by something you didn’t account for as a particular path unfolds.

This may sound so negative that you may wonder why I even bother writing about this on the internet. Most people are so far out of their depth, is this even useful? My answer is a confident “yes” if you can learn the right lesson from it:

There is no silver bullet. Successful trading is the sum of doing many small things correctly including reasoning. Understanding arbitrage-pricing principles is a prerequisite for establishing what is baked into any price. Only from that vantage point can one then reason about why something might be priced in a way that doesn’t make sense and whether that’s an opportunity or a trap7. By slowly transforming your mind to one that compares any trade idea with its arbitrage-free boundary conditions or replicating portfolio/strategy, you develop an evergreen lens to ever-changing markets.

You may only gain or handle one small insight from these posts. But don’t be discouraged. Understanding is like antivenom. It takes a lot of cost and effort to produce a small amount8. If you enjoy this process despite its difficulty then it’s a craft you can pursue for intellectual rewards and profit.

If profit is your only motivation, at least you know what you’re up against.


Examples Of Comparing Interest Rates With Different Compounding Intervals

Simple Interest

If you pay someone $90 today and they promise to give you $100 in 12 months, you are making a loan. This is the same idea as buying a bond. To back out the simple interest rate denoted (ie assuming no compounding) we solve for r:

90 * (1+r) = 100

r = 100/90 – 1

r = 11.11%

Annualizing

If the loan was only for 6 months, then we’d annualize the interest rate by multiplying by 2 (12 months / 6 months) for a rate of 22.22%

Compound Interest

Let’s return to the 12-month loan and say that the rate is compounded semi-annually. Then the computation is:

90 * (1+r/2)² = 100

r /2 = (100/90).5 – 1

r = 10.82%

If you compound more frequently than annually, it makes sense that the implied interest rate is lower. Consider the path of the principal + accrued interest:

Compounding semi-annually means interest gets credited at the 6-month mark. So the rate for the next 6 months is being applied to the higher accrued value amount which means the implied rate to end up at $100 (the same way the simple interest case ends up $100) must be lower than the simple interest case.

Continuous Interest

We can compound interest more frequently. Quarterly, monthly, daily. Since the number we are backing out, namely the implied rate, is being applied to a growing basket of principal + accrued interest at each checkpoint (I think of the compounding interval as a checkpoint where the accrued interest is rolled into the remaining loan balance), the implied rate to end up at $100 must be smaller. If we take this logic to the extreme and keep cutting the time interval into smaller increments we eventually hit the limit of Δt → 0. The derivatives world models everything in continuous time finance so interest rates get the same treatment.

Mechanically, the math is no harder.

To compute the continuously compounded interest rate we still just solve for r:

90 * ert = 100

t is a fraction of a year. So for the 12-month case:

90 * er*1 = 100

er = 100/90

r ln(e) = ln(100/90)

r = 10.54%

As expected, this is a lower implied rate than the 11.11% simple rate and the 10.82% semi-annual rate. Again, because we are compounding continuously.

Annualizing remains easy. If $90 grows to $100 in just 6 months, we compute the continuously compounded rate as follow:

90 * er*1/2 = 100

er*1/2 = 100/90

r *1/2 = ln(100/90)

r = 21.07%

This can be contrasted with the 22.22% 6-month loan using simple interest we computed earlier.

Application To Real Life

Note in all these cases, $90 is growing to $100. We are just seeing that the implied rate depends on the compounding assumption. In real life, when you see “compounded daily” or “compounded monthly” and so on, you are now equipped with the tools to compare rates on an apples-to-apples basis. If a rate is lower but compounds more frequently than another rate the relative value between both loans is ambiguous.

APYs disclosed on financial products make yields comparable. But now you understand how APYs convert different rate schedules into a single measure.

Gabriel Leydon’s “Purple Pills” From His Invest Like The Best Interview

Video game designer Gabriele Leydon went on Invest Like The Best and dropped deeply provocative bits about what I might describe as design and gamification as a response to a future that has thus far proved disappointing or alienating. I don’t know how much of it I agree with it though I’ll admit I have had similar thoughts (and a few essays sitting in my drafts on the topic) with respect to financialization. I’d describe listening to this as Patrick interviewing the Ben Hunt of video games. If there’s something I’d probably disagree with most it’s the pastoral sense that the frontier seemed somehow more accessible to the common man 100 years ago beckoning people to go West for opportunity. There are frontiers, and they are always crushing by the standards of their time. I think a lot about the stories of cab-driving immigrants and have a sense that they are deeply courageous and today’s modern day pioneers, leaving all that is familiar behind (and probably why the success of immigrants in the US shouldn’t be surprising. They are built different). The definition of frontier is context-dependent. Still, I really enjoyed listening to this interview and any disagreement I’d have is well worth the brain food Gabriele serves. Patrick does a great job as usual asking questions.

episode link

These notes are just pulled from the transcript and a (lightly edited) snippet of what I wanted to refer back to. It’s not a summary. All emphasis is mine.


A Dark Interpretation of Our Obsession With Stories and Design

Patrick: I know you’re going to restrain yourself, but we’ll do our best. The first red pill of the discussion is around the topic of design. There’s a huge emphasis on design right now, and I think you’ve got an interesting take on what an emphasis on design means about where we are in capitalism. What are your thoughts on the importance of design or what it might mean?

Gabriel: There’s this pattern where when things are innovative, nobody really cares what they look like. If I made up a teleport machine and it was the size of an arena and it was covered in slime and smelled really bad or something nobody would care. There’d be a line around the block. Everybody would just jump in and they would think it’s the greatest thing ever. But over time we kind of would make it smaller, and then the artists would come in and try to make it look nicer and feel better. And once you kind of get to that design phase, where Silicon Valley’s been for about 10 years, there’s only so much you can do to make something look better.

If you remember 5 years ago, everybody was talking about delighting their users, and delighting is “We don’t have any more ideas. So we’re just going to feel a little bit better because we’re out of ideas. So now we’re going to just delight you.” The game design stuff is, “we don’t know how to make this look better, so now we’re just going to tap into your human condition of biology and psychology to make our products better. Because we don’t know how to make them more innovative, we don’t know how to make them better looking, but we can add levels and achievements.”

How that presents itself is all of a sudden you’re getting achievements for buying erectile dysfunction pills from Hims. You buy extra orders of minoxidil to max out your Hims account. That’s what we’re seeing…You see this kind of talk about everything becoming a video game, but I actually see it as a bad sign. We’re basically running out of new ideas. The economy is just becoming more and more psychological and it’s less about innovation and more about understanding your condition as a person and then building a product around biological and psychological reflexes rather than a teleport machine that can move you around the world.

Patrick: It reminds me of that Neil Postman book, Amusing Ourselves to Death [Kris: I’m coincidentally about to start this book], that Huxley’s version of the future was more accurate than Orwell’s.

Gabriel: I think it’s because when people think about capitalism, they think about the early 1900s. They think about cars and radios and TVs and microwaves and it almost never ends. And I think it peaks in the ’60s and the ’70s with all that futurism. The futuristic art, flying cars, and skyscrapers. And that’s the same time we go off the gold standard and there was this infinite optimism around money printing and innovation basically. And we could just print as much as we want because we’re going to be immortal space beings, zapping around the galaxy. So who cares?

That didn’t happen. So when the innovation growth didn’t really match the expectation, it’s just like things just start getting designed, they start moving towards the design phase, and then eventually a gamification phase, like what you’re seeing in the financial markets and software and pretty much everything.

I’m not a big person on late-stage capitalism. Capitalism is just a human condition. What does that even mean? I think it’s more like we just don’t know what to do anymore. So we’re just going to add levels to the stuff that we already know how to do. And there’s a lot of margin in it too. So it’d be, it’s like a big gravity well where it’s like, “Well, we can just take the existing stuff and add achievements to it and we’ll sell more pills.”

There’s also another part of it in Silicon Valley where … And you’re a VC, so has anybody ever tried to pitch you a video game? Do you understand it at all?

Patrick: What did you learn about the reasons why people will pay? Famously in free to play there’s this crazy power law of who pays and how much. And the 0.1% of the players, I don’t know what it is. Some crazy high percentage of the revenue. So maybe a better way of asking the question is like, what have you learned about what characterizes that willingness to spend?

Gabriel: We’re tribal people by nature. And when I say tribe, I don’t just mean your culture. I also mean the size. Tribes tend to be pretty small. If you look at early America and people say, go West and land of opportunities. What does land of opportunity mean? It means if I’m a blacksmith and I’m the only blacksmith around for 100 miles, it doesn’t matter if I’m the world’s best at making horseshoes or not. I’m the only one around. So, that’s my land of opportunity. I could just keep going West essentially, and there’ll be less and less people, and I’ll have more and more of an opportunity to become important to the community that I’m in.

And we’re in this age of hyper-competition. We have these social networks, forums, and chat rooms, clubhouses, whatever, where we have essentially this real-time leaderboard of who matters and who doesn’t. So when you say that 1% of spenders, that group is even smaller with who matters online.

So the answer is that the world has become so soul-crushingly competitive. Being good at something doesn’t matter anymore — you have to be the best. If you make horseshoes, doesn’t matter if you’re good at it, I’ll just order it for someone else and it’ll arrive in two days. And you better be cheap, because if not I’ll wait a week and get it from China.

So we’re in this hyper state of competition, that makes people feel like they don’t matter. Because they don’t. They actually really don’t, and everybody knows it. That’s the honest truth. So you end up with these online communities with a seductive and simple way to belong to something, where these things actually reward time spent, rather than skill. So if I just spend more time, I’ll be more important. You see that a lot on social networking, they’re all designed that way. Spend more time, you’ll matter more. You see so much like online activism, for example. Online activism that you would never see in person because all I got to do is post something, or whatever. And they matter because they’ll get lots of likes, they’ll get lots of retweets.

You get the culture and then the counterculture. And they’re both essentially the same thing, like one side saying thing because that’s the thing to say. The other side is saying the opposite because that’s the opposite to say. And both sides get a lot of likes. Video games give more structure to that than Twitter does. A lot more structure. They could have levels, and Kings, and Queens, and weapons, and kingdoms, and whatever you want, you just make it up. So you get more structure. And the video games become a place to get lost in because they have so much structure. That’s what I did. And I loved it. And for me it was really important to me, because before that I was just like, what’s the point? I don’t even know what the point of my life was basically. It’s like, you’re working at Target, and Dave & Buster’s, and whatever, and you’re not going to college, what else do you have? That’s what I had. And I think that’s what made me understand it. There’s just too much competition, and people need environments to excel in. This whole hyper-globalization thing just crushes souls because they can’t excel. And they know it. Everybody’s like, robots are going to replace you. And AI is going to replace you, and you got to go eat bugs and go live in a box. It’s so funny, I talk to these AI guys in Silicon Valley. They’re all trying to make God versions of themselves. They always say to the game developers “We need you.” Because what are people going to do when my God AI thing works?

It’s so sick. It really is sick, like they know what they’re doing. They know exactly what is going to happen. And they’re looking at the game designers like, well maybe you’ll distract everybody. Maybe everybody will just be distracted as the whole world collapses around them. Like every person in AI, every single person in AI, every single one. They’re all, “We’re going to need VR.”

I wish they would be more honest in public about it. Because they all say it. I think this game design worldwide takeover is partly because the innovators think that’s what should happen. And also because they don’t know what else to do.

Patrick: Give me one more thing at least. One more what I would call purple pill. Something not too inflammatory. Something you think that is true about the world that people wouldn’t like to hear.

Gabriel: I think we need AI more than we think. I think that we’re at an IQ limit and the reason why innovation feels like it’s slowing down is because we can’t do it. We just literally, physically can’t do it. And there may be an exit ramp through AI, but it’s not exactly clear that we can do that either.

I really think that the 60s and 70s futurism is the reason why we’re suffering so much today. Because there was no reason to not print money, to not full-on inflationary mindset and everything because we were going to live in paradise. We were going to be on the moon. We’ll be able to pay all this back, there’s no problem. And then financialization happened, and gamification of financialization happened because that was easier and it worked. But it’s not better. Innovation is better. It’s clearly better. If I make a teleport machine, I don’t need to make a video game, I don’t need to have levels and achievements. It doesn’t need to look nice. It doesn’t need any of those things. It’s just is what it is and everybody wants one. That is better. That’s the only way to really have prosperity. And this design/now gamification is a symptom of the limits of our minds. So instead of doing things in the physical world, we’re doing things in the psychological world now, and that may be permanent. And I hope that’s not true, but more and more of the economy is going into this exploit, automation, high-frequency trading, that kind of thinking. And it’s not rockets to Mars.

We’ve gotten to the point where we look at the two richest men… Like we used to have the Wright brothers, these two guys trying to make an airplane, they’re in the middle of nowhere, who are these guys like? Now we look to the two richest men in the world to solve our most difficult problems. The regular person has no chance in participating in the future of the economy now. The only people who have the chance [appear to be these rich people], “I hope Bill Gates figures out solar panels.” And the regular people are just kind of looking up to them saying, “Well, I don’t know what to do.” And I think the reality is the rich guys don’t know what to do either. We got the rockets going. Those are cool. And we’re making some incremental innovations. There’s been some really important things like crypto. So it’s not hopeless. It’s just not what we thought was going to happen. The dislocation between the economy and the reality of innovation is that the economy moved way ahead of innovation, under false expectations that we would be able to keep innovating at an exponential rate.

I think there’s a fear that we know that we can’t. So then you’re staring at deflation, like a reset, essentially. We’ve got too much of everything and there’s not enough innovation to pay this back. It doesn’t exist so we got to abandon ship basically. That’s pretty bad. But from my lens, from my point of view, it’s why gaming is becoming so important. It’s because we don’t have the teleport machine and we need one. And if we had teleport machines, nobody would be playing games.


Something More Uplifting: A Qualitative Screen For A Promising Investment

Patrick: Does the idea, I’ll call it the gooey teleportation principle or something, is this also an investing principle? You should look for stuff that has terrible design or is breaking?

Gabriel: NFTs are important the same way the App Store was important. Meaning that at the beginning of the App Store, everything was broken. It took like three months to get an app approved. Just crazy stuff. It was a real nightmare. And it was growing like crazy. That’s what you want. You want environment that’s completely broken. There’s like a couple spaces still in the innovation phase and crypto is clearly one of them.

You always hear these VCs who don’t know what they’re talking about. They go, “You know what crypto needs, it needs a good UI.” I’m like, “Oh my God, just stop. Like stop it.” It’s innovative, it doesn’t need that. It’s still growing despite that. If we get to the phase where all crypto can do is add UI, it’s over. That’s it. Right? Then it’s just a matter of who’s got more DAU at that point, and it’s over.

So crypto is a good example of something that’s still really deep in the innovation phase. It’s not everything, but crypto will eventually turn into a game too. It’s obvious. It’s kind of got elements like that. But my favorite stuff is you go to the websites, they look terrible. You ever noticed that? If you look at this DeFi projects, it’s like the worst looking website you’ve ever seen. That’s a good thing. That’s what I want. I want it to look terrible like it’s crashing all the time, and it’s just growing. That’s the sign. Because when you clean it up, when you do put the good UI in, and you do gamify it, it will be 100x bigger. If you’re 10 years deep and still looks terrible and still growing like crazy, that’s all you need to know.

VC is right that when it does get cleaned up, it’s going to be bigger. But that’s not what you’re looking for. You’re actually looking for it being a mess and it’s still growing.

Put all your money there. Anything that’s just growing like crazy and totally broken, just put all your money there because obviously when it gets fixed, it’s going to be better. And there are tons of examples of this. There’s like the MySpace/Facebook example, right? They both had the broken but working thing, but MySpace couldn’t fix itself fast enough. So that’s kind of the bet. But if I didn’t know the future, I’d go, “Yeah, put all your money in MySpace.” I mean it’s growing and it’s like totally broken all the time. That’s where I would look at the risk. I think you kind of have to be an entrepreneur to even understand that. But that’s how I look at it, where’s the space that’s just totally screwed up and it’s still working? That’s what you want to be involved in.

Interview with Bill Burnett & Dave Evans on Designing Your Life

From the Peter Bregman podcast:

Are you living your best life? You can’t think your way to the future – you have to design your way. I’m joined today by Bill Burnett and Dave Evans, authors of Designing Your Life: How to Build a Well-Lived, Joyful Life. Discover the five mindsets, how to make decisions in the face of uncertainty, and what to do if you have a “gravity problem.”

YouTube link

This was a ton of great insight packed into 30 minutes. The following are my notes of what I want to retain not a summary. This was dense, you should watch it yourself.


You are not defined by your earlier choices

  • Don’t let “dysfunctional beliefs” or sunk costs trap you (ie I studied X in college so I must practice X)
  • Humans are curiosity-driven. Life may have beaten it out of us but it just needs re-awakening.

Behavior change —> Bias to action

You can’t think your way out of a rut. To solve problems you must take action. They call experiments “life design protoypes”.

  • The answers you seek are out there in the world not in your head.
  • Expand your circle. Those in your bubble often have the same problems or thought patterns — there’s no new data there.
  • “Finite is your friend” —> lower the mental burden of novel experiments by saying you will only do the new thing 6 times, or spend 5 minutes a day doing X

Decision-Making

Large focus on awareness of the nature of the decision and the power of re-framing. Problem-solving requires applying the frame that best aligns with your need. Before you can do this, it’s critical to understand your current framing of a problem.

  • Life-design thinking with experimentation won’t help with certain types of decisions. For example, should you buy disability insurance? You can learn everything there is to know about your risks, the costs of insurance, the suppliers of insurance and so on but it’s a decision that you must make one way or another and accept the inherent ambiguity. Acceptance is the answer.

This leads to the single most common re-frame they use:

There is no single answer to your life. There is no single best “you”. There are many possible great satisfying lives that you can have and you never actually know about the ones you didn’t get a chance to try so we’re all getting partial credit on essay questions, not right wrong on true/false on all the big issues of life. Once you accept that this is the nature of being a human being you can say “how’s it going today?” and the answer is “it’s going reasonably well. And that’s fabulous because this is as good as it gets.”

  • Borrowing from decision researchers like Dan Gilbert they mention tactics like “burning bridges” by making certain decisions irrevocable. [Me: This makes a lot of sense to me bc FOMO is an energy suck. I tend to satisfice on everything that doesn’t hold major meaning to me — if I’m like 70% sure that product X will tick my boxes I just buy it and move on. I don’t care enough about my TV to spend a week in analysis/paralysis about how deep the blacks are. But if I were a cinephile I might.]
  • “Anchor problems”: These occur when you become inflexibly anchored to a single solution to a problem.

For example, you say: ”I’d like to do it I’d like to be a gardener or do something in the garden but I’ve decided the only solution is moving to the Berkshires. Since we can’t move to the Berkshires, I can’t have a garden, therefore I can’t be happy”

What you’ve done is you’ve baked the solution into the problem. The solution has been defined as the problem.

Instead, you might notice there are community gardens in the Upper West Side of Manhattan or you could start by putting a container on the porch. There are a million different ways you can do it but people take a solution, pretend it’s the problem and then say “Oh gosh since I can’t have the thing I want, I can’t solve this problem.” They’ve mistaken a solution for a problem and now they’ve anchored on it and can’t move forward. Once we explain it to them it’s almost laughable. They go, “Oh yea I could reframe this and there are hundreds of ways to be a gardener in Manhattan. Maybe gardner is also an anchor problem because the reality is maybe it’s about spending time outdoors in Central Park or maybe it’s about growing something”

  • “Gravity problems”: These are unactionable problems. They are still issues but if a problem cannot be acted on it’s not so much a problem as it’s a circumstance. Like gravity.As soon as you realize your problem is a gravity problem, that it’s not actionable the way it’s currently framed, you can unfixate from it. You might hate knowing you will never get rich being a poet, but can you live and write poetry? Of course.

A few lines that were dropped in passing that are actually quite poignant.

Here they are with my commentary:

I’d rather get a B on time then an A too late

Dave’s framing for how to think about optimization. Forgive yourself for being human. Any sensible approach to prioritization means you can’t turn every weakness into a strength. Again, the theme of acceptance. Or not letting perfect be the enemy of the good. I tutor 2nd graders that are far behind their grade level. Am I the best person to do this? Is this the best use of my time? Does this scale? No all counts. But it’s something that needs to be done and they still need people. If the only people who tutor are the “optimal” people to do so then what do you think is going to happen if we are already short tutors?

Some people obsess over peak performance and optimizing and so on. That’s fine. It’s a big world. In most things, I’m more concerned with the area under the curve than its peak.

Meaning comes from engagement, what you spend your time on.

I believe that there is no Meaning with a capital “M”. We create our own meaning and since I put more stock in actions than words, I think what you spend your time on is the best reflection of where you draw your meaning. This is often oblique. Maybe you spend all your time making money on something you don’t necessarily care about. This strikes me as a difficult way to live but it may reflect your value of providing for your family. There’s always a question of balance…the time spent providing is a cost to you and them as well and deciding where the diminishing returns to being at work vs being present are personal and downstream from not just our values and desires but insecurities and ego.

Figuring it out is kind of helpful but actually behaving differently is hugely helpful

Dave dropped that line in the context of therapy (he was explaining that this work in not therapy and ofc there are problems for which you should seek therapy). It reminded me of a story Slatestarcodex told about a psychiatric patient his clinic was helping. The patient was crippled by OCD. Every time she left the house she needed to go home because she thought she left the hair dryer on. The doctors racked their brains trying to get to the origin of the problem until someone suggested a highly effective but, seemingly unsatisfying solution — she could just bring the blow dryer with her:

Approximately half the psychiatrists at my hospital thought this was absolutely scandalous, and This Is Not How One Treats Obsessive Compulsive Disorder, and what if it got out to the broader psychiatric community that instead of giving all of these high-tech medications and sophisticated therapies we were just telling people to put their hair dryers on the front seat of their car? But I think the guy deserved a medal. Here’s someone who was totally untreatable by the normal methods, with a debilitating condition, and a drop-dead simple intervention that nobody else had thought of gave her her life back. If one day I open up my own psychiatric practice, I am half-seriously considering using a picture of a hair dryer as the logo, just to let everyone know where I stand on this issue.

Liquidity Ostrich

I have a friend who turned $2k into $6.5mm, eventually cashing out of the crypto markets with about $2.5mm. Because of the path, his framing is “what could I have done better?” He came to me looking for perspective on risk management.

I began my reply with a story I recounted in Talking To The Diamond Hands. In 2017, I was at dinner with a young product manager at Coinbase and an older tradfi friend that brought us all together.

At some point, the product manager who was about 22 went to the restroom. The senior guy, in a hushed tone, turned to me.


“So one of the reasons [the 22-year-old] wanted to talk to you is he has a high-class problem. He’s sitting on a giant pile of ETH he’s been mining since college. At current prices, he’s rich, but doesn’t know anything about investing. He needs advice and we thought you could help.”

As I was soaking that it in, our young tycoon was returning. There was no need to tippy-toe. The whiz kid cut right to it. He explained respectfully and with great maturity his “problem”.

What did I say to him?

“I don’t have much to say. If you listened to my opinion years ago you would never be in this beautiful predicament. I would never have held on this long, so there is nothing I can say that you should listen to. But now that you are here, I can offer one way to think about it — sell an amount that makes you feel like you never have to take a job just for money. You are 22 and achieved freedom.”

I don’t even know if this is good advice. It feels like such a dowdy perspective that it can only come from someone who would never have scored that big.

I re-told this story because I wanted to highlight an important point — there is no risk management rule forged from the business of trading that condones having most of your eggs in one basket. In other words, there’s no vetted risk management framework that would have let you turn $2k into $6mm so the entire conceit of “what could I have done better?” is misplaced.

That doesn’t mean it was wrong necessarily. It depends on your goals.

If you need ransom money by Friday, not betting everything on a roulette wheel tomorrow might be the riskiest course of action.

I’ve explained how bet sizing is not intuitive. I’m reading a Man For All Markets now, and there’s a scene where a 38-year-old Richard Feynman explains to Ed Thorp how he agreed to “be the house” for another friend who wanted to play roulette. Playing as the house, Feynman taps out after losing $80, underestimating the short-run variance of the game despite his advantage. The Nobel Laureate’s failed gambling intuition cautions us mortals that in some areas you should “work out the math”.

Now notice that my friend’s pickle is really not even at the level of bet sizing where we can triangulate on a reasonable range of answers given some constraints. My buddy’s dilemma is philosophical. What are constraints and the goals? His first task is to back up and find the inputs that reduce to “what matters to me”.

It reminded me of another conversation with a family member who was trying to solve what I’d call a “thymos-question” with a spreadsheet. Look, if you have a high income but feel the burning call to press your full potential in something that is just not lucrative, Excel isn’t going to help. You can’t generate a 3-D chart with a binary z-axis labeled “living the one life I got” and “dead”.

Luck is not a strategy. But it exists. If you want to bet on variance maybe the most practical thing to remember is “trade less when you don’t have an edge”. You are in the exact mirror situation of a casino with a small edge that wants you to pull the handle every day.

Once you know you’re gambling and decide that even long odds are the only acceptable way forward, try to minimize your contact with the rake, and shoot your shot.

Money Angle For Masochists

All option traders have stories about days they regret going into the office because they had a massively winning option position that they mitigated by hedging too aggressively. A $1 OTM put that goes $10 ITM, but they bought stock the whole way down hedging the delta. Or a short straddle that pins on expiration but the stock’s daily range meant they bought the high and sold the low. In the long option case, liquidity was the enemy — you would have preferred the stock gapped down $10.

Think now what this means for options backtests that pretend closing prices are the only prices. Your sampling frequency should align with the frequency by which your p/l matters. If you sample daily but your intraday risk and p/l matter you are acting like an ostrich.

This observation is rarely overlooked in short option strategies, at least by non-charlatans, but it’s worth noting that long options strategies that over-index on gapping price charts will overstate their attractiveness since the gaps are a gift in “not being able to rebalance”.

Since long option p/l’s can have highly skewed distributions (ie most of the profits coming from a few trades) this is not just a theoretical concern. Consider the expected value computation for optimal video poker play:

The Royal Flush, an event that happens 1 in 40,000 hands (if you played a hand every 10 seconds and didn’t sleep from Monday to Friday you’d expect to get one Royal Flush) contributes 2% of the game’s return. Said differently, if there was no possibility of a Royal Flush the house edge goes from .5% to 2.5%. This would be like the bid-ask spread in a $10 stock going from a nickel to a quarter. Annualize that churn in any strategy and see what happens to the “alpha”.

There’s a Wario world perspective (cc private equity) in which the downside of illiquidity gets moral equivalence with its upside. If you can’t re-balance you are safe from yourself and behavioral trading biases. Like pretending that every gap comes back. That’s the unsaid assumption that discourages you from selling at in-between prices. (If close-to-close vol is much lower than OHLC or tick vol then you want to sell straddles and go on vacation. Basically betting on mean reversion. Too bad this volatility behavior is only known in hindsight. Conversely, if you are long gamma you want to hedge more frequently if you know that close-to-close vol computations are smaller than range or tick vol computations of realized vol. If only you could know in advance.)

Well, this week Matt Levine wrote a banger called Structure. First an echo:

One cynical way to understand private investing generally is that private investment firms — venture capital, private equity, private real estate, etc. — charge their customers high fees for the service of avoiding the visible volatility of public markets. If you invest in stocks, sometimes they go up, and other times they go down. If you invest in private assets, they don’t trade; sometimes they go up (because companies raise new rounds of capital at higher prices), but the companies and the investment managers take pains to keep them from going down. This makes the chart of returns look much nicer — it mostly goes up smoothly — so the private investment managers can charge higher fees. We talk about this theory from time to time around here.

The real meat of the post is describing how start-ups, rather than taking a down-round in funding, prefer “structure”. Levine walks through the mechanics, but the gist is that the new investors who subscribe at the stale, overpriced valuation are getting an embedded put option (it’s more of a put spread since it only protects you so far). This gives the illusion that the valuation is unchanged, but only because you didn’t assign the put value. If you wanted to compare valuations over time, you’d need to back out the value of the put, to see how much the private company’s value has actually fallen.

Instead, we are left with the optics that the valuation is the same but the economic reality is that it’s lower. That should tell you quite a bit about the dog-and-pony culture around private investing. (In fairness, Levine explains how most insiders understand all this but that makes the gaslighting even darker in my axiological naivety).

I’d accept the pushback that it’s all made up anyway so who cares if we decompose the price of the glitter from the measure of fairy dust.

White Lotus Rorschach

Welcome to year 4 of this party at the Moontower. I took a 3 week holiday break from writing and the universe sent locusts. Well, a different bug at least — Covid and RSV which I’m pretty sure is bronchitis rebranded from the 1980s when I was a kid. Our house was a petri dish and the rain has been non-stop, although as a Californian you’re not allowed to mention precipitation without the solemn acknowledgment “we really need it”. I’m inside playing a lot of NBA2k23 with the kids and as much fun as that is, I’m done with winter. But like Pepé Le Pew, I doubt it’s done with me. Bah.

One silver lining was doing stuff I don’t do as much as I would sometimes like to — play guitar (1,2,3 songs with friends), watch movies (Bardo stood out) and binge TV (Classic Concentration reruns). I watched some mainstream stuff too. Avatar 2 and…White Lotus season 2.

I enjoyed and would recommend season 2 (I haven’t seen season 1 but it’s not necessary). White Lotus is a murder mystery but the mystery is actually not central to the show. The characters and dialogue are the draw. I recently watched this ancient but outstanding interview with Tarantino where he contrasts how American cinema [used to be] best at storytelling while “Europe was where you had character-based or mood-based films”. (Eddie Izzard’s old bit about British vs US movies implants the distinction with the stickiest mind-adhesive — side-splitting laughter). White Lotus is more in the spirit of a European film with a cheap Coen Brothers-style plot pushing the series forward.

The scenery in Italy is a timeless luxury. The acting is exceptional. Sure, the references to “mimetic desire” and “dark triad” felt focus-grouped from Twitter but it totally works even as a nod to the terminally online. The show provoked a lot of thoughts that I expected would have been covered in reviews. I don’t normally read reviews until after I watch something so I can see how my interpretation squares with English majors with much better literary comprehension skills than I do. In this rare case, I found the quality of reviews to be unsatisfying, lacking the depth clenching the show. (If anyone has a review probably from a Substack that stood out pass it on…I’m too lazy to write one myself because it would require a second watch. It’s a weak-sauce excuse. I’m torn between saying “sorry” and “tough”).

The editorial The White Lotus Nails How We Struggle To Reassess Classic Cinema does an admirable job of covering one of the show’s remarkable repartees:

Grandpa Bert Di Grasso planned the trip to get in touch with the family’s Sicilian roots, including worshipping at the altar of “The Godfather.” He lights up with absolute glee when telling Portia why their lunch location is so important, reveling in how Al Pacino cries out “Apollonia!” as the Corleone character watches his wife explode before his eyes. “It’s a great scene,” Bert declares. Portia, having zero nostalgia or cultural kinship to the film pushes back. “She blows up? Like, blows up? It’s a little tasteless maybe,” she says.

Bert immediately tries to double down by saying, “Well, look, they’re trying to make a buck. They own the house where they shot the best American movie ever made,” but Portia finds a (possible incel) softboi ally in grandson Albie, who confidently disagrees with his grandpa about the film’s brilliance, telling him he only likes it because:

“you’re nostalgic for the solid days of the patriarchy…men love ‘The Godfather’ because they feel emasculated by modern society. It’s a fantasy about a time when they could go out and solve all their problems with violence and sleep with every woman and then come home to their wife who doesn’t ask them any questions and makes them pasta.”

My favorite part of the scene is the chicken-egg tension that follows:

Bert and Dom Di Grasso then go on to say that “The Godfather” is a “normal male fantasy,” which Albie disagrees with and instead says, “No, movies like that socialize men into having that fantasy.” His father pushes back: “Movies like that exist because men already do have that fantasy. They’re hard-wired,” and Bert agrees. “Mm-hmm, comes with the testosterone.” Albie can’t let it go, and either because he genuinely believes what he’s saying or because he’s trying to impress Portia by coming off as “one of the good ones,” he declares, “No. Gender is a construct. It’s created.”

The article continues…

The scene is magnificent because it’s a circle of three generations of men being so loudly wrong about the message of “The Godfather,” while simultaneously nailing why conversations surrounding classic films are never-ending and consistently complicated. All three of the Di Grasso men were introduced to “The Godfather” in different eras, and their relationships to masculinity are completely different because of not only the changing social climate, but the types of masculinity modeled for them by the men in their lives.

The interpretation of historical figures through contemporary values is a guaranteed click-bonanza as people who think they can anticipate “the right side of history” battle with those who take an unnecessary apology so far that they come out the other side of the Pac-Man map needing to actually apologize.

The scene ends with a line that could have been captioned with “to be continued all-the-time and forever on the internet”:

“They used to respect the old. Now we’re just reminders of an offensive past.”

Does the Godfather’s masculinity reflect or culturally manufacture our apparent nature? I hate the trading advice if you don’t know what to do “sell half”, but I feel like bi-directional causation is embedded in so many forms of expression that any broad concept that devolves into a nature/nurture argument is hard to lay long odds on.

My “sell half” cop-out in this particular example is to recognize that men’s physical dominance is a thing but that it explains many behaviors rather than justifies them. “Explains but does not justify” is a phrase I picked up from Russ Roberts’ Do I Deserve What I Have Series which I reference in Why ‘Deserve” Makes My Skin Crawl. Russ asserts:

Accomplishments explain results; they don’t justify them 

Explanations are not justifications anymore than temptations determine outcomes. There’s a layer of personal agency that resides between eating a pint of Salt & Straw every day and not fitting in your jeans. Id vs ego.

Collectively, there’s a layer of cultural agency. Impulse vs laws. We like, decide, about stuff.

Decisions are never justified “just because [insert banal observation about nature]”. Discussion and debate are part logic, but that’s still only downstream from our value weightings. And those weightings can’t always be reconciled. In fact, if you take the wide-angle view of the human experience, it’s a miracle that we can agree enough to have any kind of general order. I have Oliver Sacks’ 1985 book The Man Who Mistook His Wife for a Hat and Other Clinical Tales on my nightstand. It’s a reminder that our perceptions and values are widely different cross-sectionally. This short post When Childhood Was Discovered explains that childhood as a concept is a fairly modern idea. It’s pretty clear that despite 23 pairs of chromosomes being a common denominator throughout history, we, as in the anthropological “we” change much faster than the 8th-grade life science “we”.

Arguments that pretend otherwise, leaning their full bodyweight on one side of the nature/nurture divide, collapse as soon as a second perspective enters the room. If the internet “dress” from 2015 taught us anything, it’s that we don’t even perceive colors the same. Good luck with the Godfather.