5 Ideas By Matthew Clifford on the Infinite Loops Podcast

Introduction by Infinite Loops host Jim O’Shaughnessey:

Matt is the Co-founder & CEO at Entrepreneur First, and Co-founder & NED at Code First Girls. We talk with Matt about:

  • Internet in an era of “dampened variance”
  • Increasing democratic participation
  • Bull and Bear case for creativity
  • What Matt looks for in people before investing
  • Role of geography in entrepreneurship
  • And MUCH more!

Episode link

(Bold is mine)


  1. Variance dampening institutions

    Matt flips Jim’s question by explaining that “weird” has been the default until the last few hundred years

    Jim O’Shaughnessy: Why has the world gotten so fucking weird? So, I like weird. I’m an anomaly, I guess, and because I’m 61 and I love weird, but I’m super excited about what’s going on. I think that we are on the cusp of a golden age, not just in one sector, but in many, many sectors. But to get there, you have to go through some turbulence. You basically tell us that we are in the middle of this turbulence. And so what I’d like you to do is explain your thesis for what got us here, what should we expect?

    Matt Clifford: That’s a big question. I think the way I would think about this is if you zoom out, maybe the first question should be, how did the world get to be not weird? Why should we take that the natural state of affairs is non-weirdness? One way of thinking about this is to say that modernity, however you want to define that… let’s say the last 250ish years, is really about the triumph of non-weirdness. It’s about constant or apparently constant, apparently unstoppable motion towards the reduction of variance in our lives. And if you want to get out of that Hobbsian nightmare, you need to find ways to reduce variance. Liberal democracy, incredible reducer of variance. No longer do you hand over power by having a war or an assassination, you have an election. It’s reduced variance. Monetary economics is a way to tame the business cycle over some period of time. Reduced variance, reduced variance… we’ve developed all these institutions, the rule of law, constitutional rights, all these things make life somewhat more predictable. And so for most of, let’s say, the second half of the 20th century post Second World War, anyone who lived in, for one of a better term, the west, had a life of far less variance than say 3, 4, 5, 10 generations before that. You could call that the triumph of modernity. And then something happened in the midst of these fantastic variance dampening institutions, we somewhat accidentally unleashed the mother of all variance amplifying institutions, and it’s called the Internet. And what the Internet does, is it selects the weird and amplifies it. And so I’ll stop talking, but I think the brief history of the last decade is that we suddenly introduced this variance amplifying institution right into the middle of our somewhat peaceful variance dampened lives and chaos has ensued.

  2. The internet as variance amplifier and ambition

    Matt Clifford: One slightly provocative framing would be that the rise of modernity, the rise of variance dampening institutions was really bad for ambitious people. It was really good for the average person and if you’re a utilitarian, maybe on balance, that’s a trade that we want to take. But why is it bad for ambitious people? Because one of the main ways to reduce variance is to stop a Napoleon invading Europe every time they want show you how smart they are. Insert your favorite example here. And so the apotheosis of this, if you like, is the idea of the career. Napoleon, didn’t set out to have a career. He wasn’t looking to impress his boss. And yet if you look at what the 20th century was about from the perspective of work and ambition, it was really about having these more or less formalized tracks for ambitious people to climb. And it doesn’t mean that if you got to the top of that, you couldn’t be wealthy, powerful, insert your favorite adjective here. But what it did mean was that we more or less knew what someone at the top of that hierarchy could do and what they couldn’t do. In the age of variance amplifying institutions, what you see is the Internet selecting for people that are not willing to have careers. Like if you take Donald Trump, Elon Musk, these are people that were not built to have 20th century careers. They were not built to make their boss look good, to fill in the engagement performance review card at the end of every project and climb up the ladder. And so, one of the reasons… it’s a slightly different point, but one of the reasons I think there’s been such an enormous Renaissance of founding entrepreneurship. I mean, it was partly technologically determined. Partly it’s just that if you’re a super ambitious person today, you actually look back historically, I think, and look, well, actually it was possible to do more as an ambitious person. It was possible to find more leverage, to have fewer constrains in the past. It was then a period of about 50 years, like the great moderation, if you’d like, where a lot of that was constrained. And again, I’m not totally against that, despite both being an ambitious person and spending my entire career, trying to amplify the ambitions of ambitious people. I think in some ways it’s a good thing for the world, but we’re now in this new era where Elon Musk can tweet what he likes and send the pigeons flying and several regulatory agencies flying. Or Donald Trump can be the most powerful man in the world and do what he likes. And these are examples of the Internet as sort of a anti-career institution. An institution that breaks a lot of the assumptions of what ambition should look like.

  3. Bull vs Bear view of the internet as a net good

    Matt Clifford: You can make a bull and a bear case for where we are today in terms of how do we think about allowing each human to fully express all aspects of who they are as you were describing in this sort of internet age. I think the bull cases, well, actually, what you’re talking about, you already alluded to this earlier in the conversation you’re talking about. How do you let each person find hierarchies in which they are comfortable in which they can express who they are, but they have a chance to compete and to rise given that in the world at large, it’s very hard to do that. It’s most of us, if we constrained to the physical world, we’re just going to be in state hierarchies where we always feel unhappy. One of the great things about the internet is it allows these extraordinary niches of interests to come together where, I could be working minimum wage in a job that I hate, but maybe I’m in the top three, most celebrated commenters on this sub Reddit for this interest that I have. And I’m not trying to pretend that we don’t need to do something about the material conditions that person’s life, right. That’s clearly a different question, but there is an extraordinary, if you think about almost the equivalent of biodiversity for ecosystems of interest, genuine hierarchy, diversity, you can be someone within a particular group. I think the internet is the greatest force for that, that there has ever been. And you can even extend this idea into this very fashionable idea of the Metaverse. We can imagine and creating world, whole worlds in which people can fulfill their ambitions and like the fullness of who they want to be in a way that is less damaging to others potentially. I mean, again, like you could say, that’s a very bullish case. There’s lots to critique in that, but there is something about the idea of virtualization as a way to enable many more people to achieve what they want to achieve, because we move from scarcity to abundance or potentially to abundance. Again, lots of footnotes on that, whether actually the metaverse as it is to actually emerging will permit that. I think the bear cases well, actually what the internet does is exposes us to, as you’ve already said, like a global competition where previously there was a local one, it sort of amplifies inequalities rather than dampening them. And so, really, I think the question is, can we get to material abundance quickly enough that the sort of satisfaction of people’s holistic needs beyond the material world is enough where actually being, finding your tribe on the internet is enough because we have co selected, successfully created enough material, abundance that people aren’t worried about where the next meal is coming from. I think if we can, I actually feel very optimistic about the internet as a way of providing outlets for exactly what you’re describing.

  4. This bit reminded me of the efficiency vs equality trade-off in economics (see tweet)

    Jim O’Shaughnessy: That’s just the way networks work. It’s not just human beings, it’s any complex adaptive learning system. The nodes that are finding the right answers, get the most connections and the nodes that are not finding the right answers die. And so, I’ve really had to sit and think about that one for a long time, because, so for example, I changed my opinion about universal basic income, because I think for the first time, really in human history, there is going to be a group of people, and the part I underline is through no fault of their own, who have a harder time adjusting and thriving in this new environment. And so your point that you just made, we can’t have them worried about where their next meal is coming from, because that human is a desperate human and desperate humans are destructive humans and violent, and listen, you don’t really even have to know too much about history to understand that [Kris note: notice this is a pragmatic not moral argument]. So there’s a lot of reasons why, universal basic income is not liked by both sides of the political spectrum in person. But I think that the term that I’ve often used is symbol manipulators. So I am a symbol manipulator. I don’t make anything with my hands. And so if you look at the Forbes 400, the list of the wealthiest people, if you look at the original one in 82, it was all physical things. That generated wealth, it was real estate, it was steel. It was, shipping and or inherited. In fact, I think the majority of the list was inherited sort of this dynastic wealth being passed down and down, which creates an aristocracy, whether you have a formal one or not. Look at the list today, there are, there’s virtually no one on that list who is not a symbol manipulator. Right. I personally think that’s great. You know what? I love Amazon. I love the fact that I can get any (beep) thing I want in at most two days. And if I’m in the city in 15 minutes, right. So I like that, but we do have to figure out a way, which, and I guess maybe it’s just like these conversations bleeding into higher conversations, bleeding in, because without that there could be chaos that we don’t come back from.

    Matt Clifford: Totally. Well, I think its worth sort of thinking about what are the objections that we might have to growing economic inequality and I’m not going to be comprehensive because I’m sure there are people who would have others, but I think one is actually political as though with great economic inequality, be kind of calms, great political inequality. And most of us have an instinctive sense that how rich you are, shouldn’t be the measure of political power that you have. And most of us have a pretty intuitive affinity for the idea of one person, one vote. And so, I think there’s like a set of things that we should worry about as people gain wealth, particularly extreme wealth, does it mean too powerful? And there’s then like a sort of almost like aesthetic thing of what do we do about a world where, like Bezos can fly to space and there are people that can’t eat or whatever. I call that aesthetic because I think it’s, you could frame it as justice, but I think it’s just, for most of us, the idea of sort of waste or maybe that’s actually a bad example that, but frivolous consumption versus like people not being able to eat that feels wrong. And then I guess there’s a thing about sort of lock-in, does it get to the point where a sufficient level of economic advantage closes off the ability for others to ever compete. Because I think most of us have an instinct that dynamism is good and mobility is good. Now I think what’s interesting about all those three things is they’re not actually in my view, objections to economic inequality per se. They’re actually to the conditions within which it occurs. So if we can find ways to have our politics less influenced by economic power, if, as you’ve already said, we can get to the point of economic abundance that no one starves however many rockets, Elon and Jeff flying to space, whatever. And if we can figure out what are the rules of the game, that means that however wealthy people become, you don’t have to be them or be related to them to be successful. Now I’m not saying they’re easy problems, but I think that sometimes, you see people default, the idea that we have to break the underlying creators of variance, the underlying economic engine, that’s allowed people to build in Amazon or a Microsoft or an apple or whatever. I think that’s the wrong instinct. I think it comes back to this, how do we make sure error correction actually functions? Well, we can’t have any of these things that are irreversible, we don’t want to have a static society. And so I would, I think people like you and me should be using our energy to think about how can we craft the rules of the game, such that we still allow people to build enormous companies and therefore enormous fortunes, but they don’t break the system. And it’s the second bit that I think we sort of let go of and I think they’re, without getting too political, I think we are missing a trick. If we jump straight to the idea that there’s something intrinsically broken, if someone becomes a billionaire that that’s not what we should care about, what we should care about, or what are the consequences of that. I don’t think every billionaire is a policy failure, but I do think that if only the children of billionaires can become billionaires, as you were saying, if it, then that’s a policy failure. And so I think it’s how do we harness wealth creation in a way that doesn’t violate those things that we kind of, most of us in intrinsically care about.

  5. Moral luck (a parallel to kindness as epistemic humility)

    Matt Clifford: The idea of moral luck, meaning I think it’s very easy to go through life feeling that you deserve kind of various things, although you don’t deserve various things. Most of us have an intuition that we want to live in a world where people get their just desserts one way or another. But I think, we’ve talked a lot in this conversation about sort of epistemic humility, the idea that we don’t really know anything. I also feel there’s a kind of moral luck humility, which is like, we don’t really get to choose who we turn out to be in many, many ways. And I think if that makes us a little bit more humble in the face of the suffering of others, the success of others, the ups and downs, a little more tolerant of like, what are the, you know… Go back to this idea of error correction. What are the systemic things that we need to prevent anyone falling too far off the edge in one direction? I believe in a world where, to my innovation point, anyone should be allowed to try anything. And if they build something phenomenally valuable, they should be allowed to reap the rewards of that in a pretty unconstrained way. And I think the offsetting force of that is the reminder that the fact that they were the person that could do that, that’s nothing they deserved. And it doesn’t mean that they shouldn’t benefit from it, but it should bring with it a humility that allows us to design institutions and systems that mean that none of us can fall too far. [Kris: Super resonant because you know how I feel about the word “deserve”].


The rest of the interview talks about qualities Entrepreneur First looks for when funding founders. The qualities themselves are not surprising but the list is surprising because of how mundane it is. And that is actually uplifting. They have tremendous data on founders and are quite certain it takes at least 6 months of close observation to actually know if a founder will be effective (even after 3 months the data is noisy!). The implication is you should widen the top of the funnel, make low cost bets on many founders which is in direct opposition to overly strict selection criteria. I’ve written about this idea and the math behind it in:

  • There’s Gold In Them Thar Tails: Part 1 (13 min read)
  • There’s Gold In Them Thar Tails: Part 2 (24 min read)

Part of widening the funnel is by expanding geographic search. Matt shares this story of Iranians in Singapore:

It’s an amazing story is that if you look at the list of nationalities by how frequently we’ve invested in people of that nationality, it’s quite surprising. I guess in some places, not that surprising. Like in Bangalore, it’s nearly all people who are Indian. But in Singapore, it’s quite surprising. So, actually in Singapore, the number one nationality we fund is Indian. The number two is Singapore. I think third might be Indonesian. I forget. But in the top four is Iranians, people from Iran. That’s kind of crazy, right? Because how come there are so many Iranians in Singapore? And the answer is there aren’t. I think there’s only about 250 Iranians in Singapore, and we funded about 50 of them. Why is that? Well, basically because if you are an incredibly smart, ambitious Iranian, the single biggest drag on your life outcome, sadly, is that you were born in Iran. And so getting out is very important for a certain type of person. And in particular, if you skew technical, which is a lot of what we do, good luck getting a visa these days to study, I don’t know, nuclear physics in the US or whatever. Maybe slightly facetious, but not very. If you write a list out of the world’s top universities and start to cross off the ones where Iranian grad students will struggle to get a visa, the number one university left in the world is the National University of Singapore, which is actually a very good university anyway. It’s top 20 globally even before you do the crossing out, but it’s the number one that’s very accessible to really smart Iranian science grads. And so there’s this very tight knit community of exceptionally smart graduate students from Iran in Singapore. And we’ve ended up funding as a sort of nontrivial proportion of them. Now, why do I tell that story? Because to me, it points to the ability to overcome geography without remote. Now, actually I’m very bullish on remote as an overall system. Lots of our companies are remote first. I think it’s very possible to do. But I think for the act of building, co-founding teams from strangers, which is the core of our IP, if you like, we really believe in the power of the physical for that, at least for now. So I think watch this space, probably some experimentation to come on that, but we think there are lots of ways to transcend geography while retaining the sort of physicality of what we do.

Commodities As Risk Transfer Markets

  • 5 Ideas by Eric Crittenden on the Mutiny Investing Podcast (11 min read)
    by Moontower

    I jotted a few notes from this terrific conversation between Eric Crittenden of Standpoint and my friend Jason Buck of Mutiny.

    If you read CTA (especially trend-following CTAs) decks about why trend-following works in commodities you will hear stories that sound like:

    • taking the other side of hedgers
    • markets have behavioral biases like anchoring which cause futures to underreact on breakouts

    These are reasonable claims. I traded commodity options for most of my career and a lot of flow is in fact constrained (ie forced and price-insensitive) due to hedging covenants attached to financing arrangements for new projects such as plants and wells. The behavioral bias argument sounds good but I’m not sure to what extent biases like that cancel out (just replace “extrapolators” for “greed” and “mean-reversioners” for “fear”).

    Overall, I think commodity markets are basically zero-sum. They make sense as diversifers because they can act as an inflation hedge at times. But because inflation is diabolically hard to hedge in isolation, I’d expect futures markets to have negative expected returns after fees and taxes (note the similarity to insurance. It’s negative expected return but still makes sense as a diversified and hedge when you consider compounded returns at the portfolio level). The pre-fee/tax return is probably random depending on the term-structure.

    Yet, Eric and Jason’s discussion framed the problem in a way I hadn’t thought of which is more of a risk transfer service. Since the demand to transfer risk is not static the curve shapes and positioning will be key determinants of which way the edge presents itself.

    If CTA positioning is inversely correlated with physical hedger positions you’d expect positive edge. I found this provocative because one of the trades I liked to look for was actually betting against the CTAs but in an asymmetrical way. If CTA’s were all-out long coffee futures (for example the Commitment of Trader’s Report, aka COT, showed that as a percentage of open interest managed money length was in the 100th percentile) then I’d like to look for cheap put skew to buy. My reasoning was that CTAs are actually weak hands in the sense that they just follow price, so if there was a sharp reversal in the market they’d rush for the exits together. CTAs often use similar signals (breakouts or moving averages for entries and stops for exits) so they tend to have correlated flows.

    Now, percentiles are risky inputs to trades. If something is in the 100th percentile today and goes up tomorrow that is the new 100th percentile. But I was betting in a risk-contrained way. Instead of shorting, I was buying puts (and again only if the skew surface presented attractive pricing…the qualitative and quantitative both need to line up, and even then an idea like this is a small edge and small part of a broader portfolio).

    Here is a pertinent excerpt from the interview (bold is mine):

    Jason Buck: You said three return sources, so eliminate the three return sources that you believe you have?

    Eric Crittenden: So, I feel like there’s capital formation markets, like stocks and bonds, which are kind of a one-way street, the risk premia is kind of a one-way street. I mean, the bulk of the risk premia is your long stocks. The futures, whether it’s metals, grains, livestock, energy, these are risk transfer markets and risk transfer markets are different than capital formation markets. I feel like risk transfer markets, you need to be symmetrical, you need to be willing to go long or short, because they’re a zero-sum game. They have term structures, so they’re factoring expectations, storage costs, cost of carry, all that stuff. And then there’s the risk-free rate of return, which used to be a great way to kind of recapture inflation, it’s not so much anymore.

    [Eric continues…]

    This is an important concept to me, because it goes to the point of why I do what I do, or why I think that macro trend-oriented approaches expect a positive return over time, because the futures markets are a zero-sum game or actually, a negative-sum game after you pay the brokers, and the NFA fees, and all that stuff. So, in a negative-sum game, you better have a reason for participating. For you to expect to make money, you better be adding something to that ecosystem that someone else is willing to pay for, because somebody else has to mathematically lose money in order for you to make money. So, in studying the futures markets, and I’ve been on both sides, I’ve been on the corporate hedging side, I’ve been on the professional futures trader side.

    I believe I understand who that somebody is, that has deep pockets, and they’re both willing and able to lose money on their future’s position. A trend-oriented philosophy that’s liquidity weighted is going to be trading opposite those people on a dollar-weighted basis through time. It does make sense that they would lose money on their hedge positions, I mean, in what world would it make sense for people who hedge, which is the same thing as buying insurance, to make money from that? It makes no sense, that would be an inverted, illogical world. So, anyone who’s providing liquidity to them should expect some form of a risk premia to flow to them. It’s just up to you to manage your risk, to survive the path traveled, and that’s what trend following is. I don’t know why that is so controversial, and more people don’t talk about it, because I couldn’t sleep at night if I didn’t truly believe that what we’re doing deserves the returns that we’re getting.

    Jason Buck: CTA trend followers, or whatever, just they don’t really know how they make money. They’re like, “It’s trending, it’s behavioral, it’s clustering, it’s herd mentality, and that’s how we make money.” You’ve accurately portrayed it as these are risk-transfer services, speculators make money off of corporate hedgers. But the only thing I would push back, and I’m curious your take on this, is like you said, zero-sum game or negative-sum at the individual trade level. But when we look more holistically, those corporate hedgers are hedging their position for a reason, and it’s likely lowering their cost of capital for one of the exogenous effects. So, my question always is, is it really zero-sum or negative-sum, or is it positive-sum kind of all the way around? In a sense that the speculator can make money offering these risk transfer services that the hedgers are looking for that liquidity, and then the hedgers are also… If we look at the rest of their business, they’re hedging out a lot of their risks, which can actually improve their business over time, whether that’s cost of capital, structure, or other exogenous effects.


    Eric Crittenden: Absolutely, I wish I had… You did record this, so I’m going to steal everything you just said. In the future’s market, it’s negative-sum. If you include the 50% of participants that are commercial hedgers, it’s no longer zero-sum. But most CTAs, and futures traders, and futures investors don’t even concern themselves with what’s going on outside the futures market. So, but if you pull that in and look at it, you can see, or at least it’s clear to me, we’re providing liquidity to these hedgers. They’re losing some money to us, and the more money they lose to us, the better off their business is doing, for a variety of reasons. Tighter cash flows, more predictable cash flows results in a higher stock price, typically. But you brought one up that almost no one ever talks about, and that is if they’re hedged, their cost of capital, the interest rate that they have to pay investors on their bonds is considerably lower. Oftentimes, they end up saving more money on their financing than they lose on their hedging, and they protect the business, and they make Wall Street happy at the same time, so who’s really the premium payer in that? It’s their lenders. So, by being a macro trend follower in the future space, the actual source of your profits is some bank that’s lending money to corporations that are hedging these futures. So, it’s the third and fourth order of thinking, and you can never prove any of this, which is great, because if you could prove it, then everyone would do it, and then the margins would get squeezed.

  • More commodities stuff:
    • I created a Twitter list to follow commodities folk. I’ll add to it as I learn of more accounts that fit. (Twitter list)
    • The CME has a great tool for charting and studying the CFTC’s COT report. You will need to sign up for their free QuikStrike suite of analytics.

Just Keep (Open Source) Livin’

I just got back from vacation and after traveling a big chunk of the summer, I’m looking forward to the steady backbeat of routine. Kids start school this week and that’s my cue to get in front of a computer and start pushing the ball forward on some projects.

For that matter, I’ll write a post, maybe for next week, about how I’m thinking about not just projects but the broader context of what I’m “doing with myself”. It’s almost a year and a half since I left the daily grind and while I’d like to say I have a clear picture of my next steps, it’s more accurate to say I’m just less confused. I had a lot of time to think this summer and I’ll share those thoughts soon enough.

Today, I’ll share a meta-thought.

Open Source Living

Trading culture is secretive. Now all secrets including trade secrets should be vaulted. Loose lips sink ships. But there’s a range of information that is insightful but not under lock-and-key that gets treated as a secret.

I’ve recently been consuming a ton of content by Jamey Stegmaier. He is the founder of tabletop game publisher Stonemaier who put out Wingspan. Jamey is a prolific sharer. His YT channel is outstanding and he talks about everything from nerdy game design topics, to life, to his business. His video A Brief History of Stonemaier Games is, to use that pedo-cringe term, “open kimono”. Even though his company is private he volunteers information that would be impossible to find. See 2021 Behind-the-Scenes Stakeholder Report for Stonemaier Games.

His transparency is alien to anyone from a secretive culture. Jamey has become an ambassador to the boardgame industry. Instead of protecting his turf (he’s not unstrategic of course — I haven’t seen him disclose his own vendors), he is blatantly thinking about growing the pie by promoting the industry. He encourages people to play and design games by boosting competitors’ games, discussing others’ game mechanics that inspire him, and even talking about games he wished he published or games he regretfully passed on.

Being transparent and vulnerable is a risk, but not without reward. If you embrace open-source living and can reasonably filter out selfish opportunists, you have a better chance, in my humble opinion, of “finding the others”. I used to tell myself that I wrote to clarify my thinking and educate. It was a big moment when I realized those were actually byproducts of what was really happening. I was “finding the others”. (It was Paul who I first heard say that. It was a lightning bolt of self-understanding. It’s also why it’s crazy to me that the most common writing advice is “write in your own voice”. This would be like life advice that started with “step1: respirate”. It’s not just obvious but easier).

Cooperation and negotiation are core requirements to get anything done. They don’t need to be warm and fuzzy, but the adversarial nature of spending your day on the phone with option brokers whose loyalties shift like the clay soil around the Hayward fault can grind down even the most extroverted trader’s enthusiasm. And I’m sure they feel the same about dealing with the short list of market-makers they need for liquidity. For all the aggravation, we wouldn’t deal if we weren’t both better off in the long run. But when I look around at other fields, or even my wife’s role on the biz dev side of finance, the dynamics are far less contentious. There’s more of a positive sum spirit.

Technology makes everything including finance more efficient. It disintermediates, improves transparency, and increases legibility. In that sense, technology, at the conceptual not necessarily specific instantiation level, is always a growing business. On the other hand, fields that are being disintermediated shrink. Survivors huddle on the lifeboats. If someone starts sneezing, throw ‘em overboard. A forward-looking firm might try to pull in a fit swimmer to help row, but most lifeboats would prefer to not take the risk and just preserve whatever rations are left for the seniority remaining. This might be totally rational and maximizing.

And that’s the problem.

If you are in an industry where pulling in the perimeter defense instead of pushing out the frontiers is the optimal play, I hope you are good at compartmentalizing. You don’t want that mentality bleeding over to the rest of your life outlook. At least I don’t.

At risk of a superficial analogy, it’s hard to watch boomers hanging on to their gerontocracy in politics without seeing a fearful cling to old ideas somehow wiped of any nostalgia (it’s hard to believe boomers were Flower children unless you think they forgot their LSD years). Every housing development they shoot down is stepping on the neck of someone trying to climb into that boat. Just log onto suburban Nextdoor if you want to eavesdrop on the debate homeowners (survivors is an increasingly fitting analogy here) have when a treading swimmer flails a desperate hand onto the side of the SS Nimby raft.

Morgan Housel likes the phrase “the grass is always greener on the side that’s fertilized with bullshit.” There’s enough grift outside the highly regulated financial world to make the money game seem downright honorable in comparison (a finance friend has told me things about the art market that would earn Madoff’s respect). I’m not pollyannish about life outside trading. But this letter and its #learninpublic spirit have always been a step towards openness and sunlight. The upcoming projects and discussions will lean even harder in that direction. I’ll learn. You’ll learn. We’ll go further together that way.


Speaking of secrecy, Byrne Hobart recently published:

Understanding Jane Street (25 min read)

Byrne didn’t paywall this post and it was his most-read piece ever which is saying a lot, so I don’t have to say more. Go read it.


Related post on information flow from the Moontower archive:

Twitter Reminds Me Of The Trading Pits (7 min read)

Moontower #156

I just got back from vacation and after traveling a big chunk of the summer, I’m looking forward to the steady backbeat of routine. Kids start school this week and that’s my cue to get in front of a computer and start pushing the ball forward on some projects.

For that matter, I’ll write a post, maybe for next week, about how I’m thinking about not just projects but the broader context of what I’m “doing with myself”. It’s almost a year and a half since I left the daily grind and while I’d like to say I have a clear picture of my next steps, it’s more accurate to say I’m just less confused. I had a lot of time to think this summer and I’ll share those thoughts soon enough.

Today, I’ll share a meta-thought.

Open Source Living

Trading culture is secretive. Now all secrets including trade secrets should be vaulted. Loose lips sink ships. But there’s a range of information that is insightful but not under lock-and-key that gets treated as a secret.

I’ve recently been consuming a ton of content by Jamey Stegmaier. He is the founder of tabletop game publisher Stonemaier who put out Wingspan. Jamey is a prolific sharer. His YT channel is outstanding and he talks about everything from nerdy game design topics, to life, to his business. His video A Brief History of Stonemaier Games is, to use that pedo-cringe term, “open kimono”. Even though his company is private he volunteers information that would be impossible to find. See 2021 Behind-the-Scenes Stakeholder Report for Stonemaier Games.

His transparency is alien to anyone from a secretive culture. Jamey has become an ambassador to the boardgame industry. Instead of protecting his turf (he’s not unstrategic of course — I haven’t seen him disclose his own vendors), he is blatantly thinking about growing the pie by promoting the industry. He encourages people to play and design games by boosting competitors’ games, discussing others’ game mechanics that inspire him, and even talking about games he wished he published or games he regretfully passed on.

Being transparent and vulnerable is a risk, but not without reward. If you embrace open-source living and can reasonably filter out selfish opportunists, you have a better chance, in my humble opinion, of “finding the others”. I used to tell myself that I wrote to clarify my thinking and educate. It was a big moment when I realized those were actually byproducts of what was really happening. I was “finding the others”. (It was Paul who I first heard say that. It was a lightning bolt of self-understanding. It’s also why it’s crazy to me that the most common writing advice is “write in your own voice”. This would be like life advice that started with “step1: respirate”. It’s not just obvious but easier).

Cooperation and negotiation are core requirements to get anything done. They don’t need to be warm and fuzzy, but the adversarial nature of spending your day on the phone with option brokers whose loyalties shift like the clay soil around the Hayward fault can grind down even the most extroverted trader’s enthusiasm. And I’m sure they feel the same about dealing with the short list of market-makers they need for liquidity. For all the aggravation, we wouldn’t deal if we weren’t both better off in the long run. But when I look around at other fields, or even my wife’s role on the biz dev side of finance, the dynamics are far less contentious. There’s more of a positive sum spirit.

Technology makes everything including finance more efficient. It disintermediates, improves transparency, and increases legibility. In that sense, technology, at the conceptual not necessarily specific instantiation level, is always a growing business. On the other hand, fields that are being disintermediated shrink. Survivors huddle on the lifeboats. If someone starts sneezing, throw ‘em overboard. A forward-looking firm might try to pull in a fit swimmer to help row, but most lifeboats would prefer to not take the risk and just preserve whatever rations are left for the seniority remaining. This might be totally rational and maximizing.

And that’s the problem.

If you are in an industry where pulling in the perimeter defense instead of pushing out the frontiers is the optimal play, I hope you are good at compartmentalizing. You don’t want that mentality bleeding over to the rest of your life outlook. At least I don’t.

At risk of a superficial analogy, it’s hard to watch boomers hanging on to their gerontocracy in politics without seeing a fearful cling to old ideas somehow wiped of any nostalgia (it’s hard to believe boomers were Flower children unless you think they forgot their LSD years). Every housing development they shoot down is stepping on the neck of someone trying to climb into that boat. Just log onto suburban Nextdoor if you want to eavesdrop on the debate homeowners (survivors is an increasingly fitting analogy here) have when a treading swimmer flails a desperate hand onto the side of the SS Nimby raft.

Morgan Housel likes the phrase “the grass is always greener on the side that’s fertilized with bullshit.” There’s enough grift outside the highly regulated financial world to make the money game seem downright honorable in comparison (a finance friend has told me things about the art market that would earn Madoff’s respect). I’m not pollyannish about life outside trading. But this letter and its #learninpublic spirit have always been a step towards openness and sunlight. The upcoming projects and discussions will lean even harder in that direction. I’ll learn. You’ll learn. We’ll go further together that way.


Speaking of secrecy, Byrne Hobart recently published:

Understanding Jane Street (25 min read)

Byrne didn’t paywall this post and it was his most-read piece ever which is saying a lot, so I don’t have to say more. Go read it.


Related post on information flow from the Moontower archive:

Twitter Reminds Me Of The Trading Pits (7 min read)


Money Angle

  • 5 Ideas by Eric Crittenden on the Mutiny Investing Podcast (11 min read)
    by Moontower

    I jotted a few notes from this terrific conversation between Eric Crittenden of Standpoint and my friend Jason Buck of Mutiny.

    If you read CTA (especially trend-following CTAs) decks about why trend-following works in commodities you will hear stories that sound like:

    • taking the other side of hedgers
    • markets have behavioral biases like anchoring which cause futures to underreact on breakouts

    These are reasonable claims. I traded commodity options for most of my career and a lot of flow is in fact constrained (ie forced and price-insensitive) due to hedging covenants attached to financing arrangements for new projects such as plants and wells. The behavioral bias argument sounds good but I’m not sure to what extent biases like that cancel out (just replace “extrapolators” for “greed” and “mean-reversioners” for “fear”).

    Overall, I think commodity markets are basically zero-sum. They make sense as diversifers because they can act as an inflation hedge at times. But because inflation is diabolically hard to hedge in isolation, I’d expect futures markets to have negative expected returns after fees and taxes (note the similarity to insurance. It’s negative expected return but still makes sense as a diversified and hedge when you consider compounded returns at the portfolio level). The pre-fee/tax return is probably random depending on the term-structure.

    Yet, Eric and Jason’s discussion framed the problem in a way I hadn’t thought of which is more of a risk transfer service. Since the demand to transfer risk is not static the curve shapes and positioning will be key determinants of which way the edge presents itself.

    If CTA positioning is inversely correlated with physical hedger positions you’d expect positive edge. I found this provocative because one of the trades I liked to look for was actually betting against the CTAs but in an asymmetrical way. If CTA’s were all-out long coffee futures (for example the Commitment of Trader’s Report, aka COT, showed that as a percentage of open interest managed money length was in the 100th percentile) then I’d like to look for cheap put skew to buy. My reasoning was that CTAs are actually weak hands in the sense that they just follow price, so if there was a sharp reversal in the market they’d rush for the exits together. CTAs often use similar signals (breakouts or moving averages for entries and stops for exits) so they tend to have correlated flows.

    Now, percentiles are risky inputs to trades. If something is in the 100th percentile today and goes up tomorrow that is the new 100th percentile. But I was betting in a risk-contrained way. Instead of shorting, I was buying puts (and again only if the skew surface presented attractive pricing…the qualitative and quantitative both need to line up, and even then an idea like this is a small edge and small part of a broader portfolio).

    Here is a pertinent excerpt from the interview (bold is mine):

    Jason Buck: You said three return sources, so eliminate the three return sources that you believe you have?

    Eric Crittenden: So, I feel like there’s capital formation markets, like stocks and bonds, which are kind of a one-way street, the risk premia is kind of a one-way street. I mean, the bulk of the risk premia is your long stocks. The futures, whether it’s metals, grains, livestock, energy, these are risk transfer markets and risk transfer markets are different than capital formation markets. I feel like risk transfer markets, you need to be symmetrical, you need to be willing to go long or short, because they’re a zero-sum game. They have term structures, so they’re factoring expectations, storage costs, cost of carry, all that stuff. And then there’s the risk-free rate of return, which used to be a great way to kind of recapture inflation, it’s not so much anymore.

    [Eric continues…]

    This is an important concept to me, because it goes to the point of why I do what I do, or why I think that macro trend-oriented approaches expect a positive return over time, because the futures markets are a zero-sum game or actually, a negative-sum game after you pay the brokers, and the NFA fees, and all that stuff. So, in a negative-sum game, you better have a reason for participating. For you to expect to make money, you better be adding something to that ecosystem that someone else is willing to pay for, because somebody else has to mathematically lose money in order for you to make money. So, in studying the futures markets, and I’ve been on both sides, I’ve been on the corporate hedging side, I’ve been on the professional futures trader side.

    I believe I understand who that somebody is, that has deep pockets, and they’re both willing and able to lose money on their future’s position. A trend-oriented philosophy that’s liquidity weighted is going to be trading opposite those people on a dollar-weighted basis through time. It does make sense that they would lose money on their hedge positions, I mean, in what world would it make sense for people who hedge, which is the same thing as buying insurance, to make money from that? It makes no sense, that would be an inverted, illogical world. So, anyone who’s providing liquidity to them should expect some form of a risk premia to flow to them. It’s just up to you to manage your risk, to survive the path traveled, and that’s what trend following is. I don’t know why that is so controversial, and more people don’t talk about it, because I couldn’t sleep at night if I didn’t truly believe that what we’re doing deserves the returns that we’re getting.

    Jason Buck: CTA trend followers, or whatever, just they don’t really know how they make money. They’re like, “It’s trending, it’s behavioral, it’s clustering, it’s herd mentality, and that’s how we make money.” You’ve accurately portrayed it as these are risk-transfer services, speculators make money off of corporate hedgers. But the only thing I would push back, and I’m curious your take on this, is like you said, zero-sum game or negative-sum at the individual trade level. But when we look more holistically, those corporate hedgers are hedging their position for a reason, and it’s likely lowering their cost of capital for one of the exogenous effects. So, my question always is, is it really zero-sum or negative-sum, or is it positive-sum kind of all the way around? In a sense that the speculator can make money offering these risk transfer services that the hedgers are looking for that liquidity, and then the hedgers are also… If we look at the rest of their business, they’re hedging out a lot of their risks, which can actually improve their business over time, whether that’s cost of capital, structure, or other exogenous effects.


    Eric Crittenden: Absolutely, I wish I had… You did record this, so I’m going to steal everything you just said. In the future’s market, it’s negative-sum. If you include the 50% of participants that are commercial hedgers, it’s no longer zero-sum. But most CTAs, and futures traders, and futures investors don’t even concern themselves with what’s going on outside the futures market. So, but if you pull that in and look at it, you can see, or at least it’s clear to me, we’re providing liquidity to these hedgers. They’re losing some money to us, and the more money they lose to us, the better off their business is doing, for a variety of reasons. Tighter cash flows, more predictable cash flows results in a higher stock price, typically. But you brought one up that almost no one ever talks about, and that is if they’re hedged, their cost of capital, the interest rate that they have to pay investors on their bonds is considerably lower. Oftentimes, they end up saving more money on their financing than they lose on their hedging, and they protect the business, and they make Wall Street happy at the same time, so who’s really the premium payer in that? It’s their lenders. So, by being a macro trend follower in the future space, the actual source of your profits is some bank that’s lending money to corporations that are hedging these futures. So, it’s the third and fourth order of thinking, and you can never prove any of this, which is great, because if you could prove it, then everyone would do it, and then the margins would get squeezed.

  • More commodities stuff:
    • I created a Twitter list to follow commodities folk. I’ll add to it as I learn of more accounts that fit. (Twitter list)
    • The CME has a great tool for charting and studying the CFTC’s COT report. You will need to sign up for their free QuikStrike suite of analytics.

Last Call

  • The 2-Hour Cocktail PartyHow to Make New Friends and Build Big Relationships with Small Gatherings

    Nick Gray wrote a book about how to throw a cocktail party. I’ve read half of it so far and it’s a nice reminder that get-togethers can be much richer experiences if approached thoughtfully and with empathy for guest’s desires and concerns. I will be borrowing key ideas from it for one of the upcoming projects.

    A bit that resonated:

    There’s a concept I often cite from “Moonwalking with Einstein” around memory anchors. The more anchors you can create for a memory, the easier it is to remember. If you can split your parties into 3-4 different activities in different spaces, the party is more memorable because people have a richer more varied memory to look back on. It also has the effect of making the party feel longer. When you stand around nursing tequila sodas and picking at the food for 2 hours, the party is a quick blur. When you move through four different activities and locations in the same time period, the party feels much longer during and on reflection. Time probably flew by, but when you reflect, you are amazed at how much happened in such little time.

    You can check out much of the book before you buy here.

Stay groovy!

5 Ideas by Eric Crittenden on the Mutiny Investing Podcast

Mutiny founder and host Jason Buck’s introduction:

In this episode, I talk with Eric Crittenden, Founder and Chief Investment Officer of Standpoint, an investment firm focused on bringing all-weather portfolio solutions to US investors. Eric plays an active role in the firms’ research, portfolio management, product innovation, business strategy, environments and client facing activities. He believes using an all-wealth approach is the most effective way to prepare for a wide rage of market environments, while producing meaningful investment returns with limited downside risk.

Eric has over 20 years experience researching, designing, and managing alternative asset portfolios on behalf of families, individuals, financial advisors, and other institutional investors. Eric and I talk about circuitous paths with multi-year dead-end rabbit holes, simplicity can be the ultimate sophistication, what clients want, what’s wrong with the investing industry, and strategy scaling.

Episode link

All bold emphasis is mine.


  1. Investing opens your mind

    Jason Buck: Well, like you said, you don’t have to be overly prescient to talk about negative oil or negative interest rates. What I’ve always loved about macro trend is that you just follow price, right? And so if price goes negative, you just keep following it negative if that’s the direction of the trend. You don’t have to have any global macro narrative. And that’s the point, is you’re just offsetting narratives and people love narratives, so they didn’t like the idea that you said it could potentially go negative. You weren’t calling for it. You’re like it’s just within the realm of possibility. And I wonder, do you think that following trends for so long just opens up your mind that anything’s possible?

    Eric Crittenden: I think doing the research around it and seeing what actually happened. I mean, you can see with your own eyes what happened historically, like the sugar trade in the 1980s, where the price was below the cost of production. And the price didn’t actually go any lower, but you made a boatload of money being short because of the contango and the futures curve. Right? So today, you fast forward to today, and I talk to emerging CTAs or people that want to start trading their own account, they’ll do the same thing over and over. It’s always the same thing. They come up with all these filters to filter out trades and they say, “Well, if the price is too low, it won’t go short. If the price is too high, it won’t go long.” Well, okay, so one of these days you’re going to experience this phenomenon, and the greatest trade of the decade will be the one that your filter filters out.

  2. Breakouts vs moving averages

    I looked at many, many different ways to measure and identify a developing trend, and what I found, and you know this, is that they all basically pick up on the same thing. They’re just different ways of measuring the same thing. It’s like if there’s a wave coming in and you’re in Santa Barbara and you’ve got a guy from Hawaii and a guy from Oregon and a guy from California, and one guy says it’s four and a half feet, the other one says it’s five feet, and the other one says it’s four, they’re all measuring the same thing, they’re just doing it the Hawaiian style or the Oregon style or whatever.
    So there’s not a lot of benefit from diversifying your entry/exit style, moving average crossover, breakout. There’s a whole bunch of different styles. That being said, you could develop a strategy that uses a moving average crossover that doesn’t have a lot of … in other words, they’re not all created equal.

    I like breakouts. So I’m kind of in the minority there. I like breakouts because they’re pure trigonometry. They’re just triangles, essentially. And you know the price that would force you to get in, and then your stop-loss is some other price, and you know what that is. And you know what both of those prices are every single day. And that means you can calibrate your risk. You can lean on that. We call that the risk range. So I know approximately how much risk I’m taking to market because I know what both of those prices are. When it comes to a moving average crossover, I don’t know what price is going to force those two moving averages to crossover without doing some really advanced, or not advanced but tedious math to come up with a bunch of different scenarios about how they might crossover in the future. So because they all basically pick up on the same thing, but the breakout approach is very clean from a risk management perspective, I gravitate towards that, and I didn’t see a lot of benefit from diversifying meaningfully beyond what I’m already doing when it comes to entries. [Kris: This is resonant with what I saw at a fund that ran a breakout trend strategy.]

  3. Approach to risk management depends on whether you come from the relative vs absolute return crowd

    Jason Buck: Is like CTAs have always been pointing out, or macro trends specialists, have always pointed out that this is what actually matters is your aggregate drawdown risk, not your volatility metric. But that just doesn’t seem to translate well to everybody else, and everybody still seems to care most about sharp ratios versus max drawdown.

    Eric Crittenden: I think in the securities world, stocks, bonds, mutual funds, it’s historically been a relative game rather than an absolute game. In a relative game, anytime you sell, you’re putting yourself into a position to get left behind. If you get left behind, it’s game over for you, everyone loses confidence in you. Futures guys, derivatives guys, live in a very different world or grew up in a very different world where it’s all about survival. Some of these guys are using leverage and quite a bit of it, so it really was essential that they control the amount of risk they’re taking. So, and when CTAs is drone on, and on, and on about risk management, it drives advisors crazy, because they don’t even really know what you mean when you say that.

    [Kris: I’m biased but I agree with this from my life as a derivatives trader. Risk management is the #1 focus, but I had never thought about why the beta world might not think that way]

    It’s not that important in their world, because a balanced portfolio of stocks and bonds, it’s more important to not manage risk, because you don’t want the taxes, you don’t want the turnover, and you don’t want to get left behind. You can look at these psychological studies, and I’ve had people tell me it’s okay to be down 50% once every 10 years, as long as the market’s down 45, or 50, or 55%, I won’t lose my clients. But if I manage my risk along the way, the way you guys do, and I’m up 20 when the market’s up 25, and then the next year I’m up six when the market’s up 11, it’s game over for me. That’s unfortunate, but that’s how it is in the securities industry. So, but when you’re looking at alternatives, and in particular all-weather investments, frame the right way, that all goes away.

  4. “All weather” and uncorrelated risk premia

    Dalio coined that term or made it popular and he sometimes will say, “You need upwards of 16 uncorrelated return streams,” do you think that’s even possible?

    Eric Crittenden: No, it’s not, and I like Dalio, I like his writings, I modeled a lot of what we do off of what their firm did in the ’80s. So, I have a lot of respect for what he achieved, and how he did it, the how is very important. That being said, anyone with a plain vanilla copy of Excel can use a random number generator and realize that three uncorrelated variables are pretty much all you need to be the best money manager out there. So, I don’t know where the 21’s coming from. I’ll tell you hit on something though that there’s only one thing in this world that actually that I’m jealous of right now. There’s one risk premia out there that I can’t source, but it would be so valuable if I could.  So, I’m really just getting three, and I feel like that’s all we need, it’s the best I can do. I think it solves a lot of problems for people, but there’s one more out there that I think is big and sustainable, but you can’t get it from Phoenix, Arizona, and that is the market-making style risk premia. Where you need economies to scale, you need poll position, co-locate your servers, you got to be big, and have a solid network. You got to be basically like Amazon or Costco, where you can just muscle your competitors out of the way. You’re like, “Nope, get out of here, this is my real estate, and I’m doing…” It would be so valuable, but there’s just no way we could pull it off.

    Jason Buck: You said three return sources, so eliminate the three return sources that you believe you have?

    Eric Crittenden: So, I feel like there’s capital formation markets, like stocks and bonds, which are kind of a one-way street, the risk premia is kind of a one-way street. I mean, the bulk of the risk premia is your long stocks. The futures, whether it’s metals, grains, livestock, energy, these are risk transfer markets and risk transfer markets are different than capital formation markets. I feel like risk transfer markets, you need to be symmetrical, you need to be willing to go long or short, because they’re a zero-sum game. They have term structures, so they’re factoring expectations, storage costs, cost of carry, all that stuff. And then there’s the risk-free rate of return, which used to be a great way to kind of recapture inflation, it’s not so much anymore. We can get into that later on, it’s a fascinating time to be managing money, because there’s a huge gap between inflation and risk-free. But, historically speaking, those are the three that I think makes sense, especially in the context of an all-weather portfolio that uses futures to get its commodity and derivative exposure, because it leaves a lot of cash lying around. So, to go source that risk-free rate of return costs you nothing, there’s no opportunity cost, because you were going to be sitting on that cash anyways.

    When I look at all the different risk premium on this computer or the one behind me, historically, I see those three blending together more beautifully, and there’s other ones out there, they just don’t move the needle for me. Things that are related to real estate, credit, they just all have that same trap door risk that the equity market has when the equity market’s going down. So, and then the rest of the time they’re expensive, they’re tax inefficient, they’re illiquid, and then they disappear on… Sometimes they get crowded, I mean, they just cause more problems than they solve. That’s how I feel about corporate bonds, credit, all that stuff. I mean, I wish there was something there, I know other people strongly feel that there is, but I’ve looked at the data until my eyes are blurry, for decades, and I don’t see it.

  5. Capital formation vs risk transfer markets

    This is an important concept to me, because it goes to the point of why I do what I do, or why I think that macro trend oriented approaches expect a positive return over time, because the futures markets are a zero-sum game or actually, a negative-sum game after you pay the brokers, and the NFA fees, and all that stuff. So, in a negative-sum game, you better have a reason for participating. For you to expect to make money, you better be adding something to that ecosystem that someone else is willing to pay for, because somebody else has to mathematically lose money in order for you to make money. So, in studying the futures markets, and I’ve been on both sides, I’ve been on the corporate hedging side, I’ve been on the professional futures trader side.

    I believe I understand who that somebody is, that has deep pockets, and they’re both willing and able to lose money on their future’s position. A trend oriented philosophy that’s liquidity weighted is going to be trading opposite those people on a dollar-weighted basis through time. It does make sense that they would lose money on their hedge positions, I mean, in what world would it make sense for people who hedge, which is the same thing as buying insurance, to make money from that? It makes no sense, that would be an inverted, illogical world. So, anyone who’s providing liquidity to them should expect some form of a risk premia to flow to them. It’s just up to you to manage your risk, to survive the path traveled, and that’s what trend following is. I don’t know why that is so controversial, and more people don’t talk about it, because I couldn’t sleep at night if I didn’t truly believe that what we’re doing deserves the returns that we’re getting.

    Jason Buck: CTA trend followers, or whatever, just they don’t really know how they make money. They’re like, “It’s trending, it’s behavioral, it’s clustering, it’s herd mentality, and that’s how we make money.” You’ve accurately portrayed it as these are risk-transfer services, speculators make money off of corporate hedgers. But the only thing I would push back, and I’m curious your take on this, is like you said, zero-sum game or negative-sum at the individual trade level. But when we look more holistically, those corporate hedgers are hedging their position for a reason, and it’s likely lowering their cost of capital for one of the exogenous effects. So, my question always is, is it really zero-sum or negative-sum, or is it positive-sum kind of all the way around? In a sense that the speculator can make money offering these risk transfer services that the hedgers are looking for that liquidity, and then the hedgers are also… If we look at the rest of their business, they’re hedging out a lot of their risks, which can actually improve their business over time, whether that’s cost of capital, structure, or other exogenous effects.

    Eric Crittenden: Absolutely, I wish I had… You did record this, so I’m going to steal everything you just said. In the future’s market, it’s negative-sum. If you include the 50% of participants that are commercial hedgers, it’s no longer zero-sum. But most CTAs, and futures traders, and futures investors don’t even concern themselves with what’s going on outside the futures market. So, but if you pull that in and look at it, you can see, or at least it’s clear to me, we’re providing liquidity to these hedgers. They’re losing some money to us, and the more money they lose to us, the better off their business is doing, for a variety of reasons. Tighter cash flows, more predictable cash flows results in a higher stock price, typically. But you brought one up that almost no one ever talks about, and that is if they’re hedged, their cost of capital, the interest rate that they have to pay investors on their bonds is considerably lower. Eric Crittenden: Oftentimes, they end up saving more money on their financing than they lose on their hedging, and they protect the business, and they make Wall Street happy at the same time, so who’s really the premium payer in that, it’s their lenders? So, by being a macro trend follower in the future space, the actual source of your profits is some bank that’s lending money to corporations that are hedging these futures. So, it’s the third and fourth order of thinking, and you can never prove any of this, which is great, because if you could prove it, then everyone would do it, and then the margins would get squeezed.

    [Kris: As a commodity options trader, this framing is spot on. I was typically trading with flow that was constrained or price-insensitive. Corporate hedgers must hedge because of the covenants in their loan financing. I had never thought about the edge being spilled in the option market is coming from the lenders ultimately! I guess if we follow that logic even deeper it’s the bank shareholders that are giving up expectancy by requiring less loan defaults and it’s an open question as to whether the hedging activity is worth the lower cost of capital at the bank share level]

15 Ideas From Morgan Housel’s Interview with Tim Ferriss

Morgan Housel is one of my favorite finance writers who happened to make it to the mainstream with his massive hit book Psychology of Money. It’s a book I like to gift people even though I haven’t read it myself. That probably sounds weird, but I’ve read almost every blog post he’s written in the past 5 years and cite his writing in my newsletter constantly. I am just bad better at buying books than reading them. My nightstand has more than 50 books on it. That’s not a typo, it’s a problem (since I moved to CA I read about 5 books per year which is about 1/3 of what I used to back when I had an NYC subway commute).

Anyway, Morgan is great and his big-time interview with Ferriss is worth the 3 hour listen (transcript).

Here are 15 parts I felt like sharing. Bold is my own emphasis.

  1. Who’s the greatest investor of all time?

    It doesn’t seem like a hard question to answer. It should be an analytic answer, it’s just like a number who’s had the best performance, but then you can split this different ways. So who is the wealthiest investor of all time? That answer is Warren Buffett. Who’s the greatest investor of all time in terms of like long term average annual returns? It’s Jim Simons by a mile. And like it’s not even close. Warren Buffett’s long term average annual returns are about 21 percent per year. Jim Simons’ are like 66 percent per year after his ridiculous fees. He’s like in a different universe, but Warren Buffett is like way wealthier. And Jim Simons is like a deca-billionaire himself. And to say like he’s not as rich sounds crazy, but to parse out the reason that Warren Buffett has earned one third of the returns, but he’s like 10 times as wealthy, is because Warren Buffett has been investing for 80 years.

    And so even though he’s not the greatest investor of all time in annual returns, he has so much endurance in terms of what he’s done that by a mile. He’s the wealthiest, which to me, that gets into a really interesting point, which is how do you become a great investor? And most people when they hear that, what they think of is like, how can I earn the highest returns? What are the highest returns that I can earn this year and over the next five years, and over the next 10 years. And that’s not bad, that can be a great thing to do. But to me, if the goal is to maximize the dollars that you have, just like what’s the way that maximize the amount of dollars I accumulate over the course of my life. Then the answer to that question, the huge majority of the time is not earning the highest returns.

    It’s what are the best returns that you could earn for the longest period of time, which usually aren’t the highest returns that are out there because maybe you can double your money this year, but can you do that for 50 years in a row? Like probably not, but could you earn 10 percent annual returns for 50 years? Yeah, you can totally do that and generate an enormous sum of wealth. All compounding is, is returns to the power of time, but time is the exponent. So that’s to me what you want to maximize and that’s why Warren Buffett is in my mind, and it seems like an easy answer, the greatest investor of all time, even though his returns are probably not even in the top 20 percent of annualized returns among professional investors.

  2. Investors Morgan admires besides Buffet

    John Bogle, who started Vanguard, I think is probably the most admirable because it was so selfless what he did.

    A lot of people don’t even know this, Vanguard is owned by the people who own Vanguard Mutual. There’s no Vanguard shareholders. There’s no profits. There’s no dividends that are played to the owners. Vanguard was made for the benefit of the people who own the ETFs, the people who own the mutual funds and John Bogle did not make that much money for himself because of that. And you could almost think that Vanguard’s low fees, all of that is — the amount that you saved in fees is money that could have gone to John Bogle and John Bogle’s estate that didn’t. He’s like this undercover philanthropist of finance that I really admire just because there’s so few other people like that.

    And I think someone like James Simons, who we mentioned earlier. I think in every field, there’s only one person who’s claimed a fame, who’s competitive advantage is “I’m smarter than everyone else”. In tech, for 20 or 30 years, that person was Bill Gates, and I think in finance for the last 20 or 30 years, that person has been James Simons. The only person in the field who can say, if you ask them the question, “What is your competitive advantage?” They can say, “I’m just smarter than everyone else.” Only one person can say that, and it’s James Simons. If you look at what Renaissance Technology has done and just the results that they’ve accumulated and the consistency of what they’ve done, it’s like LeBron James times Michael Jordan times Tiger Woods to the power of Mikaela Shiffrin. It’s just such a different universe compared to what anyone else has done that it’s just, it’s astounding to watch.

  3. Admiration but not copying

    So I think most of the people who I really admire as investors, it’s more that I admire just how they’ve lived their lives, and their general life philosophies, and their investing philosophies stems from that. That’s true for Buffett as well. Actually, there’s an interesting thing about Buffett, which is that it was so easy to admire him and still is. But when the book The Snowball came out, which is a biography written about Buffett by an author named Alice Schroeder, and it came out, I want to say 2009, something like that. It really makes clear the case that Buffett has not lived a perfect life by any means. And in a lot of instances, his family life has been a disaster. I think that’s the right word to use. It’s kind of rude to say that, but I think it’s really true. In some ways, it’s good to hear that, that like everyone puts their pants on one leg at a time in the morning. Everyone is human. Everyone deals with the ups and the downs of living a life. And that he’s a human.

    And also that a lot of the reason that his family life was troubled at times is because he was, had a singular devotion in life, which was picking the best stocks and everything else came second to that. Everything from his family on down came second to that, in a way that a lot of people, including myself at one point said, “I want to be Warren Buffett. I want to be the next Warren Buffett.” But then you read about what it took to get there, and I’m like, “No, I want to stay 10 miles away from that.”

    …In The Making of an American Capitalist, and I read this decades ago, but the story that really stuck out to me and I’m probably getting this wrong, but someone on the internet will correct me. I remember his meeting, Warren’s routine was to work at the office and then come home and basically just walk straight upstairs, and begin reading like S-1 filings or annual reports of one type or another, quarterly reports. And that was his routine.

    And one day, he came home after work and I want to say his son, but one of his kids was like splayed out at the bottom of the stairs and had clearly like fallen down the stairs, and he just stepped over this child and walked up to his office to read reports. Like it didn’t even register to attend to his child.

    That’s a really important insight to learn is that a lot of these people who you admire, the reason that you admire them is they’re so successful, and that success that they had had enormous costs associated with it that are easy to ignore. And when I look at that, it’s like, I can look at pieces of Buffett’s life that I admire and pieces of Jim Simons’ life that I admire, but I don’t want to be them. Because that mega success had so many costs attached to it that I want to avoid in my life. That’s been an important observation too, for me.

  4. Compounding

    [Kris note: A reminder that geometric growth is N² and exponential growth is 2ᴺ…compounding deals with exponential growth. For example, if you grow at 10% per year for 30 years you end up with 1.10³⁰ = 17.4]

    The math behind it is 99 percent of his wealth was accumulated after his 50th birthday and 97 percent came after his 65th birthday, which is a really obvious thing. If you think about how compounding works, like it’s always in the extreme later end of year, is that the numbers just start getting ridiculous. Compounding is just like, it’s just like, it starts slow and then it’s boring. And for 10 years it’s boring, for 20 years it starts to get pretty cool. And then 30 years you’re like, wow. And then 40, 50 years, it’s like, holy, like it just explodes into something incredible. There’s a friend of mine named Michael Batnick, who its explained compound growth, I think the most easy way to comprehend, which is, if I ask you: “What is eight plus eight plus eight plus eight?” you can figure that out in your head in three seconds, like anyone can do that.

    That’s no problem. But if I say, “What is eight times eight times eight times eight times eight?” Like, your head’s going to explode trying to think about it. All compounding is never intuitive. And that’s why, if we look at someone like Buffett, we in the financial industry have spent so much time trying to answer the question: how has he done it? And we go into all this detail about how he thinks about moats and business models and market cycles and valuations, which are all important topics. But we know that literally 99 percent of the answer to the question, how has he accumulated this much wealth, is just that he’s been a good investor for 80 years. It’s just the time. And if Buffett had retired at age 60, like a normal person might, no one would’ve ever heard of him. He would’ve been like one of hundreds of people who retired with a couple hundred million bucks and like moved to Florida to play golf.

    He never would’ve been a household name. He would’ve been a great investor, of course, but there’s a lot of great investors out there. The only reason he became a household name is just his endurance and his longevity, that’s it. And that’s why if you go back to like, even the late 1990s, not that long ago, Warren Buffett was known within circles. Like within investing circles, people knew who he was. He didn’t become a household name until the early and mid-2000s, which is that’s when the compounding took his net worth to become worth 20 billion, 50 billion, a hundred billion where he is right now. It’s just the amount of time he’s been doing it for.

  5. Tim describes the letter Morgan wrote to his son while the boy was still a child

    “You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does — especially from the people you want to respect and admire you.”

    Here’s the paragraph that stuck out to me:

    “When you see someone driving a nice car, you probably don’t think, ‘Wow, that person is cool.’ Instead, you think, ‘Wow, if I had that car people would think I’m cool.’ Do you see the irony? No one cares about the guy in the car. Have fun; buy some nice stuff. But realize that what people are really after is respect, and humility will ultimately gain you more of it than vanity.”

    Now the last sentence has some counter examples maybe. But the point that we rarely look at the person in the cool car and say, “Wow, that person must be cool.” Rather, we apply it to ourselves is I think a very profound observation.

    …Morgan adds:

    I was a valet at a high-end hotel in Los Angeles. So I was in my early 20s and there were people coming in in Ferraris and Lamborghinis and Rolls-Royces, like the whole thing. And it dawned on me one day that when those cars pulled in, that I had really admired, I’m a car guy, I love that. Never once did I look at the driver and say, “That guy is cool.” What I did is I imagined myself as a driver and I thought people would think I’m cool. And this was like, I was in my early 20s, but I’m just thinking like that was my first kind of light bulb into how wealth works, that everyone thinks that they want to be the driver, but no one actually is paying attention to the driver.

    They’re imagining themselves. People think about themselves way more than they think about other people. But we all think that everyone’s looking at us, I think that’s like a universal thing. Everyone thinks like, oh, this person’s looking at me, they’re impressed with me. By and large they’re not, they’re thinking about themselves and how other people might want to be impressed with them.

    [Kris note: I describe this effect as the “bad hair day”. The ratio of people noticing someone else’s hair is messy divided by people mentally derailed by their “bad hair day” is indistinguishable from zero]

  6. Purpose of wealth

    I think if there is a universal trait of money that’s true for like not a hundred percent of people, but let’s say 90 percent of people, is that, what people really want in life is independence and autonomy. I think no matter where you’re from, what you do, your aspirations are, that’s a common denominator. That people just want to wake up every morning and do what they want to do on their own terms. And whether they’re able to do that, whether they can actually do that today, or that’s a goal. I think that’s a universal trait among people is just independence and autonomy. And so to the extent that we can use money to gain that, to gain independence and autonomy, that is, I think, as close as it comes to a universal want and thing that we can use money for. The interesting thing to me is that among huge numbers of people, educated people, financial professionals, the purpose of money is to buy stuff. It’s to accumulate more stuff, bigger house, nicer car, whatever it might be, which is great.

    I love all that stuff too. But to me, the most powerful thing that money can do and the most universal benefit that it can bring us is systematically overlooked, like using it for independence and autonomy is so overlooked. And that to me has always been kind of a sad thing that we are so accustomed and attuned to just wanting to use our money, whatever money that we have, whatever savings that we have, to go out and buy more stuff when we could be using it for freedom and autonomy. And then when you come to a period like in March and April 2020, or October 2008, when millions of people lose their jobs and you see during those periods, like the early day of COVID, how many people are just on the razor’s edge of insolvency. And it does not take them much, one or two weeks of unemployment to be in a really bad financial spot, whether that’s for an individual or a small business, it does not take them much to be thrown over the edge.

    And you realize how dependent so many people are on their jobs, their salaries, their theirs customers in a short period of time. And there’s just not a lot of room for error throughout most of the world. And I think for the huge majority of people, not everyone, but for the majority of people, there could be a lot more. And the reason that they don’t want to have more savings is because to them, the knee jerk reaction is “Why would I just keep my money in the bank or even invest it? Like, the purpose of money is to go out and buy more stuff to enjoy my life.”

    I get that, I understand it, but it’s usually once every five or 10 years that people realize how important independence and autonomy is. And having that wealth that you have not spent, having the money that you haven’t spent that was just lying around doing nothing, becomes the most valuable thing in the world when it lets you gain control of your time and just wake up every morning and say, “I can do whatever the hell I want today.”

    I want to wake up every morning and hang out with my kids and I want them to be happy and I want to do it on my own schedule. If it’s a Wednesday morning and I don’t want to work, then I’m going to sit on the couch all day and watch Netflix. And if it’s a Sunday and I got a good idea, I’m going to spend all day working. It’s all my own schedule on my own time, whatever I want to do. It’s that independence and autonomy.

    Tim Ferriss: Can you not do that right now?

    Morgan Housel: Yes. Yeah, I can. There was a point when I couldn’t and that’s why I feel like I’m pretty happy, and I feel like I’ve done a decent job of doing that. Now I do have, as a lot of people would, a tendency to be like, “Oh, what if I got that Porsche? What if we got the bigger house? What if we did this? What if we did that?” And it’s fun to think that because I love nice cars, I love all of that. It’s just so easy to realize. There was a great quote that I love that’s, “The grass is always greener on the side that’s fertilized with bullshit.” I think that’s really what it is. That’s the accurate phrasing of that well-known quote, and I think that’s really what it is. The idea that all that nicer stuff is going to make you necessarily happier, I think is just so easy to disprove.

    Especially once you’ve experienced a little bit of it yourself and that actually what is going to make people happy is that independence and autonomy, that once I remind myself of that, I’m like, okay. And then the game of earning more just becomes a game, it’s less about like, oh, if I have more money, I’m going to be happier. No, if my net worth is 10 X what it is today, I’m not going to be any happier. That was not true at one point in my life, but I think it’s true today, it’s probably true for you right now, it’s true for a lot of people listening. And therefore you can admit that a game is fun and a game is fun to play, but just admit that it’s a game and it’s actually not going to make you happier.

  7. Risk is personal

    The takeaway from that is most investing debates, where people are arguing with each other, is this a risk? Is that a risk? Should I buy this stock? Is the market going to go up next week? By and large, those debates are not actually debates. It’s people with different risk tolerances and different time horizons talking over each other, talking over one another. And that’s why. I think to me, the most important part about risk is that the definition is different for everyone. My definition’s going to be different from yours, which is different from anyone else who’s listening.

    And it’s not because we disagree with each other. It’s just because we’re different people, with different goals and different ages and different family situations, etc. And so, risk is a very personalized calculation for everyone whether that’s in investing or other areas of your life.

    [Kris: I always say that if you need $1mm tomorrow, the biggest risk is not flying to Vegas and betting 500k on red]

  8. “Tails drive everything” demonstrated without math

    Tim: Am I recalling correctly that a bulk of his career returns came from concentration in GEICO? Am I getting that right?

    Morgan Housel: That’s true. The last page of Benjamin Graham’s book, The Intelligent Investor, tells us little tale about an investor who earned basically his entire career success off of one investment. And that one investment broke every rule that this investor had laid out. And then kind of in the last paragraph on the last page of his book, he says, “By the way, that investor is me.”

    And if you look at Benjamin Graham’s track record, his career track record is incredibly good. And if you remove GEICO, it’s average. And like I mentioned, GEICO by Graham’s own saying, breaks every rule that he just laid out in that book to buy it. And so that’s a really interesting thing is like, not only was it one company, but it’s a one company that broke all the rules. So if you’re reading that book and looking for rules to follow, like by definition, you are not going to achieve Benjamin Graham’s success.

    And so, I think that’s really telling, and I don’t know what the takeaway from that is. If you could say, “Well, then clearly he’s just lucky.” If all of the success was due to one company that broke the rules, you could say, he’s just lucky.

    The other thing you could say is that’s just how capitalism works. And that’s true for Buffett. It’s true for a lot of people. That if they make a hundred investments, you’re going to make the huge majority of your money on probably five of them. That’s true for anyone. That’s even true if you’re investing in an index fund. That within the index, most of the games are going to come from five percent of the companies that you invest in. That’s always the case.

    I think it just kind of changes how people view success though. Like if your view of success is that every stock that Warren Buffett or Chamath or Jim Chanos or all these big name investors, that every time they make an investment, then it’s clear that, that company’s going to be a winner.

    And that’s just not how this success plays out at all. That even among the top names, the best investors over time, the majority of the picks that they make do not do very well. And the reason that they’re so successful is because one or two or maybe five investments they’ve made are ultra home runs. People associate that with venture capital. That’s how it works in NVC. But it’s actually true in all stages of investing.

    The stat that I’ll share with you here is that if you look at the Russell 3000 index, which is an index of large public stocks in the United States, over time, from I think, 1980 to 2010, 40 percent of the stocks in this large cap, like mom-and-pop index, 40 percent of the companies went out of business, not merged, not BAPA, but they went bankrupt, 40 percent of them.

    But the index did very well because seven percent of components were huge winners. It was like Amazon, Microsoft, Netflix, those companies. So even in a boring old index fund, almost half the companies are going to go out of business. But you’ll still do well because a few do very well. And so that was true. And I think the more successful you are, the more you see that.

    Even at a company like Apple or whatnot, what percentage of Apple success is the iPhone? It’s enormous. But they’ve experimented with dozens of different products over time. Amazon has experimented with the Fire Phone, which is a total flop, and they’ve done things in music which were flops. They’ve done all these flops, but they’ve also done Prime and AWS, which matters more than anything else. So almost anywhere you look, you will see that a tiny number of activities, apply for the majority of success. And it’s so hard to wrap your head around that when you’re trying to emulate these people who you look up to and admire.

  9. Safety net vs fuel approach to inheritance

    I’m quoting Buffett again, I don’t want to do this ad nauseam for the whole podcast, but he has a great quote on wealth where he says he wants to leave his kids enough money that they can do anything, but not so much money that they could do nothing — I think that’s really the key. And that’s how I think about my own kids who are very young, but when my wife and I think, how do we want to use whatever savings that we have to benefit them? Giving them a safety net, but not a fuel is a — that’s what my parents did for myself and my siblings, I always knew — when I was a teenager and in my early 20s, I always knew they would be there if I fell on my face and they would — I would never just completely fail, I’d never be homeless, I would never — they would always catch me, but they were never going to be a fuel. They’re never just going to give me money just to make my life better, that was never going to be the case.

  10. Against optimization

    Even if you look at the periods that in hindsight we think were the greatest that existed, which for most Americans is the 1950s and the 1990s, that’s what we remember as the golden age of prosperity and happiness and peace. Even if you look at those periods, like in the 1950 people were high, kids were doing nuclear bomb drills under their desks, and there was a lot of pessimism and negativity. Even if we know in hindsight, it was great at the time, by and large, they did not know that maybe it was good economically, but there was a lot to be worried about in the 1950s. Same in the 1990s, which we today it’s like, oh, the booming 1990s, the bull market. But even people forget in 1994 there was a big interest rate calamity where a bunch of bond interest rates rose and then the stock market crashed.

    And then in 1998 a big hedge fund went out of business and almost took the whole global economy down with it. There was a lot to worry about during these periods, so how do you protect yourself from that? How do you actually become buy and hold? I think there’s one thing to do here, there’s a friend of mine named Carl Richards, who’s a financial advisor, and he has a quote where he says, “Risk is what is left over when you think you’ve thought of everything.” And I think that’s the definition of risk is whenever we’re done planning and forecasting, everything that’s left over that we haven’t thought about, that’s what risk actually is. And the takeaway from that, the actual practical takeaway is that if you are only planning for risks that you can think about and you can envision and you can imagine, then 10 times out of 10, you’re going to miss the biggest risk that actually hits you.

    The biggest risk is always something that nobody sees coming, including something like COVID where it’s actually not fair to say no one saw it coming, but by and large — it’s like in financial circles, not a single investor in 2019 in their economic outlook had a viral pandemic as something that they were worried about, not a single one, or 9/11, or Lehman Brothers going bankrupt, all the big events that actually mattered, it’s pretty much true to say no one saw them coming. I think that’s generally true. And therefore, the takeaway is you have to have a level of savings in your asset allocation that doesn’t make sense. You have to have a level of conservatism that seems like it’s a little bit too much. That’s the only time that you know that you are prepared for risks that you cannot envision.

    And if you are only prepared for what you can imagine, again, you’re going to miss the biggest risk every single time. Whenever people look at my asset allocation, if I share that with them, it looks a little bit too conservative and they say, “Ah, you could be taking a little bit more risk,” and they’re right. I probably could, but I want to be prepared for the risks that I can’t imagine, or the risk that is possible but I don’t want to even think about it, it’s too painful to think about. That’s the only time that you can be prepared for the surprises in life. And I think most people, not all investors, but the majority of investors are not conservative enough. And I know whenever I say that they shake their head like, “Come on. Why don’t you want to take risk?” And once a decade you learn why, once a decade. Whether it’s COVID, or 9/11, or 2008, once per decade, you’re like, “Oh, okay, I get it now. I didn’t see this coming. It was a calamity and I either ground myself into the floor and I got wiped out, or I had a little bit of extra savings that got me through.” So that’s how I think about how to stay in the game in a long term history where history is a constant chain of surprises. That’s the only way to do it.

  11. Framing: Understanding when volatility or pain is a “fee or a fine”

    The way that I’ve phrased it in the book was “understanding the difference between a fee and a fine,” which seems like they’re really similar but there’s a very important difference which is, a fine means you did something wrong like, “Shame on you, here’s your speeding ticket. Don’t do it ever again, you’re in trouble.” And a fee is just a price of admission that you paid to get something better on the other side. Like you go to Disneyland, you pay the fee, and then you get to enjoy the theme park. You didn’t do anything wrong, it’s just that’s the fee.

    I think if you could situate your life to where you view a lot of the ups and downs, not all of it, but a lot of the volatility in investing, a lot of the volatility in your career, as a fee instead of a fine, then it just becomes a little bit more palatable. And when the market falls 30 percent, it’s not that you enjoy it, you don’t think it’s fun, but you’re like, “Okay, I understand this is the fee that I have to be willing to pay in order to do well over a long period of time.” Most investors don’t do that. When their portfolio falls 30 percent, they say, “I fucked up. I did something wrong. I clearly made a mistake. And how can I make sure this never happens again?” And that’s the wrong way to think about it. And I think if you view it as a fee instead of a fine, it’s just much more enjoyable. It’s much more realistic to deal with.

    Now, I said earlier that there are some areas in life where it’s like that. If you’re talking about a death in the family, a divorce, there’s things that’s like, “No, that’s not — that’s just a straight negative.” Like no silver lining to some of these things in life so I want to be careful at parsing that. But particularly investing, the huge majority of the pain that people go through and put themselves through is just the fee for earning superior returns over time. And if you’re not willing to pay that, then you’re probably not going to get the reward on the other side. And that’s why you can see so many people who at the first experience with being uncomfortable in investing with a loss, they view it as they screwed up and then they want out. They want to move on to something else.

    And of course, they’re not going to get the rewards over time. Nothing in life is going to give you those rewards for free. There’s a cost to everything. And just identifying what the cost is then realizing that the cost is not on a price tag, you’re going to pay for it with stress and anxiety, and dopamine, and cortisol, like that’s how you pay for these things, I think that’s the only way to deal with those big ups and downs.

  12. The optimal amount of bullshit

    You had Stephen Pressfield on your show, and he was talking about a time when he lived in a mental institution. He was not a patient himself, but he lived there and he starts talking to all these people. And he made this comment that a lot of the common denominators of these people who lived in a mental institution was they were not crazy, they just could not handle or put up with the bullshit of life. They just couldn’t deal with it. And that was kind of why they ended up in the mental institution. And he said all these people were the smartest, most creative people who he had ever met, but they couldn’t put up, they had no tolerance for the bullshit of the real world. And that to me, just brought this idea that there’s actually an optimal amount of bullshit to deal with in life. If your tolerance for bullshit is zero, you’re not going to make it at all in life…

    I listened to that [interview] and it was like, “Oh, see, these people could not function in the real world because they had no tolerance for bullshit.” The second step from that is, there is an optimal amount of bullshit to put up within life. And that was where this article, “The Optimal Amount of Hassle,” came from.

    And I remembered I was on a flight many years ago and there was this guy in a pinstripe suit who let everyone know that he was a CEO of some company, and the flight was like two hours delayed, and he completely lost his mind. He was dropping F bombs to the gate agents and just completely making an ass of himself because the flight was delayed. And I remember thinking like, “How could you make it this far in life and have no tolerance for petty annoyance, like a delayed flight?”

    And I just think like there’s a big skill in life in terms of just being able to deal with some level of bullshit, and a lot of people don’t have that. There’s another great quote that I love from FDR, who of course was paralyzed and in a wheelchair. And he said, “When you’re in a wheelchair and you want milk but they bring you orange juice instead, you learn to say, ‘That’s all right.’ and just drink it.” And I think that just having the ability to put up with that kind of stuff is, I think, really important and often lost in this age where we want perfection. We want everything to be perfect, and it never is.

    [Kris: I have a good friend who is insanely smart and well-traveled (top 1% in both categories of everyone I know). He has a  brother who is not conventionally successful and I’ve asked him about what that brother is like. His brother is also very well-traveled in part to choosing a life in the armed forces. But my friend has also described is brother as also extremely smart. But he’s incapable of tolerating the b.s. that defines the ladder-climbing world. The military life is simple in the ways he prefers. It has always stayed with me, that my friend quite explicitly described his brother as being unwilling to suffer bullshit. I really think about this a lot (too much if I’m being honest), since I often feel that “getting ahead” is really just climbing sedimentary layers of compressed bullshit.]

  13. The durability of value investing with a lower case “v”, not the investment category

    Value investing will always work in terms of, if you buy an asset for less than it’s worth, you’ll probably do pretty well over time. But the actual formulas that you use to determine value, those have always evolved and always changed. And formulas that people use, whether it’s price to book value, the P/E ratio. Whatever formula it is that may have worked at one period of time, those always evolve. That’s always been the case. I think it always will be the case that there will be people that will be stubbornly attached to the metrics and the formulas and the valuation techniques that worked perfectly in the previous era that now outdated and outmoded.

  14. Incentives

    If I was selling products by commission, if I was a financial advisor selling by commission, I would probably be much more into active investing and active strategies than I am right now. I think because I’m not a financial advisor, I’m not giving people advice, I can just view it as an outsider and be like, well, this is what makes sense to me so that’s what I’m going to do.

    Whereas I know that if I was in the trenches so to speak and had to make a living doing this, I know I would’ve very different views about what strategies you should pursue. And I know that the strategies that I would lead towards would be higher fee higher commission. I just think that’s the reality of it. Most people who work in finance are good, honest, noble people. Not all of them, but most of them are. But to the extent that is bad advice that gets perpetuated, I really just think it comes down to the incentives that are in the industry. The perfect example of this is that the only firm that’s really been able to make a good business out of selling passive funds is Vanguard and they’ve done it by becoming a nonprofit. That’s the only way that you can do it. You can’t make a good business out of selling the lowest fee funds that are out there. You just can’t do it. So I know that if I had a different compensation structure, I would think differently as an investor.

  15. I couldn’t help mentioning this section. Do what you will with it

    Tim Ferriss: Yeah. I am going to try to find this. There it is. It is a tweet from Jason. So a few years ago, Naval Ravikant and I were having a conversation on the podcast and he talked about the asymmetric costs of offense and defense in a world where drones are weaponized. Meaning if you have a drone or a bunch of tiny drones that are weaponized, and this is being developed all over the world, of course. You have sophisticated attacks where they can be coordinated with software to say all land on a given tank and explode at once. They can be used in more ad hoc, improvised ways.

    But I’ve been tracking this space because a number of my friends are involved. Some of them design and manufacture predator drones, for instance. So a drone that would kill or capture other drones, and they use netting that is shot out like Spider-Man to catch drones and they’re used by different major league sports franchises, because that’s a non-trivial threat to say an arena would be drone attacks. And Jason has a tweet, this is from December 7th, 2021. “Saudi Arabia is running out of the ammunition to defend against drone and missile attacks from rebels in Yemen…” I can’t pronounce, the Houthi it might be, I’m sure I’m pronouncing that incorrectly, ” …rebels in Yemen is appealing to the US and its Gulf and European allies for a re-supply.” This is in The Wall Street Journal and the lead, or at least the teaser sentence that I see presented by Wall Street Journal, is, “Saudi Arabia’s defense against the rebels’ drones pits $1 million missiles against $10,000 ‘flying lawn mowers.’” In quotation marks.

    Morgan Housel: I remember that. Yeah. That’s a great way to phrase the problem that you’re dealing with and who has the edge here? It’s crazy.

    Tim Ferriss: Yeah. The future of warfare is here. Not to beat poor William Gibson’s quote to death, but the future’s already here, it’s just not evenly distributed. But this is something that I’ve been watching very closely because the potential consequences and the implications are so terrifying. So not to end on that, but I only saw that tweet today from Jason and it served as a reminder to me that I think in a year, particularly with the technological development cycles that we’re seeing, how compressed they are, and the innovations that we’re seeing from drone manufacturers. I recently had some interactions with the newer drones and drones with flir technology and infrared tracking capabilities. It is incredibly impressive. Compared to drones from even 18 months ago, they are worlds apart. It is shockingly impressive.

    Morgan Housel: Here’s what’s scary to me about that too, is that when the nuclear bomb came about, there was obviously fear that this is the future of war and knock on wood, fingers crossed, it has not since 1945. Because the consequences of a nuclear war are so catastrophic, that everyone who has them up until this point has said it’s not worth using them because the consequences are so severe. I almost think drone war is the opposite where it’s like there’s no skin in the game, you’re not sacrificing any soldier’s lives. You’re sacrificing civilian lives, of course, on the other side. But there’s so little skin in the game and it’s so easy to just flip these things up in the air and go for it, that it makes starting a war, progressing a war so much easier than it’s ever been. It’s the opposite of what happened with nuclear war over for the last 80 years.

    Tim Ferriss: Yeah. If people want to make an attempt at looking around some corners, also from a technical perspective with respect to AI and cyber warfare, highly recommend listening to my recent podcast with Eric Schmidt, it is mind-boggling. What else? I think that within a year we will have things like GPT-3 at a point where we can generate probably, I would say within a year might be aggressive, but within 18 months, with figures who have enough audio on online that you can really deep fake effectively. You’ll have synthetic interviews with people alive and dead that are convincing enough that they can’t be distinguished from live interview. I could see that being graspable in the next 12 to 18 months.

    Morgan Housel: And that just torpedoes trust even more than it’s ever been. You hear a quote from Tim Ferriss, and you’re like, “That’s probably not even Tim, so I don’t even take it serious anymore.” There’s no trust anywhere.

    Tim Ferriss: Election cycle 2022. It’s going to be exciting.

    Morgan Housel: I got my son in Oculus for Christmas and there’s a thing where you can do a tour of the White House with Barack and Michelle. It was filmed back then. And just sitting at a table in VR, having a conversation with Barack Obama, it was so shockingly realistic. And you know where that’s going, the VR headsets that we have 10 years from now are going to make this look like a complete joke. If you mix that with the ability to deep fake, we’re heading into a world that’s going to be so wild.


    Kris: As I was pulling insights from the transcript this was a timley news event:

Cousin Camp

Cousin Camp finally happened. This was one of the best things we’ve ever been a part of. I think the 8 cousins (+2 close friends) will have an amazing memory of this week. The kids ranged from 5 to 12 years old.

Schedule

7:30am-9am: Breakfast, making beds, getting dressed

9am: A chess coach would come teach for an hour.

10am-noon: Our boys amazing preschool teacher Jen came and led the kids through thoughtful activities.

Noon-2pm: Lunch break and play

2pm-4pm: Second session with Jen

4pm-6pm: Swimming pool (lots of Blind Man’s Bluff with Fish Out Of Water rules), Nerf battles, badminton, feeding the neighbor’s cat, and games like Throw Throw Burrito and A Fake Artist Goes To New York.

6pm til bedtime: Dinner, play, and music rehearsals for the open mic we went to in town Friday night. [A piano and group vocal cover of Ed Sheeran’s Perfect and a piano cover of Vanessa Carlton’s Thousand Miles]

A few additional notes

  • The theme of the week was communication. Being an active, empathetic listener, looking out for each other, making sure your tone matches what you want to project into the world. Jen is a master teacher and our first call for behavioral questions. She is another hero I try to emulate. Her touch balances firmness and love. Toughness and understanding. An example is when one child hurts another she doesn’t force them to say “sorry” because she knows it’s an empty sentiment when done at gunpoint. Instead, she facilitates a dialogue between the children that surfaces the “why” of the action and the victim can express how they feel. Most of the time, the offender apologizes genuinely because you can see them really perceive the other person’s POV.
  • Dinner was Yinh’s favorite part of the week. She would lead some pretty thoughtful discussions about how we treat each other and act generally. The kids one by one describe the day’s highs and lows and the reasons for that. They are asked to point out which actions other kids did were helpful or considerate. It’s truly awesome to see what kids notice. If anything, it’s a reminder to give them lots of credit. Their observational skills often surprised us to the upside.A moment I want to memorialize in case I read this in 10 years. Maddox thought his treatment was a result of his “reputation” and that was something Yinh really unpacked with him. The gist of it — you don’t need to conform to the expectations of others. It was insanely mature for a 10-year-old best known for bouncing around the room to realize that some of his actions were guided not by what he wanted but by his “reputation” and being freed of that was a moment of unlocking in his eye. And that’s the point. He’s so much more than a boisterous 10-year old and that wildness is a feature not a bug. Maybe some adults could benefit from realizing their reputation doesn’t need to define all aspects of their life. There’s more to existence than expected value or being smart or being able to do X. Maybe allowing yourself multiple identities relieves pressure.
  • Some of the activities:Building boxes that they had to drill together and pain before creating a scene inside. Some kids made things like a labyrinth or pinball machine.

    Bridge building contest like you did in science class

    Kids would each pull an “Angel” card in the morning. The card would give them a trait to be extra mindful of for the day.

    Kids would be expected to clean after every module and by Day 2 they were doing this unprompted. They’d close the pool, put away all the toys, set the table, and take out the garbage.

  • Date nights. That’s what the other parents got to do while the kids were with us all week. They were all sending us pics of the restaurants and bars they were enjoying every night. Yinh and I even fashioned our own dates. We’d play Wingspan every night after the kids went to bed. I have yet to beat her. Grr.

Finally, it’s worth remembering it takes a village. My mother-in-law was a saint, prepping all meals. More than half the kids were her grandkids which made the week extra sweet. Seeing all the plates laid out, all the kids crammed into bedrooms on makeshift sleeping arrangements, and those beautiful in-between moments when the kids scattered all over the backyard, front yard or in various rooms just organizing their own fun. Even the oldest cousin’s bunny, Olaf, had a great time getting love from so many little hands.

Cousin’s Camp Year 1 was a massive success and we can’t wait to do it again next year.

Structuring Shorts

Don’t Get Squozen: How to structure equity shorts for max profit and min risk of ruin (14 min read)
by Brent Donnelly

Brent’s free Substack series on trading concepts is terrific. The title doesn’t bury the lede. It’s a great discussion of shorting. But this post really stood out because of the decision tree it lays out for how and when to consider using options. I also added the post to the Moontower Volatility Wiki.

I’ve written a bunch on shorting and using options for directional reasons. Please read Brent’s post if you care about this stuff. If you feel like hearing my written voice after that, you can learn more about these topics here:

  • Shorting In The Time Of ShitCos (8 min read)
  • The difficulty with shorting and inverse positions (2 min read)
  • The Gamma Of Levered ETFs (8 min read)
  • Structuring Directional Option Trades (8 min read)
  • How Options Confuse Directional Traders (8 min read)
  • Using The TSLA Price Endgame To Understand Options (12 min read)

I’ve been reading J. Paul Getty’s How To Be Rich: His Formulas which is a collection of essays that was first serialized in Playboy magazine at the behest of Hef in the 1960s. I like the way Getty writes and I liked learning about how he amassed his fortune in oil but it’s not a book I’d say rush out and read. I picked it up from the Getty Museum gift shop because it was short and I knew nothing about him.

Anyway, you’ll recall Moloch was a heavy theme of this newsletter at the beginning of the year. I just liked this:

Relentlessly Inspiring

School starts here on August 9th and we are on vacation with friends before heading back to a more regular routine. We finally pulled off Cousin’s Camp last week. I’ll describe it at the end of the letter for those interested.

I’ll keep things short otherwise.

Relentlessly Inspiring

Instead of reading anything I wrote this week, check out these 2 TED talks by Mark Rober. He has one of the most followed YouTube channels and deservedly so.

Watch his YT videos. Watch how he approaches problems. Watch how he communicates. I’ve watched most of his vids with my kids several times. These Ted talks are amazingly put together. The presentation, the ease in which he directs the production, the off-hand humor that breaks up transitions, and the genuine enthusiasm. He’s tirelessly uplifting.

Our culture is buried in irony and memes. I’m not immune. I follow shitposters because it’s an art in itself. If Jonathan Swift or Oscar Wilde were alive today they’d have 7-figure follower counts. But when sound bytes become a sport, it turns the volume down on earnestness and mutes nuance.

Rober is holding the ladder when so many others are trying to kick it. He does it with a smile. He shows you the formula. And he’s honest in a way that distances himself from the saccharine, even toxic, positivity that the crystal woo crowd pushes with not so much as a wink.

I want to point out one more thing. Rober is a scientist. By definition, he’s a skeptic. He must carry a sack of hypotheses he wanted dearly to embrace, but reality forced him to reject. And yet, he wields that skepticism as a tool. A scalpel. Not a personality.

I’m a 44-year-old dude and I still have heroes. You can put your ego aside and have them too. There are people who I try to channel. They are models of how I want to respond to others. How I want to listen. How I want to think. It’s not about wanting to be them. It’s about incorporating what inspires you about others into yourself. If you practice this, you eventually integrate it and give it your own flavor. Just like you play covers to learn guitar before your style develops. Look, most of your personality is modeled anyway. Might as well be conscious about it.

Enough earnestness from me. Go watch the vids:

This vid gives a 3 bullet point answer to an important question that, if you have retained any playfulness in your life, you might still wonder about:

Moontower #155

School starts here on August 9th and we are on vacation with friends before heading back to a more regular routine. We finally pulled off Cousin’s Camp last week. I’ll describe it at the end of the letter for those interested.

I’ll keep things short otherwise.

Relentlessly Inspiring

Instead of reading anything I wrote this week, check out these 2 TED talks by Mark Rober. He has one of the most followed YouTube channels and deservedly so.

Watch his YT videos. Watch how he approaches problems. Watch how he communicates. I’ve watched most of his vids with my kids several times. These Ted talks are amazingly put together. The presentation, the ease in which he directs the production, the off-hand humor that breaks up transitions, and the genuine enthusiasm. He’s tirelessly uplifting.

Our culture is buried in irony and memes. I’m not immune. I follow shitposters because it’s an art in itself. If Jonathan Swift or Oscar Wilde were alive today they’d have 7-figure follower counts. But when sound bytes become a sport, it turns the volume down on earnestness and mutes nuance.

Rober is holding the ladder when so many others are trying to kick it. He does it with a smile. He shows you the formula. And he’s honest in a way that distances himself from the saccharine, even toxic, positivity that the crystal woo crowd pushes with not so much as a wink.

I want to point out one more thing. Rober is a scientist. By definition, he’s a skeptic. He must carry a sack of hypotheses he wanted dearly to embrace, but reality forced him to reject. And yet, he wields that skepticism as a tool. A scalpel. Not a personality.

I’m a 44-year-old dude and I still have heroes. You can put your ego aside and have them too. There are people who I try to channel. They are models of how I want to respond to others. How I want to listen. How I want to think. It’s not about wanting to be them. It’s about incorporating what inspires you about others into yourself. If you practice this, you eventually integrate it and give it your own flavor. Just like you play covers to learn guitar before your style develops. Look, most of your personality is modeled anyway. Might as well be conscious about it.

Enough earnestness from me. Go watch the vids:

This vid gives a 3 bullet point answer to an important question that, if you have retained any playfulness in your life, you might still wonder about:


Money Angle

Links:

Don’t Get Squozen: How to structure equity shorts for max profit and min risk of ruin (14 min read)
by Brent Donnelly

Brent’s free Substack series on trading concepts is terrific. The title doesn’t bury the lede. It’s a great discussion of shorting. But this post really stood out because of the decision tree it lays out for how and when to consider using options. I also added the post to the Moontower Volatility Wiki.

I’ve written a bunch on shorting and using options for directional reasons. Please read Brent’s post if you care about this stuff. If you feel like hearing my written voice after that, you can learn more about these topics here:

  • Shorting In The Time Of ShitCos (8 min read)
  • The difficulty with shorting and inverse positions (2 min read)
  • The Gamma Of Levered ETFs (8 min read)
  • Structuring Directional Option Trades (8 min read)
  • How Options Confuse Directional Traders (8 min read)
  • Using The TSLA Price Endgame To Understand Options (12 min read)

I’ve been reading J. Paul Getty’s How To Be Rich: His Formulas which is a collection of essays that was first serialized in Playboy magazine at the behest of Hef in the 1960s. I like the way Getty writes and I liked learning about how he amassed his fortune in oil but it’s not a book I’d say rush out and read. I picked it up from the Getty Museum gift shop because it was short and I knew nothing about him.

Anyway, you’ll recall Moloch was a heavy theme of this newsletter at the beginning of the year. I just liked this:


From My Actual Life

Cousin Camp finally happened. This was one of the best things we’ve ever been a part of. I think the 8 cousins (+2 close friends) will have an amazing memory of this week. The kids ranged from 5 to 12 years old.

Schedule

7:30am-9am: Breakfast, making beds, getting dressed

9am: A chess coach would come teach for an hour.

10am-noon: Our boys amazing preschool teacher Jen came and led the kids through thoughtful activities.

Noon-2pm: Lunch break and play

2pm-4pm: Second session with Jen

4pm-6pm: Swimming pool (lots of Blind Man’s Bluff with Fish Out Of Water rules), Nerf battles, badminton, feeding the neighbor’s cat, and games like Throw Throw Burrito and A Fake Artist Goes To New York.

6pm til bedtime: Dinner, play, and music rehearsals for the open mic we went to in town Friday night. [A piano and group vocal cover of Ed Sheeran’s Perfect and a piano cover of Vanessa Carlton’s Thousand Miles]

A few additional notes

  • The theme of the week was communication. Being an active, empathetic listener, looking out for each other, making sure your tone matches what you want to project into the world. Jen is a master teacher and our first call for behavioral questions. She is another hero I try to emulate. Her touch balances firmness and love. Toughness and understanding. An example is when one child hurts another she doesn’t force them to say “sorry” because she knows it’s an empty sentiment when done at gunpoint. Instead, she facilitates a dialogue between the children that surfaces the “why” of the action and the victim can express how they feel. Most of the time, the offender apologizes genuinely because you can see them really perceive the other person’s POV.
  • Dinner was Yinh’s favorite part of the week. She would lead some pretty thoughtful discussions about how we treat each other and act generally. The kids one by one describe the day’s highs and lows and the reasons for that. They are asked to point out which actions other kids did were helpful or considerate. It’s truly awesome to see what kids notice. If anything, it’s a reminder to give them lots of credit. Their observational skills often surprised us to the upside.

    A moment I want to memorialize in case I read this in 10 years. Maddox thought his treatment was a result of his “reputation” and that was something Yinh really unpacked with him. The gist of it — you don’t need to conform to the expectations of others. It was insanely mature for a 10-year-old best known for bouncing around the room to realize that some of his actions were guided not by what he wanted but by his “reputation” and being freed of that was a moment of unlocking in his eye. And that’s the point. He’s so much more than a boisterous 10-year old and that wildness is a feature not a bug. Maybe some adults could benefit from realizing their reputation doesn’t need to define all aspects of their life. There’s more to existence than expected value or being smart or being able to do X. Maybe allowing yourself multiple identities relieves pressure.

  • Some of the activities:

    Building boxes that they had to drill together and pain before creating a scene inside. Some kids made things like a labyrinth or pinball machine.

    Bridge building contest like you did in science class

    Kids would each pull an “Angel” card in the morning. The card would give them a trait to be extra mindful of for the day.

    Kids would be expected to clean after every module and by Day 2 they were doing this unprompted. They’d close the pool, put away all the toys, set the table, and take out the garbage.

  • Date nights. That’s what the other parents got to do while the kids were with us all week. They were all sending us pics of the restaurants and bars they were enjoying every night. Yinh and I even fashioned our own dates. We’d play Wingspan every night after the kids went to bed. I have yet to beat her. Grr.

Finally, it’s worth remembering it takes a village. My mother-in-law was a saint, prepping all meals. More than half the kids were her grandkids which made the week extra sweet. Seeing all the plates laid out, all the kids crammed into bedrooms on makeshift sleeping arrangements, and those beautiful in-between moments when the kids scattered all over the backyard, front yard or in various rooms just organizing their own fun. Even the oldest cousin’s bunny, Olaf, had a great time getting love from so many little hands.

Cousin’s Camp Year 1 was a massive success and we can’t wait to do it again next year.

Stay groovy and have a great week!