The Antisocial Advantage

Friends,

  • 5 years ago the Patriots’ Malcolm Butler intercepted a Russell Wilson pass on the goal line to cement another Super Bowl trophy. The NFL Network called it the 5th greatest play of all time, and Seahawk’s coach Pete Carroll’s decision to pass and not hand the ball off to Marshawn Lynch aka The Beast is one of the most widely criticized calls of all time. Was it a bad call?
  • If you were coaching a Stanley Cup playoff game and were down by 2 goals, when would you pull your goalie? With 2 minutes left? 90 seconds? When do you see coaches typically decide the benefit of having an extra skater outweighs an unminded net?

Straight from the writing-a-hook-101 playbook, surprise! You guessed right — the answers are counterintuitive. In the first case, coach Carroll actually made the right call despite what many observers think. How about the hockey coaches? According to famous Wall Street quants, Cliff Asness and Aaron Brown, coaches should yank the goalies with more than half the time remaining in the 3rd period. Their argument and model has been one of the most popular papers on SSRN since it was published last year.

Going for it on 4th and long near midfield. Letting your opponent score a TD when they are in close range for a go-ahead FG late in the 4th. These are some examples of the unconventional but correct calls that have been normalized in the NFL. Upon first glance, these stories seem to be about sports becoming more woke about math. I disagree. The math was not the bottleneck. Bill James and sabermetrics have been around for forty years.

The deeper lesson is about acting independently. Pete Carroll made the right call. It happened to not work out. When you have a 55% edge on a coin flip you still lose almost half the time. What makes this call memorable is how courageous it was. He knew that observers would ridicule him if he called a pass and lost. A lesser coach may have chosen wrongly to run the ball knowing that nobody would second-guess the call if it didn’t work. Even if a magical flying Seahawk materialized on most coach’s shoulders with divine knowledge that running was only 45% to work, you can easily imagine the coaches rationalizing that it was still worth trying. Such is the power of motivated reasoning when the fear of a mob shakes your conviction.

(The story of the defensive play that was called on the field for that interception is fascinating. If you want to understand the depth of Belichik’s strategy it’s worth a listen. Mike Lombardi, Pats assistant that year, breaks it down starting at 38:40)

Somewhat anti-social

For Carroll to pass the ball in that goal line situation took faith that the team owner wouldn’t fire him based on the outcome. He had to trust that that the process which brought him to this moment and dictated the decisions on smaller stages deserved more weight than the emotions which might emerge in the spotlight. To explore why some people seem to be more capable at this and how we can all be aware of the forces which inhibit us from good decisions check out Malcolm Gladwell’s interview with Cliff Asness and Aaron Brown.

For those of you who have taken the Big Five Personality test (also known as the Five-Factor or OCEAN model), you will see the role of ‘disagreeability’ and in which ways it is an adaptive quality. The trait of being less interested in others’ approval has significant pros and cons. It’s advisable to match your temperament in this category to the work you do. More than many other traits, I feel like a mismatch here leads to very avoidable frustration. After the interview (and a moment to ponder how Brown’s voice sounds just like Jeff Bridges), you will find yourself in the following thought exercise:

You discover an armed intruder in your house when you are home alone with your child. What’s your strategy?

Gladwell, riffing on the plot of No Good Deedwalks you through the right strategy versus the one you are going to choose. He then explains why you should be forgiven for choosing poorly.

The Courage to Be Disliked

This is a book by Fumiake Koga and Ichiro Kishimi which follows a conversation between student and philosopher to demonstrate the principles of Adlerian psychology. It was the latest book covered in the Rad Read’s Slack book club. Borrowing from Blas Moros’ notes:

No matter what moments you are living, or if there are people who dislike you, as long as you do not lose sight of the guiding star of “I contribute to others,” you will not lose your way, and you can do whatever you like. Whether you’re disliked or not, you pay it no mind and live free.

Armed with observations from Alfred Adler, you can orient towards your needs more effectively than the often misguided promise of other’s approval. I highlighted Moros’ notes here if it helps you decide whether you want to pick it up the book.

Being A “Disagreeable” Investor

Having a disagreeable streak is an advantage in the investing world. If backed by stakeholders that are not beholden to conventional thinking (rare), you at least have a chance to stand apart from the herd. Some observations I’ve collected on contrarianism and investing.

  • Josh Wolfe on the Invest Like the Best Podcast: Not all contentious ideas turn out great, but all great ideas were contentious. The contentiousness is what allowed them to be underpriced. If everyone loves an idea from the outset than it’s probably overpriced or it’s obvious which increases the chance someone else has tried it and failed for a reason you have yet to discover.
  • Since 1968 [until recent history], Altria has generated average annual returns of more than 20%. No other stock has come close to matching that long-term performance, according to renowned stock market expert and Wharton professor Jeremy Siegel. Jared Dillian would not be surprised. His pet theory of ‘constraints investing’ advocates for owning names that others can’t be seen holding. This is not limited to sin stocks. Mall REITs, brick & mortar retail, and perhaps even the next round of unicorn IPOs are all businesses a constrained investor might not look at since the downside is losing money AND ridicule.
  • Unsexy businesses and careers can be quietly lucrative. My impulse is that people who own funeral homes and sanitation companies are doing pretty well. Small-cap private equity investor Brent Beshore is making a living out of this idea. His company Adventures’ website is a wealth of real business knowledge and he’s one of my favorite follows on fintwit.
  • A very simple math example to demonstrate the importance of divergence when filling out an NCAA bracket: Suppose 4 people are filling out a bracket and the favorite has a 72% chance of winning the tourney. If 3 people choose the favorite and I choose the second best team which has a 28% of winning the tourney (the numbers are silly but it won’t change the conclusion), then I have the most equity. How? If the favorite wins only 1 of the 3 people will claim the prize based upon the rest of their bracket, reducing their initial equity to 72/3 or 24% vs my 28%. Assuming the scoring system is designed to give massive weight to the final game (most brackets do) then the conclusion is apparent: if many people overbet the favorite you want to pick the likeliest teams to win who are relatively ignored! (h/t Steve for help with the example)
  • Many investors create risk management rules that say “if I lose X dollars, I will close the position”. This type of rule fails to acknowledge that the best opportunities often occur when an asset’s path has inflicted max pain. The merit of an investment on a going-forward basis has nothing to do with your p/l up until that point. Instead, consider a risk management framework that recognizes the benefits of contrarianism. Such a system would have its users establish max pain tolerance as an input into sizing the position in the first place. This may sound like a subtle difference but in practice it is not. Work it out yourself to see why.
  • The Allocators’s Dilemma

  • Activist investors are great examples of ‘disagreeable’ personalities. Being funny is a byproduct of their style. Market folk will recall the venom in Dan Loeb’s pen as well.
  • Short sellers are like the investigative journalists of corporate America, sniffing out frauds and accounting anomalies. One of my favorite interviews is with famous short-seller Marc Cohodes. His irreverent, iconoclast reputation is on full display. Being a short-seller requires an extremely ‘disagreeable’ personality streak since they are often battling against charming executives who are masterful story-tellers and fundraisers. Short selling is often condemned by its targets as opportunistic when in fact it serves an imperative truth-seeking function in the markets. For technical reasons I’ve described here, it is one of the most challenging strategies. When short-sellers are sounding off we should actually pay extra attention since the truth they uncover is a byproduct of one of the most masochistic paths to profit.
  • Examples of businesses featured on Guy Raz’s How I Built This born from contrarian thinking.
  • I have concerns about climate change but have reservations about the discourse around it. Let me explain. Dissenting with the scientific orthodoxy immediately gets you associated with the unwoke, the climate deniers, or Trump. In other words, you get camped with uncritical ideologues that are often associated with being stupid. This is a binary view of the world. One of Moontower’s recurring themes is the world is messy and grey. When something becomes that polarized, the ensuing lack of nuance raises an antenna. There’s no short-seller function in discussions like this. Truth-seeking is completely suppressed by signaling tribe allegiance. Honesty is compromised by incentives. Dissension risks academic grants, public ridicule, and maybe even friendships.

Lyall Taylor is an independent investor I read. He answers to nobody. He’s disagreeable. This gives him an edge in finding situations where the baby has been thrown out with the bathwater. His recent post on climate change discourse and ESG discourse is a great way to step through nuanced thinking. Agree or disagree with him, but don’t miss the lesson. Behind every conversation exists an intellectual meta backdrop. The odds of any conclusions need to be discounted by the incentives embedded in the evidence.

Here’s the post with my highlights.

A concept I call “Career TANSTAAFL”

There is a psychic premium to jobs that are sexy like chefs or jobs that are rewarding like teaching. So those types of careers will either be very competitive or pay poorly. If a job was lucrative and rewarding everyone would want to do it. Musicians are cool. No way they get to be well paid too. Same for actors, artists, models, athletes. Unless you think being the best basketball player in your state (that’s roughly how good you need to be to have a shot at the NBA) is a legit career plan, recognize that working on cool things means you will need to give up financial comfort.

A tangential, possibly cynical, musing: You can be paid in money. In prestige. In honor. In gratitude. How you weigh these things is personal. And the weights reveal your insecurities.

Contrarian Examples from How I Built This

Allen Cheng writes the best book and content summaries on the web. He wrote this post summarizing what he learned from 50 episodes of Guy Raz’s How I Built This podcast.

Many of the businesses were built on ideas that seemed polarizing or crazy at the time. Pulling directly from Allen, these are the ones that jumped at me:

  • Airbnb: idea of staying in someone’s house was crazy
  • Sam Adams: American beer at the time were watered down lagers. Didn’t want to compete with Budweiser.
  • Southwest: Violated all the “rules” of airlines. Discount airline (some tickets cost $10), no frills, direct routes between second tier airports. Focused not on market share but profitability.
  • Jose Andres: Did crazy things in the kitchen at El Bulli with Ferran Adria. “Don’t take things for granted. You have to discover things for yourself. If you only follow the teachings of people before you, you are only following others.” Also was part of the tapas sharing-food movement in the US – “just move your plate 20 inches to indicate sharing.”
  • Patagonia: “If you want to understand an entrepreneur, understand a juvenile delinquent.” If you can’t win at a sport, invent your own sport that you can be best in. Don’t go head to head against Coca-Cola, they’ll kill you. Do it differently. Figure out something that no one else has thought about.
  • Melissa & Doug: In the digital age, they went retro, building physical toys that gave parents nostalgia. “Don’t go with the tide. If we copy every good model out there, we’re going to be mediocre by definition.”
  • Warby Parker: Got a lot of feedback of glasses being weird to buy online, people wanted to touch them. They offered free shipping and returns for home trial program.
    • Price was believed to be signal of quality. Would be absurd to consumers that a comparable product was sold at 10% of price. $100 presents a psychological barrier, so they priced at $95 so it looks deliberate (as opposed to $99)
    • Conventional wisdom was to either build a brand or ecommerce site, not both. They wanted to build a vertically integrated brand.
  • Zumba: Novel in how much fun people had while exercising. Make it easy so your mom can do it. Don’t use microphone or it’ll interrupt the music – cue visually.
  • Drybar: Gave blowouts at $40, in between the expensive $100+ salons that would guilt you into cutting hair, and the discount Supercuts experience (classic Blue Ocean).
  • Honest Tea: Saw there was a sweetness gap, between unsweetened and super sweet. Also made its tea by brewing, not by powder. People who liked the tea were loyal since other teas tasted so different. But distributors for Snapple etc. rejected them thinking there wasn’t a market for it.
  • Zappos: Seemed like classic bad dotcom idea – no one wanted to buy shoes without trying them out. But footwear was a $40B industry in US, and mail order was fastest segment of shoes.
  • Kate Spade: Felt handbags at the time were too complicated, wanted simple architectural shapes.
  • Lyft: In 2012, saw Uber with elite black cars picking up on demand. Thought, we should do this for personal vehicles. Getting into a stranger’s car was absurd at the time (like Airbnb) and regulation was heavy. Even as they gained traction, other companies were waiting to see how the regulatory problems would be resolved.
  • Beyond Meat: All an animal is doing is taking in plant matter and water and creating protein and lipids. Why can’t we do this too outside the animal? Wasn’t a big hit among investors until Kleiner Perkins got involved.
  • Crate & Barrel: European furniture was expensive and out of reach of young couples. In addition to their direct-from-factory purchase model, a few trends grew the market – jet travel to Europe, food culture (eg Julia Childs), and America was getting wealthier.
  • Atari: Home arcade machines were completely novel. Toy vendors didn’t think people were willing to pay much for them.
  • Stripe: Around the time of founding in 2010, payments seemed like a relatively solved problem. From the consumer side, payments (eg to Amazon) were already frictionless, investors thought Paypal would take care of developer ease.
    • Also, Stripe targeted developers rather than businesses through a salesforce, which was of unclear value to investors and competitors. Stripe assumed that targeting developers would let Stripe grow with its customers (as did happen with customers Lyft and Shopify).
  • Betterment: Starting a fintech company required wading through regulation, something many tech entrepreneurs were unwilling to do. Around 2008, faced some criticism around starting a financial company around the time of the recession, but they believed it was the best time, given the confusion around what to do with money then.

The Homeownership Fetish

Homeownership is a fetish.

Americans buy homes that are about 4.5x their household income which is about 33% more than they spent when our parents were forming households in the 70s and 80s. The trend looks like it started exactly a generation ago.  Why? I could speculate uncritically — lower interest rates, wealth effects, more square footage per house, tax codes, the Property Brothers. That last one is a half-joke only. Wikipedia told me HGTV launched in 1994 and in 2016 overtook CNN to be the third most-watched cable network.

For those making ends meet in HCOL areas, the home price-to-income ratio looks like a bodybuilder who skips leg day. There’s an awful lot of weight being held up on stilts. In SF, you’d need to make nearly $300k a year to afford the $1.5mm median home That would put you in the top 5% of Bay Area income and top 2% nationally. Most people are overstretching to own just a median home.

When the average person stretches for a home, our comparative instincts propagate the distortion up the status ladder. If you have a high salary, you probably feel that a median home won’t cut it. The Joneses only swim in heated pools. And everyone knows a SubZero fridge keeps vegetables fresher longer. The flip side of your high salary is a high cost to your employer. While you shop RH outdoor furniture, your boss is being pitched a SaaS solution to replace you for 20 cents on the dollar. Even less when they consider the full cost of employing you. (I can hear the push back now — “my boss is my friend”. Well, what if the board cuts them in on half the savings. And since they know the same logic applies to them, they better take while they still have a seat. Managers answer to owners and owners answer to markets.)

Overexposed

I’ve recently heard anecdotes of homes in the $2-$5mm range in NYC and CT being “no bid”. This is no doubt symptomatic of the bloodletting occurring in finance and fund management which are overweight industries in those areas. But the lesson of software eating your margins is not just a finance story. We’ve talked about the hollowing of the middle here before. As automation crawls its way up the skill stack, accountants, radiologists, and everyone whose job that looks like a recipe will find themselves pulled into middle-class quicksand. And before you overestimate how complicated your recipe is, I’ll remind you that no-limit hold em was only until recently thought to be immune to the robotic intrusions the chess and Go world witnessed.

How about software engineers? Like any of these fields, the best will be spared. But just as WordPress abstracted away the need to write HTML, the growing world of no-code lowers the price of reproducing software. And that may just be an interim step before software writes itself. The fact that elementary schools are teaching it means the skill will simply be less scarce. If it still sounds far fetched, you can see that it is one of the most searched queries on WillRobotsTakeMyJob.com.

Spending 6x income for a house is a bet on everything continuing to go right. Just ask doctors. They were driving Lambos in the 80s. Be careful. Mean reversion is the highway patrol lurking to give you a ticket for reckless extrapolation.

Feel Better About Renting

The tax code, your parents, and biased myths like “build equity” all conspire to make “throwing money away on rent” seem financially irresponsible. Anyone that has dug into the full economic math including opportunity costs knows the buy/rent decision depends on many variables some of which are extremely personal. In other words, there is no overarching advice that suits everyone and if somebody tells you otherwise watch your wallet.

If it’s your well-meaning parents point them to this article. It is my reference for analyzing the factors which affect the buy/rent decision.

  • Walking through this calculator will give you numerical intuition for the levers.

More links from my “Don’t Buy A House” support group

  • ArrivedHomes is a startup. Instead of buying a single home, you buy into a pool of homes allowing you to “build equity” instead of rent. You get the financial consequence of homeownership without the double-edged sword of geographic concentration. Without a deep dive into the model, I’m guessing you are overpaying for diversification but worth a closer look for people who want to merge their need for shelter with a desire to be long real estate.
  • Just how stubborn have realtor fees been in the U.S.?
  • Remember that a home is land + a depreciating structure whose buyer in 20 years will hate everything you did to the place. Don’t kid yourself. The economic force of inflation acts upon land and structures differently. Plan accordingly.
  • Finally, my favorite real estate writer is John T. Reed. Extremely experienced, smart, and numerate. If you are interested in RE investing, he’s probably one of the best sources for useful, no-nonsense education. Here’s a snippet from a more editorial piece I keep in mind:

Do not buy a BIG house. 3,000 square feet is about all anyone needs. And no gold faucets or five ovens (“for entertaining”). Just keep trading up to better and better LOCATIONS. Do that for 30 or 40 years and you would have ended up in one of the premier rich people communities in the U.S.: Malibu, Manhattan, Newport Beach, Honolulu, San Francisco, Palm Beach. I ended up in the San Francisco suburbs. (We lived on Russian Hill on the cable car line in the city from 1977 to 1980—but as tenants.)

My Own Take

We have all heard that buying is better than renting if you plan to stay put for a long time and while often true, it’s an overweighted aspect of the analysis. The big thing that jumps out at me is how people stretching for homes are putting themselves in sneakily fragile positions. They are making a huge, leveraged purchase. One that requires 10 maybe 15+ years commitment to make the math pencil out. But if you believe the rapid rate of change in technology is shortening career half-lives and intensifying winner-take-all dynamics, then how do you have more than just a few years of visibility? The option to be mobile is probably worth more than the economic benefit of long-term ownership. So if you buy, be honest about how much stretching really makes sense for you. And if you can afford more, be careful about why you might want to.

As I said before, the decision is personal and economics are just one part of it.

Full disclosure: I personally don’t enjoy homeownership. I’ve owned 3 homes. A fixer studio in Manhattan. It was a coop which was slightly annoying but overall that experience was unremarkable and benign and the coop inconvenience was worth the discount in this case. The second was a new development loft in Long Island City that we bought in 2007 off of plans. Closing was delayed. I moved in when it was a construction zone. We were part of a class-action suit against the negligent developer. The winter of 2009 in NYC was super cold and we had no hot water so I showered in the Nymex gym for a few months. Finally, our current home which we gut renovated. Houses are not apartments. Let’s just say, that if you are not handy, you are signing up for a parade of asymmetrical dealings with vendors. For those with no interest in home improvement or maintenance, all caveats about ownership apply double. I long for a rental on the 40th floor of a doorman building, but they don’t allow them in my town. If you want more homeownership dissuasion, this post has an impressive litany.

Byrne Hobart on the toxicity of the 30 yr mortgage

Class is in session. Here’s a challenging and fun look at the innovation we know as the 30-year mortgage. All sorts of perverted effects on markets to untangle plus a dive into American financial history. An excerpt:

The option vega that is embedded in the mortgage prepayment option consumers have means that Freddie and Fannie short gamma creates artifical volatility that spills into interest rate markets via the 10 year bond. so the ten-year US Treasury is the benchmark long-term interest rate for everybody, everywhere. Ultimately, every asset gets compared to it, directly or indirectly. So if there’s artificial volatility in the ten-year, there’s artificial volatility in every market. All this, just so American homeowners don’t have to think about floating-rate debt, a problem so daunting it can only be handled by homeowners in every country in the world except the US and, for some reason, Denmark.

The rate of return on everything since 1870

This monster paper is a nice look at equities, real estate, and all types of assets across the world. The discussion of how they normalized data like rental yields is worth a look for those of you interested in methods of standardizing cumbersome data sets. Equity returns are higher than real estate returns. But not when we switch to geometric returns. If you understand why without looking, I know you have been reading Moontower lately.

3 Economic Novels

Introductory Learning Recs

In the past year, I have read 3 relatively simple finance books while flying. They would make great gifts for teens or anyone interested in learning about some basic economic and business concepts. What all three have in common is they are narratives. They teach explicitly but in a fiction wrapper. And while it’s not Shakespeare, this style is underrepresented since I could see it being more resonant than textbook or essay style instruction because the lessons are weaved into the character’s stories. Here’s a link to my notes on:

  • The Rebel Allocator: This book’s device is a junior private equity analyst learning the lessons of capital allocation by a Buffet/Munger composite
  • Invisible Heart: An economic romance novel by leading economist and podcast host Russ Roberts.
  • The Accounting Game: This book has taught scores of people accounting for good reason. By following a boy’s lemonade stand for a summer you will learn how financial statements work to the pros and cons to various accounting strategies and regimes. It’s structured as a workbook so you get to practice constantly. It’s also just fun. Seriously.

For Investors or Inspiring Investors

Adam at Movement Capital is a reader whose business and blog I discovered this year. He’s always putting out content that is pound for pound some of the most educational, useful and concise reading. You can start with his most recent post Investment Switch Calculator. With funds slashing their fees, you may want to compute how long it will take you to break even on a transaction from a higher cost fund to a lower cost fund. This is not as straightforward as it initially appears and requires a tool like his. By walking through the model you are bound to learn something if this is not your expertise. His site is one of the first I’d send someone to if they were trying to learn the basics of portfolio construction and math. His approach is true to Einstein’s advice: “Everything should be made as simple as possible, but no simpler.”

SF as a Failed State

For Halloween I’d like the Bay Area to dress up like a first world country. I’m writing this Friday evening and expect my power to be shut off tomorrow. So instead of my planned topic, I’m going to share some personal history and perspective from the past 7 years in the Bay Area.

In 2012, we moved to the Bay Area and rented a flat in the Castro. With its central location, proximity to Muni, array of bars and restaurants, and bursting energy it felt like a natural transition from our Long Island City life which we had left behind. We lived in the Castro for 2 years happily. Zak was born there, and we generally enjoyed the scene. Duboce and Dolores Park. The view from our place as the fog would halt above Mt. Sutro, splitting the sky into light and the dark which we donned Beowolf. At 14 months, Zak would stand by the window overlooking the intersection of Castro and Market. He was enamored with the vintage above-ground F train. I don’t think he noticed “SF Tommy Lee”, as we used to call him, and the rest of the men that would hang out naked in the sitting area by the iconic Twin Peaks bar.

Now if you have been to the Castro, you know it’s literally and metaphorically colorful. I remember when my mom visited during the Castro street fair weekend. She was truly amused by the sight of leather and chains and in a moment of such innocent amusement thought the rainbow flag was the flag of San Francisco. As newcomers we appreciated the city’s spirit of inclusiveness and individuality. So with Yinh’s family nearby and good jobs, we were ready to plant roots.

At this point, we had already browsed open houses for 2 years. In the first year, we looked no further than the city. I think we saw about 75 places. We considered an offer on 1 but never followed through. In the following year from 2013 to mid-2014,  we saw about 20 places in Marin and spent one day looking at the peninsula before sticker shock at what we saw in-person had us about-face as fast as you can say “offer day”. Finally, we happened upon Lamorinda and decided on a fixer. Maybe the Castro rubbed off on us, because we were apparently now into masochism. Not the fun kind with whips and ice. This was the kind where you put your money into an incinerator and the safe word is “just get it done” until you run out of savings in a crescendo of desperate ecstasy. When you’re finished you give the movers a big tip and tell them to enjoy it, it’s all you had left anyway.

House hunting in SF is a rite of passage. Asking prices are more like suggestions that can be pulled at any moment. Writing letters to sellers to prove your worthiness beyond your ability to actually close. I hear the market is softening a touch these days. It would make sense if you think Uber, Lyft, and Slack were foreshocks and WeWork was the venture quake. The startup world could be sitting in a liquefaction zone. Even still, low unemployment rates and net population inflows (despite all the stories of who’s leaving the Bay area) have fueled intense demand for housing. But demand is only half the story. Given lag time in construction, we expect supply to respond more slowly but in SF it is especially glacial. And telling.

Bureaucrat Bonanza

A couple we are close with is building a house in Noe Valley for their family. This is kink.com level masochism. (I didn’t hyperlink that URL for a reason…side note: kink.com studio headquarters used to be at the Armory in the Mission. I’ve done the tour two times with visitors. The building and its history are amazing. Besides having been an actual weaponized fort it was a filming location for Empire Strikes Back and host to famous boxing matches. Kink re-outfitted it with dungeons, electric shock rooms, and a wrestling ring. The lube was stored in oil drums. The building is being converted to a SoHo House, so think about that when a member takes you).

Back to our masochistic friends. They submitted their plans for design review. These are the hearings where your neighbors can chime in and a public paper-pusher can run up your architect bill by demanding you decrease your window size by 1%. In the process, the city said something to the tune of “a hundred years ago a construction worker lived there who once worked on a landmark building so now this site is also considered a historic landmark”. Unfortunately, Ashton Kucher did not pop out to end this nightmare. They are reading this. I love you guys but I bet Zak will be driving us to the housewarming.

It’s no surprise supply is stranded in plain sight.

A recent housing policy example

If you were to design a kleptocracy from scratch you’d build an obstacle course of arcane rules for citizens to navigate. You’d create discretionary chokepoints where rules could be enforced or not enforced. A bunch of bureaucrats in dire need of a Snickers bar capriciously ruling on vague policies sporting virtuous titles. Like the Community Opportunity to Purchase Act (COPA). This is a real act that went into effect last month. Here’s a description by tenant lawyer Joseph Tobener:

COPA would give the first right to purchase (this includes a first right to offer to purchase and a first right of refusal to match an existing offer) vacant lots or residential rental buildings with three or more units to nonprofit housing organizations.  This means that when an owner of a multi-unit building puts it up for sale or has received an offer to purchase, nonprofit housing organizations that are pre-selected by the City would have a chance to bid on the building first or to match an existing offer.

Once the owner puts the building up for sale or has received an offer from a potential buyer, the owner would need to notify the Mayor’s Office of Housing.  The pre-selected nonprofit housing organizations would then have thirty days to make an offer to purchase the building.  To be pre-qualified, the nonprofits would need to show that they intend to create permanent affordable housing for low- and moderate-income residents.

If you made an offer to buy a property, and your bid was subordinate to an organization pre-approved by the city you’d probably be frustrated. If you are a hurried seller and find a buyer only to have the negotiation frozen by this city-backed interloper, you will also be frustrated. The city has actually granted a free option to a non-profit. Those familiar with institutional trading will recognize this as the ability to “break up a cross” that 2 parties have already committed to. It’s a kingmaker privilege. In the resulting equilibrium, any average Joe buyer is only getting filled when the designated non-profit has passed on the deal. In econspeak, adverse selection. Sure, the policy is well-intentioned but fails to appreciate multi-order effects that determine how it will play out in practice. Which is what actually matters.

Incompetence?

Hanlon’s razor would point to incompetence over planned kleptocracy. It’s tempting to say politicians don’t understand microeconomics. You couldn’t swing a cat in California without striking an innumerate politician. It’s also easy to trace inevitable unintended consequences back to a policy and its advocate. But anticipating every unintended consequence is hard (I know I’m being a bit charitable since its no secret policies like rent-control are notorious for restricting supply). Still, I am resistant to the full incompetence case. I’m usually impressed by the arguments presented in the manual you are given when voting for local politicians and propositions. The policies aren’t created as whimsically as they seem to be enforced and it takes a special brand of cynicism to think the opposing views aren’t at least considered.

So my fallback filter here is plain old incentives. The politicians understand the economics but their constituents don’t. The pols are in the vote-getting business. So with motivated reasoning, human being’s specialty, they pander to a populace which wants them to fix their problems. If your problem is the rent keeps going up, they run on the “the rent won’t be allowed to go up” platform. Comforting and simple. And effective. For getting votes. Of course, interfering with the invisible hand driving housing demand means boards and hearings and backroom deals. Developer and crony interests find that expediency fees and bribes allow them to do business in Gotham while landmine rules blockade more scrupulous competition. This classic market failure mode is called regulatory capture. Look for it in your industry and you’re sure to find some overpaid meatheads nearby.

What to do?

You just shake your head mostly. SF has become an adjective. As in, “the most San Francisco thing I’ve seen this week is…” The city’s reputation as a ‘failed state’ seems to be growing and this is in the midst of a 10-year bull market. As all tides must, this one will eventually go out. It’s hard to imagine taxes not going higher then. Or services getting worse. But in the meantime, there’s a lot we love about being here but rather than enumerate them it’s sufficient to say on balance it’s just worth it. If I could tie up my thoughts with a tidy bow I would but the nature of the bay area defies a coherent model and satisfying answers. If those things matter to you, I doubt you’ll like it here.

This twitter thread had me laughing aloud and is so SF.

This is worth sharing again for anyone interested in a very comprehensive analysis of the housing crisis from every angle. It’s my go-to reference on the topic. Reality is more complex than anyone pretending it’s just one thing at the root of the problem.

Howard Marks Tax Memo: “Your Fair Share”

Tax policy is a balancing act between two titans of economics: efficiency and equity. In 2011, Howard Marks wrote an even-handed memo outlining the implicit considerations in our tax laws and just how loaded the question of “fair share” is. Neither liberals nor conservatives will find the porridge just right, so it has become my reference paper for how to think about taxes. My notes on it here.

Speaking of Howard Marks, his memos are iconic in the investment world and I’d make his book The Most Important Thing required reading for any inspiring investor. Blas Moros recently published his lessons from over 10 years of memos for your free enjoyment.

And speaking of taxes, economist Greg Mankiw discusses the “trophy wife tax credit”.

Continue reading “Howard Marks Tax Memo: “Your Fair Share””

Which Principles Are Ok To Bribe?

According to 538, socially liberal / fiscal conservatives comprised 16% of the 2016 election. And the majority of them chose Trump. I found it surprising but hardly difficult to imagine their mental ledger as they weighed pros and cons. When Trump wins I’ll donate half my tax savings to Planned Parenthood. Like a political carbon offset.

We’ve talked about Nimbyism here before and how liberal renters are suddenly long a housing crisis the moment they close on their first home. Values versus narrow self-interest.

The NBA. Activision Blizzard. Recent controversy has them trying to get a quote for the exchange rate between dollars and honor?

Louis CK. Tiger Woods. These guys were pulling pages from Motley Crue’s playbook. Not illegal but don’t expect sponsors to call you back. I retroactively wish instead of Tiger it was Yao Ming just to know if his scarlet letter would have just blended into his Rocket red jersey?

More than ever, morality is on public trial. Offsets and virtue signaling are used to prosecute and defend. Cancel culture and doxing stand ready to enforce sentences that lack time limits or discussions of proportionality. If that doesn’t faze you, the logical extension should. If you are aware of behavior that is clearly legal but controversial you are now an accomplice to a non-crime or if you want to be Orwellian about it, a thoughtcrime. Paranoia about being complicit in a non-crime would seem a comical way to expend some brain cycles but I’m not sure Daryl Morey’s boss would laugh. I doubt he ever thought he was going to be put on trial by his fellow owners whose interests may shapeshift them into wands of the Chinese public.

So we find ourselves in 2019 running ethical parkour, making stuff up as we bounce from one obstacle to another trying to find our footing. So let’s check out a framework from Slatestarcodex that can guide our understanding.

Terms of Ethics

  • Axiology is the study of what’s good
  • Morality is the study of what the right thing to do is
  • Law is what’s allowed by your government

He goes on:

These three concepts are pretty similar; they’re all about some vague sense of what is or isn’t desirable. But most societies stop short of making them exactly the same. These concepts stay separate because they each make different compromises between goodness, implementation, and coordination. Axiology can’t distinguish between murdering your annoying neighbor vs. not donating money to save a child dying of parasitic worms in Uganda. But morality absolutely draws this distinction: it says not-murdering is obligatory, but donating money to Uganda is supererogatory.
So fundamentally, what is the difference between axiology, morality, and law?

  • Axiology is just our beliefs about what is good. If you defy axiology, you make the world worse.
  • Morality is an attempt to triage the infinite demands of axiology, in order to make them implementable.
  • Law is an attempt to formalize the complicated demands of morality, in order to make them implementable by a state with police officers and law courts.

How the Terms Interact

In healthy situations…each of these systems reinforces and promotes the other. In these healthy situations, the universally-agreed priority is that law trumps morality, and morality trumps axiology. So first you do your legal duty, then your moral duty, and then if you have energy left over, you try to make the world a better place.

In unhealthy situations…you can get all sorts of weird conflicts. Moral dilemmas such as the “fat man version of the trolley problem” pit axiology vs morality. Meanwhile, civil disobedience is a battle between morality and the law. Think of conscientious objectors or Edward Snowden.

Drawing Ethical Equivalences

The promise of such a framework is a balance of consistency, convenience, and sensibility to ethical comparisons. By donating to the ASPCA you can’t atone for embezzling from the zoo fundraiser, but it can offset your axiological charges for eating animals (between this example and the fact that I do eat animals I hope I have offended everyone equally). You can’t offset morality, meanwhile, the legal system has its own prices for transgressions.

By keeping offenses in one domain not fungible with offenses in another we are spared the nonsensical task of setting inter-tier exchange rates. That task may be a fun game in the vein of ‘would you rather?’ but in practice feels like measuring the spot of a blind ref. Close enough to the tackle but far enough to be arbitrary.

For the full text of Slatestar’s post on moral offsets, including my highlights, click here.

Living By Your Principles

You may strive to live according to some coherent worldview but in reality, you whizz through life with wide rounding errors in your moral math. You can rationalize the price for anything if you want something bad enough or you are in enough pain. The only people don’t feel pain are dead or soon to be dead. On the practical limitations of living according to first principles, Byrne Hobart writes:

 A fourteen-year-old who just read Foucault or Peter Singer or Ayn Rand can absolutely trounce mom and dad in a fair debate, because the newly-enlightened teenager is reasoning straight from a narrow set of sensible premises. This tells you something important about philosophy and hypocrisy: it’s easy to be morally consistent if you don’t have bills to pay.

For the realists, Hobart proffers salvation:

One approach is to use a model as a tiebreaker rather than an absolute rule: instead of radical honesty, err on the side of honesty; instead of following every rule in Leviticus, start going to church on Easter and Christmas. This produces nonstop hypocrisy, but that’s okay: if you always live up to your principles, you’ve chosen undemanding principles. It’s not really incremental hypocrisy, just incremental awareness.

Beyond ethics, it is no easier to live according to first principles especially when they sit outside the circle of consensus. Your instinct may be to decide your principles, then try to live by them. The truly enlightened approach does the opposite: figure out what everyone else implicitly believes, and what opportunities that presents.

Most middle-class Americans at least act as if:

  • Exactly four years of higher education is precisely the right level of training for the overwhelming majority of good careers.
  • You should spend most of your waking hours most days of the week for the previous twelve+ years preparing for those four years. In your free time, be sure to do the kinds of things guidance counselors think are impressive; we as a society know that these people are the best arbiters of arete.
  • Forty hours per week is exactly how long it takes to be reasonably successful in most jobs.
  • On the margin, the cost of paying for money management exceeds the cost of adverse selection from not paying for it.
  • You will definitely learn important information about someone’s spousal qualifications in years two through five of dating them.
  • Human beings need about 50% more square feet per capita than they did a generation or two ago, and you should probably buy rather than rent it.
  • Books are very boring, but TV is interesting.

You can be a low-risk contrarian by just picking a handful of these, articulating an alternative — either a way to get 80% of the benefit at 20% of the cost, or a way to pay a higher cost to get massively more benefits — and then living it.

Continue reading the whole post here.

ESG, Trump Tweet Trades, Volatility Follow Ups

The Money Angle from Weekly Moontower #32

  • You will recognize ESG as the latest battleground between corporate axiology, morality, and law.
    • Takeaways from Matt Levine compartmentalizing your role as a corporate citizen from your role as a person. He channels realism and illuminates the downsides of mission driven companies. My notes here.
    • Cullen Roche’s pragmatic view on ESG investing. His pragmatic concerns are drawn from matters of axiology, morality, and law.
    • Aswath Damodaran’s explanation of shareholder vs stakeholder views of the corporation.
  • The article dismantling the conspiracy theories of friends of Trump trading ahead of his announcements. At the end of the article I noticed one of the contributors as an anonymous blogger/trader KidDynamite. I have been following him for nearly a decade. His work is top-notch especially his accounting level forensics to debunk claims that precious metals prices are manipulated.
  • Follow-ups from last week’s discussion about volatility’s toll on compounded returns:
    • My notes on a fun paper about how inept even educated people are about sizing wagers and how you can adapt the Kelly criterion for binary type bets.
    • A walkthrough of my simulation of investing in a 2 coin portfolio including the impact of rebalance and the influence of volatility on mean vs geometric returns.
    • An observation: A friend with some rental properties mentioned he does not aggressively raise his tenants’ rent. This incents the tenants to take good care of the place since they don’t want to lose the apartment. That means lower maintenance costs which is a second-order effect that offsets the first-order effect of keeping the headline rent a bit low. Between that and a very low vacancy rate, the returns of the rental properties are less volatile. And we all learned what volatility does to portfolios. An especially interesting bit to keep in mind since rental properties are usually levered.

Matt Levine on shareholder value

Matt Levine discusses:

  • Traditional and progressive views of the role of corporations
  • How a narrow desire to raise shareholder value keeps frauds from capitalizing on investors who appeal to higher causes.
  • Compartmentalizing your job from your personhood as a necessary convenience

https://www.bloomberg.com/view/articles/2018-09-27/shareholder-value-could-be-worse



Primacy of Corporate profits

Friedman, along with Michael Jensen and William Meckling, is probably the person most associated with the theory that—as his famous article put it—“The Social Responsibility of Business Is to Increase its Profits.” In this theory, managers of a corporation have a singular duty to the shareholders to maximize their economic return as far as possible (while complying with the law), and if managers pursue any other objective—treating workers well or being good environmental stewards or standing up for what they believe in—at the expense of shareholder value, then they are misbehaving. Of course, there is plenty of room to argue that pursuing those other objectives actually enhances shareholder value. And there is much to be said for Friedman’s view—which is also after all Adam Smith’s view—that by focusing on economic profits, a company will maximize the amount of social good that it does, simply because the normal way to maximize profits is to figure out what people want and then sell it to them.

Including More Stakeholders

It is popular, these days, to criticize that view. The corporation is a political construct, embedded in a society; it has many stakeholders whose interests it needs to consider, not just shareholders. You see this criticism everywhere, from attacks on stock buybacks to Elizabeth Warren’s call for “accountable capitalism.” In its more extreme form, you can see shareholder-profit-maximizing corporations compared to science-fiction robot villains, or to psychopaths: If you value only profit and nothing else, then there is something inhuman about you.

Compartmentalizing

That probably overstates matters. If you come to work and focus on maximizing the profits of your company, that probably doesn’t mean that you’re a psychopath. It probably just means that you have a job. You compartmentalize things a bit; your work does not contain the entirety of your personhood; it’s a thing that you do because you need to make a living. In this sense, a company whose philosophy is “we will sell products that people want for more than it costs us to make them so that we can make a profit and increase our share price” is rather psychologically healthy. That is a good goal to work on during business hours Monday through Friday, and then leave. It is a modest, reasonable, businesslike goal. Obviously there are large contested margins, and you shouldn’t do psychopathic things to pursue that goal, and some people do and that’s bad, but for the most part “shareholder value” is the sort of mission that inspires people more or less the right amount. If you go around murdering people to maximize shareholder value then, yes, you are a psychopath, but most people aren’t.

The Difficulty of Accounting for Intentions

But there are other goals. Those goals are bigger, and you can wrap your whole personhood up in them, and you can believe that those goals are so important that they can justify anything. If Facebook’s goal is to maximize revenue by selling targeted ads to clothing companies, and you find out that it has features that enable genocide, then you shut down those features because the ads just aren’t worth it. If Facebook is about the “noble mission” of “connecting people,” then the tradeoffs are murkier. If “Facebook is truly the only company that’s singularly about people,” then … what even … how do you measure how about-people it is being? If you’re the singular company whose focus is people, then whatever you do is sort of necessarily good; your end is so vague and noble that it can justify any means. And for all that Facebook’s meddling with Instagram and WhatsApp seems to be driven by straightforward ad-revenue-maximization considerations, it’s worth saying that Facebook isn’t really answerable to shareholders and that its explicit ideology rejects shareholder value as a goal. “Facebook was not originally created to be a company,” Mark Zuckerberg wrote when it went public. “It was built to accomplish a social mission.” Okay!

Grand Visions Can Be Weaponzied, But Shareholder Value? Not So Much.

I am late to it, but I just finished reading John Carreyrou’s “Bad Blood,” the story of the fraud at Theranos Inc. and his work to uncover it. Theranos—in Carreyrou’s view, and the view of federal prosecutors—issued tens of thousandsof blood-test results to real patients using technology that it knew didn’t work, endangering those patients’ lives. There are a lot of passages in the book about Theranos founder Elizabeth Holmes inspiring and cajoling her employees to work harder, to get with the mission, to override their moral objections to faking the technology and push ahead. None of those passages mention shareholder value or profit maximization. They mention Holmes’s vision of revolutionizing health care to save lives and treat cancer patients. If you want to inspire people to do terrible things, it is very useful to sell them on a grand vision, a higher purpose, a noble mission. Shareholder value is nobody’s idea of an inspiring mission. That’s what’s good about it!”