Start Of Summer

Yinh and I have covid this weekend and the timing couldn’t be worse.

Our first inaugural Cousins Camp was supposed to start today.

We were scheduled to have 8 nieces and nephews staying with our kids this week. We hired a teacher and chess coach to guide enrichment programs from 8 until noon every day. The kids would do crafts, write and perform a song, play games, and present/public-speak. Afternoons were left open for play, sports and pool time. 80’s summer kid mode.

Our plan is to rotate this every year at a different family’s home (the other parents are going on mini-vacations without their kids, so this is a win-win for everyone!). We decided to do this because it will be a great series of memories to gift both the children and the parents.

We had a different version of this idea in 2020. Boardgame Week. A local parent offered their amazing backyard as a site. I was planning a week of PTO to host 14 kids (I wasn’t charging so it was oversubscribed amongst our parent friends before Yinh finished typing the text message) for 3 hours a day of gaming and then play time.

Covid blew it all up and then last year we traveled all summer so I was so stoked that we were finally going to pull this off. Until yesterday when it became clear we had to cancel because we and some of the guests have covid.

[I’ve had chills, fevers and razor blade throat since Friday night but it’s all been manageable. I took a my 3rd covid test in 3 days and finally tested positive. I was getting nervous that my sickness could somehow be not covid and that I was going to get covid too.]

Anyway, I’ll be back in your inbox sometime in July. I’ll still be around on Twitter a little bit and you can always email me.

Enjoy the start of summer. Summer is for memories. Spread kindness. Make joy a priority for someone else and it will just as easily be your own. A little intention goes a long way. Whoever your they is, they will remember.

Stay groovy!

Kris


Postscript

In a crazy coincidence, I just hung out with the family that rented our house before we leased it (they are tight with our neighbors and visited from the East Coast). Apparently, they did this same camp idea with their family and friends at the house we live in now! They showed us a video of the finale performance the kids put on and pictures throughout the week. The mom couldn’t believe we randomly settled on a similar plan. She’s an artist and said something to the effect of “there’s just something about that house”.

Our house is a 1950s 3/2.5 CA ranch that looks straight outta Boogie Nights. Mirrors, bricks, and cabin interior. Everyone would be piled up on each other. I’m too cheap to put the A/C on. And everyone gets chores. If there were movie props on the premises you’d think I was recreating the commune on Spahn Ranch. Without the sex, drugs, and ya know, murder.

Although you might hear some Brian Wilson in the background.

The Success Paradox

I was going to write about how to measure implied skew. The post would also have been a nice demonstration of why I write about options stuff in the first place (hint: it’s not because I think you should be trading options). You would walk away from the post excited by a new insight but rattled because it would crack a door you’d definitely prefer to keep closed.

The anticipation is a tad cruel because I’m going to table that post for next time. I didn’t feel like breaking up today’s letter with nerd stuff.

Dazed and Confused transpires over the last day of school. Randy “Pink” Floyd ain’t doing homework in the moontower and I’m not gonna be the cruel teacher who’s gonna put your mind in problem set mode.

Instead, I give you one of my favorite videos. Watch it through to the end. It’s worth it.

As tensions go, it presents one of the most difficult tensions an intellectually honest person needs to contend with. I’ve come to the same conclusion its author does — the “Success Paradox” cannot be resolved without some controlled self-deception1.

You will recognize the same thinking in this 2-part series:

✍️ My Personal Trigger (5 min read)

✍️Why ‘Deserve’ Makes My Skin Crawl (8 min read)

I’ve always been sensitive to the “success paradox”. It informs my politics. My worldview. It’s why I find Freddie deBoer’s views on education impossible to look away from. (I will be writing more about learning in the back half of this year. You can expect Money Angle to get some of that treatment in the context of investing as well.)

For now, watch the video. At worst, you are introduced to a beautiful YT channel.

Compass

Last week, I waded into gun control thoughts to demonstrate what kindness by humility looks like to me. That was an unexpected detour given the horrible news from Uvalde. This week, I’ll return to where that post was originally headed.

The post started with Slatestar’s Fake Graduation Speech which I maintain as one of my favorite reads. Graduation speeches are irresistible. They are the prize for beating the final boss in the tightly-tracked 8-bit side-scrolling video game known more colloquially as “school”. A great speech can be used as a compass to the wide-open MMORPG the diploma achievement unlocks. The commencement speaker is the sage shopkeeper in Zelda — “It’s dangerous to go alone. Take this.”

The compass points to a metaphysical place. The destination is meaning. But it doesn’t exist without you. You give your life meaning. So the compass is unique to you. It has a biometric lock, like your phone. Only your eyes can see where it points.

Without a compass, you’d be paralyzed. Overwhelmed by choices. Think of a grizzly bear. It eats, sleeps, socializes, and screws. It doesn’t buy a duplex as the forest gentrifies or join the Peace Corps to help its polar cousins learn to climb trees because the ice caps are melting. You are blessed and cursed to not be a grizzly bear.

Our awareness drives us to ponder meaning. This feels necessary to at least loosely rank our values so we can make decisions. I wasn’t finished referencing Jared Dillian last week. In Memento Mori he wonders:

Even though I am not religious, I tend to believe that there is some accumulated wisdom in organized religion. All major religions believe in an afterlife. Most believe in the concept of heaven and hell. And then we have empirical evidence of tens of thousands of people dying, being reanimated, and describing what seems to be heaven and hell. I don’t think this is a coincidence. So the first question is: what happens to you after you die? And the second question is: how do you avoid going to hell? People get a Starbucks on the way to work, sit in a chair all day, come home, watch some shows, and go to bed, without really pondering this question.

I think about it every day.

So what is the solution?

His answer rhymes with Slatestar’s full-bodied endorsement of kindness.

Jared answers his own question:

The answer is love.

This is where people get confused. Most people equate love with falling in love, or romantic love, but that type of love is a feeling. Real love is not a feeling, it is an action. You see, people reverse cause and effect. They think that you feel love and as a result of that, you act selflessly towards someone. It is the other way around. You act selflessly toward someone, and then as a result, you feel love. [Comment from me: the surprising satisfaction of arranged marriages speaks to Jared’s inversion of cause and effect]

Real love should be given freely and without reservation.

He continues:

Most people love their spouse, their kids, their pets, their family. That is the low-hanging fruit. What about everyone else? What about your dickhead coworkers? What about your grumpy neighbor? What about your enemies? Do you wish for them to get everything you want for yourself? Do you feel compassion and understanding towards them?

Do you strive to ease the burden of everyone you come in contact with?

Do you give people the gift of time?

I’m no saint. But the progress chart is going from the lower left to the upper right. The point is that I am constantly working on it.

That last line is the action dictated by the compass. There’s no right answer, your compass is your own. But in a life where I’m privileged enough to consider more than where my next meal is coming from, I don’t think my compass’ magnetic resonance with this is a coincidence.

YMMV.


Loosely Related Tangents

  • I tend to be more on the introspective end of the thinking-action continuum than I’d objectively prefer. If you lean more towards “doer”, that probably sounds like a weird, possibly pathetic, observation. Like why even waste a thought to put yourself on such a spectrum. But if you are a fellow over-caveating shoegazer you understand. It’s a pernicious form of self-sabotage. You can’t help seeing the tension in every platitude. I literally keep a file in my notes called “Tensions”. If I shared it, you’d quite possibly die of exhaustion. Here’s an example.Jared: Real love should be given freely and without reservation.

    Me ankle-biting: What lesson do people internalize when love is unconditional?

    As Jared requests at the end of each letter, I’ll just go f myself now.

    (Mumbling like Milton as I plod away: The thinking-action continuum is a false binary anyway, it’s more like…[Yinh proceeds to gag me])

  • Again this line: Real love should be given freely and without reservation.I’m doing a mentorship program this summer where we work with HS students. These kids are defying long odds to even find this program. The training made their circumstances abundantly clear. This is a chance to help kids who may have never had a real conversation with an adult who is not a teacher, parent or coach. The kids are surprised an adult would even find them worth talking to. A story of a prior kid in the program was that he never bothered to learn to read because an adult once told him when he was young that he’d be dead by 19. Today, he’s 26 and regrets listening to that jerk.

    As I prepare for my assignment, we were taught to navigate a too-common situation — the kids have been given paid internships this summer but when they go back home they are going to face tremendous pressure from their families and neighborhoods to share the money. Now there’s nothing wrong of course with being generous, but that’s the point. We are instructed to teach them to: give cheerfully.

    The goal is to help these kids discern exploitation from genuine charity. A skill they have rarely had to practice because the concept of any surplus is foreign. Hearing this is more harrowing than surprising. Part of humility is expecting that we take things for granted, even if we don’t know what those things might be until we hear about them.

    On an intellectual level, I know what the words “love freely” and “give cheerfully” mean. It would be a shame if the meaning stayed arrested at that level. Jared’s post is an invitation for all of us to stretch further.

  • In Professor Kevin Bracker’s essay on college, he explains: a lot of schools are starting to offer — courses on professionalism. Things like showing up on time, table manners at a business lunch, working with others, etc. These are more important skills than many people realize. Grow up in the right environment and you learn it through osmosis. Grow up in a different environment and you probably won’t.

    The mentorship training is highly aware of this. Teaching the kids to carry themselves professionally (i.e. no slang) is a core objective. I can imagine many readers bristling at the conformity of etiquette courses, but that’s a sumptuous degree of naivete. The way we speak and act signals class. Hipsters (my favorite definition of them is “someone who identifies with both the counterculture and the dominant class”) lament that reality without appreciating its ramifications — the cost of non-conformity is much higher for the underprivileged.

    It might not be fair that something akin to “acting white” is required to get ahead, but the change to that is going to come from above. Not below. Being unrealistic is a luxury these 18-year-olds can’t afford.

Moontower #152

Very verbose programming note:

For the second consecutive year, I’ll be giving your inbox and me a summer break.

Last summer, I traveled with my family for 10 weeks, staying with friends and family around the US. After getting our vaccines last Spring we wanted to hit the road to reunite with loved ones. It was a summer I hope our boys remember forever. I know I will.

We also explored other places to live and even bought a house in TX on a whimsical overbid which turned into a lucky personal account trade. So much for diligence. But just as some people separate only to discover the grass isn’t greener, we have come back home and reaffirmed that CA is a beautiful place for us. It’s far from perfect but everywhere has warts. It’s the best place we’ve seen…for us. You won’t find me writing an indulgent Substack piece elaborating on that any further. You get enough of my indulgences as it is 🙂

This summer we will be traveling again but only for 5 weeks. In an attempt to be present as possible during my kids’ summer (I’m trying to reign in my Twitter addiction as well), I find unplugging from Moontower to be helpful. I also want to be deliberate about my relationship with public writing. This letter has almost doubled its subs to nearly 5k in the first 5 months of this year even though I’ve been writing for 40 months. Sub count is a vanity metric (I’m more proud of the open rate staying above 50%), but I’m human — it nudges me towards wanting to see “number go up”. That represents a shift from an internal to external locus of control and I’m not cool with that. So taking a break is also a circuit breaker. I’ll come back, growth will have slowed, and I’ll realize this is fine.

Last year when I came back from the break I switched from Mailchimp to Substack and used the opportunity to bounce recipients that haven’t opened an email in 6 months. I will cull the list again when I return. If people want to read this, they’ll find it. If you don’t miss it, that’s totally cool. Attention is precious. Re-allocate it to the deluge of other awesome stuff out there (or other Substacks I recommend!)

Ok, sorry if this sounded self-important. I’m just managing my neurosis out loud. If it helps other writers who may feel reluctantly caught up in “growth” it will have been worthwhile.

You can expect Moontower to be back in mid-July. The list of stuff I want to write about grows about 5x faster than I can write, so there should be lots of fun things to come back to.

As always thanks for reading, y’all give me so much. I write to “find the others” and it’s working. I’m confident writing a free newsletter and blog will be the highest-yielding investment of my non-family time.

Onwards…


Friends,

Last week, I waded into gun control thoughts to demonstrate what kindness by humility looks like to me. That was an unexpected detour given the horrible news from Uvalde. This week, I’ll return to where that post was originally headed.

The post started with Slatestar’s Fake Graduation Speech which I maintain as one of my favorite reads. Graduation speeches are irresistible. They are the prize for beating the final boss in the tightly-tracked 8-bit side-scrolling video game known more colloquially as “school”. A great speech can be used as a compass to the wide-open MMORPG the diploma achievement unlocks. The commencement speaker is the sage shopkeeper in Zelda — “It’s dangerous to go alone. Take this.”

The compass points to a metaphysical place. The destination is meaning. But it doesn’t exist without you. You give your life meaning. So the compass is unique to you. It has a biometric lock, like your phone. Only your eyes can see where it points.

Without a compass, you’d be paralyzed. Overwhelmed by choices. Think of a grizzly bear. It eats, sleeps, socializes, and screws. It doesn’t buy a duplex as the forest gentrifies or join the Peace Corps to help its polar cousins learn to climb trees because the ice caps are melting. You are blessed and cursed to not be a grizzly bear.

Our awareness drives us to ponder meaning. This feels necessary to at least loosely rank our values so we can make decisions. I wasn’t finished referencing Jared Dillian last week. In Memento Mori he wonders:

Even though I am not religious, I tend to believe that there is some accumulated wisdom in organized religion. All major religions believe in an afterlife. Most believe in the concept of heaven and hell. And then we have empirical evidence of tens of thousands of people dying, being reanimated, and describing what seems to be heaven and hell. I don’t think this is a coincidence. So the first question is: what happens to you after you die? And the second question is: how do you avoid going to hell? People get a Starbucks on the way to work, sit in a chair all day, come home, watch some shows, and go to bed, without really pondering this question.

I think about it every day.

So what is the solution?

His answer rhymes with Slatestar’s full-bodied endorsement of kindness.

Jared answers his own question:

The answer is love.

This is where people get confused. Most people equate love with falling in love, or romantic love, but that type of love is a feeling. Real love is not a feeling, it is an action. You see, people reverse cause and effect. They think that you feel love and as a result of that, you act selflessly towards someone. It is the other way around. You act selflessly toward someone, and then as a result, you feel love. [Comment from me: the surprising satisfaction of arranged marriages speaks to Jared’s inversion of cause and effect]

Real love should be given freely and without reservation.

He continues:

Most people love their spouse, their kids, their pets, their family. That is the low-hanging fruit. What about everyone else? What about your dickhead coworkers? What about your grumpy neighbor? What about your enemies? Do you wish for them to get everything you want for yourself? Do you feel compassion and understanding towards them?

Do you strive to ease the burden of everyone you come in contact with?

Do you give people the gift of time?

I’m no saint. But the progress chart is going from the lower left to the upper right. The point is that I am constantly working on it.

That last line is the action dictated by the compass. There’s no right answer, your compass is your own. But in a life where I’m privileged enough to consider more than where my next meal is coming from, I don’t think my compass’ magnetic resonance with this is a coincidence.

YMMV.


Loosely Related Tangents

  • I tend to be more on the introspective end of the thinking-action continuum than I’d objectively prefer. If you lean more towards “doer”, that probably sounds like a weird, possibly pathetic, observation. Like why even waste a thought to put yourself on such a spectrum. But if you are a fellow over-caveating shoegazer you understand. It’s a pernicious form of self-sabotage. You can’t help seeing the tension in every platitude. I literally keep a file in my notes called “Tensions”. If I shared it, you’d quite possibly die of exhaustion. Here’s an example.

    Jared: Real love should be given freely and without reservation.

    Me ankle-biting: What lesson do people internalize when love is unconditional?

    As Jared requests at the end of each letter, I’ll just go f myself now.

    (Mumbling like Milton as I plod away: The thinking-action continuum is a false binary anyway, it’s more like…[Yinh proceeds to gag me])

  • Again this line: Real love should be given freely and without reservation.

    I’m doing a mentorship program this summer where we work with HS students. These kids are defying long odds to even find this program. The training made their circumstances abundantly clear. This is a chance to help kids who may have never had a real conversation with an adult who is not a teacher, parent or coach. The kids are surprised an adult would even find them worth talking to. A story of a prior kid in the program was that he never bothered to learn to read because an adult once told him when he was young that he’d be dead by 19. Today, he’s 26 and regrets listening to that jerk.

    As I prepare for my assignment, we were taught to navigate a too-common situation — the kids have been given paid internships this summer but when they go back home they are going to face tremendous pressure from their families and neighborhoods to share the money. Now there’s nothing wrong of course with being generous, but that’s the point. We are instructed to teach them to: give cheerfully.

    The goal is to help these kids discern exploitation from genuine charity. A skill they have rarely had to practice because the concept of any surplus is foreign. Hearing this is more harrowing than surprising. Part of humility is expecting that we take things for granted, even if we don’t know what those things might be until we hear about them.

    On an intellectual level, I know what the words “love freely” and “give cheerfully” mean. It would be a shame if the meaning stayed arrested at that level. Jared’s post is an invitation for all of us to stretch further.

  • In Professor Kevin Bracker’s essay on college, he explains: a lot of schools are starting to offer — courses on professionalism. Things like showing up on time, table manners at a business lunch, working with others, etc. These are more important skills than many people realize. Grow up in the right environment and you learn it through osmosis. Grow up in a different environment and you probably won’t.

    The mentorship training is highly aware of this. Teaching the kids to carry themselves professionally (i.e. no slang) is a core objective. I can imagine many readers bristling at the conformity of etiquette courses, but that’s a sumptuous degree of naivete. The way we speak and act signals class. Hipsters (my favorite definition of them is “someone who identifies with both the counterculture and the dominant class”) lament that reality without appreciating its ramifications — the cost of non-conformity is much higher for the underprivileged.

    It might not be fair that something akin to “acting white” is required to get ahead, but the change to that is going to come from above. Not below. Being unrealistic is a luxury these 18-year-olds can’t afford.


Money Angle

I was going to write about how to measure implied skew. The post would also have been a nice demonstration of why I write about options stuff in the first place (hint: it’s not because I think you should be trading options). You would walk away from the post excited by a new insight but rattled because it would crack a door you’d definitely prefer to keep closed.

The anticipation is a tad cruel because I’m going to table that post for next time. I didn’t feel like breaking up today’s letter with nerd stuff.

Dazed and Confused transpires over the last day of school. Randy “Pink” Floyd ain’t doing homework in the moontower and I’m not gonna be the cruel teacher who’s gonna put your mind in problem set mode.

Instead, I give you one of my favorite videos. Watch it through to the end. It’s worth it.

As tensions go, it presents one of the most difficult tensions an intellectually honest person needs to contend with. I’ve come to the same conclusion its author does — the “Success Paradox” cannot be resolved without some controlled self-deception1.

You will recognize the same thinking in this 2-part series:

✍️ My Personal Trigger (5 min read)

✍️Why ‘Deserve’ Makes My Skin Crawl (8 min read)

I’ve always been sensitive to the “success paradox”. It informs my politics. My worldview. It’s why I find Freddie deBoer’s views on education impossible to look away from. (I will be writing more about learning in the back half of this year. You can expect Money Angle to get some of that treatment in the context of investing as well.)

For now, watch the video. At worst, you are introduced to a beautiful YT channel.


From My Actual Life

Yinh and I have covid this weekend and the timing couldn’t be worse.

Our first inaugural Cousins Camp was supposed to start today.

We were scheduled to have 8 nieces and nephews staying with our kids this week. We hired a teacher and chess coach to guide enrichment programs from 8 until noon every day. The kids would do crafts, write and perform a song, play games, and present/public-speak. Afternoons were left open for play, sports and pool time. 80’s summer kid mode.

Our plan is to rotate this every year at a different family’s home (the other parents are going on mini-vacations without their kids, so this is a win-win for everyone!). We decided to do this because it will be a great series of memories to gift both the children and the parents.

We had a different version of this idea in 2020. Boardgame Week. A local parent offered their amazing backyard as a site. I was planning a week of PTO to host 14 kids (I wasn’t charging so it was oversubscribed amongst our parent friends before Yinh finished typing the text message) for 3 hours a day of gaming and then play time.

Covid blew it all up and then last year we traveled all summer so I was so stoked that we were finally going to pull this off. Until yesterday when it became clear we had to cancel because we and some of the guests have covid.

[I’ve had chills, fevers and razor blade throat since Friday night but it’s all been manageable. I took a my 3rd covid test in 3 days and finally tested positive. I was getting nervous that my sickness could somehow be not covid and that I was going to get covid too.]

Anyway, I’ll be back in your inbox sometime in July. I’ll still be around on Twitter a little bit and you can always email me.

Enjoy the start of summer. Summer is for memories. Spread kindness. Make joy a priority for someone else and it will just as easily be your own. A little intention goes a long way. Whoever your they is, they will remember.

Stay groovy!

Kris


Postscript

In a crazy coincidence, I just hung out with the family that rented our house before we leased it (they are tight with our neighbors and visited from the East Coast). Apparently, they did this same camp idea with their family and friends at the house we live in now! They showed us a video of the finale performance the kids put on and pictures throughout the week. The mom couldn’t believe we randomly settled on a similar plan. She’s an artist and said something to the effect of “there’s just something about that house”.

Our house is a 1950s 3/2.5 CA ranch that looks straight outta Boogie Nights. Mirrors, bricks, and cabin interior. Everyone would be piled up on each other. I’m too cheap to put the A/C on. And everyone gets chores. If there were movie props on the premises you’d think I was recreating the commune on Spahn Ranch. Without the sex, drugs, and ya know, murder.

Although you might hear some Brian Wilson in the background.

Investing Q&A With Khe and Kris

Money Angle

This week my friend Khe asked me to join him for a Q&A on investing basics as a way to give some extra value to his Rad Reads community. In this letter and my blog, I write a lot about wonky finance stuff. Despite my best efforts to simplify the brain damage, I realize it’s not exactly basic.

This session was basic and I enjoy taking a shot at helping people learn the essentials. The feedback on this session was glowing and kind:

This is such good information because you’re going through all the things that I read, all the little bits and pieces, and you’re saying, “Well, this is not why this works.” This is very logical, and it makes a lot of sense. I really love how you got deeper into what you’re teaching and saying, to explain how things are not what some people are touting them to be. There’s so many examples here.

You can watch the replay:

🎬Investing Fundamentals With Khe and Kris (1 hour)

📝Transcript (Otter.AI)

This was the list of resources I shared for novice investors to learn:

Introductory

My Favorite Investing Blogs To Learn

Favorite Advanced Blogs

Professors

Following Along On A Regular Basis

  • Matt Levine’s daily Money Stuff column (Link)Apply your knowledge and learn how to think from Wall Street’s supreme writer. His supremacy is a fact.
  • Kyla Scanlon (Substack)
  • Link roundups: Abnormal Returns (Link)

Humility As Kindness

I want to share one of my favorite Scott Alexander posts while we are still in graduation season.

✍️SSC Gives A Graduation Speech (21 min read)

It’s the commencement speech Slatestar would give if asked.

He caveats the speech as such:

[Trigger warning for deliberately provoking horror about graduates’ real-world post-college prospects]
[Epistemic status: intended as persuasive speech, may somewhat overstate case]

With that warning, go read it.

If you ever want to refer back to its themes, you are welcome to my notes:

Keepsakes From Slatestar’s Fake Graduation Speech (8 min read)

There is a lot to chew on in the speech but I want to zoom in on a bit at the end.

I don’t know how to fix the system, but I am pretty sure that one of the ingredients is kindness.

I think of kindness not only as the moral virtue of volunteering at a soup kitchen or even of living your life to help as many other people as possible, but also as an epistemic virtue. Epistemic kindness is kind of like humility. Kindness to ideas you disagree with. Kindness to positions you want to dismiss as crazy and dismiss with insults and mockery. Kindness that breaks you out of your own arrogance, makes you realize the truth is more important than your own glorification, especially when there’s a lot at stake.

In our household, we have 3 core values we treat as a coat of arms:

  1. Kindness
  2. Gratitude
  3. Curiosity

I could go into each of these and why these 3 values, in particular, stand out to us. The shortest explanation is that I feel that many object-level values like “being hard-working” are downstream of these.

I’ll just talk a bit about epistemic kindness as humility since Slatestar brought it up. Experience tells us that people do not form opinions after weighing all arguments or data and coming to conclusions. Spock is fiction. We believe, then we cherry-pick instances that confirm our beliefs.

I’m sure there are legions of PhDs studying how beliefs form. Don’t worry about that. Instead, let’s just remember the dress for a moment.

In case you suffered an EMP outage in early 2015, you should recall that we couldn’t agree on what color the dress was.

This was a profound moment for me. It messed me up. If we can perceive this dress so differently, good luck agreeing on anything that matters. The keyword here is “perceive”. The horrors of the past week and the various reactions are a reminder that I do not understand many people. I don’t understand their views. Or how they weight their views.

And they probably wouldn’t understand my views. And why I weight them the way I do.

There’s a part of me that feels we need to build bridges. And grimly, a part of me thinks it’s futile. We can’t even agree on the dress because we simply don’t “see” the same way.

This point was further driven home when I read Jared Dillian’s Manic/Depressive (6 min read). I’ve been reading Jared’s professional newsletter Daily Dirtnap for a decade. I’ve read one of his books. I’ve exchanged emails with him over the years. His work is deeply personal. I’m aware of his mental health struggles. Still, that post, like the dress, halted me in my tracks. It reminded me of how limited my lived experience is. In many ways, I see myself in Jared. Some superficial, some less so. But when I read that post I also realized how different we are.

That understates the case. His description of bipolar disorder affirms my sense that the potential distance between 2 people is wider than we can imagine. It’s possible to not have any shared values with a fellow human because their perceptions are different from yours.

There is a wide range in our emotional wiring. There are billions of people in the world so there are tens, perhaps hundreds of millions of people with outlier hormonal balance. If intelligence follows a bell curve there are around 50mm Americans who have an IQ 1 standard deviation below the mean or worse.

Jared worked at Lehman when it went under. He wrote this about its boss Dick Fuld:

You can’t measure the intelligence of animals, but gorillas aren’t that smart. It’s safe to say that he didn’t have the intellectual horsepower to lead a complex financial firm through a decade-and-a-half of lurching from one crisis to the next. Lehman almost went tits up in 1998, then didn’t, and Fuld learned entirely the wrong lessons from that experience. He learned that you could cheat death by having the biggest balls. Hard to believe anyone was willing to own the stock after 1998.

IQ has a mixed reputation, and it’s kind of a political third rail these days, but I think it’s useful to have a discussion about intelligence, and how some people have less of it than others. The average IQ of the population is 100 (by definition), and the standard deviation is 15. If Fuld had an IQ of 115 (which is probably a pretty good guess), and you had an IQ of 145 (roughly 1 in 1000 people do, and there are lots of them at investment banks), then you would be two standard deviations above Fuld. Which is to say that you talking to Fuld would be like an average person talking to an eggplant.

Variations in culture, trust, and mental compute power mediate what we give attention to and how we weigh it. IQ is an incomplete measure of compute and is sensitive to cultural artifacts. But it’s not hard to understand that large differences in it can leave you feeling like you are talking to an “eggplant”. There are things you cannot explain to a mentally disabled person (I’m not calling them eggplants, and Jared wouldn’t either.) This obviously doesn’t devalue them as people. But it does devalue them in certain contexts. For example the context of driving. The public good requires drivers to exceed a minimum bar of cognitive and sensory capacity.

There is a real spectrum of measured intelligence. A person with a 100 IQ (average) would be frustrated dealing with someone with a 70 IQ. The distance between 100 and 130 is just as wide to Jared’s point. My point isn’t that someone who disagrees with a smart person is wrong. Smart people are outstanding at being wrong. They are clever in rationalizing how they are right which makes them especially dangerous and prone to overlearning the wrong lessons (the classic “midwit” meme). The point is that intelligence, like delusions and hormones, constitutes an axis of perception. How that axis intersects with culture, trust, and ambition will find people of all abilities scattered across the political map.

When I disagree with others I do my best to keep the dress in mind. To remember others’ mental and psychological composition may be impossible to relate to without a lot more information. Experience and perception shape our beliefs which we then rationalize. This means our conclusions are slaves to the tyranny of path-dependence. A single draw from a million possible lives. We suck at counterfactuals and we can’t tell the difference between “because of” and “in spite of” (You’ve surely heard justifications that follow this pattern: “There’s nothing wrong with playing video games 8 hours a day, I did it and I turned out fine”. Sigh. See my post Video Game Veto).

So what does humility look like when you vehemently disagree? It looks like more questions and less statements. You must ask questions.

[I’ll issue my own warning: personal takes to follow]

I’ll use the recent gun controversy as an example.

There’s a hardline strand of gun advocacy that prefers to sidestep any discussion of restrictions or background checks by sticking its fingers in its ears and crying “Second Amendment”. This easily devolves into strange debates about what the framers of the Constitution meant and to what extent citizens today should even care about proclamations from the graves of people who never saw a telephone never mind a smartphone.

That debate feels like a distraction. It’s a convenient way to avoid deeper questions when one’s stance is “I can appeal to a document’s authority to justify not needing any justifications”. Instead of getting tractor-beamed into a pointless debate, I’d rather ask questions to understand gun advocates further. It might go like this:

Hey, you were once a 19-year-old young adult interested in dogs, video games, baseball, DJ-ing, cooking, public speaking, and what you were going to do for a living. You remain interested in some of these things but now the 2nd Amendment and guns occupy a conspicuous amount of your mindshare.

  • Perhaps you feel threatened by gun control measures, teach me why.
  • The interpretation of the First Amendment includes prosocial concessions that restrict some freedoms. You cannot yell “fire” in a crowded theater. That’s not your right. You are suddenly put in charge. What prosocial concessions would you build into the Second Amendment?
  • Do you believe your current position on guns is best for society or best for you? It’s ok to say “best for you”. I’m not naive. This country has pursuit-of-narrow self-interest as a higher value than cooperation in its DNA. Whoever you think your stance is best for, teach me why.
  • What would need to be true, or what argument that currently supports your position would need to be false, for you to update your beliefs?

On an individual level, I still believe humility is critical to understand one another.

Regrettably, I’m not sure that view scales.


More Personal Thoughts

For many shooting and hunting are passionate hobbies. Growing up, my dad had a gun in the house, one of my closest friends in HS was an avid hunter. I was always at his house filled with shotguns and compound bows. My dad’s brother had an arsenal. I shot a .22 in Big Bear with that uncle when I was 9 (I turned down the chance to shoot the .45 that day because I was scared of the recoil). Guns provide millions of Americans entertainment and security.

Gun control deserves the same level of oversight we give to driving. Both domains need to square freedom with public health. Speed limits, seat belts, and lines on roads are not especially controversial. If there was an amendment with vague language about automobiles would we be debating the DMV while watching a high-speed chase on an LA freeway? Would O.J.’s right to speed in his white Bronco be as polarizing as his actual murder case?

To me, it feels that the gun debate overreaches suspiciously far into “freedom” discourse. Is there not a lot of room for reform without violating people’s rights in excess of the norms we voluntarily accept in exchange for public health? The debate is a source of power for a circle of politicians. They stand to benefit from scaring voters into making the gun debate about freedom.

These politicians use a sleight of hand — slippery slope arguments. Slippery slope is an argumentative technique for closing a debate before it starts by exploiting common thinking fallacies that make some end state appear inevitable even though it’s a single destination in a garden of forking paths. The user of such an argument is steamrolling you. If slippery slope arguments were universally valid, you would be paralyzed. You’d never do anything new. The left likes to invoke Hitler in every argument while the right pretends any change is a needless inhale that the government boa constrictor seizes to tighten its coil.

There are always people who argue in bad faith. It’s usually in the name of some abstract principle. In some cases, their minds are hacked. Yet there are others who know exactly what they are doing. They already have the Prisoner’s Dilemma boxes filled out in their minds. But we know cooperation is the basis of human flourishing. It would be grim to accept that the majority of people are unable to find mutually agreeable ground and even grimmer to think they have consciously abandoned the pursuit of cooperation. But it also feels like our system is selecting for bad faith leadership that has spawned a negative feedback loop where the most powerful signal you can send is who your enemies are. That’s what cartel warfare looks like. It’s a dangerous step away from principles to “might is right”. Barbarians beg for that world.

What happened this past week was barbaric. I’m ashamed of us. I don’t think it’s purely about guns but something more perverse in our culture. But the guns make the expression of that perversity convenient and amplify the impact. My initial reaction was sadness and anger. I didn’t have kids when Sandy Hook happened. I thought it was ghastly of course, but now I appreciate just how shaken every other American parent felt upon hearing that news.

It’s so disheartening.

The valence of guns seems to have a wider grip on people’s identity than other hobbies. There are so many things to possibly be interested in, how did this galvanize so much of their attention? Something about the discourse wreaks of manipulation. Like sophists with an extreme idealogy managed to successfully implant brainworms into a population. Or is a totally disproportionate minority hijacking us? I don’t study politics enough to understand the dynamic (happy to be educated if someone has a good grasp of it). Is the NRA more powerful than every other deep-pocketed non-psycho organization?

For the people who insist on arming teachers or suggest interventions that don’t explicitly create more friction to the wrong people accessing guns, I want to shout “who hurt you?” But this would be condescending instead of humble and I don’t think we get anywhere by attacking. We need a good-faith debate about the tradeoffs in our laws between freedom and public health.

The idea that more guns is the answer can only come from people who are not used to having their beliefs tested by reality. Imagine a futures contract that settled to 100 if the following were true:

“If we armed every citizen non-suicide gun deaths go down”

I’m a size seller at 50.

Convenience trumps self-control no matter what you tell yourself.

In David Epstein’s update this week:

A common argument, though, is that if those people didn’t shoot themselves, they would have just found some other way [to commit suicide]

Ample evidence (like this, and this) points to the contrary — that easy access to lethal means, like guns, increases the numbers of deaths by suicide overall.

The burden of proof is on the people who argue more gun control won’t help. And if they say you need to crack eggs to make an omelet, my question is how many eggs with baby chicks in them are you willing to sacrifice for that omelet?

Moontower #151

I want to share one of my favorite Scott Alexander posts while we are still in graduation season.

✍️SSC Gives A Graduation Speech (21 min read)

It’s the commencement speech Slatestar would give if asked.

He caveats the speech as such:

[Trigger warning for deliberately provoking horror about graduates’ real-world post-college prospects]
[Epistemic status: intended as persuasive speech, may somewhat overstate case]

With that warning, go read it.

If you ever want to refer back to its themes, you are welcome to my notes:

Keepsakes From Slatestar’s Fake Graduation Speech (8 min read)

There is a lot to chew on in the speech but I want to zoom in on a bit at the end.

I don’t know how to fix the system, but I am pretty sure that one of the ingredients is kindness.

I think of kindness not only as the moral virtue of volunteering at a soup kitchen or even of living your life to help as many other people as possible, but also as an epistemic virtue. Epistemic kindness is kind of like humility. Kindness to ideas you disagree with. Kindness to positions you want to dismiss as crazy and dismiss with insults and mockery. Kindness that breaks you out of your own arrogance, makes you realize the truth is more important than your own glorification, especially when there’s a lot at stake.

In our household, we have 3 core values we treat as a coat of arms:

  1. Kindness
  2. Gratitude
  3. Curiosity

I could go into each of these and why these 3 values, in particular, stand out to us. The shortest explanation is that I feel that many object-level values like “being hard-working” are downstream of these.

I’ll just talk a bit about epistemic kindness as humility since Slatestar brought it up. Experience tells us that people do not form opinions after weighing all arguments or data and coming to conclusions. Spock is fiction. We believe, then we cherry-pick instances that confirm our beliefs.

I’m sure there are legions of PhDs studying how beliefs form. Don’t worry about that. Instead, let’s just remember the dress for a moment.

In case you suffered an EMP outage in early 2015, you should recall that we couldn’t agree on what color the dress was.

This was a profound moment for me. It messed me up. If we can perceive this dress so differently, good luck agreeing on anything that matters. The keyword here is “perceive”. The horrors of the past week and the various reactions are a reminder that I do not understand many people. I don’t understand their views. Or how they weight their views.

And they probably wouldn’t understand my views. And why I weight them the way I do.

There’s a part of me that feels we need to build bridges. And grimly, a part of me thinks it’s futile. We can’t even agree on the dress because we simply don’t “see” the same way.

This point was further driven home when I read Jared Dillian’s Manic/Depressive (6 min read). I’ve been reading Jared’s professional newsletter Daily Dirtnap for a decade. I’ve read one of his books. I’ve exchanged emails with him over the years. His work is deeply personal. I’m aware of his mental health struggles. Still, that post, like the dress, halted me in my tracks. It reminded me of how limited my lived experience is. In many ways, I see myself in Jared. Some superficial, some less so. But when I read that post I also realized how different we are.

That understates the case. His description of bipolar disorder affirms my sense that the potential distance between 2 people is wider than we can imagine. It’s possible to not have any shared values with a fellow human because their perceptions are different from yours.

There is a wide range in our emotional wiring. There are billions of people in the world so there are tens, perhaps hundreds of millions of people with outlier hormonal balance. If intelligence follows a bell curve there are around 50mm Americans who have an IQ 1 standard deviation below the mean or worse.

Jared worked at Lehman when it went under. He wrote this about its boss Dick Fuld:

You can’t measure the intelligence of animals, but gorillas aren’t that smart. It’s safe to say that he didn’t have the intellectual horsepower to lead a complex financial firm through a decade-and-a-half of lurching from one crisis to the next. Lehman almost went tits up in 1998, then didn’t, and Fuld learned entirely the wrong lessons from that experience. He learned that you could cheat death by having the biggest balls. Hard to believe anyone was willing to own the stock after 1998.

IQ has a mixed reputation, and it’s kind of a political third rail these days, but I think it’s useful to have a discussion about intelligence, and how some people have less of it than others. The average IQ of the population is 100 (by definition), and the standard deviation is 15. If Fuld had an IQ of 115 (which is probably a pretty good guess), and you had an IQ of 145 (roughly 1 in 1000 people do, and there are lots of them at investment banks), then you would be two standard deviations above Fuld. Which is to say that you talking to Fuld would be like an average person talking to an eggplant.

Variations in culture, trust, and mental compute power mediate what we give attention to and how we weigh it. IQ is an incomplete measure of compute and is sensitive to cultural artifacts. But it’s not hard to understand that large differences in it can leave you feeling like you are talking to an “eggplant”. There are things you cannot explain to a mentally disabled person (I’m not calling them eggplants, and Jared wouldn’t either.) This obviously doesn’t devalue them as people. But it does devalue them in certain contexts. For example the context of driving. The public good requires drivers to exceed a minimum bar of cognitive and sensory capacity.

There is a real spectrum of measured intelligence. A person with a 100 IQ (average) would be frustrated dealing with someone with a 70 IQ. The distance between 100 and 130 is just as wide to Jared’s point. My point isn’t that someone who disagrees with a smart person is wrong. Smart people are outstanding at being wrong. They are clever in rationalizing how they are right which makes them especially dangerous and prone to overlearning the wrong lessons (the classic “midwit” meme). The point is that intelligence, like delusions and hormones, constitutes an axis of perception. How that axis intersects with culture, trust, and ambition will find people of all abilities scattered across the political map.

When I disagree with others I do my best to keep the dress in mind. To remember others’ mental and psychological composition may be impossible to relate to without a lot more information. Experience and perception shape our beliefs which we then rationalize. This means our conclusions are slaves to the tyranny of path-dependence. A single draw from a million possible lives. We suck at counterfactuals and we can’t tell the difference between “because of” and “in spite of” (You’ve surely heard justifications that follow this pattern: “There’s nothing wrong with playing video games 8 hours a day, I did it and I turned out fine”. Sigh. See my post Video Game Veto).

So what does humility look like when you vehemently disagree? It looks like more questions and less statements. You must ask questions.

[I’ll issue my own warning: personal takes to follow]

I’ll use the recent gun controversy as an example.

There’s a hardline strand of gun advocacy that prefers to sidestep any discussion of restrictions or background checks by sticking its fingers in its ears and crying “Second Amendment”. This easily devolves into strange debates about what the framers of the Constitution meant and to what extent citizens today should even care about proclamations from the graves of people who never saw a telephone never mind a smartphone.

That debate feels like a distraction. It’s a convenient way to avoid deeper questions when one’s stance is “I can appeal to a document’s authority to justify not needing any justifications”. Instead of getting tractor-beamed into a pointless debate, I’d rather ask questions to understand gun advocates further. It might go like this:

Hey, you were once a 19-year-old young adult interested in dogs, video games, baseball, DJ-ing, cooking, public speaking, and what you were going to do for a living. You remain interested in some of these things but now the 2nd Amendment and guns occupy a conspicuous amount of your mindshare.

  • Perhaps you feel threatened by gun control measures, teach me why.
  • The interpretation of the First Amendment includes prosocial concessions that restrict some freedoms. You cannot yell “fire” in a crowded theater. That’s not your right. You are suddenly put in charge. What prosocial concessions would you build into the Second Amendment?
  • Do you believe your current position on guns is best for society or best for you? It’s ok to say “best for you”. I’m not naive. This country has pursuit-of-narrow self-interest as a higher value than cooperation in its DNA. Whoever you think your stance is best for, teach me why.
  • What would need to be true, or what argument that currently supports your position would need to be false, for you to update your beliefs?

On an individual level, I still believe humility is critical to understand one another.

Regrettably, I’m not sure that view scales.


More Personal Thoughts

For many shooting and hunting are passionate hobbies. Growing up, my dad had a gun in the house, one of my closest friends in HS was an avid hunter. I was always at his house filled with shotguns and compound bows. My dad’s brother had an arsenal. I shot a .22 in Big Bear with that uncle when I was 9 (I turned down the chance to shoot the .45 that day because I was scared of the recoil). Guns provide millions of Americans entertainment and security.

Gun control deserves the same level of oversight we give to driving. Both domains need to square freedom with public health. Speed limits, seat belts, and lines on roads are not especially controversial. If there was an amendment with vague language about automobiles would we be debating the DMV while watching a high-speed chase on an LA freeway? Would O.J.’s right to speed in his white Bronco be as polarizing as his actual murder case?

To me, it feels that the gun debate overreaches suspiciously far into “freedom” discourse. Is there not a lot of room for reform without violating people’s rights in excess of the norms we voluntarily accept in exchange for public health? The debate is a source of power for a circle of politicians. They stand to benefit from scaring voters into making the gun debate about freedom.

These politicians use a sleight of hand — slippery slope arguments. Slippery slope is an argumentative technique for closing a debate before it starts by exploiting common thinking fallacies that make some end state appear inevitable even though it’s a single destination in a garden of forking paths. The user of such an argument is steamrolling you. If slippery slope arguments were universally valid, you would be paralyzed. You’d never do anything new. The left likes to invoke Hitler in every argument while the right pretends any change is a needless inhale that the government boa constrictor seizes to tighten its coil.

There are always people who argue in bad faith. It’s usually in the name of some abstract principle. In some cases, their minds are hacked. Yet there are others who know exactly what they are doing. They already have the Prisoner’s Dilemma boxes filled out in their minds. But we know cooperation is the basis of human flourishing. It would be grim to accept that the majority of people are unable to find mutually agreeable ground and even grimmer to think they have consciously abandoned the pursuit of cooperation. But it also feels like our system is selecting for bad faith leadership that has spawned a negative feedback loop where the most powerful signal you can send is who your enemies are. That’s what cartel warfare looks like. It’s a dangerous step away from principles to “might is right”. Barbarians beg for that world.

What happened this past week was barbaric. I’m ashamed of us. I don’t think it’s purely about guns but something more perverse in our culture. But the guns make the expression of that perversity convenient and amplify the impact. My initial reaction was sadness and anger. I didn’t have kids when Sandy Hook happened. I thought it was ghastly of course, but now I appreciate just how shaken every other American parent felt upon hearing that news.

It’s so disheartening.

The valence of guns seems to have a wider grip on people’s identity than other hobbies. There are so many things to possibly be interested in, how did this galvanize so much of their attention? Something about the discourse wreaks of manipulation. Like sophists with an extreme idealogy managed to successfully implant brainworms into a population. Or is a totally disproportionate minority hijacking us? I don’t study politics enough to understand the dynamic (happy to be educated if someone has a good grasp of it). Is the NRA more powerful than every other deep-pocketed non-psycho organization?

For the people who insist on arming teachers or suggest interventions that don’t explicitly create more friction to the wrong people accessing guns, I want to shout “who hurt you?” But this would be condescending instead of humble and I don’t think we get anywhere by attacking. We need a good-faith debate about the tradeoffs in our laws between freedom and public health.

The idea that more guns is the answer can only come from people who are not used to having their beliefs tested by reality. Imagine a futures contract that settled to 100 if the following were true:

“If we armed every citizen non-suicide gun deaths go down”

I’m a size seller at 50.

Convenience trumps self-control no matter what you tell yourself.

In David Epstein’s update this week:

A common argument, though, is that if those people didn’t shoot themselves, they would have just found some other way [to commit suicide]

Ample evidence (like this, and this) points to the contrary — that easy access to lethal means, like guns, increases the numbers of deaths by suicide overall.

The burden of proof is on the people who argue more gun control won’t help. And if they say you need to crack eggs to make an omelet, my question is how many eggs with baby chicks in them are you willing to sacrifice for that omelet?


Money Angle

This week my friend Khe asked me to join him for a Q&A on investing basics as a way to give some extra value to his Rad Reads community. In this letter and my blog, I write a lot about wonky finance stuff. Despite my best efforts to simplify the brain damage, I realize it’s not exactly basic.

This session was basic and I enjoy taking a shot at helping people learn the essentials. The feedback on this session was glowing and kind:

This is such good information because you’re going through all the things that I read, all the little bits and pieces, and you’re saying, “Well, this is not why this works.” This is very logical, and it makes a lot of sense. I really love how you got deeper into what you’re teaching and saying, to explain how things are not what some people are touting them to be. There’s so many examples here.

You can watch the replay:

🎬Investing Fundamentals With Khe and Kris (1 hour)

📝Transcript (Otter.AI)

This was the list of resources I shared for novice investors to learn:

Introductory

My Favorite Investing Blogs To Learn

Favorite Advanced Blogs

Professors

Following Along On A Regular Basis

  • Matt Levine’s daily Money Stuff column (Link)

    Apply your knowledge and learn how to think from Wall Street’s supreme writer. His supremacy is a fact.

  • Kyla Scanlon (Substack)
  • Link roundups: Abnormal Returns (Link)

From My Actual Life

It’s been an action-packed week. I was in Panama last weekend. According to the guide, the canal saves a vessel 26 days of travel. The toll for container ships is about $100 per container. The largest ship he could remember had 14,000 containers!

The system of locks (“water elevators” because the Caribbean/Atlantic side is higher elevation than the Pacific side) is mesmerizing to view.

This dude helped me level up my classic daiquiri game:

I keep a list of my modest repertoire here: Moontower Cocktails

My kids had their last day of school.

My music teacher helped me infect them with the bug (I dragged them to my jam session and being in that environment sparked their interest without me pushing…the older kid wants to take drum lessons!).

And finally, it’s been a weekend of nostalgia — I saw Metallica at Bottlerock on Friday and Top Gun last night.

I’m sending this from beautiful Big Sur.

Happy wedding anniversary to V&L, M&L, and the many others who tied the knot in late May. Happy graduation to Elijah and the legion of grads celebrating. Seriously, read that Slatestar speech. Or my personal favorite commencement speech — Wooderson (you do understand where the Moontower namesake comes from right?)

Respect and warmth from me to y’all.

Stay groovy this Memorial Day weekend!

My Investing Shame Is Your Gain

For this 150th issue Moontower, I have a confession.

I write this Money Angle section each week but as recently as 6 years ago, I didn’t really care about or understand investing. The delay in learning has cost returns and even shame. I might as well get the most out of that expensive tuition by sharing the story so others can learn from my mistakes.

When I graduated in 2000, the options and still-new ETF trading businesses were a party. The internet bubble led to high volumes and volatility. The volumes were a step-function higher than anything seen before. I’d estimate prop shops made 4-5x the profits they typically expected.

Before the dot-com days, options trading was a cottage industry where a typical trader could earn a low six-figure pay working relatively short hours without having to ingratiate their personalities to either clients or corporate overlords. A roaring stock market and the emergence of electronic trading transformed the landscape. The existing prop shops and sole proprietors had expertise and so-called time-place advantage on the exchange floors. The competition from banks hadn’t arrived because like I said, it used to be a niche industry. Banks were not internalizing flow just yet. In fact, to play catch-up Goldman paid a shocking sum of $6.5B for Spear, Leeds, and Kellogg after acquiring Hull months earlier.

The upshot. Prop shops were hiring like crazy. I snuck into SIG’s largest ever cohort. I started working in August 2000. I was a trader with my own book by October 2001. (Story time: I finished SIG’s class at the end of summer 2001. I took a 1-week vacation visiting my friends in Cupertino before heading back to NY to my assigned pit on the AMEX. During that trip to CA, my mother called waking me up after a 5am bender. 2 planes had crashed into the World Trade Center. She was in Midtown and called because she “just wanted to hear my voice”. I dismissed her as crazy and went back to sleep. Later that morning, when I turned on the news, it was the worst I ever felt in my life. Only to be topped a few minutes later when I tried to call her and couldn’t get through because the phones were overloaded. When I got back to NY the exchanges were still closed and I wouldn’t start trading for a few weeks).

I was 23-years-old, had my own trading account, and making $100k including bonus. It was more money than anyone in my family made. In the next year, I would pay off my student loans but what would I do with my savings next? Growing up, my parents didn’t have extra money to invest. I didn’t learn about compounding and what 100 bps means in the long run.

There was also a perverse combination of influences that kept investing in markets off my radar. First, the bursting of the internet bubble made me feel thankful for not investing in stocks. Second, as a trader we were trained to have no opinions. I thought of option customers as deluded gamblers. Suckers and tourists unless they had inside info. As market-makers, we were always worried about toxic flows. Toxic flow is informed flow. It’s either flow frontrunning a larger incoming flow or straight-up insider trading (I clerked at the post were options on XAL traded. That’s the AMEX Airline Index. Put option action before 9/11 was investigated with attempts to trace profits back to Al Queda. No smoking guns were found). In my model of markets, you either cheated to make money or you were the casino. Otherwise you were just gambling. Pretty dark.

I was starting to accumulate savings with my debts paid off. SIG had 401k matching so it seemed like a no-brainer to put money there. I think I just used a target-date fund. It was a snap decision. Retirement felt really far away so money trapped in a 401k felt fake to me. Later, when I was self-employed I would contribute $50k/year to a SEP IRA and just jam it into stocks. Again, fake money since half of it would have been taxed if I didn’t contribute.

But what would I do with liquid savings if I wasn’t going to invest beyond a 401k? The default was to buy a place to live so I wasn’t “throwing money away on rent” (that’s the wrong framing of rent; learning is unlearning). With this goal in mind, I was focused on saving about $75k for a down payment on an apartment. As a near-term goal it was money I couldn’t afford to lose, so investing didn’t make sense anyway.

In 2005, I bought a coop studio in midtown on 57th between Lexington and 3rd Ave. It was a 450 sq ft fixer that I renovated. (Random: the apartment was above a memorabilia store that had a Guns N’ Roses VMA award presumably from the night Duff and Slash, stumbling drunk, accepted the moon man while slurring their words and cursing on live TV. They were asking $5,000 for it. The most burning missed trade in my career.) Between the apartment and renovations, my savings were now depleted to a healthy reserve. No reason to invest.

2 years later, I score a low seven-figure bonus. So what do I do? I buy a condo in LIC off of plans. Paid the developer’s costs and everything. It was 2007 in NYC. That’s how it was. Toppy.

By the time the place is built and I move in, the GFC is in full swing. I never had great timing. (Not even as a vol trader…that’s why it’s critical to manage risk and size well. Timing is impossible to nail consistently but it’s not as important. Harley Bassman likes to say “sizing is more important than entry level”. Co-sign.)

I was in the midst of taking 6 months off after leaving SIG to start my own trading business with a backer. I’m shopping for an engagement ring, expect to have big wedding expenses in the next year, and embarking on a new venture where I’d have to post cash in escrow with the backer. Plus I’m watching the financial world implode. With all these demands and an apartment that is immediately underwater from its basis, there was no way was I going to stick money in the market.

So here I am, I just turned 30, a trader for 7 years, and I still don’t know a thing about investing.

I won’t drag out the next decade in detail, but I remained apathetic about investing. When we moved to SF in 2012, we started looking for homes. Another imminent purchase, so no point in investing, right? Since I don’t understand investing I figure I’ll just buy a house in cash and at least lock in the after-tax mortgage rate as a return. I know, I know. (Look, writing this is part of the healing.)

We can zoom ahead until about age 36. We just bought our family house in the ‘burbs and have a 1-year-old. This focuses you on the future. While my wife and I enjoy substantial W2 incomes, high taxes and relaxed spending habits make something abundantly clear — the strategy of just outrunning will eventually tire. I’m sitting there without equity in anything except a house.

That’s when I turned to the internet. I started lurking on Twitter. Listening to podcasts. I approached investing with a beginner’s mind. I realized that my trading background actually harmed me but it was because of how I generalized its lessons. It was my own failure. [See: How I Misapplied My Trader Mindset To Investing]

I became swept up in a process of unlearning and reconciling. What about trading applies to investing? The answers are still unfolding for me. When I started this newsletter I was mostly sharing links and concepts I found interesting. Somewhere along the line, I began translating from one domain to the other. The feedback told me that people outside trading could learn from the niche I spent my whole career in if I could peel off the skin to get to the fruit.

The quest to get better at investing goes hand in hand with learning and teaching. Some of the cornerstones from which I approach investing education:

  • Markets, from the perspective of most people, are “efficiently inefficient”. Efficiency is highly seat-dependent. Sitting in the cockpit at my last job, I could see inefficiency. I have no such visibility from my living room. My experience in trading has paradoxically contributed to this view — I’ve spent a lot of time in awe of how something that I thought was clever was actually priced in before I got there. That’s a hint that the relative efficiency of markets is not a paradox.
  • I can appreciate others being incurious about investing (I still consider it a chore…I find finance conceptually fascinating but investing is about a lot more than concepts). So I’m sensitive to people’s preference for simple. Investing is a wicked domain with tremendous luck. One of my favorite statistics comes from my buddy Nick Maggiulli. The dates are cherry-picked but somebody lived them:if you had invested from 1960-1980 and beaten the market by 5% each year, you would have made less money than if you had invested from 1980-2000 and underperformed the market by 5% a year.

    The returns to effort dimish extremely quickly. Charley Ellis describes investing as “a loser’s game” like amateur tennis. You win by not losing. Not making giant errors. Not carrying 18% credit card debt. Not concentrating your wealth in the latest shiny rock.
  • Not everyone grows up knowing about compounding. There’s a lot of financial literacy stuff for kids or teens out there. Much of it is impractical unless the youth is specifically interested in investing. Yet the idea of compounding, not just financially, but in relationships, knowledge, and skills is critical. Finding ways to deliver this message so that it sticks is a worthy challenge.
  • Separate what matters from what doesn’t matter. Investing is a playground for decision-making. You can be doubly helpful if you can help map investing rationale to general thinking. A hunch — the best lessons from investing and portfolio theory are more useful outside investing.

My last confession for today. I didn’t really understand where equity returns came from for most of my adult life. I thought that over time “stocks just go up” without any sense of why. That’s just willful ignorance at some point. I wanna believe I knew where returns came from if you pressed me but I’m not sure. Either way, I’m sympathetic to others who don’t get where returns come from.

A non-zero percentage of people who invest in RE fall in this camp. There’s something about them not being able to see the cashflow that makes them think stocks are fairy dust and not businesses. The whole dividend darling marketing spiel is aimed straight at them even though dividends are tax-inefficient.

[The decision to pay dividends or not has nothing to do with whether a company is a good business. It’s a capital allocation decision. Jake uses a simple picture to show they are mathematically equivalent to buybacks. Stock prices fall by the amount of the dividend. If you have ever exercised a call option early you know this. In fact, when you see the “change in price” column in a data vendor after a distribution, that change is net of the dividend. So if a $50 stock pays a $1 dividend and the next day is trading for $49, the vendor will say the stock is “unchanged”.

Dividends, just like the buybacks, reduce the amount of cash on a company’s balance sheet. In the case of the dividend, the price of the stock falls reducing the company’s market cap by the amount of cash they spent. In the buyback scenario, the price of the stock remains unchanged but the shares outstanding falls. Again, the market cap falls by the amount of cash the company spent.]

It’s totally understandable to have mistaken beliefs about where stock returns come from. All of the charts we look at are price charts. How many charts do you see of earnings or FCF in mainstream financial outlets? It’s not nefarious but it makes you wonder. How can financial content be displayed so that it improves our understanding? How can investing education be incorporated effectively into pre-teen and teen education?

I’m a trader and a lot of investing basics managed to avoid me. It’s understandable. People’s asset allocations are not openly discussed. There’s so much financial information online but it’s hard to know what’s trustworthy especially when you are a beginner. There’s no brand that comes to mind as the obvious choice for financial literacy.

As I continue learning, I’ll keep doing my small part to share and educate. There’s work to be done here.

*Special thanks to Nick and Jake. We had dinner a few weeks ago and the seeds of this post fell out of that conversation. We were also celebrating the early success of Nick’s outstanding book Just Keep Buying. I have read nearly all of Nick’s blog posts and when I came to investing it was formative. Now you can get all the lessons in one tidy place. And there’s a kicker — the book is better than the blog. So even if you read Nick regularly, the book is worth buying. It’s also a perfect book to give someone when they are in high school or college or their early 20s.

If I had this book back then, I never would have written this post.

Damn that thought has major Terminator plot vibes.


When I started learning about investing, this post would have been welcome:

✍️Return: Where Does It Come From? (11 min read)
by @kbracker

This is an evergreen post fundamental to investing education. It explains the components of equity returns.

Kevin Bracker is a retired finance professor.

His YouTube channel is epic. In-depth examples of fundamental, quantitative, and derivative concepts. Check it out.

Moontower #150

Friends,

I had a trip booked this week, but when one of the kids got Covid last week I expected our whole household to go down with it.

Somehow nobody else got it, so…

I’m in Panama.

I wrote this before I left. I hope I’m alive right now.

Let’s just hop into one of the best posts I’ve read in recent memory.

✍️The Arc Of The Practical Creator (16 min read)
by @moretothat

Lawrence Yeo’s work is a trojan horse. Your mind’s guard thinks “oh what a cuddly cartoon, open the gate”. Then boom. You’re staring into a philosophical mirror. The words belong to a cartoon, yet the sentiment is unmistakably yours.

I’ve been enjoying these posts for years but this felt like an opus tying together many themes I read Lawrence for. The object-level matter is a set of directions leading you towards the path you want to walk. It’s a guided tour of the forks you’ll see along the way, their meaning, and a framework for deciding which way to go.

The meta-lesson has to do with agency. The meaning you create by your choices. And a paradoxically liberating insight — the path is endless.

I took notes as a reference. You can find them in my public Notion: Moontower’s Favorite Posts By Others

The most pragmatic bits are captured in the description of the arc. The deepest bits are timeless wisdom. They are reminders that creativity is important because it’s about agency. The word “creativity” is imbued with impractical or whimsical connotations usually relegated to art, music, performance, or writing. This gives the impression that creativity is rare or somehow reserved for the few.

Creativity resides in each of us. You don’t need permission to unlock it. And it’s not just a plaything. You have a duty to your well-being to unlock it. Lawrence, take us out:

Every stage will be challenging, and that’s the point.

Creative endeavors are inspiring because the scope of the problem often feels bigger than your capacity to solve it. But because you find that problem so worthwhile, you’re willing to put in the effort required to provide the best solution possible. Through this process, you become a more capable person, which allows you to address more worthwhile problems in turn. It’s this beautiful cycle that gives you a sense of purpose and meaning in how you spend your time and energy.

So regardless of which stage you’re in, understand that there is no easier or harder. There is just challenge. And the only way to cultivate a healthy relationship with challenge is to develop the patience required to manage it properly.


Money Angle

For this 150th issue Moontower, I have a confession.

I write this Money Angle section each week but as recently as 6 years ago, I didn’t really care about or understand investing. The delay in learning has cost returns and even shame. I might as well get the most out of that expensive tuition by sharing the story so others can learn from my mistakes.

When I graduated in 2000, the options and still-new ETF trading businesses were a party. The internet bubble led to high volumes and volatility. The volumes were a step-function higher than anything seen before. I’d estimate prop shops made 4-5x the profits they typically expected.

Before the dot-com days, options trading was a cottage industry where a typical trader could earn a low six-figure pay working relatively short hours without having to ingratiate their personalities to either clients or corporate overlords. A roaring stock market and the emergence of electronic trading transformed the landscape. The existing prop shops and sole proprietors had expertise and so-called time-place advantage on the exchange floors. The competition from banks hadn’t arrived because like I said, it used to be a niche industry. Banks were not internalizing flow just yet. In fact, to play catch-up Goldman paid a shocking sum of $6.5B for Spear, Leeds, and Kellogg after acquiring Hull months earlier.

The upshot. Prop shops were hiring like crazy. I snuck into SIG’s largest ever cohort. I started working in August 2000. I was a trader with my own book by October 2001. (Story time: I finished SIG’s class at the end of summer 2001. I took a 1-week vacation visiting my friends in Cupertino before heading back to NY to my assigned pit on the AMEX. During that trip to CA, my mother called waking me up after a 5am bender. 2 planes had crashed into the World Trade Center. She was in Midtown and called because she “just wanted to hear my voice”. I dismissed her as crazy and went back to sleep. Later that morning, when I turned on the news, it was the worst I ever felt in my life. Only to be topped a few minutes later when I tried to call her and couldn’t get through because the phones were overloaded. When I got back to NY the exchanges were still closed and I wouldn’t start trading for a few weeks).

I was 23-years-old, had my own trading account, and making $100k including bonus. It was more money than anyone in my family made. In the next year, I would pay off my student loans but what would I do with my savings next? Growing up, my parents didn’t have extra money to invest. I didn’t learn about compounding and what 100 bps means in the long run.

There was also a perverse combination of influences that kept investing in markets off my radar. First, the bursting of the internet bubble made me feel thankful for not investing in stocks. Second, as a trader we were trained to have no opinions. I thought of option customers as deluded gamblers. Suckers and tourists unless they had inside info. As market-makers, we were always worried about toxic flows. Toxic flow is informed flow. It’s either flow frontrunning a larger incoming flow or straight-up insider trading (I clerked at the post were options on XAL traded. That’s the AMEX Airline Index. Put option action before 9/11 was investigated with attempts to trace profits back to Al Queda. No smoking guns were found). In my model of markets, you either cheated to make money or you were the casino. Otherwise you were just gambling. Pretty dark.

I was starting to accumulate savings with my debts paid off. SIG had 401k matching so it seemed like a no-brainer to put money there. I think I just used a target-date fund. It was a snap decision. Retirement felt really far away so money trapped in a 401k felt fake to me. Later, when I was self-employed I would contribute $50k/year to a SEP IRA and just jam it into stocks. Again, fake money since half of it would have been taxed if I didn’t contribute.

But what would I do with liquid savings if I wasn’t going to invest beyond a 401k? The default was to buy a place to live so I wasn’t “throwing money away on rent” (that’s the wrong framing of rent; learning is unlearning). With this goal in mind, I was focused on saving about $75k for a down payment on an apartment. As a near-term goal it was money I couldn’t afford to lose, so investing didn’t make sense anyway.

In 2005, I bought a coop studio in midtown on 57th between Lexington and 3rd Ave. It was a 450 sq ft fixer that I renovated. (Random: the apartment was above a memorabilia store that had a Guns N’ Roses VMA award presumably from the night Duff and Slash, stumbling drunk, accepted the moon man while slurring their words and cursing on live TV. They were asking $5,000 for it. The most burning missed trade in my career.) Between the apartment and renovations, my savings were now depleted to a healthy reserve. No reason to invest.

2 years later, I score a low seven-figure bonus. So what do I do? I buy a condo in LIC off of plans. Paid the developer’s costs and everything. It was 2007 in NYC. That’s how it was. Toppy.

By the time the place is built and I move in, the GFC is in full swing. I never had great timing. (Not even as a vol trader…that’s why it’s critical to manage risk and size well. Timing is impossible to nail consistently but it’s not as important. Harley Bassman likes to say “sizing is more important than entry level”. Co-sign.)

I was in the midst of taking 6 months off after leaving SIG to start my own trading business with a backer. I’m shopping for an engagement ring, expect to have big wedding expenses in the next year, and embarking on a new venture where I’d have to post cash in escrow with the backer. Plus I’m watching the financial world implode. With all these demands and an apartment that is immediately underwater from its basis, there was no way was I going to stick money in the market.

So here I am, I just turned 30, a trader for 7 years, and I still don’t know a thing about investing.

I won’t drag out the next decade in detail, but I remained apathetic about investing. When we moved to SF in 2012, we started looking for homes. Another imminent purchase, so no point in investing, right? Since I don’t understand investing I figure I’ll just buy a house in cash and at least lock in the after-tax mortgage rate as a return. I know, I know. (Look, writing this is part of the healing.)

We can zoom ahead until about age 36. We just bought our family house in the ‘burbs and have a 1-year-old. This focuses you on the future. While my wife and I enjoy substantial W2 incomes, high taxes and relaxed spending habits make something abundantly clear — the strategy of just outrunning will eventually tire. I’m sitting there without equity in anything except a house.

That’s when I turned to the internet. I started lurking on Twitter. Listening to podcasts. I approached investing with a beginner’s mind. I realized that my trading background actually harmed me but it was because of how I generalized its lessons. It was my own failure. [See: How I Misapplied My Trader Mindset To Investing]

I became swept up in a process of unlearning and reconciling. What about trading applies to investing? The answers are still unfolding for me. When I started this newsletter I was mostly sharing links and concepts I found interesting. Somewhere along the line, I began translating from one domain to the other. The feedback told me that people outside trading could learn from the niche I spent my whole career in if I could peel off the skin to get to the fruit.

The quest to get better at investing goes hand in hand with learning and teaching. Some of the cornerstones from which I approach investing education:

  • Markets, from the perspective of most people, are “efficiently inefficient”. Efficiency is highly seat-dependent. Sitting in the cockpit at my last job, I could see inefficiency. I have no such visibility from my living room. My experience in trading has paradoxically contributed to this view — I’ve spent a lot of time in awe of how something that I thought was clever was actually priced in before I got there. That’s a hint that the relative efficiency of markets is not a paradox.

  • I can appreciate others being incurious about investing (I still consider it a chore…I find finance conceptually fascinating but investing is about a lot more than concepts). So I’m sensitive to people’s preference for simple. Investing is a wicked domain with tremendous luck. One of my favorite statistics comes from my buddy Nick Maggiulli. The dates are cherry-picked but somebody lived them:

    if you had invested from 1960-1980 and beaten the market by 5% each year, you would have made less money than if you had invested from 1980-2000 and underperformed the market by 5% a year.

    The returns to effort dimish extremely quickly. Charley Ellis describes investing as “a loser’s game” like amateur tennis. You win by not losing. Not making giant errors. Not carrying 18% credit card debt. Not concentrating your wealth in the latest shiny rock.

  • Not everyone grows up knowing about compounding. There’s a lot of financial literacy stuff for kids or teens out there. Much of it is impractical unless the youth is specifically interested in investing. Yet the idea of compounding, not just financially, but in relationships, knowledge, and skills is critical. Finding ways to deliver this message so that it sticks is a worthy challenge.
  • Separate what matters from what doesn’t matter. Investing is a playground for decision-making. You can be doubly helpful if you can help map investing rationale to general thinking. A hunch — the best lessons from investing and portfolio theory are more useful outside investing.

My last confession for today. I didn’t really understand where equity returns came from for most of my adult life. I thought that over time “stocks just go up” without any sense of why. That’s just willful ignorance at some point. I wanna believe I knew where returns came from if you pressed me but I’m not sure. Either way, I’m sympathetic to others who don’t get where returns come from.

A non-zero percentage of people who invest in RE fall in this camp. There’s something about them not being able to see the cashflow that makes them think stocks are fairy dust and not businesses. The whole dividend darling marketing spiel is aimed straight at them even though dividends are tax-inefficient.

[The decision to pay dividends or not has nothing to do with whether a company is a good business. It’s a capital allocation decision. Jake uses a simple picture to show they are mathematically equivalent to buybacks. Stock prices fall by the amount of the dividend. If you have ever exercised a call option early you know this. In fact, when you see the “change in price” column in a data vendor after a distribution, that change is net of the dividend. So if a $50 stock pays a $1 dividend and the next day is trading for $49, the vendor will say the stock is “unchanged”.

Dividends, just like the buybacks, reduce the amount of cash on a company’s balance sheet. In the case of the dividend, the price of the stock falls reducing the company’s market cap by the amount of cash they spent. In the buyback scenario, the price of the stock remains unchanged but the shares outstanding falls. Again, the market cap falls by the amount of cash the company spent.]

It’s totally understandable to have mistaken beliefs about where stock returns come from. All of the charts we look at are price charts. How many charts do you see of earnings or FCF in mainstream financial outlets? It’s not nefarious but it makes you wonder. How can financial content be displayed so that it improves our understanding? How can investing education be incorporated effectively into pre-teen and teen education?

I’m a trader and a lot of investing basics managed to avoid me. It’s understandable. People’s asset allocations are not openly discussed. There’s so much financial information online but it’s hard to know what’s trustworthy especially when you are a beginner. There’s no brand that comes to mind as the obvious choice for financial literacy.

As I continue learning, I’ll keep doing my small part to share and educate. There’s work to be done here.

*Special thanks to Nick and Jake. We had dinner a few weeks ago and the seeds of this post fell out of that conversation. We were also celebrating the early success of Nick’s outstanding book Just Keep Buying. I have read nearly all of Nick’s blog posts and when I came to investing it was formative. Now you can get all the lessons in one tidy place. And there’s a kicker — the book is better than the blog. So even if you read Nick regularly, the book is worth buying. It’s also a perfect book to give someone when they are in high school or college or their early 20s.

If I had this book back then, I never would have written this post.

Damn that thought has major Terminator plot vibes.


When I started learning about investing, this post would have been welcome:

✍️Return: Where Does It Come From? (11 min read)
by @kbracker

This is an evergreen post fundamental to investing education. It explains the components of equity returns.

Kevin Bracker is a retired finance professor.

His YouTube channel is epic. In-depth examples of fundamental, quantitative, and derivative concepts. Check it out.

Stay groovy!

Greeks Are Everywhere

The option greeks everyone starts with are delta and gamma. Delta is the sensitivity of the option price with respect to changes in the underlying. Gamma is the change in that delta with respect to changes in the underlying.

If you have a call option that is 25% out-of-the-money (OTM) and the stock doubles in value, you would observe the option graduating from a low delta (when the option is 25% OTM a 1% change in the stock isn’t going to affect the option much) to having a delta near 100%. Then it moves dollar for dollar with the stock.

If the option’s delta changed from approximately 0 to 100% then gamma is self-evident. The option delta (not just the option price) changed as the stock rallied. Sometimes we can even compute a delta without the help of an option model by reasoning about it from the definition of “delta”. Consider this example from Lessons From The .50 Delta Option where we establish that delta is best thought of as a hedge ratio 1:

Stock is trading for $1. It’s a biotech and tomorrow there is a ruling:

  • 90% of the time the stock goes to zero
  • 10% of the time the stock goes to $10

First take note, the stock is correctly priced at $1 based on expected value (.90 x $0 + .10 x $10). So here are my questions.

What is the $5 call worth?

  • Back to expected value:90% of the time the call expires worthless.10% of the time the call is worth $5

.9 x $0 + .10 x $5 = $.50

The call is worth $.50

Now, what is the delta of the $5 call?

$5 strike call =$.50

Delta = (change in option price) / (change in stock price)

  • In the down case, the call goes from $.50 to zero as the stock goes from $1 to zero.Delta = $.50 / $1.00 = .50
  • In the up case, the call goes from $.50 to $5 while the stock goes from $1 to $10Delta = $4.50 / $9.00 = .50

The call has a .50 delta

Using The Delta As a Hedge Ratio

Let’s suppose you sell the $5 call to a punter for $.50 and to hedge you buy 50 shares of stock. Each option contract corresponds to a 100 share deliverable.

  • Down scenario P/L:Short Call P/L = $.50 x 100 = $50Long Stock P/L = -$1.00 x 50 = -$50

    Total P/L = $0

  • Up scenario P/L:Short Call P/L = -$4.50 x 100 = -$450Long Stock P/L = $9.00 x 50 = $450

    Total P/L = $0

Eureka, it works! If you hedge your option position on a .50 delta your p/l in both cases is zero.

But if you recall, the probability of the $5 call finishing in the money was just 10%. It’s worth restating. In this binary example, the 400% OTM call has a 50% delta despite only having a 10% chance of finishing in the money.

The Concept of Delta Is Not Limited To Options

Futures

Futures have deltas too. If the SPX cash index increases by 1%, the SP500 futures go up 1%. They have a delta of 100%.

But let’s look closer.

The fair value of a future is given by:

Future = Seʳᵗ

where:

S = stock price

r = interest rate

t = time to expiry in years

This formula comes straight from arbitrage pricing theory. If the cash index is trading for $100 and 1-year interest rates are 5% then the future must trade for $105.13

100e^(5% * 1) = $105.13

What if it traded for $103?

  • Then you buy the future, short the cash index at $100
  • Earn $5.13 interest on the $100 you collect when you short the stocks in the index.
  • For simplicity imagine the index doesn’t move all year. It doesn’t matter if it did move since your market risk is hedged — you are short the index in the cash market and long the index via futures.
  • At expiration, your short stock position washes with the expiring future which will have decayed to par with the index or $100.
  • [Warning: don’t trade this at home. I’m handwaving details. Operationally, the pricing is more intricate but conceptually it works just like this.]
  • P/L computation:You lost $3 on your futures position (bought for $103 and sold at $100).
    You broke even on the cash index (shorted and bought for $100)
    You earned $5.13 in interest

    Net P/L: $2.13 of riskless profit!

You can walk through the example of selling an overpriced future and buying the cash index. The point is to recognize that the future must be priced as Seʳᵗ to ensure no arbitrage. That’s the definition of fair value.

You may have noticed that a future must have several greeks. Let’s list them:

  • Theta: the future decays as time passes. If it was a 1-day future it would only incorporate a single day’s interest in its fair value. In our example, the future was $103 and decayed to $100 over the course of the year as the index was unchanged. The daily theta is exactly worth 1 day’s interest.
  • Rho: The future’s fair value changes with interest rates. If the rate was 6% the future would be worth $106.18. So the future has $1.05 of sensitivity per 100 bps change in rates.
  • Delta: Yes the future even has a delta with respect to the underlying! Imagine the index doubled from $100 to $200. The new future fair value assuming 5% interest rates would be $210.25.Invoking “rise over run” from middle school:delta = change in future / change in index
    delta = (210.25 – 105.13)/ (200 – 100)
    delta = 105%

    That holds for small moves too. If the index increases by 1%, the future increases by 1.05%

  • Gamma: 0. There is no gamma. The delta doesn’t change as the stock moves.

Levered ETFs

Levered and inverse ETFs have both delta and gamma! My latest post dives into how we compute them.

✍️The Gamma Of Levered ETFs (8 min read)

This is an evergreen reference that includes:

  • the mechanics of levered ETFs
  • a simple and elegant expression for their gamma
  • an explanation of the asymmetry between long and short ETFs
  • insight into why shorting is especially difficult
  • the application of gamma to real-world trading strategies
  • a warning about levered ETFs
  • an appendix that shows how to use deltas to combine related instruments

And here’s some extra fun since I mentioned the challenge of short positions:

Bonds

Bonds have delta and gamma. They are called “duration” and “convexity”. The duration is the sensitivity to the bond price with respect to interest rates. Borrowing from my older post Where Does Convexity Come From?:

Consider the present value of a note with the following terms:

Face value: $1000
Coupon: 5%
Schedule: Semi-Annual
Maturity: 10 years

Suppose you buy the bond when prevailing interest rates are 5%. If interest rates go to 0, you will make a 68% return. If interest rates blow out to 10% you will only lose 32%.

It turns out then as interest rates fall, you actually make money at an increasing rate. As rates rise, you lose money at a decreasing rate. So again, your delta with respect to interest rate changes. In bond world, the equivalent of delta is duration. It’s the answer to the question “how much does my bond change in value for a 1% change in rates?”

So where does the curvature in bond payoff come from? The fact that the bond duration changes as interest rates change. This is reminiscent of how the option call delta changed as the stock price rallied.

The red line shows the bond duration when yields are 10%. But as interest rates fall we can see the bond duration increases, making the bonds even more sensitive to rates decline. The payoff curvature is a product of your position becoming increasingly sensitive to rates. Again, contrast with stocks where your position sensitivity to the price stays constant.

Corporations

Companies have all kinds of greeks. A company at the seed stage is pure optionality. Its value is pure extrinsic premium to its assets (or book value). In fact, you can think of any corporation as the premium of the zero strike call.

[See a fuller discussion of the Merton model on Lily’s Substack which is a must-follow. We talk about similar stuff but she’s a genius and I’m just old.]

Oil drillers are an easy example. If a driller can pull oil out of the ground at a cost of $50 a barrel but oil is trading for $25 it has the option to not drill. The company has theta in the form of cash burn but it still has value because oil could shoot higher than $50 one day. The oil company’s profits will be highly levered to the oil price. With oil bouncing around $20-$30 the stock has a small delta, if oil is $75, the stock will have a high delta. This implies the presence of gamma since the delta is changing.

Games

One of the reasons I like boardgames is they are filled with greeks. There are underlying economic or mathematical sensitivities that are obscured by a theme. Chess has a thin veneer of a war theme stretched over its abstraction. Other games like Settlers of Catan or Bohnanza (a trading game hiding under a bean farming theme) have more pronounced stories but as with any game, when you sit down you are trying to reduce the game to its hidden abstractions and mechanics.

The objective is to use the least resources (whether those are turns/actions, physical resources, money, etc) to maximize the value of your decisions. Mapping those values to a strategy to satisfy the win conditions is similar to investing or building a successful business as an entrepreneur. You allocate constrained resources to generate the highest return, best-risk adjusted return, smallest loss…whatever your objective is.

Games have mine a variety of mechanics (awesome list here) just as there are many types of business models. Both game mechanics and business models ebb and flow in popularity. With games, it’s often just chasing the fashion of a recent hit that has captivated the nerds. With businesses, the popularity of models will oscillate (or be born) in the context of new technology or legal environments.

In both business and games, you are constructing mental accounting frameworks to understand how a dollar or point flows through the system. On the surface, Monopoly is about real estate, but un-skinned it’s a dice game with expected values that derive from probabilities of landing on certain spaces times the payoffs associated with the spaces. The highest value properties in this accounting system are the orange properties (ie Tennessee Ave) and red properties (ie Kentucky). Why? Because the jail space is a sink in an “attractor landscape” while the rents are high enough to kneecap opponents. Throw in cards like “advance to nearest utility”, “advance to St. Charles Place”, and “Illinois Ave” and the chance to land on those spaces over the course of a game more than offsets the Boardwalk haymaker even with the Boardwalk card in the deck.

In deck-building games like Dominion, you are reducing the problem to “create a high-velocity deck of synergistic combos”. Until you recognize this, the opponent who burns their single coin cards looks like a kamikaze pilot. But as the game progresses, the compounding effects of the short, efficient deck creates runaway value. You will give up before the game is over, eager to start again with X-ray vision to see through the theme and into the underlying greeks.

[If the link between games and business raises an antenna, you have to listen to Reid Hoffman explain it to Tyler Cowen!]

Wrapping Up

Option greeks are just an instance of a wider concept — sensitivity to one variable as we hold the rest constant. Being tuned to estimating greeks in business and life is a useful lens for comprehending “how does this work?”. Armed with that knowledge, you can create dashboards that measure the KPIs in whatever you care about, reason about multi-order effects, and serve the ultimate purpose — make better decisions.