In light of midterms, or really the midterm avalanche on social media from all sides, I feel like I can say some stuff that will just be forgotten in the inevitable refractory period of โtakeโ fatigue.
Politics are as old as Cain, the worldโs 3rd person.
The game and tactics evolve alongside our technologies and ideological fashions. Iโve never cared about politics despite it having these game-like qualities. I think my disinterest in it is related to why I also donโt consider myself a businessman.
I donโt really see myself as a businessman. As someone who would spin something up just because they see an opportunityโฆ I donโt care about solving a problem just because it exists. There are infinite problems, and I have one attention span. To a businessman, profit helps them filter. But more money than I actually need is not motivating enough to do work I donโt care about.
The bold bit sums up my apathy about politics. I vote. Otherwise Iโm an NPC and donโt care to put the effort into not being an NPC in this realm of life.
So Iโm not particularly informed about politics. I donโt follow news on it. The job is fundamentally about persuasion, but on matters that are always composed of challenging trade-offs. Like any sales gig, thereโs no obligation to present those trade-offs in a way that weakens your case. I donโt find this offensive because Iโm a grown-up. But Iโm also not drawn to listening to motivated arguments any more than I care to listen to timeshare pitches.
Unless Iโm strongly affected by a matter, I will not prioritize becoming sufficiently educated on the topic to the standard of competent debate with a worthy adversary. And if Iโm not to that standard, who cares what I have to say beyond entertainment value anyway. [Iโm not discounting entertainment value as frivolousโฆI enjoy hearing takes from people good at making them even if I suspect gaps in their knowledge.]
Iโm restraining myself from giving advice on this because I canโt do it credibly. Maybe when you sit on the toilet poasting about what so-and-so said while your legs fall asleep makes a difference in the same way that voting makes a difference in aggregate, even though your singular vote makes no mathematical difference. I can only share what I think, and that is to be taken with you or left behind without prejudice as to what I would prefer.
So here are a smattering of thoughts that you will make what you want of:
When I look at political discourse, I see games as well as their necessity. It is serious business. Life and death, joy and sorrow depend on it. I donโt hold my non-participation with pride just as I donโt justify not exercising as much as I should. I recognize that personal failings are themselves trades. Every choice has an opportunity cost.
Much of our thinking is gerrymandered, not coherent. Your beliefs are darts that you then draw a bullseye around. Iโm ok with this because itโs reality. But I warn you that to internalize it means many chains of logic you encounter, both earnest and propaganda, are not wrong because of how they stick together, but because they fundamentally donโt map to anyoneโs reality. There is no normative. Itโs just whatโs allowed or whatโs not. Which brings us to powerโฆ
In the film Nuremberg, Russell Crowe, playing Nazi leader Hermann Gรถring, delivers this ditty during his interrogation: โYou have your freedom and I am a prisoner because youโve won and we lost. Not because you are morally superior!โ The great tension society must balance is that heโs right, but to maintain order we must all aspire to prove him wrong, which we knowingly do in vain.
You want what you want and only then do you retrofit coherence. A trader would notice this before a commentator because a traderโs greatest battles are with p/l. P/L is an agent of Reality over enough trials.
The relationship of logic and conclusion is flipped everywhere where reality isnโt the judge. If you need a bridge to stand, you need logic. If you want to cut taxes, logic is a luxury, a tool at best. Remember, the conclusion was born before there was a logic to it, and it will survive once the logic has been refuted, rehabilitated, repackaged, and refuted again.
Anyway, this is what I think our nature is. Itโs not evil, itโs just a neutral adaptation. It survives because it works. I donโt care about, nor recommend, your adoption of this perspective. For all I know, itโs a form of self-protection, while I tell myself thinking it comes from observation. Either way, it does explain why political disputes just sound like people arguing over their favorite color.
In light of midterms, or really the midterm avalanche on social media from all sides, I feel like I can say some stuff that will just be forgotten in the inevitable refractory period of โtakeโ fatigue.
Politics are as old as Cain, the worldโs 3rd person.
The game and tactics evolve alongside our technologies and ideological fashions. Iโve never cared about politics despite it having these game-like qualities. I think my disinterest in it is related to why I also donโt consider myself a businessman.
I donโt really see myself as a businessman. As someone who would spin something up just because they see an opportunityโฆ I donโt care about solving a problem just because it exists. There are infinite problems, and I have one attention span. To a businessman, profit helps them filter. But more money than I actually need is not motivating enough to do work I donโt care about.
The bold bit sums up my apathy about politics. I vote. Otherwise Iโm an NPC and donโt care to put the effort into not being an NPC in this realm of life.
So Iโm not particularly informed about politics. I donโt follow news on it. The job is fundamentally about persuasion, but on matters that are always composed of challenging trade-offs. Like any sales gig, thereโs no obligation to present those trade-offs in a way that weakens your case. I donโt find this offensive because Iโm a grown-up. But Iโm also not drawn to listening to motivated arguments any more than I care to listen to timeshare pitches.
Unless Iโm strongly affected by a matter, I will not prioritize becoming sufficiently educated on the topic to the standard of competent debate with a worthy adversary. And if Iโm not to that standard, who cares what I have to say beyond entertainment value anyway. [Iโm not discounting entertainment value as frivolousโฆI enjoy hearing takes from people good at making them even if I suspect gaps in their knowledge.]
Iโm restraining myself from giving advice on this because I canโt do it credibly. Maybe when you sit on the toilet poasting about what so-and-so said while your legs fall asleep makes a difference in the same way that voting makes a difference in aggregate, even though your singular vote makes no mathematical difference. I can only share what I think, and that is to be taken with you or left behind without prejudice as to what I would prefer.
So here are a smattering of thoughts that you will make what you want of:
When I look at political discourse, I see games as well as their necessity. It is serious business. Life and death, joy and sorrow depend on it. I donโt hold my non-participation with pride just as I donโt justify not exercising as much as I should. I recognize that personal failings are themselves trades. Every choice has an opportunity cost.
Much of our thinking is gerrymandered, not coherent. Your beliefs are darts that you then draw a bullseye around. Iโm ok with this because itโs reality. But I warn you that to internalize it means many chains of logic you encounter, both earnest and propaganda, are not wrong because of how they stick together, but because they fundamentally donโt map to anyoneโs reality. There is no normative. Itโs just whatโs allowed or whatโs not. Which brings us to powerโฆ
In the film Nuremberg, Russell Crowe, playing Nazi leader Hermann Gรถring, delivers this ditty during his interrogation: โYou have your freedom and I am a prisoner because youโve won and we lost. Not because you are morally superior!โ The great tension society must balance is that heโs right, but to maintain order we must all aspire to prove him wrong, which we knowingly do in vain.
You want what you want and only then do you retrofit coherence. A trader would notice this before a commentator because a traderโs greatest battles are with p/l. P/L is an agent of Reality over enough trials.
The relationship of logic and conclusion is flipped everywhere where reality isnโt the judge. If you need a bridge to stand, you need logic. If you want to cut taxes, logic is a luxury, a tool at best. Remember, the conclusion was born before there was a logic to it, and it will survive once the logic has been refuted, rehabilitated, repackaged, and refuted again.
Anyway, this is what I think our nature is. Itโs not evil, itโs just a neutral adaptation. It survives because it works. I donโt care about, nor recommend, your adoption of this perspective. For all I know, itโs a form of self-protection, while I tell myself thinking it comes from observation. Either way, it does explain why political disputes just sound like people arguing over their favorite color.
Figuratively. But you never know these days.
Money Angle
a Levine index for commodity nerds
Thought Iโd share an idea that you can recycle for your own custom needs.
If I’m drafting a commodity piece and vaguely remember (or Iโm not even sure if heโs covered the topic or something adjacent to it) Matt Levineโs take, I don’t want the friction of searching years of email to find it.
I had agents (Grok + Claude) build an index from my Gmail archive of the newsletter. They went through 1,533 daily columns section by section, 8,845 sections in all, read 277 candidates in full, and kept 160. A section makes the cut when a market, a mechanic, or a company story has commodities at its core.
Each entry has the date, the column it ran in, theme tags, a short summary, and one verbatim passage. It lives as flat files in git, one file per entry, and Claude adds new columns every Monday.
When Iโm working in my Writing Projects folder, I can then call upon Matt Levineโs brain when needed.
Breakdown:
The problem with commodity investing | 15 min read
Bruno Schwalbach’s points out a flaw commodity traders understand well. The big commodity indices are oil bets. Energy was over half of the S&P GSCI’s weight in 2026 and has carried about 85% of its risk over history. BCOM caps any sector at 33% but still gets roughly half its risk from energy.
He also points out the brutal variance drag: the GSCI averaged 5.1% a year but compounded at 2.7% and how it feels like wasted diversification since across 26 commodity futures, correlation averages 0.14 across sectors s 0.53 within a sector.
His fix, Balanced Commodity, splits risk equally across the six sectors, tilts toward markets that are trending up, and goes to cash when everything trends down. Long-only, unlevered. Backtest from 1996, after costs: 8.2% a year vs 2.8% for the GSCI, max drawdown 35% vs 88.5%, 0.29 correlation to global equities. It made 1.1% in 2008 and 7.5% in 2022.
As you might expect, it will underperform when energy rips. From January to mid-October 2026 the GSCI returned 60% and Balanced Commodity 16%. But I think this is not so much disappointing as a misguided prior on the role of an allocation. If youโre looking for broad exposure to commodities, youโre looking for a well-constructed index. Itโs also reasonable, given oilโs chokepoint status in the global economy, to acutely care about a a strategic allocation to that much like you would with gold. You donโt buy gold via its meager weight in an index but consider it separately. Thereโs no shortage of vehicles for concentrated oil exposure, so thereโs no reason to mix your motivation towards it with the broad commodity index motivation.
Brunoโs article is both interesting and educational. It also reminded me of an interview RCM did with Jim Rogers back in 2021. If you traded commodities, you know Jim. He co-founded Quantum Fund with Soros and foresaw the rise of China in the early 2000s. Making a bet not just financially, he moved there with his family to make sure his kids learned Mandarin and is just an adventurous fellow, having been the first person to ever make some notable motorcycle journeys off-beaten paths across various continents.
Before his move and knowing he wanted to get long commodities in a set-it-and-forget-it way, he also found the GS and BCOM indices to be lacking. He fashioned the Rogers index (RICI), but to be blunt, it feels merely incremental with respect to the indices he tried to get around. Itโs still 40% energy by weight, better than the GSCI on oil weight, worse than BCOM. But it does have a little wrinkle that always appealed to us floor trader types.
Its roll dates intentionally front-run the much larger GSCI rolls.
If you want to play Whereโs Waldo, you can search all my letters for backhanded parentheticals about how the relentless low correlation regime must be a boon to โstock pickersโ. Itโs backhanded because, of course, it hasnโt. As a cohort, active managers arenโt doing any better than they did in higher correlation regimes where they were always sulking that there was no opportunity for differentiation.
Elm Wealth, instead of being snarks like me, decided to write about this puzzle. I love learning new shit, this is just very enlightening and a neat example of applying portfolio construction knowledge to form predictions. If I was great at that, I might have realized this isnโt quite the puzzle I originally thought.
Iโll let Victorโs quotes carry:
Active managers are conventionally judged against a benchmark, and they manage their tracking error, which is the volatility of their return relative to that benchmark. Clients, consultants and in-house risk managers expect tracking error to stay within a fairly narrow band. When dispersion rises, the same positions generate more tracking error, so managers tend to shrink their bets.
Our LSE friend Dimitri Vayanos has written about this behavior, and its impact, in several excellent papers. If tracking error stays constant, the share of managers who underperform is approximately:
where “costs” include fees and trading costs and N is the cumulative standard normal distribution function.
With a cost disadvantage of 1.5% (fees of 1% and trading costs of 0.5%) and tracking error of 3%, about 69% of managers should underperform. That is close to what we observe. As tracking error shrinks toward zero, the formula gives 100%, the lockstep case from Sharpe’s arithmetic. Dispersion does not appear in the formula because managers holding their tracking error steady make it irrelevant.
Active management is also a negative-sum game on risk, even before costs. Because active portfolios add up to the market, the average active portfolio is riskier than the market. That extra risk is uncompensated, idiosyncratic risk. Even a manager who matched the index return would, on average, deliver a worse risk-adjusted result.
High dispersion sharpens the dilemma. A manager who keeps position sizes unchanged takes on more uncompensated risk. A manager who cuts them gives up whatever help dispersion offered, and pays trading costs to do it. Either way, the investor loses.
Basically, the urge to keep tracking error low is a constraint that makes you unable to take advantage of the increased dispersion between stocks. So long as asset management is fixated on benchmarks like the SP500, disappointment is not actually a puzzle at all.
My timing could not have been (accidentally) better on the topic of dispersion. I scheduled what if the โsingularityโ trade cracks?to go out Thursday am which happened to be after a giant rally and before a giant bloodbath which was accompanied by:
From My Actual Life
A thought I shared on Instagram (follow) now that my mother is taking an online options course.
[VIDEO PLACEHOLDER: Substack-hosted clip, re-upload or embed from Instagram]
Here are the questions for the first homework I gave here:
And finally, we finally got our chance to see Gary Gulman live as he performed his โGrandiloquentโ theater show in San Rafael Saturday night.
Garyโs style combines a unique pacing, a performative vocabulary, with rare mix of high-brow literary references + pop culture-infused storytelling.
This show had a long bit about early 90s rock which is immediately one of my favorite comedy sketches.
There are still lots of dates on his current tour, but the tour is actually 2 different shows. Grandiloquent is only being performed once more. We got lucky because when I booked the show, I didnโt realize he had 2 different shows, and this one felt uniquely special. Yinh and I love to be inspired by live performances, and as we walked out of this, we were just filled with respect for the talent and execution on display. Inner voice admonishing me: โwork harder, be betterโ.
Iโd let this thread seep into your cells before we continue.
Ok, now you are ready.
[Only do this hands-free via Bluetooth. Safety first.]
While driving to pick up my kids, I interrupted the podcast that was playing to launch Grokbotโs voice mode to ask about TLT volatility (a random market idea popped into my head). The bot is connected to moontower.ai data via MCP and, of course, the internet and its own training data. Before I know it, Iโm at the destination and never switched back to the podcast.
This felt weirdly profound.
Podcasts have an infovore following. But can anything compete with an infovore discussing topics they care about and getting to ask questions and guide their own learning? AI + voice feels like the seed of a trend that is not totally visible to everyone. A โconversational AI custom media eats traditional mediaโ thesis.
If this is a thing, it would leave less attention for the businesses and individuals that monetize attention. Publishers sell page views, minutes, subscriptions, which are all quantities that are produced once, then delivered at zero marginal cost. But custom, conversational media runs on tokens and compute.
Attention is zero-sum bounded by hours and my guess is individualized media means more properties are sucked into the black hole of the โmiddleโ. The โhollowing of the middleโ has been the ruthless evisceration of saccharine mass market media. You either want to own a hyper niche or be broadcasting the Super Bowl. The middle is the failed Vice magazine which outgrew an edgy audience but was not large enough to scale its fixed costs.
Iโm not planting any new flags here. Itโs just part of my gradual awakening to how these powerful technologies can reshape behavior, in turn, altering and replacing business models. The investing question is not โcanโ but โwillโ.
An obvious counterargument against this is that most people are consumers and lurkers. They want to scroll and channel surf. They donโt actually want to steer if entertainment is an escape as opposed to an outlet.
Thatโs all valid and fair. But itโs also consensus (for good reason). But weird things happen when we remove friction. Iโm old enough to remember ordering a pizza on the phone before DoorDash existed.
Games are an interesting category in that theyโre a hybrid of active and passive. We donโt generally make our own games, but we enjoy active participation in our couch leisure, whether itโs Catan, GTA, or D&D. In Games: Agency as Art, the philosopher C. Thi Nguyen argues that games are the art form whose medium is agency itself. The designer shapes what you can do and what youโre trying to do, but the specific experience depends heavily on what you bring to it. More examples in the same vein:
User-made games: Minecraft and Roblox, where players build the content.
Fan fiction and modding: people taking a finished story and making their own version.
Musical hobbies: Everything from performing an instrument or dance to curating playlists
Choose-your-own-adventure shows like Netflixโs Bandersnatch never caught on. Perhaps people like agency when itโs the point and not when it interrupts a story. But again, this is consensus.
On the other hand, if the friction to self-expression is reduced to the ease by which a thought crosses your mind, like it did when I was driving, this is a glimpse into an unimagined, non-consensus future replete with multi-order cascades that can fuel a substantial engine of investing and business opportunity.
I was chatting with a friend this week who Iโm so happy for it makes me almost teary-eyed. He turned down an unbelievable job to take a chance on building an HFT startup a few years ago. Itโs going VERY well. And itโs fun. And theyโre hiring and all the things. I couldnโt help but say, โMan, youโre just in one of those sweet parts of the curve nowโ. The work fits like a glove and to quote Eddie Murphy โthe ends are meeting like a muthfckrโ.
Itโs HFT with Sharpe so high you donโt bother with numbers, I just call it Charizard. I have to waste my breath because this is as cheap as an option gets, but โare you raising money?โ
Of course not.
They raised once at the start and thatโs it. Self-financing from here. Interestingly, they raised from VCs, not allocators. This unusual arrangement combined with the mathematical visibility of their edge, which doesnโt exist in long-term stock-picking, just had me thinking again about the nature of investing.
From The Paradox Of Provable Alpha, we know that the only place to mine for alpha among managers is among those with longer-term horizons. The regular investment firms are not as capacity constrained, are an underdog to have any edge at all, and happy to work for a small take on other peopleโs money. The managers that look like traders, with high turnover and sample sizes, who consistently crush, donโt want your money.
An advantage in long-run investing on the basis of pure analysis is very hard and even if youโre good you thereโs no stats that will ever affirm you to be as good as you think. Active managers either think they charge too little, but since they canโt flaunt HFT stats, settle for what the market will bear, or the managers know they are way overpaid. Nobody thinks the fee is exactly right because the industry is some mix of a economic โlemonโ problem and a circus exhibition that has little to do with serious investing and more with spectacle. (Pick your favorite negative alpha manager that finds a way to stay relevant and maintain assets).
Alpha in long-term investing is scarce for even more fundamental reasons. The nature of advantage in a zero-sum game (the warm drift of beta is a public good, but alpha is fixedโฆno winners without losers).
You have probably seen some version of the right/wrong vs consensus/contrarian 2×2 before. If you havenโt, you should sit under a tree with it for a while. Itโs liberating in its proscriptiveness.
A looming annunciation of this problem comes from an interview VC Josh Wolfe had nearly a decade ago on Invest Like the Best.
He noticed that every one of his fundโs investments that became a giant winner was highly contentious at the start. Typically, the stake had just one passionate champion for it on the investment committee.
[Do not confuse this with all highly contentious ideas will be winners. Itโs a statement conditional on the investment paying off huge already.]
In light of the 2×2, this is not surprising. If the investment makes obvious sense, it will be consensus and even overbid.
Iโve seen an analogous phenomenon in trading, but even in mock trading. Iโve talked about it a lot before, but when I watch a room of people mock trade, I can quickly tell quite a bit about the person from their action or lack of action (in the case of lack of action, I have to probe a bit, but the lack of action comes from a fairly small number of common reasons which are as telling as taking action).
[If I ever host an event like that again, maybe Iโll consider report cards, where I inform the individual what I learned about them and they can tell me if it matched their horoscope.]
But, one consistent trait that I think is good out of the box is the ability to act before all the info is obvious.
If you need to wait until the evidence is convincing, youโre too late. In fact, at that time you may want to be doing the opposite.
Why trading decisions are different from many routine decisions
This is a ruthless aspect of markets because it defies the requirements of regular decision-making. In your daily life, youโre not in a race to buy the best phone or lunch before itโs gone. You can usually hold out for a bit more info, improve decision quality, and not have your patience used against you.
The ability to act before you have all the info is useful in other zero-sum games as well. Thereโs an unsavory connotation to say someone has great political instincts because the object is usually someone who seems impure. The left-coded VC who moved right sharply after Covid. Perhaps they were honestly disillusioned with their team. Perhaps it was just good for business. Either way, the begrudging respect one might hold for a winning political trade echoes the lauded financial agnosticism of great traders. Stan has no problem flipping a yard from long to short at a speed that obviously outpaces any kind of formal research process.
VC to me is an interesting solution to long-term investing because its very structure acknowledges the futility of analysis on forecasting what is going to pay-off. Instead, create a marketing machine that both stabilizes assets and makes founders, the lifeblood of your upside, want to come to you. Then diversify the lotto tickets. As long as you’re drawing from a sample that truly has no mean, then surviving practically ensures thriving.
Yes, the surviving is hard, but has surprisingly little to do with returns.
Related
The Efficient Venture Markets Hypothesis (9 min read)
Abraham Thomas doesnโt publish too often but I am always sure to read them. This one opens:
Venture capital is deeply weird these days. Consider these phenomenaโฆ
Thomasโ description of VC circa 2026 strikes me as a triumph of venture creating demand for its services by becoming a part of the โmarket portfolioโ (in the CAPM sense of the word). It is now as much beta as SPX members, which elevates it above the bucket of crabs that is zero-sum competition for outperformance. VC funds are essential allocations to those trapped in the asset-managment-industrial complex should seem paradoxical if their scale ensures beta-level returns. But this article makes it make sense.
Norm MacDonald, one of the funniest people to ever walk the planet, was also a degenerate gambler, busting out a number of times and going to zero. His therapist told him that he gambled in order to escape reality. Norm said, โThatโs why everyone does everything.โ
You should read the essay, but today I just want to zoom in on something Norm said. I watched the recent documentary Judd Apatow did on him (Netflix). Apparently, Norm was a heavy and eventually reformed gambler. Judd pulls the following quote from Normโs 2016memoir Based on a True Story:
Most people would think itโs the wins that keep the gambler going, but any gambler knows this is not trueโฆ When the red dice hit the green feltโฆ and youโre declared the winnerโฆ you feel relief. Relief is all, and relief is fine, but hardly what a man would give the whole rest of his life to gain. It has to be something elseโฆ It is a particular moment, a magic moment that occurs after the placing of a bet and before the result of that bet. It is after the red dice are thrown but before they lie still on the green feltโฆ As long as the red dice are in the air, the gambler has hope. And hope is a wonderful thing to be addicted to.
At the seat of any good comedianโs observational power is a rare balance of sensitivity with cold logic. Norm is able to feel and diagnose simultaneously (his struggle to quit is a notch for philosopher David Humeโs idea that we are slaves to passion).
As you gaze at the horizon in 2026, dotted with inescapable metaphorical gambling billboards, I urge you to remember that their pitches are hacking an otherwise adaptive impulse just like Frosted Flakes hacks our predisposition to the muted sweetness of pre-industrial fruit. The impulse thatโs being hacked is our urge to grow.
Celebrating short-term wins when you donโt have an advantage is like falling in love with the good cop during an interrogation. You are being manipulated. In the gambling sense, by chance herself. Sheโs an abusive partner who gives up the milkshake just enough for you to stay.
We need growth so nature wraps it in hope. Take the motion to gamble as a sign that you crave risk. Risk is good because it precedes growth. Risk involves failure. Failure leads to learning. Learning changes behavior.
Donโt waste the urge towards risk on a loop where the lessons of failure fail to compound towards durable knowledge that you can actually build upon.
Gambling addiction has always seemed to me like the โinsanity of doing the same thing over and over again and expecting different resultsโ. Norm humanizes why we are susceptible to it without taking the stupid low road that it has to do with innumeracy or anything like that. But as it increasingly gets hawked as something more noble (ahem, prediction), they are trying to bring it even closer to what constitutes growth and learning. Iโm not against gambling any more than Iโm not against freedom to indulge in most conventional โvicesโ. But big tobacco doesnโt even try to put Vitamin C in their cigarettes.
Norm MacDonald, one of the funniest people to ever walk the planet, was also a degenerate gambler, busting out a number of times and going to zero. His therapist told him that he gambled in order to escape reality. Norm said, โThatโs why everyone does everything.โ
You should read the essay, but today I just want to zoom in on something Norm said. I watched the recent documentary Judd Apatow did on him (Netflix). Apparently, Norm was a heavy and eventually reformed gambler. Judd pulls the following quote from Normโs 2016memoir Based on a True Story:
Most people would think itโs the wins that keep the gambler going, but any gambler knows this is not trueโฆ When the red dice hit the green feltโฆ and youโre declared the winnerโฆ you feel relief. Relief is all, and relief is fine, but hardly what a man would give the whole rest of his life to gain. It has to be something elseโฆ It is a particular moment, a magic moment that occurs after the placing of a bet and before the result of that bet. It is after the red dice are thrown but before they lie still on the green feltโฆ As long as the red dice are in the air, the gambler has hope. And hope is a wonderful thing to be addicted to.
At the seat of any good comedianโs observational power is a rare balance of sensitivity with cold logic. Norm is able to feel and diagnose simultaneously (his struggle to quit is a notch for philosopher David Humeโs idea that we are slaves to passion).
As you gaze at the horizon in 2026, dotted with inescapable metaphorical gambling billboards, I urge you to remember that their pitches are hacking an otherwise adaptive impulse just like Frosted Flakes hacks our predisposition to the muted sweetness of pre-industrial fruit. The impulse thatโs being hacked is our urge to grow.
Celebrating short-term wins when you donโt have an advantage is like falling in love with the good cop during an interrogation. You are being manipulated. In the gambling sense, by chance herself. Sheโs an abusive partner who gives up the milkshake just enough for you to stay.
We need growth so nature wraps it in hope. Take the motion to gamble as a sign that you crave risk. Risk is good because it precedes growth. Risk involves failure. Failure leads to learning. Learning changes behavior.
Donโt waste the urge towards risk on a loop where the lessons of failure fail to compound towards durable knowledge that you can actually build upon.
Gambling addiction has always seemed to me like the โinsanity of doing the same thing over and over again and expecting different resultsโ. Norm humanizes why we are susceptible to it without taking the stupid low road that it has to do with innumeracy or anything like that. But as it increasingly gets hawked as something more noble (ahem, prediction), they are trying to bring it even closer to what constitutes growth and learning. Iโm not against gambling any more than Iโm not against freedom to indulge in most conventional โvicesโ. But big tobacco doesnโt even try to put Vitamin C in their cigarettes.
[Ha, ha Iโm lying. They actually did.]
Money Angle
I was chatting with a friend this week who Iโm so happy for it makes me almost teary-eyed. He turned down an unbelievable job to take a chance on building an HFT startup a few years ago. Itโs going VERY well. And itโs fun. And theyโre hiring and all the things. I couldnโt help but say, โMan, youโre just in one of those sweet parts of the curve nowโ. The work fits like a glove and to quote Eddie Murphy โthe ends are meeting like a muthfckrโ.
Itโs HFT with Sharpe so high you donโt bother with numbers, I just call it Charizard. I have to waste my breath because this is as cheap as an option gets, but โare you raising money?โ
Of course not.
They raised once at the start and thatโs it. Self-financing from here. Interestingly, they raised from VCs, not allocators. This unusual arrangement combined with the mathematical visibility of their edge, which doesnโt exist in long-term stock-picking, just had me thinking again about the nature of investing.
From The Paradox Of Provable Alpha, we know that the only place to mine for alpha among managers is among those with longer-term horizons. The regular investment firms are not as capacity constrained, are an underdog to have any edge at all, and happy to work for a small take on other peopleโs money. The managers that look like traders, with high turnover and sample sizes, who consistently crush, donโt want your money.
An advantage in long-run investing on the basis of pure analysis is very hard and even if youโre good you thereโs no stats that will ever affirm you to be as good as you think. Active managers either think they charge too little, but since they canโt flaunt HFT stats, settle for what the market will bear, or the managers know they are way overpaid. Nobody thinks the fee is exactly right because the industry is some mix of a economic โlemonโ problem and a circus exhibition that has little to do with serious investing and more with spectacle. (Pick your favorite negative alpha manager that finds a way to stay relevant and maintain assets).
Alpha in long-term investing is scarce for even more fundamental reasons. The nature of advantage in a zero-sum game (the warm drift of beta is a public good, but alpha is fixedโฆno winners without losers).
You have probably seen some version of the right/wrong vs consensus/contrarian 2×2 before. If you havenโt, you should sit under a tree with it for a while. Itโs liberating in its proscriptiveness.
A looming annunciation of this problem comes from an interview VC Josh Wolfe had nearly a decade ago on Invest Like the Best.
He noticed that every one of his fundโs investments that became a giant winner was highly contentious at the start. Typically, the stake had just one passionate champion for it on the investment committee.
[Do not confuse this with all highly contentious ideas will be winners. Itโs a statement conditional on the investment paying off huge already.]
In light of the 2×2, this is not surprising. If the investment makes obvious sense, it will be consensus and even overbid.
Iโve seen an analogous phenomenon in trading, but even in mock trading. Iโve talked about it a lot before, but when I watch a room of people mock trade, I can quickly tell quite a bit about the person from their action or lack of action (in the case of lack of action, I have to probe a bit, but the lack of action comes from a fairly small number of common reasons which are as telling as taking action).
[If I ever host an event like that again, maybe Iโll consider report cards, where I inform the individual what I learned about them and they can tell me if it matched their horoscope.]
But, one consistent trait that I think is good out of the box is the ability to act before all the info is obvious.
If you need to wait until the evidence is convincing, youโre too late. In fact, at that time you may want to be doing the opposite.
This is a ruthless aspect of markets because it defies the requirements of regular decision-making. In your daily life, youโre not in a race to buy the best phone or lunch before itโs gone. You can usually hold out for a bit more info, improve decision quality, and not have your patience used against you.
The ability to act before you have all the info is useful in other zero-sum games as well. Thereโs an unsavory connotation to say someone has great political instincts because the object is usually someone who seems impure. The left-coded VC who moved right sharply after Covid. Perhaps they were honestly disillusioned with their team. Perhaps it was just good for business. Either way, the begrudging respect one might hold for a winning political trade echoes the lauded financial agnosticism of great traders. Stan has no problem flipping a yard from long to short at a speed that obviously outpaces any kind of formal research process.
VC to me is an interesting solution to long-term investing because its very structure acknowledges the futility of analysis on forecasting what is going to pay-off. Instead, create a marketing machine that both stabilizes assets and makes founders, the lifeblood of your upside, want to come to you. Then diversify the lotto tickets. As long as you’re drawing from a sample that truly has no mean, then surviving practically ensures thriving.
Yes, the surviving is hard, but has surprisingly little to do with returns.
Related
The Efficient Venture Markets Hypothesis(9 min read)
Abraham Thomas doesnโt publish too often but I am always sure to read them. This one opens:
Venture capital is deeply weird these days. Consider these phenomenaโฆ
Thomasโ description of VC circa 2026 strikes me as a triumph of venture creating demand for its services by becoming a part of the โmarket portfolioโ (in the CAPM sense of the word). It is now as much beta as SPX members, which elevates it above the bucket of crabs that is zero-sum competition for outperformance. VC funds are essential allocations to those trapped in the asset-managment-industrial complex should seem paradoxical if their scale ensures beta-level returns. But this article makes it make sense.
Money Angle For Masochists
Trigonometry and Vol
I had Claude make me a custom chalkboard app for making math and investing tutorials Khan Academy-style. For fun, I asked Claude to use it to teach me something. Claude knows me better than my mother, so naturally it chose to talk about volatility.
It created this geometric intuition for volatility. Watch the video and then if you feel like visiting trigonometry, below you can read a full treatment of what cosines have to do with correlation and volatility estimates! โ Using Geometry to See Why Volatility Scales With โt
Iโve mentioned before that Iโm playtesting a game called Market-Maker that I started making just over a year ago. The current form of it didnโt come together until a) I attended the Arbor Bootcamp last November and got inspiration for one of the core mechanics and b) vibe-coding got so good that it could build a fully digital version of the game that can be played on the internet.
Iโm still iterating on it (slowly, this is a hobby project), but when I was playing with a trader friend he understood immediately how to price a straddle that expired in round 5 (itโs the lesson of the video).
Although sometimes that sqrt(round) trick isnโt quite right. The reason, to put it in the context of the geometry article, is that there are card interactions that would make the โangle something other than 90 degreesโ and for sigma itself to change. Your cards are private information. Looking forward to getting to play this with you. I think it will be quite the mix of fun and educational (but the goal for this is really fun).
I had Claude make me a custom chalkboard app for making math and investing tutorials Khan Academy-style. For fun, I asked Claude to use it to teach me something. Claude knows me better than my mother so naturally it chose to talk about volatility.ย
It created this geometric intuition for volatility. Watch the video and then if you feel like visiting trigonometry, below you can read a full treatment of what cosines have to do with correlation and volatility estimates!
Iโve mentioned before that Iโm playtesting a game called Market-Maker that I started making just over a year ago. The current form of it didnโt come together until a) I attended the Arbor Bootcamp last November and got inspiration for one of the core mechanics and b) vibe-coding got so good that it could build a fully digital version of the game that can be played on the internet.
Iโm still iterating on it (slowly, this is a hobby project), but when I was playing with a trader friend he understood immediately how to price a straddle that expired in round 5 (itโs the lesson of the video).
Although sometimes that sqrt(round) trick isnโt quite right. The reason, to put it in the context of the geometry article, is that there are card interactions that would make the โangle something other than 90 degreesโ and for sigma itself to change. Your cards are private information. Looking forward to getting to play this with you. I think it will be quite the mix of fun and educational (but the goal for this is really fun).
The rule of thumb for a random walk is that volatility scales with the square root of time. 1% a day is about 16% a year because โ252 โ 16.
This post builds that rule from a triangle, one day at a time. Then it bends the triangle to show what changes when days aren’t independent.
Day 1
One day, one move. Call its size ฯ, one standard deviation. After day 1 you’re ฯ from where you started.
Day 2
Day 2 adds another move of size ฯ. If day 2 has nothing to do with day 1, draw it at a right angle to day 1. (Independent = perpendicular. Take that on faith for now.)
Now there’s a right triangle with two legs of ฯ. The distance from the starting point is the hypotenuse.
Two days of moves, 1.41 days’ worth of distance.
Day 3
Day 3 adds another ฯ, again at a right angle. This time the right angle is to the line from the start to where you are after day 2.
a = ฯโ2 (where you are after 2 days) b = ฯ (day 3’s move) c = the new distance from the start
Check with ฯ = 1: 1.414ยฒ + 1ยฒ = 2 + 1 = 3, and โ3 โ 1.732.
Every independent day adds one ฯยฒ to the squared distance. After t days the squared distance is tยทฯยฒ, so the distance is ฯโt.
That’s why variance (ฯยฒ) is the thing that adds across days and volatility (ฯ) is the thing that scales with โt. Squaring undoes the root.
Run it for six days and you get the spiral of Theodorus: ฯ, ฯโ2, ฯโ3, 2ฯ, ฯโ5, ฯโ6. Four days of moves put you 2ฯ from the start. (The video above draws it one triangle at a time.)
The right angle is the assumption
Everything above assumed each new day was perpendicular to the path so far. That’s the independence assumption. To see what happens when it fails, the angle has to be allowed to be something other than 90ยฐ.
This is where “cosine” shows up and people close the tab. If you took trig in high school you already have everything you need, even if it’s been 30 years.
Cosine is a ratio of two sides of a right triangle:
That’s the whole definition. (SOH CAH TOA. The CAH part.) A few values:
cos 0ยฐ = 1
cos 60ยฐ = 0.5
cos 90ยฐ = 0
cos 120ยฐ = โ0.5
Bending day 3
Back to day 3. Same a = ฯโ2, same b = ฯ. Instead of fixing day 3’s move at 90ยฐ, turn it by an angle ฮธ from the direction you’ve been traveling.
Cosine splits day 3’s move into two pieces:
along the path so far: bยทcos ฮธ
sideways: bยทsin ฮธ
Those two pieces make a right triangle with the full distance c as the hypotenuse, so Pythagoras still works:
Multiply it out and use cosยฒฮธ + sinยฒฮธ = 1:
That’s the law of cosines: Pythagoras plus a correction term, 2abยทcos ฮธ. At 90ยฐ, cos ฮธ = 0 and the correction term is zero.
Plug in a = ฯโ2 and b = ฯ:
ฮธ = 60ยฐ, cos ฮธ = 0.5: cยฒ = 3ฯยฒ + 1.41ฯยฒ = 4.41ฯยฒ, so c โ 2.10ฯ
ฮธ = 90ยฐ, cos ฮธ = 0: cยฒ = 3ฯยฒ, so c โ 1.73ฯ
ฮธ = 120ยฐ, cos ฮธ = โ0.5: cยฒ = 3ฯยฒ โ 1.41ฯยฒ = 1.59ฯยฒ, so c โ 1.26ฯ
Same three daily moves of ฯ. Three different distances.
What the angle is in market terms
The variance of the sum of two moves X and Y:
Next to the law of cosines:
Same equation. The side lengths are standard deviations and cos ฮธ is the correlation ฯ between the new day’s move and the path so far.
ฮธ = 0ยฐ, ฯ = +1: the new day repeats the path
ฮธ = 60ยฐ, ฯ = +0.5: leans with it (momentum)
ฮธ = 90ยฐ, ฯ = 0: independent
ฮธ = 120ยฐ, ฯ = โ0.5: leans against it (reversion)
ฮธ = 180ยฐ, ฯ = โ1: undoes it
The โt rule is the 90ยฐ line.
Six days, then 20
Hold the angle fixed every day and walk six days.
60ยฐ: 4.22ฯ from the start after 6 days, vs ฯโ6 = 2.45ฯ
90ยฐ: 2.45ฯ, the spiral
120ยฐ: 1ฯ. The path closes into a hexagon around the start.
Over 20 days:
Below 90ยฐ the distance grows close to linearly, about ฯยทcos ฮธ per day once you’re away from the start (โ0.5ฯ a day at 60ยฐ). 60ยฐ ends at 11.9ฯ vs ฯโ20 = 4.5ฯ.
Above 90ยฐ the distance levels off at โฯ รท (2ยทcos ฮธ): 1.93ฯ at 105ยฐ, 1ฯ at 120ยฐ.
Caveat: a fixed angle to the running total is a toy. The usual measure is the correlation between returns k days apart (autocorrelation at lag k). The arithmetic is the same. Positive cross terms make the distance longer than ฯโt. Negative ones make it shorter.
Daily hedger vs holder to expiry
The variance ratio compares the two:
ฯโ is the correlation between returns k days apart. VR = 1 is independent, VR > 1 is momentum, VR < 1 is reversion. The sum is the 2abยทcos ฮธ term added up over every pair of days.
ฯ = โ0.5: VR(20) = 0.36, so vol measured on 20-day changes annualizes to 9.5%
ฯ = 0: VR(20) = 1, 15.9%
ฯ = +0.5: VR(20) = 2.80, 26.6%
Which number matters depends on how you hold the option.
Delta-hedging daily, P&L each day is roughly ยฝยทฮยทSยฒ ร (that day’s squared return โ one day of implied variance). The daily squared returns are what pay you.
Holding to expiry unhedged, the payoff depends on where the underlying ends up. That’s the 20-day number.
Same price series in a reverting market: the daily hedger realizes 15.9%, the holder to expiry gets the distribution of a 9.5% vol. In a trending market it flips: 15.9% for the hedger, 26.6% for the holder.
Taking a small punt on gold upside before the end of the year. You can follow the thread here.
Kris
@KrisAbdelmessih
If GLD bottomed this am and you think the bank hacking narrative has legs it’s an interesting time to look at metals upside. The vols screen cheap cross-sectionally and have low percentile call skew (x axis is our "buy vol" algo score), y axis is skew percentile
Even though I mentioned GLD, I actually executed in GC, the Comex futures gold options. GLD references gold in London vaults, and Comex delivery is in NY. But that difference has nothing to do with it.
Trading futures options has 1/3 the all-in cost (IBKR and exchange fees) of the equivalent risk in equity options. 250 GLD spreads = 25 GC spreads. The cost difference was about $100 instead of $300.
For educational purposes, I thought Iโd share some observations from the point of sale. I targeted the 4260/4270 call spread. Itโs a tight spread, similar to if you just wanted a binary bet on the futures expiring above 4265 or ~7% higher by late November.
I bid 1.40 for 25 spreads and didnโt get any contracts until the futures drifted lower to about 4006.70. Thatโs the first candle in this pic showing GC futures chart until the end of the day. I also superimposed the market in the call spread on the chart.
The market was 1.40 / 1.50 with Bid size (15), ask size (771)
I had been staring at the quote for a while before I even got a fill. After getting hit on 10 lots, I turned on a screen recorder for the next 2.5 hours (until 4pm ET, though the futures continue to trade for another hour)
Keep in mind this is a $10-wide spread with a .01 delta. $10 in gold is about 25 bps.
What follows is whatโs running through my mind when I stare at the quote while watching the futures tick. I stepped away for long stretches and the other thing to keep in mind, based on what the recording revealed:
The quote never changed. Not a single market โeventโ. HFT people refer to any modification in a quote as a market event.
The offer never budged.
The bid was not joined.
Nothing traded.
The offer size stayed constant. No additions or subtractions.
My thoughts:
Taking a partial fill of only 10 out of 25 is bizarre. Iโd think the only counterparty to this is a market-maker. Who wakes up looking to trade a 25 bps wide vertical naturally? So I expect when I get hit itโs a market-maker, but then they only sell 10 out of the 25? What is this, a market-maker for ants?! And then when a partial trades, how does the rest of the bid not get swept by the chipper algo which surely knows this is a resting non-market maker starting to get hit.
The futures dipped a few dollars below where I was filled. If the first seller liked selling at the higher futures price, donโt they like selling the spread even more now? I know the spread is only .01 delta, butโฆ actually, letโs get into that for a moment.
In the recording window, the futures rallied to 4015, or about $9 higher than when I got a partial fill. At .01 delta, $10 is 10 cents, which is one full tick in this spread, the gap between 1.40 and 1.50. Paying 1.50 with futures at 4015 is the same price as paying 1.40 with futures at 4005. The market wouldnโt fill me at 1.40 at 4005, but offered an equivalent price at 4015. Furthermore, my bid wasnโt joined with more size and the offer didnโt pull.
Anyway, if you untangle the chain of reasoning here, it can help you think more about how options get quoted. When option deltas are low, there are minimum increment problems in edge capture. For example, if an option has .01 delta, you could sell it with the futures at any price over a $10 range and youโd be booking something between a penny and a tenth of a penny of edge but at the tenth-of-a-penny price itโs obviously worse (you’re 10x less profitable if you extrapolate across your business), but you also canโt turn the market over and be bid there for a negative a tenth a penny of edge.
If you flip this logic to the customer side, if you keep track of all the market โeventsโ you can likely deduce when a market on a low delta option will tick to the next price level. If you can buy a call synchronously with the last tick in the future before the market turned, that would be the best possible fill.
If you are a beginner, just understanding that buying a call for X vs 4015 in the futures is a better buy than buying it for X against 4006 in the futures is a step toward understanding the concept of volatility (the second buy is a worse IV than the first by:
change in underlying * delta / vega
Example
Consider a call option with a .20 delta and .05 vega, and is currently worth $5 at 20% IV.
If the stock goes up $.50 we expect the option to increase to $5.10 or .20 * $.50.
But if you can buy the call for $5 then you have paid only 18% IV since that $.10 of savings represents 2 vega or vol points.
I nearly bottom-ticked the TIPs market with my trade last week. I explained in that article that my estimate for the tradeโs 1-year expected return is about 8.50% with ~7.50% volatility. That suggests a weekly vol of ~1%
Why 1%?
7.5% / โ52
Itโs already up 2% in one week or nearly 2 standard deviations. Weโll see if the yield holds as a high. The last time I bought TIPs, I also wrote about it in October 2023 and that high in yields held until just recently.
Anyway, a friend (and mentor!) who read my recent TIPs article reached out to say I should remind readers that I-bonds might be a better choice if their income is under certain thresholds because of the education tax exclusion. I-bonds, like TIPs, are state and local tax-exempt, but you can also avoid federal tax when used for qualified higher-education expenses.
There are income limits:
I bought them for all the members of my household back in November 2021, when they paid 7.12%. I wrote up the details in I-Bonds For You.
Five other differences worth knowing:
Price risk. I bonds have no market-price swings. TIPS can lose value if real yields rise, creating a loss if you sell before maturity.
Liquidity. I bonds are locked for one year. Redeem before five years and you sacrifice the latest three monthsโ interest. TIPS can be sold in the market before maturity.
Tax timing. I bonds let you defer federal tax until redemption or maturity. In a taxable account, TIPS generate annual taxes on both coupons and inflation adjustments even though you havenโt received the adjusted principal yet.
Purchase limits. I bonds generally cap you at $10,000 per person per calendar year. TIPS accommodate much larger investments.
How you get paid. I bonds adjust their interest rate and compound internally. TIPS coupon rates remain fixed, but the principal adjusts. They pay cash coupons every six months.
TIPs donโt have limits on how much you can buy, but the other major benefit is a yield you can lock in. I-bonds usually have a paltry fixed rate portion. Since you buy them directly from the Treasury at par, you are locking in a lower fixed return vs TIPs at current pricing. The higher TIPS yield can outweigh the I-bondโs friendlier features such as the potential tax exclusion and the lack of โphantom taxesโ.
Iโve mentioned a few times that Iโm experimenting with bringing education and practical investing topics to IG.
One of the experiments I plan to do Khan Academy-style short-form where I show my work on a โchalkboardโ and speed it up for socials.
Our little 10-year-old artist has one of these USB Huion drawing tablets lying around.
I can use that to draw up the explainers, but on what software? I checked out some popular recs like Xournal+ and Openboard but found neither of them immediately delightful and just another thing Iโd need to get used to. I told Muse I wasnโt pleased with those recs.
I call an audible. I had very low expectations of what I was about to try. I tell Muse:
You know I have this Huion pen tablet thing and you understand what Iโm trying to do I have a crazy idea can you make me a prompt to give to Claude Code to ask it about the feasibility of it being able to make me my own very lightweight software tableau that can do what I want and is tuned for math and investing so make me a me a prompt and letโs see what happens
It gives me the following hand-off to Claude Code:
I made it small so it fits here easily and in case you really care to look but like people recounting what happened at each round of a poker hand, almost nobody cares. The point is simply that you should be in the habit of asking the AI to write prompts for you when the problem you are trying to solve is unoriginal.
The fact that there are many drawing apps means my issue is unoriginal. So letโs see if Claude Code, using Museโs prompt, can one-shot a web-based drawing app.
To use it, just download the file, press Command + O (or Ctrl + O on Windows) in a web browser and choose it from the file explorer.
That tool was the absolute first shot.
Seeing how cool and responsive it was, it iterated on it several times, adding way more features, including the ability to add functions to the physical pens buttons.
Itโs now a drawing tool made for math and investing concepts to be easily screenshotted or recorded formatted for IG stories, YouTube etc. This is truly personalized software.
I deployed it here: slate.moontowermeta.com, give it a shot!! Itโs also dynamic for mobile.
Oh, one more thing. I told Muse to make a 3-minute video demonstrating the features and narrating everything it was doing. Pure one shot. Might be more insane than the app itself:
A word on the audio voiceovers and the explainer IG stories
I have been using Muse to stitch together frames, edit and splice audio.
I use Google Recorder to dictate a single take.
โFrame 1โฆโ. If I mess up I just say โFlub that, Frame 1, โ.
Muse edits that single file using the open-source Whisper API hosted on HuggingFace. It knows to do that on its own, I didnโt tell it to. I can even ask it to speed up the final audio track by 1.5 or 2x. It then syncs the appropriate sections of audio with the frame it belongs to.
Actually, here are all the manual steps of the process:
Hey Muse go find one of my articles on the topic of XYZ and break it down into an IG story
I give it a photo that goes with the story.
I review the story it made, yell at it to not use AI-isms and that horrible passive voice that AI apparently trained on.
I might make minor tweaks to its arc, wording or material it chose. This step takes the longest because it takes some judgement/taste. The others might add up to 2 minutes.
Record the single-take voiceover. This step can also take several minutes depending on how long the story is, but itโs simple. Iโm just narrating naturally and casually over the material.
Muse processes the final frames for me to download and publish. You can only publish 10 frames at a time so on longer stories I have to upload more than once. I add a sticker with a link onto the frames and sometimes music. Thatโs my favorite part of the process because itโs fun to find songs to go with frames. Kinda like a โcaption thisโ contest with breakfast.
