Moontower #172

This is going to be a short issue. I meant to publish it on Thanksgiving and punt on the Sunday letter but I didn’t spend any time in front of a laptop this week.

Instead, I’ll share a file I have been adding to in my private notes for years. It used to be nothing more than a list of quotes but it’s morphed into something of a compass and manual.

I won’t say anything else about it. You can explore it if you like. If you find something useful, take it. If you find stuff you hate, ignore it or tell me. The beliefs are survivors of my internal tournament of ideas but I’m happy to enter your criticism into the coliseum.

Have at it…

Moontower Affirmations and North Stars


Money Angle

You’ll probably get sucked into some online shopping tomorrow. Here are some finance book recs from a great writer who happens to write about investing for the WSJ.

A few other lists of recommendations:

  • The Investing Pro’s Library (Moontower)In over 20 years of option market-making, trading, and portfolio management I’ve been fortunate to meet many talented risk-takers. I took the opportunity to ask some of them what the most influential books or papers they have read in their careers.

    I asked a cohort of 25 investors. They are CIO’s, PMs, and independent investors whose livelihood depend on the bets they take. Half of the respondents have had an options focus and more than 80% would be classified as quantitative…

  • For Investing Beginners (Moontower)My 25-year-old cousin is interested in going into the investing world and asked me where to start. He has taken some business courses in college so I was able to presume some very basic knowledge.

Finally, I’ve sent this list of 8 books to 2 separate friends who have middle and high-school-aged kids who wanted to learn about investing, personal finance, business in general, and economic rationale:

Investing

The Four Pillars of Investing by William Bernstein

Just Keep Buying by Nick Maggiulli

The Most Important Thing by Howard Marks

Investing with a personal finance slant

The Psychology of Money by Morgan Housel

I Will Teach You To Be Rich by Ramit Sethi

Economics and Business

The Invisible Heart: An Economic Romance by Russ Roberts
(I took notes on this novel)

The Rebel Allocator by Jake Taylor
(I took notes on this novel)

And because investing is a super low-signal endeavor, you need some protection from the sales machine:

Fooled by Randomness by Nassim Taleb

If you are a seasoned pro, many of these titles will make you groan. That’s because you are already “cursed with knowledge”. These books are highly approachable and can quickly elevate a total novice’s understanding. The 2 novels are an original and effective way to communicate economic and business contexts by turning the discourse into a conversation instead of a lecture.

If they finished these, I’d recommend Joel Greenblatt’s Little Blue Book That Beats The Market. Not because of the strategy specifics but as a tangible example of process while introducing important business metrics in a usable context.


Last Call

  • I’m Pretty Sure I Broke Linkedin: Satire makes for an excellent IQ test (10 min read)Jack Raines has been raising hell over at LinkedIn. This post is hilarious. But Jack’s writing about the culture of LinkedIn is even better than the satire. It’s a perfect-pitch articulation of his observations in the wild that is the LinkedIn timeline. Jane Goodall would be proud.
  • Jason Zweig On Writing (11 min read)I mentioned WSJ writer Jason Zweig above. He’s a masterful writer masquerading as a financial columnist. He wrote a 3-part series on the craft of writing. This post captured my favorite takeaways.

     


From My Actual Life

I stayed north of San Diego this past week where my sister’s family, my mom, my dad and my family all convened for vacation. We went to Sea World, hung around the pool, saw a theater performance of the Grinch, and hit up the Air & Space Museum in Balboa Park (there was a fantastic exhibit on Galileo…inspiring and a reminder that the breadth of what is going on inside people’s minds is incomprehensible).

The only negative was the underwhelming Korean barbecue we ate on Thanksgiving Day instead of cooking. News flash: Escondido isn’t Flushing, Queens. All in all the trip still delivered — it wasn’t about the excursions.

It was watching reruns of PasswordPlus and SupermarketSweep with my sis (and being shocked at how young some of the contestants were despite their appearance. Seriously, that Cheers meme is a thing. People looked so much older way back when).

It was chatting with my brother-in-law about both his career and personal business while sitting on the balcony. So many decisions that have nothing to do with a spreadsheet. Decisions that would be hard to discuss unless you could match the vulnerability of, well, a brother.

It was listening to my parents, who have been divorced since I was in high school, talk to each other as different people but also the same people.

It was trying to find myself in their stories. How much of them is in me? How much did I keep? How much did I unlearn? Physically speaking, how do I think about my future health when I see their struggles today? I’ve talked about some of my interventions this year. Seeing them is a reminder not to parabolically discount the future. It’s here before you know it.

When I brought my dad back to his apartment I noticed this picture.

My dad has green/blue eyes. With my parents in the same room, I tried to determine some of my blood lineage (both their presence was helpful — I have a bit of a reliable witness issue to navigate and I don’t get these chances often). Long story short, I thought I was like 98% Egyptian but the working theory is more like 80% Egyptian, with the rest mostly Greek plus a sliver of French. Seriously, anything to make me more of a mut feels like a congenital health win. As far as I can see from the community I grew up around, Egypt isn’t exactly Blue Zone.

Overall, Thanksgiving was a welcome slowing of time. I’m grateful for the time we get. You don’t know what tomorrow’s got. You should live like there’s no tomorrow. Except for that if you do that and tomorrow comes, you’ll wish you lived like you knew it all along.

In the Olympics of unsatisfying paradoxes, this ranks right up there with “I guess I’ll sell half the position”.

Stay groovy.

Moontower #171

I didn’t mince words last week:

There’s way too much obsession with investments as a way to get rich in the first place. It’s misallocated attention. It’s misplaced energy…Don’t obsess about investing beyond the point of diminishing returns.

Yes, you should absolutely learn about:

  • compounding
  • saving
  • fees
  • taxes
  • diversification
  • implementing or getting help to construct a portfolio with simple rules

Now stop and go home.

I was forceful about this because the exceptions to this are rare enough that caveats shouldn’t minimize the message.

I also recognize that “real talk” like this can feel like I’m putting a lid on your habitat without the courtesy of breathing holes. That’s why I added an emphasis on your human capital in preference to financial capital:

If you want to go big or go home, it’s best to do so on your skills or personal edge.

This brings me to a recommendation that will inspire, educate, and entertain:

David Senra’s Founders Podcast.

It’s some of the best content I’ve discovered in a long time. The premise is simple. David reads biographies and tells you about them.

It’s hard to explain how well done this is. David’s enthusiasm, tone, synthesis, and identification of a few common themes throughout these stories are immensely satisfying. The stories are inspiring even when they deserve admonition.

The narratives remind us that the exertion of our will on the world is murky but ultimately pursuit is a mother’s hand pulling a 7-year-old through the crowded sidewalks of life’s confusion. Yes, it takes time. It takes bumping into pedestrians’ butts. You often don’t know what direction you’re headed in. But eventually, there’s daylight. You are growing. You will get taller to weave through the crowd yourself.

The podcasts are empowering without any pep talks. The subtext binding them all together is enterprise. The primacy of action. The undisputed sense that the world is malleable and you can bend it.

Getting Started with Founders

With nearly 300 episodes, there’s something for everyone. I’ve listened to these:

#207: Claude Hopkins, Scientific Advertising

#189: David Ogilvy, The Unpublished David Ogilvy

#111: David Geffen, The Operator: David Geffen Builds, Buys, and Sells The New Hollywood

#66: Henry Kaiser, Builder in the Modern American West

#21: John Carmack & John Romero, Masters of Doom: How Two Guys Created An Empire And Transformed Pop Culture

My favorite so far — inspiration straight into my veins:

#18: Yvon Chouinard, Let My People Go Surfing: The Education of a Reluctant Businessman

#245: Rick Rubin, In The Studio

…and these episodes were worth heavy note-taking:

  • David Senra On Invest Like The Best (Moontower notes)

    This episode is not on Founders but instead is Patrick O’Shaughnessey interviewing host David Senra. I listened to it 3x. It was this interview that got me into listening to Founders and my favorite podcast episode this year.

    There’s more.

    I asked my 4th grader to listen with me and take notes (he’s learning note-taking in school this year). I’ve never asked him to listen to an interview before but I wish someone might have asked me to listen to a discussion like this when I was at such an impressionable age. In my link, I include his notes too! It was fascinating to see what bits stood out to him. (Since the episode is 90 minutes, we broke it up into 3 sessions of 30 minutes over 2 weeks).

    [One of the reasons the episode might have been especially fun for him is we just finished watching The Men Who Made America series on the History Channel and Senra discusses many of the “captains of industry” or “robber barons” featured on the TV series.]

    My notes discuss some of the common Founders themes that stand out to both Senra and I.

  • #93: Ed Thorp, A Man For All Markets (Moontower notes)

    An oft-repeated theme on Founders is that the subjects are deeply flawed, often miserable. You are warned to not glorify them but instead extract their deep but narrow wisdom, instead of copying their lives. This episode is special because Ed Thorp is the one person, Senra uses as his own personal blueprint.

    And I agree. Thorp in his entirety (or at least what we can know from his public action and writing) is an admirable and impressive individual.

    I immediately purchased Thorp’s book and I’m reading it to Zak at night before bed. Thorp’s life is a movie.

I’ve recommended Founders to several friends and the reaction has been universal — “where has this podcast been hiding?” If it gives you half as much joy as I’ve gotten from it it’ll be worth it.


Ok, so recapping.

  1. Don’t spend any more time than you need to on investments.

    They are numbers that go up and down and nobody can prove than know anything. From Why I Share Online And The Decision To Leave Trading:

    An aside that is gonna trigger some set of people: I could hand over all my professional dashboards and tools, and it wouldn’t make a difference. You won’t get the same results. Experience, discipline, and creativity are not something you can take from another. And they are foundational to a discretionary strategy. Think about this from a game-theoretic point of view. If I could codify (I tried and couldn’t) what I did, then it would be easy to prove the edge. The strategy would then be automated and be oversubscribed or its owners would never sell it to an investor. The fact that it’s discretionary and cannot be proven except by its eventual outcomes means an investor must always worry that I’m full of shit.

    Do you see the paradox?

    If the edge is provable, it doesn’t exist for you. So the only hope of finding edge is in your judgment of a discretionary strategy. This is not a worthy use of your time because your confidence can never be high enough a priori to bet an amount that was commensurate with moving the needle. You’re flirting around the edges of a low SNR problem. Unless this is fun, assassinate the FOMO right now by directing your Superman “rationality” eye beam at the paradox, and move on to the next obstacle holding you back from worthy pursuits.

  2. Gather energy

    Check out Founders.

    Check out Bill Gurley’s Runnin’ Down A Dream: How To Succeed and Thrive in a Career You Love speech that inspired Founders. (YouTube)

    That speech also inspired hedge fund manager Alix Pasquet’s presentation:

    Learning for Analysts and Future Portfolio Managers (2 hour video)

    Despite the investing-focused title of the speech, its central theme is broader:

    Learning Is behavioral change!

    The video is long but I found it worthwhile. The notes will let you judge for yourself.

    • Moontower notes (9 min read)

    • Frederik Gieschen’s notes (7 min read)

    • Presentation slides (download)

  3. Strike

    This old post includes links to light your fire.

    • Get Unstuck and Move (10 min read)


Money Angle

A question I posed last week:

I suspect, despite positive track records in return space, their total dollar p/l is very negative. Sometimes the simplest benchmark is useful — what are your net dollar profits? There are fund managers that have probably made more from fees than their investors have made in p/l.

Anyone know the money-weighted returns of ARKK or crypto investors?

My buddy Aneet has a strong clue to this in this post:

  • ETFs are the new stocks — mind the creation/redemption gap (4 min read)

Performance-chasing flows are a nail in their own coffin. If everyone is bulled up on an idea, the price must reflect a fat premium that sellers command to do the out-of-consensus thing. The article focuses on flows, but flows are downstream of sentiment.

You’d be wise to think about what the sentiment is before you buy any shiny investment.

I’ve discussed this before in Staring Out The Window.


Last Call

Rounding out the personal growth theme this week:

The Art of Fermenting Great Ideas (paywalled)
by Nat Eliason

Nat’s post is paywalled but it’s a banger that uses fermentation as a fitting metaphor for the process of idea generation. You can’t force it, but you create the conditions for it. Some bits with my occasional commentary.

  • If you want all of the ideas that pop into your brain to be clever responses to that person who was WRONG on Twitter today, then, by all means, scroll Twitter all day. If you want all your mental RAM to go towards fearing for your life over this year’s new armageddon myth, go for it. But if you want to come up with useful brain farts that move your life forward, you will have to stop feeding your mailroom dog shit. Garbage in, garbage out.
  • Removal is only the first step, though. You must replace it with the fresh juicy jalapeños you want your brain to be fermenting.

    You’re probably assuming I’m going to say “read great books” or “read old stuff” here, but no, that’s not the answer. That helps shift your thinking in a more interesting direction. But it doesn’t necessarily help generate great ideas.

    The most important food to constantly feed your brain is the problems you want it to be solving. These problems do not need to be grand like “solving world hunger.” Maybe one of your problems right now is what to get people for Christmas. You have to define clearly what those problems are and then constantly remind your brain to think about them. You need to be sending all-caps memos down to the mailroom fifty times a day saying COME UP WITH GIFT IDEAS!!! Otherwise, the mailroom is thinking about whether you’d rather fight 100 duck-sized horses or 1 horse-sized duck.

    [This works for getting better at anything including relationships]

  • Output time is creating the space and boredom for those inputs to ferment into something interesting. Staring at a blank page of your journal, opening a document to start writing, going for a (no headphones) walk with a notebook, working out without music, or sitting in the sauna. However you create bored, quiet space for your brain to finally get some processing room to spit ideas out; you must create that space if you want the ideas to form.

    The ways we fail at this are obvious. We never give ourselves output time because we’re terrified of silence and boredom. We need a podcast while working out. We need music while working. We keep social media up in another tab. We have notifications on our phones. We let ourselves be interrupted.

    If your first response to boredom is to seek out another input to sate the longing for stimulation, then your brain never has to make shit up to entertain you. The idea muscles will atrophy and never produce anything of worth. But if you can respond to boredom by leaning into it, keeping the blank page open, and seeing what pops out, the muscle gets stronger over time.

    [Maybe shower thoughts are shower thoughts because there are no other times when we would have such thoughts. Corollary: A good use of money is to buy time so you can be idle and have more ideas.]

  • We all want our problems to be solved quickly, and we want to neatly move through a checklist of tasks to retain the illusion of control over our lives, but great ideas don’t seem to work like that. Sometimes you need to be exceedingly patient with them.

    You can’t always have all the time in the world, but when you have the space to noodle on something, take it. I’ll narrow down what I’m going to write about in this newsletter by Monday or Tuesday of the week before, then spend the rest of the week seeing what ideas pop up about the various topic ideas. By Monday, I’ll typically have the skeleton of a post fully flushed out in one of them. If I waited until Monday to start jotting ideas down, it would be much harder, and the post would certainly be much worse.

    So give the great ideas time to pop up. Even if you know you have weeks or months to figure something out, start priming your brain with those questions now so it has time to process them.

    [This is exactly what I do. I keep several ideas brewing top-of-mind at the same time]

  • Recipe:
    1. Find the best ingredients possible to ferment into great ideas, and aggressively prune everything you don’t want your brain to process.
    2. Give your brain the boredom and output time it needs to figure out what to do with that information. Don’t keep opening the jar and packing more into it.
    3. Finally, be patient with the process. The more you can reduce the amount of information you’re taking in, and the more boredom you can give your brain to work, the better your results will be.


From My Actual Life

One of the blogs I guest posted on asked for a headshot. I got tired of using this one:

So I went to my wife Yinh. “I need help. I need like a headshot for the internet crap I do”.

Like a prepper before a Cat 5 storm, her day had arrived. “I got you. Come to my office”. Yinh’s IG story game is A+. Whenever I meet a friend or colleague of hers they always feel like they know me because her stories are prolific, but they are clever and well done (you can follow her. It’s a locked account but she accepts the requests and she knows I’m sharing it here today).

Sometimes when technology shapes us we snatch a victory. In this case, her commitment to the IG story has sharpened her photography eye over the years. So when I went to her office she posed me in different settings, lighting, and a couple of costume changes. I have no eye for design or aesthetics. I know what I like but struggle to map that to creation, whether it’s photography, decor, or even Powerpoint. I have yet even more appreciation for those skills today, as she made me look as good as I can possibly look.

After an hour and hundreds of photos (with an iPhone too), we narrowed to these 3:

Tell me you wouldn’t fork over all your life savings for a Moontower Coin or invest in my blood transfusion start-up.

(I have been told I look like Ross from Friends my whole adult life. An older lady asked me for an autograph on a subway platform in Brooklyn about 15 years ago even.)

Happy Thanksgiving and stay groovy fam!

The Podcast I Listen To With My 9-Year-Old

I didn’t mince words last week:

There’s way too much obsession with investments as a way to get rich in the first place. It’s misallocated attention. It’s misplaced energy…Don’t obsess about investing beyond the point of diminishing returns.

Yes, you should absolutely learn about:

  • compounding
  • saving
  • fees
  • taxes
  • diversification
  • implementing or getting help to construct a portfolio with simple rules

Now stop and go home.

I was forceful about this because the exceptions to this are rare enough that caveats shouldn’t minimize the message.

I also recognize that “real talk” like this can feel like I’m putting a lid on your habitat without the courtesy of breathing holes. That’s why I added an emphasis on your human capital in preference to financial capital:

If you want to go big or go home, it’s best to do so on your skills or personal edge.

This brings me to a recommendation that will inspire, educate, and entertain:

David Senra’s Founders Podcast.

It’s some of the best content I’ve discovered in a long time. The premise is simple. David reads biographies and tells you about them.

It’s hard to explain how well done this is. David’s enthusiasm, tone, synthesis, and identification of a few common themes throughout these stories are immensely satisfying. The stories are inspiring even when they deserve admonition.

The narratives remind us that the exertion of our will on the world is murky but ultimately pursuit is a mother’s hand pulling a 7-year-old through the crowded sidewalks of life’s confusion. Yes, it takes time. It takes bumping into pedestrians’ butts. You often don’t know what direction you’re headed in. But eventually, there’s daylight. You are growing. You will get taller to weave through the crowd yourself.

The podcasts are empowering without any pep talks. The subtext binding them all together is enterprise. The primacy of action. The undisputed sense that the world is malleable and you can bend it.

Getting Started with Founders

With nearly 300 episodes, there’s something for everyone. I’ve listened to these:

#207: Claude Hopkins, Scientific Advertising

#189: David Ogilvy, The Unpublished David Ogilvy

#111: David Geffen, The Operator: David Geffen Builds, Buys, and Sells The New Hollywood

#66: Henry Kaiser, Builder in the Modern American West

#21: John Carmack & John Romero, Masters of Doom: How Two Guys Created An Empire And Transformed Pop Culture

My favorite so far — inspiration straight into my veins:

#18: Yvon Chouinard, Let My People Go Surfing: The Education of a Reluctant Businessman

#245: Rick Rubin, In The Studio

…and these episodes were worth heavy note-taking:

  • David Senra On Invest Like The Best (Moontower notes)

    This episode is not on Founders but instead is Patrick O’Shaughnessey interviewing host David Senra. I listened to it 3x. It was this interview that got me into listening to Founders and my favorite podcast episode this year.

    There’s more.

    I asked my 4th grader to listen with me and take notes (he’s learning note-taking in school this year). I’ve never asked him to listen to an interview before but I wish someone might have asked me to listen to a discussion like this when I was at such an impressionable age. In my link, I include his notes too! It was fascinating to see what bits stood out to him. (Since the episode is 90 minutes, we broke it up into 3 sessions of 30 minutes over 2 weeks).

    [One of the reasons the episode might have been especially fun for him is we just finished watching The Men Who Made America series on the History Channel and Senra discusses many of the “captains of industry” or “robber barons” featured on the TV series.]

    My notes discuss some of the common Founders themes that stand out to both Senra and I.

  • #93: Ed Thorp, A Man For All Markets (Moontower notes)

    An oft-repeated theme on Founders is that the subjects are deeply flawed, often miserable. You are warned to not glorify them but instead extract their deep but narrow wisdom, instead of copying their lives. This episode is special because Ed Thorp is the one person, Senra uses as his own personal blueprint.

    And I agree. Thorp in his entirety (or at least what we can know from his public action and writing) is an admirable and impressive individual.

    I immediately purchased Thorp’s book and I’m reading it to Zak at night before bed. Thorp’s life is a movie.

I’ve recommended Founders to several friends and the reaction has been universal — “where has this podcast been hiding?” If it gives you half as much joy as I’ve gotten from it it’ll be worth it.


Ok, so recapping.

  1. Don’t spend any more time than you need to on investments.

    They are numbers that go up and down and nobody can prove than know anything. From Why I Share Online And The Decision To Leave Trading:

    An aside that is gonna trigger some set of people: I could hand over all my professional dashboards and tools, and it wouldn’t make a difference. You won’t get the same results. Experience, discipline, and creativity are not something you can take from another. And they are foundational to a discretionary strategy. Think about this from a game-theoretic point of view. If I could codify (I tried and couldn’t) what I did, then it would be easy to prove the edge. The strategy would then be automated and be oversubscribed or its owners would never sell it to an investor. The fact that it’s discretionary and cannot be proven except by its eventual outcomes means an investor must always worry that I’m full of shit.

    Do you see the paradox?

    If the edge is provable, it doesn’t exist for you. So the only hope of finding edge is in your judgment of a discretionary strategy. This is not a worthy use of your time because your confidence can never be high enough a priori to bet an amount that was commensurate with moving the needle. You’re flirting around the edges of a low SNR problem. Unless this is fun, assassinate the FOMO right now by directing your Superman “rationality” eye beam at the paradox, and move on to the next obstacle holding you back from worthy pursuits.

  2. Gather energy

    Check out Founders.

    Check out Bill Gurley’s Runnin’ Down A Dream: How To Succeed and Thrive in a Career You Love speech that inspired Founders. (YouTube)

    That speech also inspired hedge fund manager Alix Pasquet’s presentation:

    Learning for Analysts and Future Portfolio Managers (2 hour video)

    Despite the investing-focused title of the speech, its central theme is broader:

    Learning Is behavioral change!

    The video is long but I found it worthwhile. The notes will let you judge for yourself.

    • Moontower notes (9 min read)

    • Frederik Gieschen’s notes (7 min read)

    • Presentation slides (download)

  3. Strike

    This old post includes links to light your fire.

    • Get Unstuck and Move (10 min read)

Leave It Better Than You Found It

Last week I wrote about the social club idea I launched with local friends:

I Swear It’s Not Old School

The spirit of this project is to unlock serendipity and growth from the informal yet material bonds that glue a community together.

It’s an instance of a more abstract idea — not all of our values can be measured and of course not all of the things we measure have value.

Check this out:

Fairness is overrated and bragging is underrated (6 min read)

This post resonates not so much because I was interested in co-living (although with my in-laws moving in next door we are in the process of cutting a hole in the fence so the kids can go back and forth!) but I like experiments in motivation. Experiments in appealing to the multitudes within us and the needs that get neglected because they are more squishy than conventional legible desires.

Suppose you live in a house with strangers. It’s typical to designate responsibility with a chore wheel. But what if we re-framed the responsibility as a “brag sheet”? This article provides some experimental models for motivating any group that shares common goals. While it admits that these experiments do not make sense at scale it wonders how many examples abound that lazily accept the large-scale solution.

  • How big can a network become before its governance needs to change?
  • At small scale do we borrow too much from large-scale architecture forgetting that the trade-offs that exist at a large scale may not apply at the smaller one?
  • Choosing a “brag sheet” over a chore wheel may be an example of low-hanging fruit that applies to everything from co-living to motivating our children.

At some scale, overbearing rules might be necessary to impose order. But it would be nice if we could adhere to a simple maxim: leave it better than you found it.

That’s my attitude to the internet. Thanks for helping me.

Moontower #170

This was a brutal week in the investing world. The fraud at FTX was one of the largest overnight destructions of wealth in financial history. It impacts holders of crypto assets, the employees building projects in decentralized finance, equities, and traditional VC firms (Sequoia allegedly wrote down a $200mm investment to zero).

Excerpting from kyla scanlon:

And with FTX and SBF, it’s worse than other times in crypto. It’s so much worse. They posed themselves as these people that were trying to make the world better. There’s a difference between crypto going down because no one believes in it and crypto going down because it’s systematically being rugged…Many innocent people got wrapped into this because they saw Tom Brady or they saw Sam’s face on a telephone pole – and it was supposed to be safe.

In a calibrating industry, it’s easy to find holes to exploit, which is what FTX did perfectly. They saw opportunity, the VCs saw that they saw an opportunity, and people that wanted to be in crypto believed all of them. And of course, it’s like – well why *wouldn’t* you believe them. And that’s the hardest part.

While I agree with everything she says in the post, I want to address what’s unsaid.

There’s way too much obsession with investments as a way to get rich in the first place. It’s misallocated attention. It’s misplaced energy. I feel like the collective benefit of saying this is so diffuse that nobody has the incentive to tell you the truth. Just like Big Food or Big Ag will never commission a study on “intermittent fasting”. No single entity profits from the absence of eating 3 American-sized meals a day.

Same with investing. Who gains from telling people that much of the brain cycles we spend on investing are a waste of time? Maybe advisors with white-glove fees and Vanguard. Vanguard is a quasi-mutual company (investors are owners of the asset manager in a sense). Bogle undercut an industry to tell you what others wouldn’t. There are worse people to be aligned with.

We need a bit of real talk. I’m sorry if you feel like I should have told you sooner (although, I did). At first glance, this talk might sound discouraging. But take a second glance. This should liberate you. This will give you back countless hours of your time that you can use to row towards your goal with strength. Without distraction. And with less reliance on fate.

[This is an edited version of an off-the-cuff thread I wrote when I was too lazy to get out of bed yesterday]

Unless you are already rich, the proposition of earning 6% per year (insert your favorite ERP) with a 20% standard deviation and a fat left tail is not going to lead to the durable wealth you want. At least not on the timeline you want. This is discouraging and fairly obvious if you look at the proposition for what it is (some people might think you earn 10% per year in equities or harbor some other delusions about the proposition. It’s 2022, you’re entitled to “use Your own illusions” — sorry it’s the 30-year anniversary).

But we’re Americans. We are all entitled to do better than average, right? 🤨

So we snuggle up to crypto, privates, self-storage, or whatever makes you feel special. Unfortunately, investing done well, shouldn’t feel comfortable. Truly fat risk premiums feel like caffeine before bed. They make you anxious and insomniac. You should be afraid of feeling warm and righteous. This is the fundamental nature of beating point spreads.

Don’t you think that adjusted for risk (even simply by a street-smart “this sounds too good to be true” instincts) that the propositions of these shiny investments are similar to what you are presented in public markets? That’s actually your best-case scenario, where you avoid stepping on landmines.

Think about it.

There are super rich, savvy people staffing professionals in their family offices with tentacles everywhere bidding on everything. It’s very unlikely to find something special unless it’s your literal full-time job. And even when you do find something compelling in your part-time research, there should be a lower bound to your skepticism that inhibits you from sizing the exposure in a way that would make you rich quickly anyway.

If you put on your ‘equilibrium thinking’ cap you realize that it’s contradictory to think you can get rich quickly, in a prudent way, investing as a part-timer. Someone needs to hold underperformance bags. Unless this is your craft, you should expect to be a baggie if you push. The very conceit that you can find and pull out a meaningful number of diamonds from a coal pile picked over 24/7 by well-capitalized professionals is illogical.

Said simply: If you do not devote your life to the competitive task of investing, you cannot get rich quickly. You might by accident but hope is not a strategy. (Anyone know the money-weighted returns of ARKK or crypto investors? I suspect, despite positive track records in return space, their total dollar p/l is very negative. Sometimes the simplest benchmark is useful — what are your net dollar profits? There are fund managers that have probably made more from fees than their investors have made in p/l.)

And devoting your life to investing is not a guarantee either. It’s a low signal-to-noise endeavor. The best you can often hope for is a “chip and a chair”.

Nothing Good Happens After Midnight

You know exactly what that expression means.

The markets version of this is:

Don’t obsess about investing beyond the point of diminishing returns.

Yes, you should absolutely learn about:

  • compounding
  • saving
  • fees
  • taxes
  • diversification
  • implementing or getting help to construct a portfolio with simple rules

Now stop and go home. It’s that last double-shot Irish-car bomb at last call that causes the morning headache (or coyote morning 😬)

If you want to get rich without being reckless, Naval Ravikant has a valid formula:

  • specific knowledge
  • leverage
  • accountability (own your risks)

[I would actually edit this. My version:

  • do work nobody wants to do because it’s hard or otherwise unattractive
  • leverage
  • scarcity

I’d like to say “accountability” but looking at the new American dream of private gains/socialized losses and all types of bureaucratic capture I need to annoyingly quote Taleb:

Courage cannot be faked; the warrior bore the risk of his deserved glory in the service of his countryman. The ‘primacy of the risk-taker’ has been a feature of nearly all human civilization. When we reward leaders who did not bear commensurate risks we undermine virtue. Society frays as the truly virtuous/courageous bristles as they watch.]

A thought for the time

For the innocents and believers who made careers in crypto and made it their specific knowledge, I’m sad and sorry. I have a closet of FTX swag because I have a friend there and felt terrible watching this week.

I do believe it was a good bet to go into that world (although not to denominate your whole net worth in it… specific knowledge and the numeraire you take its yield in are different) and would have considered it myself. A career in crypto was a reasonable bet because the human capital is fungible with other careers, thus lowering its opportunity cost.

In addition, crypto as a small investment allocation was reasonable. But as an investment, like all investments, sizing is everything.

If you want to go big or go home, it’s best to do so on your skills or personal edge. Not on arms-length allocations to something that is big, accessible by mouse, and widely known about. The risk/reward once it had achieved mass awareness couldn’t be too out of line with other investable assets despite what all the promotors tell you.

And, critically, before you can allow yourself to get excited, remember that any sensible sizing rules neuter the returns to effort. That means you’ll always be disappointed in how much you won when you were right. In chapter 2 of Laws Of Trading Agustin Lebron explains — good trades make you wish you traded bigger, bad trades make you wish you traded less or none.

The very act of trading subscribes you to remorse. In hindsight, you always regret your sizing.

A parting message

Focus on your human capital to get rich. Your human capital > financial capital, it just doesn’t show up on a spreadsheet. In my own life, I don’t even say “investing”. I think of growing assets as “savings plus”. I’m just trying to maximize the chance of meeting my future liabilities.

I’ll rely on myself to get rich (not that anything that vague would motivate me, but you know me by now).

More on these themes from the Moontower Money Wiki:


Money Angle

My buddy Market Sentiment has a great newsletter that tackles a different evergreen market concept each week and contextualizes it with data. He recently created a useful series where he interviews other investment writers about their own frameworks for thinking about investing.

I was honored to be asked. It was also a great excuse to consolidate my own thinking about what people should emphasize. It turned out to be a fair amount of work to put together because the questions were thoughtful. The questions were sent in a document giving me the space to take my time so I could reciprocate with thoughtful answers and links.

Enjoy:

  • Interview: Decision-making for investors with Kris Abdelmessih (Part 1)
  • Interview: Decision-making for investors with Kris Abdelmessih (Part 2)

This week I edited the index of all my writing so specific categories could be linked to separately.

For example:

The Risk And Math Of Returns

or

Gaming and Education

Finally, there was an interesting discussion on Twitter about SBF’s sizing:

Kelly Criterion Resources


Last Call

Last week I wrote about the social club idea I launched with local friends:

I Swear It’s Not Old School

The spirit of this project is to unlock serendipity and growth from the informal yet material bonds that glue a community together.

It’s an instance of a more abstract idea — not all of our values can be measured and of course not all of the things we measure have value.

Check this out:

Fairness is overrated and bragging is underrated (6 min read)

This post resonates not so much because I was interested in co-living (although with my in-laws moving in next door we are in the process of cutting a hole in the fence so the kids can go back and forth!) but I like experiments in motivation. Experiments in appealing to the multitudes within us and the needs that get neglected because they are more squishy than conventional legible desires.

Suppose you live in a house with strangers. It’s typical to designate responsibility with a chore wheel. But what if we re-framed the responsibility as a “brag sheet”? This article provides some experimental models for motivating any group that shares common goals. While it admits that these experiments do not make sense at scale it wonders how many examples abound that lazily accept the large-scale solution.

  • How big can a network become before its governance needs to change?
  • At small scale do we borrow too much from large-scale architecture forgetting that the trade-offs that exist at a large scale may not apply at the smaller one?
  • Choosing a “brag sheet” over a chore wheel may be an example of low-hanging fruit that applies to everything from co-living to motivating our children.

At some scale, overbearing rules might be necessary to impose order. But it would be nice if we could adhere to a simple maxim: leave it better than you found it.

That’s my attitude to the internet. Thanks for helping me.

Stay groovy!

The Investing Version Of “Nothing Good Happens After Midnight”

This was a brutal week in the investing world. The fraud at FTX was one of the largest overnight destructions of wealth in financial history. It impacts holders of crypto assets, the employees building projects in decentralized finance, equities, and traditional VC firms (Sequoia allegedly wrote down a $200mm investment to zero).

Excerpting from kyla scanlon:

And with FTX and SBF, it’s worse than other times in crypto. It’s so much worse. They posed themselves as these people that were trying to make the world better. There’s a difference between crypto going down because no one believes in it and crypto going down because it’s systematically being rugged…Many innocent people got wrapped into this because they saw Tom Brady or they saw Sam’s face on a telephone pole – and it was supposed to be safe.

In a calibrating industry, it’s easy to find holes to exploit, which is what FTX did perfectly. They saw opportunity, the VCs saw that they saw an opportunity, and people that wanted to be in crypto believed all of them. And of course, it’s like – well why *wouldn’t* you believe them. And that’s the hardest part.

While I agree with everything she says in the post, I want to address what’s unsaid.

There’s way too much obsession with investments as a way to get rich in the first place. It’s misallocated attention. It’s misplaced energy. I feel like the collective benefit of saying this is so diffuse that nobody has the incentive to tell you the truth. Just like Big Food or Big Ag will never commission a study on “intermittent fasting”. No single entity profits from the absence of eating 3 American-sized meals a day.

Same with investing. Who gains from telling people that much of the brain cycles we spend on investing are a waste of time? Maybe advisors with white-glove fees and Vanguard. Vanguard is a quasi-mutual company (investors are owners of the asset manager in a sense). Bogle undercut an industry to tell you what others wouldn’t. There are worse people to be aligned with.

We need a bit of real talk. I’m sorry if you feel like I should have told you sooner (although, I did). At first glance, this talk might sound discouraging. But take a second glance. This should liberate you. This will give you back countless hours of your time that you can use to row towards your goal with strength. Without distraction. And with less reliance on fate.

[This is an edited version of an off-the-cuff thread I wrote when I was too lazy to get out of bed yesterday]

Unless you are already rich, the proposition of earning 6% per year (insert your favorite ERP) with a 20% standard deviation and a fat left tail is not going to lead to the durable wealth you want. At least not on the timeline you want. This is discouraging and fairly obvious if you look at the proposition for what it is (some people might think you earn 10% per year in equities or harbor some other delusions about the proposition. It’s 2022, you’re entitled to “use Your own illusions” — sorry it’s the 30-year anniversary).

But we’re Americans. We are all entitled to do better than average, right? 🤨

So we snuggle up to crypto, privates, self-storage, or whatever makes you feel special. Unfortunately, investing done well, shouldn’t feel comfortable. Truly fat risk premiums feel like caffeine before bed. They make you anxious and insomniac. You should be afraid of feeling warm and righteous. This is the fundamental nature of beating point spreads.

Don’t you think that adjusted for risk (even simply by a street-smart “this sounds too good to be true” instincts) that the propositions of these shiny investments are similar to what you are presented in public markets? That’s actually your best-case scenario, where you avoid stepping on landmines.

Think about it.

There are super rich, savvy people staffing professionals in their family offices with tentacles everywhere bidding on everything. It’s very unlikely to find something special unless it’s your literal full-time job. And even when you do find something compelling in your part-time research, there should be a lower bound to your skepticism that inhibits you from sizing the exposure in a way that would make you rich quickly anyway.

If you put on your ‘equilibrium thinking’ cap you realize that it’s contradictory to think you can get rich quickly, in a prudent way, investing as a part-timer. Someone needs to hold underperformance bags. Unless this is your craft, you should expect to be a baggie if you push. The very conceit that you can find and pull out a meaningful number of diamonds from a coal pile picked over 24/7 by well-capitalized professionals is illogical.

Said simply: If you do not devote your life to the competitive task of investing, you cannot get rich quickly. You might by accident but hope is not a strategy. (Anyone know the money-weighted returns of ARKK or crypto investors? I suspect, despite positive track records in return space, their total dollar p/l is very negative. Sometimes the simplest benchmark is useful — what are your net dollar profits? There are fund managers that have probably made more from fees than their investors have made in p/l.)

And devoting your life to investing is not a guarantee either. It’s a low signal-to-noise endeavor. The best you can often hope for is a “chip and a chair”.

Nothing Good Happens After Midnight

You know exactly what that expression means.

The markets version of this is:

Don’t obsess about investing beyond the point of diminishing returns.

Yes, you should absolutely learn about:

  • compounding
  • saving
  • fees
  • taxes
  • diversification
  • implementing or getting help to construct a portfolio with simple rules

Now stop and go home. It’s that last double-shot Irish-car bomb at last call that causes the morning headache (or coyote morning 😬)

If you want to get rich without being reckless, Naval Ravikant has a valid formula:

  • specific knowledge
  • leverage
  • accountability (own your risks)

[I would actually edit this. My version:

  • do work nobody wants to do because it’s hard or otherwise unattractive
  • leverage
  • scarcity

I’d like to say “accountability” but looking at the new American dream of private gains/socialized losses and all types of bureaucratic capture I need to annoyingly quote Taleb:

Courage cannot be faked; the warrior bore the risk of his deserved glory in the service of his countryman. The ‘primacy of the risk-taker’ has been a feature of nearly all human civilization. When we reward leaders who did not bear commensurate risks we undermine virtue. Society frays as the truly virtuous/courageous bristles as they watch.]

A thought for the time

For the innocents and believers who made careers in crypto and made it their specific knowledge, I’m sad and sorry. I have a closet of FTX swag because I have a friend there and felt terrible watching this week.

I do believe it was a good bet to go into that world (although not to denominate your whole net worth in it… specific knowledge and the numeraire you take its yield in are different) and would have considered it myself. A career in crypto was a reasonable bet because the human capital is fungible with other careers, thus lowering its opportunity cost.

In addition, crypto as a small investment allocation was reasonable. But as an investment, like all investments, sizing is everything.

If you want to go big or go home, it’s best to do so on your skills or personal edge. Not on arms-length allocations to something that is big, accessible by mouse, and widely known about. The risk/reward once it had achieved mass awareness couldn’t be too out of line with other investable assets despite what all the promotors tell you.

And, critically, before you can allow yourself to get excited, remember that any sensible sizing rules neuter the returns to effort. That means you’ll always be disappointed in how much you won when you were right. In chapter 2 of Laws Of Trading Agustin Lebron explains — good trades make you wish you traded bigger, bad trades make you wish you traded less or none.

The very act of trading subscribes you to remorse. In hindsight, you always regret your sizing.

A parting message

Focus on your human capital to get rich. Your human capital > financial capital, it just doesn’t show up on a spreadsheet. In my own life, I don’t even say “investing”. I think of growing assets as “savings plus”. I’m just trying to maximize the chance of meeting my future liabilities.

I’ll rely on myself to get rich (not that anything that vague would motivate me, but you know me by now).

More on these themes from the Moontower Money Wiki:

Repetition Economics

In Repetition Economics: The Story of the Hunter, the Mammoth, and The Wolves, Matt Hollerbach writes:

Human decision-making is quite a complicated problem. One of the leading frameworks for how people make decisions is called Prospect Theory. It was was developed by Daniel Kahneman and Amos Tversky (K&T) in the 1970’s and 80’s. Kahneman and Tversky were not economists, but psychologists. They developed their theories by giving test subjects “games” and evaluating their answers for consistency. Through these games, they determined people value losses and gains differently.  Losses “hurt” more than gains, and therefore, when people view situations involving risk, they are likely to make decisions that don’t conform with the expectations. 

Kahneman and Tversky state this behavior is because people are risk averse in terms of negative outcomes. They then take that idea and expand it to identify that people misjudge probabilities, especially at the extremes. Essentially they treat a 2% chance more like a 10% chance, and they treat a 98% chance like a 90% chance (example only).

But where K&T conclude that people are irrationally biased, Hollerbach finds that the subjects’ choices seem to maximize the geometric return instead of the arithmetic return. Yet, how are they landing on such a strategy if they aren’t doing an explicit computation? What if people’s intuition for such gambles is more rational than the cognitive bias literature suggests?

The post shows how relatively recent findings in “ergodicity economics” challenge the notion of loss aversion presented in behavioral science literature. Instead, in ergodicity, or as Hollerbach prefers “repetition economics”:

Humans evolved a “gut reaction” to match probabilities based on the geometric average, not the arithmetic average because life is about repetition.  This is why the test subjects often got these problems “wrong”, and why economists believe we have behavioral biases.

Humans understand that decisions are not “one-offs”.

We are careful about things we do repeatedly.

  1. How much can you win and how often?
  2. How much can you lose and how often?
  3. How many times will the game repeat?

We might explicitly consider 1 and 2…but we have a native sense for #3.

If you play “Russian Roulette” with 1/100 odds once, you will probably win. Play the game every day, you have almost no chance of surviving the year. Estimate your chances of getting into a wreck when running a yellow light. They are really low. You might get through the light before it changes to red. There is a slight delay before the perpendicular red light turns green. And nobody is able to start accelerating right away when the light turns green. The “expected downside” is really low versus a benefit of getting to your destination sooner. So why don’t we do it more often?

It’s because we know we are going to be faced with these types of decisions 1000’s of times in our life. Each time you try and push a yellow light, you’re very likely going to be just fine. But try and run it 10,000 times, and you’re guaranteed to get into a very nasty accident.

It’s the future repetition that keeps us from risking the yellow light.

I’m a fan of the ergodicity argument and Hollerbach’s suspicion that what economists are labeling irrational, is quite rational if the subjects are defaulting to a system 1 mode of sensing that the choices they are confronted with are repeated games.

But humans are notorious for discounting the future. We prefer clear immediate benefits, like a juicy steak today, over speculative benefits tomorrow, such as “no heart disease” or “no gout”. We struggle to save money. We procrastinate. We permit lifestyle creep in insidious ways:

  • Amazon Prime lures you in with free shipping but you end up buying more
  • You tell yourself you’ll take an Uber this “one time” instead of the subway
  • You start Doordashing. And forget how to cook.

Repetition and habits are powerful. You shouldn’t let your impulses initiate them. You should be deliberate about what you allow to recur. The people you spend the most time with will shape your thoughts. Don’t leave this to chance.

If you start taking vitamins, do you have a plan for determining if they are “working”? Or have you signed up for a perpetual liability with an unclear benefit? You can’t solve that Sunday crossword without the ginko biloba. Right? You are now gripped by a health version of Pascal’s wager.

Subscription business models are the darlings of the investment world. Recurring cash flow that forgets to opt-out. Your neglect is their LTV.

If we thought about our decisions as repeated games, then “no” should be a stronger default.

I’ll close with a section from Gary Basin’s Action Echoes:

Rather than seeing this temptation as a one-off event, view it as repeating over and over into the future. Imagine the decision you make this next time also deciding how you act in similar future situations. Your actions echo into the future. Every “bad” move has consequences later in the game. Sure, you can sometimes find ways to dig yourself out of a hole. But it’s helpful to realize that every move you make contributes to your eventual position

Reframing a decision as a bundle of future repeated actions gives a more accurate view. The goal is not to entirely avoid urges but to reframe them in a way that best accounts for their consequences. Any single temptation is not unique! The actions you take now will establish patterns that determine your future.

Taleb Lessons

Nassim Taleb is a famous author who consolidated and communicated many useful ideas. His books are worth reading but you’ll need to endure his admonishing tone.

These ideas are from an interview about his book Antifragile:

  • “The general principle of antifragility, it is much better to do things you cannot explain than explain things you cannot do.” – Nassim Taleb

  • In opaque systems where cause and effect are difficult to associate, trial and error will yield the greatest outcomes. The trial and error is defined by defined cost or downside and the ‘option’ to keep what works. “We have the option, not the obligation to keep the result, which allows us to retain the upper bound and be unaffected by adverse outcomes”. We do not understand how to create great cuisine from chemical formulas but thru trial and error our culinary repertoire evolves. In the world of research, another complex system, we rely on the methodical practice of trial and error as a strategy. By doing this we are not only capable of discovering cures before even understanding how they work, but we can proceed in many directions at once informed by the discovery of the most recent node.

  • Systems that exhibit an asymmetry between gains and losses for a given level of stimulus are described as having a ‘convexity bias’. In math, this is curvature, in financial options it is known as gamma, and in physics, it is the second derivative or acceleration. Antifragile represents a class of phenomena that possess the ‘convexity bias’ property and therefore benefit from disorder or stressors. Fragile phenomenona  hate disorder. A cup of coffee will not tolerate much disorder before spilling or breaking. In an antifragile system, we maximize the result via optionality and the value of the optionality increases with the volatility in the system since the upside expands while the downside remains fixed. Recognizing whether the system you are operating in is fragile or antifragile should guide your approach to maximizing results and/or minimizing risk.

    1. Convexity can often be attained much more cheaply than knowledge. For example, lowering your cost per trial allows you to stay in a game longer which can maximize your chance to be exposed to a convex outcome. Starting 5 low cost businesses will expose you to much greater upside than becoming even a highly paid hourly worker like a dentist. The option to shed the businesses that fail and double down on the businesses that thrive derives its value from your worst case being a zero but unlimited upside. Likewise, a person with a highly marketable resume can derive more value from the fact that they can always ‘fall back’ on a job while they pursue a more speculative endeavor. The resume is valuable not because of the outcome of the job it maps to but because it has lowered the opportunity cost of taking a chance elsewhere.

    2. A complex system favors a “1/N” strategy…ie equal weighted small bets to benefit from ‘fat tails’ of outcome distributions. Venture capital model. Minimize cost per trial, maximize trials. The final outcome is accretive but any single bet is unpredictable.

    3. Maximize serial optionality. Stay flexible and avoid a “long highway with no exits”. 5 consecutive 1-year options are more valuable than a single 5-year option (a baseball player’s career is fragile because of injury risk…they will take a haircut to receive a 5-year guaranteed contract).

    4. Tinkering > fundamental/theoretical research for generating breakthroughs. The less linear the domain the more this is true.

These ideas are from an interview about his book Skin In The Game:

The concept of Skin In The Game (SITG) mirrors evolution in nature.

  • SITG as a filtering tool not just to remark on one-sided incentive/disincentive but its central attribute of symmetry is desirable to conserve on a collective level because:
    • When an agent’s outcomes are not appropriately aligned with their risks, we throw a wrench into the gears of evolution since we fail to weed out poor behavior. Systems learn at the collective level not the level of the individual. They learn from a repeated game of interactions.
      •  A restaurant faced with intense competition will likely be much better than a monopolistic food stand in a theme park or cafeteria in a school.
      • Why can we create 2 line highways without a divider when it is so simple for any individual driver to simply turn the wheel into oncoming traffic. Bad drivers have their licenses suspended and also kill themselves. Drivers have SITG
      • The selection pressures of SITG apply to tradespeople, engineers, and ‘hard’ scientists but we do not enjoy the benefit of this filter in fields where signal-to-noise is low. This allows for a higher degree of bs and opportunity to profit disproportionately if the system without the filter achieves large scale or influence (politicians, bureaucrats, too big to fail bankers, and tenured soft-science academics being his favorite targets). “The incentive is to be published on the right topic in the right journals, with well sounding arguments, under easily some contrived empiricism, in order to beat the metrics.” When architects judge architects the building aesthetics decline.

  • The prescription is less scale and more decentralization. The more micro the more apparent the skill (or lack of). Artisans eat what they kill and incentives are properly aligned with satisfying their clients. The more scale we introduce the more layers of principal-agent problems emerge.

  • Courage cannot be faked; the warrior bore the risk of his deserved glory in the service of his countryman. The ‘primacy of the risk-taker’ has been a feature of nearly all human civilization. When we reward leaders who did not bear commensurate risks we undermine virtue. Society frays as the truly virtuous/courageous bristles as they watch.

  • Don’t pick the Hollywood version of a surgeon. [Kris: This is reminiscent of Berkson’s Paradox which says the correlation of 2 related properties can flip when the “range is restricted”. For example, being good at basketball and being tall are correlated. But when you narrow the range to the NBA, then it becomes clear that all else equal a shorter player likely has more skill than a taller player because for them to have made it to the “restricted range” or universe of the NBA they had to overcome their height disadvantage]

I Swear It’s Not Old School

I’ll start this week with an abstract idea I’ve been sitting on in my notes for years. And then I’ll take you through the concrete idea that gave it life (and a reason to publish it).

The Abstraction Sitting In My Notes

Communism doesn’t scale but it can work in small settings where the bonds and norms between people carry more weight.

This shouldn’t be surprising.

If we think of interactions with each other as transactions, money acts like a store of value that is agnostic to how it was generated. It is a commodity but critically it also commoditizes its users. If I sell a guitar on eBay, I default to selling to the highest bidder. But if I was selling it locally I might sell it to the highest bidder, but depending on my preferences, I might also sell it to the next highest bid if having it in that owner’s hands had more meaning for whatever reason. Maybe I’m selling it to a kid who couldn’t afford the higher price but is so bushy-tailed I’d rather hook them up with a deal. (This idea is also why home buyers in competitive markets throw the Hail Mary of writing touching family stories to sellers).

At scale, we use money to “summarize” our values but if we had the time and energy to look closer we could find non-monetary sources of value embedded in transactions. The flexibility in our value rankings is jettisoned in the name of expediency.

Acknowledging this idea explains many behaviors that may seem counterintuitive. The most obvious is what family members will do for each other without any consideration of money. Less straightforward, the sharing economy and open-source come to mind. Some of the explanations become more obvious as status has become more legible and measurable. The existence of “follower farms” indicates exchange rates between status and money. But this compression of value into a single number like followers is similarly lossy as the concept of money itself.

The broader point is we should be open to experimenting with incentive structures, at least on the local scale, to achieve target outcomes more cheaply by addressing a wider range of desires and therefore pressure points. We can allocate more efficiently when we can hack our human instincts.

A Concrete Implementation

Fortune would have it that those thoughts would find a real-life expression.

Friday night served as the grand opening to a local project I’m involved in. It’s been over a year in the making. A group of local friends, about 25 of us, that would have monthly happy hours decided to lease a space to make something of a social club (it’s indeed registered as a 501c7).

The vision for the club is a place to foster community and serendipity. There’s a standing happy hour every Thursday. The first Friday of every month is dinner with partners/spouses. It’s a place to watch big games, have musical jam sessions, host salons and lectures. It’s a studio to video or record podcast interviews. If you meet me for coffee, it’s where I will take you. During the day, it’s a co-working space. With many people working from home, it’s already been used as an on-site for bringing teams together for brainstorming sessions.

It has a co-op ethos, with everyone bringing their own skills (I’m not handy so I did the website), to make it a space owned by all of its members. The members include everyone from teachers and firefighters to tech entrepreneurs and finance folk. A couple of guys built this bar Friday afternoon before the dinner! (it still needs to be finished):

This room is getting a small stage in front where the blue chairs are:

This is the lounge where you walk in:

I’ll talk about this more as this experiment unfolds, but for now, our focus is on finding ways to unlock greater in-person connection in service of both joy and personal growth.

I’ll admit — describing it feels clumsy. It’s not bro-y like Old School, it’s not WeWork, it’s not Rotary or an Elk’s Club — it feels a bit illegible right now. But as it comes into focus we’ll figure out the right language to transmit its essence. To me, it’s about extracting the tangible value that resides in the soft bonds we have with others in high-trust environments for mutual, positive-sum benefit.

That’s a horrible mouthful.

But even with that crypto-ese language, when I tell people about it, it strikes a chord. There’s an appetite for deeper connection as well as the security and increased agency that community brings to our lives Religious, hobby, or work tribes solve for the same thing by coalescing around a common purpose. This is just a different combination of pivot table elements. The common rallying point here is geography + an ineffable quality of, I don’t know, “openness” is the word that comes to mind when I think of this group.

We are documenting all the work required to get us to this point and as it evolves. We are being thoughtful and meta about this entire project, because when it’s done, we want to have the recipe to hand to others who have the same vague sense we did when the idea was born over a year ago — we have a special community of open people and we want to do something I always talk about in this letter — “find the others”.

[There are so many little details from liability to inclusiveness to boundaries to rules to norms to cost-sharing and budgeting that are not straightforward. We will have done something good if we can build a template for others to do this by laying out the details and trade-offs and showing how the experience depends on the design and spirit that you bring to the initiative. Coordination always comes with “tragedy of the commons” risks. We are learning as we go along. We plan to share those lessons to reduce the frictions for others who may want to start something similar in their own communities.]

Moontower #169

I’ll start this week with an abstract idea I’ve been sitting on in my notes for years. And then I’ll take you through the concrete idea that gave it life (and a reason to publish it).

The Abstraction Sitting In My Notes

Communism doesn’t scale but it can work in small settings where the bonds and norms between people carry more weight.

This shouldn’t be surprising.

If we think of interactions with each other as transactions, money acts like a store of value that is agnostic to how it was generated. It is a commodity but critically it also commoditizes its users. If I sell a guitar on eBay, I default to selling to the highest bidder. But if I was selling it locally I might sell it to the highest bidder, but depending on my preferences, I might also sell it to the next highest bid if having it in that owner’s hands had more meaning for whatever reason. Maybe I’m selling it to a kid who couldn’t afford the higher price but is so bushy-tailed I’d rather hook them up with a deal. (This idea is also why home buyers in competitive markets throw the Hail Mary of writing touching family stories to sellers).

At scale, we use money to “summarize” our values but if we had the time and energy to look closer we could find non-monetary sources of value embedded in transactions. The flexibility in our value rankings is jettisoned in the name of expediency.

Acknowledging this idea explains many behaviors that may seem counterintuitive. The most obvious is what family members will do for each other without any consideration of money. Less straightforward, the sharing economy and open-source come to mind. Some of the explanations become more obvious as status has become more legible and measurable. The existence of “follower farms” indicates exchange rates between status and money. But this compression of value into a single number like followers is similarly lossy as the concept of money itself.

The broader point is we should be open to experimenting with incentive structures, at least on the local scale, to achieve target outcomes more cheaply by addressing a wider range of desires and therefore pressure points. We can allocate more efficiently when we can hack our human instincts.

A Concrete Implementation

Fortune would have it that those thoughts would find a real-life expression.

Friday night served as the grand opening to a local project I’m involved in. It’s been over a year in the making. A group of local friends, about 25 of us, that would have monthly happy hours decided to lease a space to make something of a social club (it’s indeed registered as a 501c7).

The vision for the club is a place to foster community and serendipity. There’s a standing happy hour every Thursday. The first Friday of every month is dinner with partners/spouses. It’s a place to watch big games, have musical jam sessions, host salons and lectures. It’s a studio to video or record podcast interviews. If you meet me for coffee, it’s where I will take you. During the day, it’s a co-working space. With many people working from home, it’s already been used as an on-site for bringing teams together for brainstorming sessions.

It has a co-op ethos, with everyone bringing their own skills (I’m not handy so I did the website), to make it a space owned by all of its members. The members include everyone from teachers and firefighters to tech entrepreneurs and finance folk. A couple of guys built this bar Friday afternoon before the dinner! (it still needs to be finished):

This room is getting a small stage in front where the blue chairs are:

This is the lounge where you walk in:

I’ll talk about this more as this experiment unfolds, but for now, our focus is on finding ways to unlock greater in-person connection in service of both joy and personal growth.

I’ll admit — describing it feels clumsy. It’s not bro-y like Old School, it’s not WeWork, it’s not Rotary or an Elk’s Club — it feels a bit illegible right now. But as it comes into focus we’ll figure out the right language to transmit its essence. To me, it’s about extracting the tangible value that resides in the soft bonds we have with others in high-trust environments for mutual, positive-sum benefit.

That’s a horrible mouthful.

But even with that crypto-ese language, when I tell people about it, it strikes a chord. There’s an appetite for deeper connection as well as the security and increased agency that community brings to our lives Religious, hobby, or work tribes solve for the same thing by coalescing around a common purpose. This is just a different combination of pivot table elements. The common rallying point here is geography + an ineffable quality of, I don’t know, “openness” is the word that comes to mind when I think of this group.

We are documenting all the work required to get us to this point and as it evolves. We are being thoughtful and meta about this entire project, because when it’s done, we want to have the recipe to hand to others who have the same vague sense we did when the idea was born over a year ago — we have a special community of open people and we want to do something I always talk about in this letter — “find the others”.

[There are so many little details from liability to inclusiveness to boundaries to rules to norms to cost-sharing and budgeting that are not straightforward. We will have done something good if we can build a template for others to do this by laying out the details and trade-offs and showing how the experience depends on the design and spirit that you bring to the initiative. Coordination always comes with “tragedy of the commons” risks. We are learning as we go along. We plan to share those lessons to reduce the frictions for others who may want to start something similar in their own communities.]


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Money Angle

Today is a math one.

The power of negative correlations is powerful when you see how rebalancing increases your expected compounded return.

One of my favorite finance educators, @10kdiver, recently wrote an absolute must-read thread on this topic.

You can use the intuition from this exercise to guide your portfolio thinking more broadly. It’s beautifully done.

However, there is a part I struggled with that I want to zoom in on because I’ve never before seen it presented as @10kdiver does it:

He converts probability to an estimate of correlation!

This is really cool. Reasons for my post:

  1. The meta-lesson

    This is the easy one:

    When I read the post, it was easy to nod along thinking “yep, that makes sense…ok, ok, got it”. Except for that, I don’t “got it”. I couldn’t reconstruct the logic on my own on a blank sheet of paper which means I didn’t learn it. Paradoxically, this demonstrates how good @10diver’s explanation was. Extrapolate this paradox to many things you think you learned by reading and you will have internalized a useful life lesson — get your hands dirty to actually learn.

  2. Diving into the probability math I struggled with. 

    Continue…

    An Example Of Using Probability To Build An Intuition For Correlation (6 min read)


More on liquidity

I’ve argued that illiquidity has a cost because you can’t rebalance (or as I painfully learned this year — tax-loss harvest). I describe a conceptual framework for pricing the liquidity “option” from a rebalancing lens in How Much Extra Return Should You Demand For Illiquidity?

This week, GOAT finance writer Matt Levine talked about liquidity. I don’t do this much but this is so good, here’s a full reprint:

One sort of financial innovation is about adding liquidity. There is some class of thing that does not trade very much for some reason, and you find a way to make it trade a lot. Perhaps the thing is very big and not many people can afford to buy it, so you split it into small pieces so people can trade the pieces. This basically describes the stock market: If you like Tesla Inc. as a company, you probably can’t go buy all of it, for a bunch of reasons of which the most important is that it costs $725 billion. But Tesla is split up into billions of shares, and you can go buy a share of Tesla for about $230. 

Or perhaps the things are very different and non-fungible, making them hard to trade, so you smush lots of them into a big standardized package that is easier to trade. This is roughly the idea behind mortgage bonds, or bond exchange-traded funds, or we talked the other day about a guy who wants to do it for diamonds. There is no visible trading market price for a 1.53-carat VVS1 diamond, because there aren’t that many diamonds with exactly those characteristics, but if you can build some sort of standardized diamond basket then maybe you can create a market price for that diamond, and thus a market.

Adding liquidity is, conventionally, desirable. It reduces risk: If you can sell a thing easily, that makes it less risky to buy it, so you are more likely to commit capital to the thing. It increases demand: If only a few rich people can buy a thing with great difficulty, it will probably have a lower price than if everyone can buy a share of it easily. It improves transparency and makes prices more efficient. Also, financial innovation tends to be done by banks and other financial intermediaries, and their goal is pretty much to do more intermediation. More liquidity means more trading, which means more profits for banks.

Another, funnier sort of financial innovation is about subtracting liquidity. If you can buy and sell something whenever you want at a clearly observable market price, that is efficient, sure, but it can also be annoying. Consider the following financial product:

  1. You give me the password to your brokerage account.
  2. I change it.
  3. You can’t look at your brokerage account for one year, because you don’t have the password.
  4. At the end of the year, I give you back your password and you pay me $5.

Is this a good product? For me, sure, I got $5 for like one minute of work.[1] For you, I would argue, it’s also pretty good. For one thing, you avoid the stress of looking at your brokerage account all the time and worrying when it goes down. For another thing, you avoid the popular temptation of bad market timing: You can’t panic and sell stocks after they fall, or get greedy and buy more after they rise, because I have your password…

Cliff Asness, in “ The Illiquidity Discount,” argues that private equity is essentially in the business of selling illiquidity. If you are a big institution and you buy stocks in public companies, the stocks might go down, and you will be sad for various reasons. You might be tempted to sell at the wrong time. You will have to report your results to your stakeholders, and if the stocks went down those results will be bad and you will get yelled at or fired. Whereas if you put your money in a private equity fund, it will buy whole public companies and take them private, and then you won’t know what the stock price is and won’t be able to sell. The private equity fund will send you periodic reports about the values of your investments, but those values won’t necessarily move that much with public-market stock prices: The fund will base its valuations on its estimates of long-term cash flows, and those will not change from day to day. By being illiquid, the private equity fund can look less volatile. Getting similar returns with less volatility is good; getting similar returns and feeling like you have less volatility also might be good. Asness writes:

If people get that PE is truly volatile but you just don’t see it, what’s all the excitement about? Well, big time multi-year illiquidity and its oft-accompanying pricing opacity may actually be a feature not a bug! Liquid, accurately priced investments let you know precisely how volatile they are and they smack you in the face with it. What if many investors actually realize that this accurate and timely information will make them worse investors as they’ll use that liquidity to panic and redeem at the worst times? What if illiquid, very infrequently and inaccurately priced investments made them better investors as essentially it allows them to ignore such investments given low measured volatility and very modest paper drawdowns? “Ignore” in this case equals “stick with through harrowing times when you might sell if you had to face up to the full losses.” What if investors are simply smart enough to know that they can take on a lot more risk (true long-term risk) if it’s simply not shoved in their face every day (or multi-year period!)? 


Last Call

My wife’s birthday was this week. She just wants help raising money for a personal cause:


From My Actual Life

People think I’m mean.

If you are curious about the outcome.

[The post-script to the outcome was Zak agreed without a fight to share the pain — both will donate 37.5%]

[The post-script to the post-script: one of the best option traders on the planet stuck true to his word and sent Max extra candy in the mail]

Stay groovy!