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:


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!

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.


  • 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


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!

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.]

Today’s letter is brought to you by the team at Mutiny Fund:

How can you access a multi-asset strategy concerned with protecting assets and growing long-term wealth?

The Cockroach Strategy seeks to achieve higher long-term, compound growth compared to traditional stock/bond-focused portfolios with more limited drawdowns. ​ It is intended as a total portfolio, a ‘set it and forget it’ approach that strives to give investors peace of mind and meaningful capital appreciation.

The Cockroach strategy consists of a diversified ensemble of assets including stocks, bonds, commodity trend strategies, long volatility strategies, and gold. It is designed to perform across multiple macroeconomic environments: growth, recession, inflation and deflation.

The Cockroach strategy gives investors exposure to asset classes designed to perform in each of those environments including stocks, bonds, commodity trend strategies, long volatility strategies, and gold.

Click Here to Learn More

Disclaimer: Investing is risky, and you are reminded that futures, commodity trading, forex, volatility, options, derivatives, and other alternative investments are complex and carry a risk of substantial losses; and that there is no guarantee the strategy will perform as intended.

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. 


    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!

Moontower #168

It’s Halloween so Moontower should spook you. We’ll get to that.

But first, let’s pretend this is a normal post. I’ll follow the little formula:

  1. Hey here’s some cool thing I read:

    [Inserts link] Book Review: San Fransicko by AC10 (formerly Slatestarcodex)

  2. Offer a tantalizing bit:

    San Fransicko is subtitled “Why Progressives Ruin Cities”. It builds off the kind of stories familiar to most Bay Area residents:

    In the spring of 2021 two colleagues and I went to San Francisco. We first went to check in on the open-air drug scenes in the Tenderloin and United Nations Plaza. It was the usual scenes of people sitting against buildings and injecting drug needles into their necks and feet. There was garbage, old food, and feces everywhere. After a couple of hours, we decided to go out to eat in the Mission. Work was over. We were all looking forward to a relaxing dinner. We were eating ice cream and walking along Valencia Street when a psychotic man, perhaps about thirty years old, began following us and screaming obscenities. When we turned around to look at him, he screamed at us, “What are you looking for, huh! WHAT. ARE. YOU. LOOKING. FOR!” and started walking faster toward us. We walked faster until the man found other people to verbally assault.

    Things haven’t always been like this. San Francisco used to be one of the safest and most beautiful cities in the world…

  3. Provide my own twisty commentary:

    The failed-stateness of San Francisco is common knowledge by now. I don’t even lock my doors when I park there. Just leave nothing in the car so I don’t have to risk a call to Safelite. [As I type that it occurs to me that Safelite’s cap-ex would have been best spent on whatever graft necessary to save Chesa Boudin’s job.]
    Oh wait, Chesa’s influence on SF’s decay is not so cut-and-dry. Why?

    Read the Slatestar review of the book!

    The post is done in a fun format. He dissects 10 of the book’s claims put forth by author and failed gubernatorial candidate Michael Shellenberger. Sometimes AC10 agrees, sometimes not, and sometimes you’re left with a non-verdict. This isn’t surprising. Books in this genre are axes because while they start with nuggets of truth, to fill a few hundreds pages with persuasion, you need to turn a lot of greys into blacks.

    Anyway, once each claim is given its trial, AC10 goes raw and says how he really feels in the actual review. I like Spock-treatment giving way to Judge Judy flow. It’s kinda like Stairway To Heaven. It starts like “oh this is interesting” nod along, nod along, ok it’s getting repetitive, now tedious, I mean it’s good and all, but also like enough already — then, finally — boom. Enough talk, weapons drawn. Energy sword cuts through the night sky as an unholy, pentatonic run screams from above as Bonzo shakes the ground, the Earth splits swallowing both civility and the quaint illusion that it ever mattered.

    [Aside: if you have never seen this deleted scene from Almost Famous, correct that when you have 12 minutes. The older brother holds the DNA from which all fanboys have been cloned and Frances McDormand’s listening expressions required not a minute less than 10,000 hours in front of a mirror. You’ll never hear the song the same way again. Cameron Crowe is a worthy rabbit hole at 2am.]

    Fun aside, the most useful exercise living inside the AC10 post is watching him reason through the claims. Since SF exists in the national conversation as a political football bouncing its way through debates on crime, public school lottos, sanctuary city status, drugs, NIMBYism, and cyberpunk levels of wealth disparity, the breakdowns have something for everyone no matter where you live. With humor and an eagle-eye, AC10 shows why his book reviews are often better than the books themselves.

Very well.

I kept the usual formula sweet and short so you will actually read the book review.

[Run along and read it]

Look at you. [deep satisfying sigh]

So kind to come back after reading that long post.

Oh wait. Is something wrong? Did your brain melt out of your cranial orifices when you got to claim #7?

I had to read it 2x just to make sure the words were in the same order as the first time I read it.

Talk about a record-scratch moment.

Naturally, I had to stop my entire life and go down a Jim Jones rabbit hole. It’s Halloween. Go ahead and indulge your morbid fascination with cult leaders and mind control. There’s a lot to learn from them in my humble-even-if-you-think-it’s-deranged opinion:

  • Jonestown: The Life and Death of People’s Temple (85 min)

    This film is loaded with real footage, audio and interview. This is some crazy stuff captured on film. Be warned.

  • The Jonestown Massacre: Paradise Lost (100 min)

    From the description: This feature-length docudrama tracks the final build-up to a horrific doomsday

    This is a dramatization. I watched it second. It’s more haunting than the documentary.

I watched them back-to-back in the same sitting. The way truth can be stranger than fiction is so…ugh words feel ineffectual. Trust me on this.

Warning: the expression “drink the Kool-Aid” will become offensive to you. What you think happened, isn’t what happened. Seriously, it’s an expression that needs to die.

This was all written under the influence of this song (which comes from an epic album btw)

Today’s letter is brought to you by the team at Mutiny Fund:

How can you access a multi-asset strategy concerned with protecting assets and growing long-term wealth?

The Cockroach Strategy seeks to achieve higher long-term, compound growth compared to traditional stock/bond-focused portfolios with more limited drawdowns. ​ It is intended as a total portfolio, a ‘set it and forget it’ approach that strives to give investors peace of mind and meaningful capital appreciation.

The Cockroach strategy consists of a diversified ensemble of assets including stocks, bonds, commodity trend strategies, long volatility strategies, and gold. It is designed to perform across multiple macroeconomic environments: growth, recession, inflation and deflation.

The Cockroach strategy gives investors exposure to asset classes designed to perform in each of those environments including stocks, bonds, commodity trend strategies, long volatility strategies, and gold.

Click Here to Learn More

Disclaimer: Investing is risky, and you are reminded that futures, commodity trading, forex, volatility, options, derivatives, and other alternative investments are complex and carry a risk of substantial losses; and that there is no guarantee the strategy will perform as intended.

Money Angle

This week I wrap and recap the month-long “real talk” series on trading/investing. I felt compelled to distill and consolidate these thoughts and append them to my progressing-like-molasses Moontower Money Wiki.

As a reminder, this wiki is my treatise on investing, broken into bite-size parts residing under 2 major headings:

  • The Nature Of Markets
  • Implementation

It’s intended to be a manual. The first part of it is only half complete and at the pace I’m moving my deadline is death.

Anyway, this month’s series has been encapsulated in:

  • Special Topic: “Do You even Trade Bro?” (Link)

    It’s a touch irreverent and subdivided into:

    • The Fundamental Misunderstanding
    • A Warning About Options
    • If You Insist On Trading…
    • Is The Brain Damage Worth It?

Personal comment: If you find this stuff useful, share it. I don’t know what the right balance of how often I should even say something like that. I’m always torn between the utter naivete of “if it’s useful people will find it” and being a whore I can live with. But I’ve noticed that I keep landing in interesting conversations and opportunities as this (whatever “this” is) and I think that will be true if I keep being useful so there’s a whole virtuous loop and all that jazz that me and others have definitely spent too many words describing but the most important takeaway is that it’s real.

[I encourage anyone who thinks they have something to share to drown their self-limiting beliefs in the toilet and get on with the sharing already.]

Last Call

I posted this. Don’t judge. (I kinda did get judged but whatever. I’m secure, I swear.)

To which I get this mind-blowing reply from resident math genius @quantian.

We learn of “digital roots”. It’s easiest to show by demonstration.

The digital root of 231 is the sum of the digits: 2 + 3 +1 = 6

You can do this for any number, just proceed until the final digital root is a single digit.

So for 489, we go:

4 + 8 + 9 = 21

(then 21 gets reduced)

2 + 1 = 3

So the digital root of 489 is 3.

After reading @quantian’s explanation, I summarized the conclusion:

Any number minus its digital root must be wholly divisible by 9.

So 489 – 3 = 486.

486/9 = 54


Gets better though.

So we can recap the rules:

  • Any number with a digital root of 9 is divisible by 9
  • Any number with a digital root of 3 is divisible by 3
  • Any number minus its digital root is wholly divisible

Add this to any number ending in 5 being divisible by 5 and even numbers being divisible by 2 and you have a playful set of numeric wonders. And as @jadam2122 recommends, your digital clock becomes a fun toy for the kids.

And I’ll address the question some if not many want to blurt out…what’s the point?

The point is wonder.

I have zero doubt that there are readers who know the practical application of these observations (and I welcome them, and will even share the ones you send). But we are pattern-matching machines. Narratives, math, music, concepts. It’s all around us.

It’s true, in this letter, we often talk about how being a pattern bloodhound often leads us astray with confirmation and availability bias. But this ability to match patterns is also a skill from chess to trading to persuasion to self-awareness to diagnosis and to discovery. It’s a power we learn to wield. It uncovers the seams between disciplines.

If every time you saw a pattern, you dismiss it because its application was not-yet-apparent then your mental library of patterns would grow too slowly and the probability that you would match new stimuli to a small library would be tiny. You would deprive yourself of insight but also that feeling of wonder.

And that feeling of wonder is what leads to the next question.

And before you know it…you grow.

That’s why you’re here. Right?

Last Call

For all the San Fransicko talk, so much of it well-placed, it’s weirdness is exactly why it’s seductive. Yinh and I joined 12 friends on Friday night to don costumes for a night out in the Mission.

We started at Hawker Fare before hitting up Valencia Room and making it to a couple of classic Market Street spots that feel like archetypal SF — the piano bar Martini’s and the karaoke stage at The Mint.

I realized something about that seduction of SF. It’s weird and age-blind. The young and the old are out to play without restraint. It felt totally lacking in self-consciousness. I learned extensively of a sexual fetish that I’ve never even heard of before. Think of how weird that needs to be to find out about offline!

Coming back to reality was tough. When we got home after 2am I immediately went to email to check what time the 6-year-old’s final soccer game would be the next day, (since I’m the coach I should know, but I didn’t, and I couldn’t check when we were out because I, of course, left my phone in the Uber).

9am. The earliest game we had all season. Why wouldn’t it be?

Stay groovy.

Moontower #167

Indulge me as I weave through a reflection I’ve been lingering on for a few weeks.

I was listening to software entrepreneur Travis Kimmel on the Mutiny Podcast (link). The whole conversation is fascinating and honestly quite dense when it gets into finance. There is a section where Travis, who studied philosophy, discusses the role of liberal arts in business.

He used a word that keeps unfolding itself in my head — “generative”.

He approaches the word came from its anti-thesis — skepticism. Travis is a fan. “Skepticism enforces discipline”. That’s a tight phrase describing a critical function for investors and traders — scrutinizing claims. Naive optimism can easily domino into over-extrapolation which is a fancy word for what hindsight simply calls “stupidity”.

Skepticism plays a key role in sound decision-making. The Big Five personality test has a dimension called agreeable/disagreeable. In Being A Disagreeable Investor, I point to the advantages of being disagreeable. [FWIW, I have median scores on 3 of the Big Five traits but score higher than the 90th percentile on “conscientiousness” and “agreeableness”. I interpret conscientiousness as the ability to jump through hoops. Combined with a standardized test, getting through a selective college signals high self-control + satisfactory IQ. As far as me being “highly agreeable”, I’ll just be happy that firms I worked for didn’t give people that test and screen me out.]

Back to Travis. Despite, celebrating skepticism he argues that skepticism cannot exist on its own. It must be part of a team because it is fundamentally “non-generative”. It is a razor that reduces. It does not build.

Seeing it phrased this way was a personal revelation. It unlocked a reinterpretation of my work history. It goes like this:

  • The first 12 years of my career I was on the trading floor. I was in the mix of hundreds of people. It was social and often raucous. I got to see what my competitors were doing because they stood next to me all day. When a smart competitor did something others did not it was like watching an “alien move” in chess. Why did they do that? What were they seeing? By observing what happened before and after, you could use pattern-matching to reverse engineer decisions and strategies. This allowed you to learn more from a given sample of trades than you could in fully electronic markets where you can’t easily tie the tape back to its actors. High learning rates are addictive. The job was fun.
  • When I moved upstairs to the hedge fund my early impression was it appeared quiet and academic. Without the roar of a pit to direct my attention, I had to re-train my senses and build new tools to “see” markets. Since I was hired to build the commodity volatility business I also had to guide decisions about infrastructure. My first few years at the fund were long hours and lots of collaboration with dev teams. I loved it. For new reasons. I was building. It was highly generative.
  • Once the cockpits and engines were built, it was time to pilot the plane. Like the trading pits, I was back to the daily dogfight. Trading is a constant parade of mid-air decisions for 7 hours. Except this was a lot less fun than the pits. On the floor, there was a Ralph Wolf and Sam Sheepdog camaraderie that came with being shoulder-to-shoulder with your adversary. Everyone is both an opponent but also a possible future employer/employee. My first backer was a guy in my pit who worked for another firm. The people who have my old job are friends from my pit days. Upstairs, you have your team to talk to which is great, but it’s one outlet. Otherwise, you’re always chatting with brokers. Voice brokers can be friends but they are always balancing a fiduciary conflict. There’s no escaping the poker dynamic of those interactions.

With the lower learning rate off the floor, only occasional forays into building after the initial heavy lift, and a dip in social stimulation (I’m no life-of-the-party but self-identify squarely with extraversion) the job became tedious.

This arc combined with writing as a larger part of my life and the urge to self-align with projects where “agreeableness” holds more value to make leaving the gig inevitable. When I think about work, I realize that the right fit for me will need to tilt more towards being “generative” and I never saw it in those terms so clearly. So thanks for the language Mr. Travis Kimmel.

If interested, here’s how I personally apply this to myself.

I’m not much of a consumer. I rarely buy stuff and I don’t collect anything. Every piece of matter that seems to accumulate in my life feels like a liability I have to service. Things own me, I don’t own things. I feel bad when I don’t maintain things, but I also have zero desire to maintain them. So minimalism is less of a design aesthetic and more of a gate-protector of my time (ironically, I’m not much a fan of minimalist, cold modern spaces. I like rich environments that feel tied to the past with taste in ways I don’t possess but love to admire).

I feel like I was supposed to be some kind of bizarro librarian. Bizarro because I don’t read that much. But I collect ideas. I collect them for synthesis. Ultimately, I want ideas to be combined so they are useful.

Collection and synthesis are generative functions. A team needs both with skepticism sprinkled in to “enforce discipline”. The functions are then passed to a do-while loop known as practice.

The requirements of practice act as a filter on the vastness of ideas one could choose to collect and index.

Applying this logic personally, I’m increasingly of the mindset that my constraint is “how do I teach” effectively. “Effectively” means arming others with the ability to improve their outcomes from learning. I’m not interested in teaching trivia. I want to enable agency in service of growth.

Finding smoother ways to both represent and communicate lessons is a generative task. If I shed restraint for a moment, I admit it’s actually compulsive. It stirs me in ways that the video game of trading does not.

I’m more interested in being obsessed than the actual output of a job (in the case of trading, the output is cash baby). But I’d rather be obsessed than rich.

Some are obsessed with being rich. Some have obsessions that lend themselves to getting rich (the best athletes, programmers, portfolio managers). I think my best chance of being happy with how I spend my time is being obsessed. And who knows, maybe that will lead to getting rich.

(I was born in America and have gotten lucky enough to consider myself rich by any broad objective standard. I purposefully live in a place that makes me feel like a small fish in a big pond so I don’t think of myself as rich but I’d be an ass to bring that attitude to a global perspective. Words have scale dependence.)

Today’s letter is brought to you by the team at Mutiny Fund:

How can you access a multi-asset strategy concerned with protecting assets and growing long-term wealth?

The Cockroach Strategy seeks to achieve higher long-term, compound growth compared to traditional stock/bond-focused portfolios with more limited drawdowns. ​ It is intended as a total portfolio, a ‘set it and forget it’ approach that strives to give investors peace of mind and meaningful capital appreciation.

The Cockroach strategy consists of a diversified ensemble of assets including stocks, bonds, commodity trend strategies, long volatility strategies, and gold. It is designed to perform across multiple macroeconomic environments: growth, recession, inflation and deflation.

The Cockroach strategy gives investors exposure to asset classes designed to perform in each of those environments including stocks, bonds, commodity trend strategies, long volatility strategies, and gold.

Click Here to Learn More

Disclaimer: Investing is risky, and you are reminded that futures, commodity trading, forex, volatility, options, derivatives, and other alternative investments are complex and carry a risk of substantial losses; and that there is no guarantee the strategy will perform as intended.

Money Angle

This month’s consolidation of ideas on the meta of trading continues with:

Trading Is A Team Sport (13 min read)

It covers:

  • The importance of building a team
    • The value of multiple perspectives
    • How a team reduces bias in practice
  • Building the team (mostly in a retail context)

Last Call

I just want to give some love to a few people doing great work. Notice how related and leveraged their journeys are to the permissionless internet. It feels like the singular most important force, for good and bad, of the past generation.

Paul Millerd

Paul is a friend who I’ve gotten to know from ping-ponging lots of ideas with over the past few years. I highly recommend his book Pathless Path (my review and notes).

He just published his 200th newsletter issue and it’s an amazing summary of everything he’s been sharing. It’s full of concise representations that you can carry with you as make decisions about your own path.

See The Great Digital Creator Arbitrage Opportunity (Boundless)

Kyla Scanlon

Kyla is a juggernaut creator on TikTok, Twitter, Youtube, Twitter, Substack and now Bloomberg who is pumping out funny, provoking, and highly educational finance content covering topics du jour. Unlike the common grift that typifies this niche, Kyla is the real deal, bringing the right mix of knowledge, skepticism, and humility to a fundamentally complex subject.

You can follow her on your preferred platform from her website:

Noah Bragg

Noah founded

I used it to create another website this week using Notion as my CMS or “content management system”. The website is a private project I’m doing with a few local collaborators but this showcase is filled with inspiration.

The latest website I built was up and running in minutes with a clean URL which is simply the domain I bought. I will be building another website soon for another project and it will also be built on Notion using Potion (my current online home is already built that way).

Noah is highly responsive and patient in dealing with a tech-handicapped fogey like me.

Millions of users, including many Moontower readers, are organizing their knowledge in Notion. You are one step away from turning that into a clean, beautiful, online property.

[None of these people pay me for endorsing them. In fact, it’s quite the opposite. I pay all three of them for their work.]

Moontower #166

One of my deepest held beliefs is that our need for coherence is a profound source of misery. We agitate for universal theories to tie everything together. Our obsessions with gurus, religion, ideology, macro, or even astrology are symptoms. We search for meaning as if it is something that’s “out there” to be discovered. I’m not holding my breath.

These quests are actively destructive when taken too seriously. When people become overly invested in any of these expeditions, we are sentenced to watching the mental gymnastics routines their precious egos cling to. It’s worse than just being cringe. It’s insidious. They dehumanize opposition so they don’t even have to consider reasonable antagonistic stances.

I just picked up Simone de Beauvoir’s book The Ethics Of Ambiguity because its description vibrates with my own feelings. I’ll report back after reading it.  (See How The Need For Coherence Drives Us Mad to see if you’d be interested in reading it.)

In the meantime, I’ll share a technique that I use to resist the seduction of coherence.

A Drawer Of Curiosities

In my notes, I keep an ever-growing list of “tensions” and “paradoxes” that I encounter from reading or experience. It is a constant reminder that every bit of advice you’ve ever heard is not universal. My buddy Jake likes to say that seat belts are the only free lunch. To which I respond, “unless the presumption of safety encourages drivers to speed or drive more recklessly”. Let’s be blunt. My response is utter ankle-biting tediousness (what I call tedious some people consider their personality). The larger takeaway is there are paradoxes running loose everywhere and if we run around trying to corral them with some ill-conceived notion that it makes us “more right” or there are truths we can somehow own and wield, then we’ve done nothing but build intellectual totems to hubris.

Instead of trying to resolve the paradoxes, maybe just accept them. Name it to tame it, put it in a drawer, and move on. You don’t need the world to bend around your own brain to protect your ego. You can just have a big list that reminds you that the task is futile. That’s the antidote.

[See A Drawer Of Curiosities for excerpts from a couple of studies that speak to the benefits of acknowledging and living with paradox. I have long thought this was important and was discussing it with a friend who said there’s actually some biology behind our resistance of paradox. They sent me the links found in the appendix of that post.]


I keep another type of list that is unexpectedly satisfying. A graveyard of ideas and projects that I’ve abandoned. It’s a form of closure. It’s a form of loving and losing. There’s no need for shame or regret because you didn’t learn to play the guitar or start that business. Most text editors have a “strikethrough”. Use it.

The things you actually did instead were a filter. They revealed your priority. (If you have a problem with your priorities that’s a separate issue). By acknowledging that you will only execute on a fraction of your ideas, you lower the stakes of having ideas, and the more ideas you allow yourself to have, the more fun life will be.

A close-minded young person feels tragic. But weirdly, I think it’s even more tragic for older people whose years give them a perch to see how wide a range of experience exists across the world and its people — and then they ignore that information. It’s like locking yourself in a room with 1 friend, setting the thermostat to your preferred temperature, throwing away the key, and talking about the same old shit until you die.

Take chances intellectually and in life. List them. If there’s nothing on the list, maybe fix that. You still have time before you yourself are in a graveyard.

Scavenger Hunt

In How to turn problems into a curiosity engineAnn-Laure Le Cunff describes a fun game renowned physicist Richard Feynman played as he navigated life:

One of Feynman’s most enduring characteristics was that he loved problems. Instead of avoiding them or trying to solve them as fast as possible, he would seek interesting problems, keep them in mind, let them simmer, and constantly try to connect his everyday experiences to these big questions.

“You have to keep a dozen of your favorite problems constantly present in your mind, although by and large they will lay in a dormant state. Every time you hear or read a new trick or a new result, test it against each of your twelve problems to see whether it helps.”

Similar to Alice who discovers a strange world through the looking glass, the questions you choose to keep in mind act as a mirror that reflects the world around you and makes you look beyond the surface of the glass.

Your favorite problems form a prism that separates incoming information into a spectrum of ideas — a frame that allows you to deliberately filter distractions, direct your attention, and nurture your curiosity. In short, your favorite problems become a curiosity engine.

Creating a list of favorite problems offers many benefits:

  • Turn stressful situations into intriguing problems to explore
  • Filter information based on whether it relates to one of your favorite problems
  • Connect with fellow curious minds who are interested in similar problems
  • Focus your attention on ideas that arouse your curiosity
  • Notice relevant patterns and potential solutions across seemingly unrelated topics

Let’s ignore yet another advice tension (Feynman is unknowingly inviting people to double-down on confirmation bias) to give this idea respect. Feynman is saying “life is a scavenger hunt.” It wouldn’t be fun if you knew where everything belonged. If everything just snapped into place.

Instead of starting with airtight beliefs, go trick-or-treating. The questions are your plastic pumpkin and the world’s wonders are the candy. Surprises will taste sweet if you are looking to grow, and bitter if you are afraid.

Like Halloween, you choose who you want to be.

Money Angle

Personal portfolio update: We closed on the sale of the Texas property we bought in Summer of 2021 this past week. The sale took a long time because showing it was a bit of a challenge with tenants. We asked an aspirational price in the Spring, probably 6 weeks too late to catch the insanity but still got a bid through the asking price. Unfortunately, the stock market dropped and 4 days later the buyer pulled out. We cut the home price 10%, and got into another contract quickly, but then the closing took 2 months. Alas, it’s done. We put about 40% of the proceeds into homebuilders and a world ETF and the balance in 4% t-bills. We will have a chat with our accountant this week about end-of-year tax management (selling investments that have gotten crushed in taxable accounts to offset gains on the property. Should be educational.)

Moving on…

Investing is hard. It’s a game in a complex environment. It’s hard to tell a bad decision from a good decision just based on the outcome because it’s a low signal vocation.

That said, I’ve harbored some suspicion that analytically-weak investment managers would find it convenient to hide behind those concessions. Synthesizing decisions in an open environment is much harder than solving a problem set. But what if you can’t even solve a problem set? Am I supposed to believe you can do all the hard stuff, but just choked on the solvable stuff?

This isn’t the first time I’ve wondered this. See Can Your Manager Solve Betting Games With Known Solutions?

Today’s post is in a similar vein.

Bet Sizing Is Not Intuitive (8 min read)

Humans are not good bettors.

It takes effort both in study and practice to become more proficient. But like anything hard, most people won’t persevere. Devoting some cycles to improve will arm you with a rare arrow in your quiver as you go through life.

Skilled betting demands 2 pivotal actions:

  1. Identifying attractive propositions

    This can be coded as “positive expected value” or “good risk/reward”. There is no strategy that turns a bad proposition into an attractive one on its own merit (as opposed to something like buying insurance which is a bad deal in isolation but can make sense holistically). For example, there is no roulette betting strategy that magically turns its negative EV trials into a positive EV session.

  2. Effective bet sizing

    Once you are faced with an attractive proposition, how much do you bet? While this is also a big topic we can make a simple assertion — bad bet sizing is enough to ruin a great proposition. This is a deeper point than it appears. By sizing a bet poorly, you can fumble away a certain win. You cannot afford to get bet sizing dramatically wrong.

Of these 2 points, the second one is less appreciated. Bet sizing is not very intuitive.

To show that, we will examine a surprising study.

The Haghani-Dewey Biased Coin Study

In October 2016, Richard Dewey and Victor Haghani (of LTCM infamy) published a study titled:

Observed Betting Patterns on a Biased Coin (Editorial from the Journal of Portfolio Management)

The study is a dazzling illustration of how poor our intuition is for proper bet sizing. The link goes into depth about the study. I will provide a condensed version by weaving my own thoughts with excerpts from the editorial.

The setup

  • 61 individuals start with $25 each. They can play a computer game where they can bet any proportion of their bankroll on a coin. They can choose heads or tails. They are told the coin has a 60% chance of landing heads. The bet pays even money (i.e. if you bet $1, you either win or lose $1). They get 30 minutes to play.
  • The sample was largely composed of college-age students in economics and finance and young professionals at financial firms. We had 14 analyst and associate-level employees of two leading asset management firms.

Your opportunity to play

Before continuing with a description of what an optimal strategy might look like, we ask you to take a few moments to consider what you would do if given the opportunity to play this game. Once you read on, you’ll be afflicted with the curse of knowledge, making it difficult for you to appreciate the perspective of our subjects encountering this game for the first time.

If you want to be more hands-on, play the game here.

Devising A Strategy

  1. The first thing to notice is betting on heads is positive expected value (EV). If X is your wager:

    EV = 60% (x) – 40% (x) = 20% (x)

    You expect to earn 20% per coin flip.

  2. The next observation is the betting strategy that maximizes your total expected value is to bet 100% of your bankroll on every flip.
  3. But then you should notice that this also maximizes your chance of going broke. On any single flip, you have a 40% of losing your stake and being unable to continue this favorable game.
  4. What if you bet 50% of your bankroll on every flip?

    On average you will lose 97% of your wealth (as opposed to nearly 100% chance if you had bet your full bankroll). 97% sounds like a lot! How does that work?

    If you bet 50% of your bankroll on 100 flips you expect 60 heads and 40 tails.

    If you make 50% on 60 flips, and lose 50% on 40 flips your expected p/l:

1.560 x .5040 = .033

You will be left with 3% of your starting cash! This is because heads followed by tails, or vice versa, results in a 25% loss of your bankroll (1.5 * 0.5 = 0.75).

This is a significant insight on its own. Cutting your bet size dramatically from 100% per toss to 50% per toss left you in a similar position — losing all or nearly all your money.

Optimal Strategy

There’s no need for build-up. There’s a decent chance any reader of this blog has heard of the Kelly Criterion which uses the probabilities and payoffs of various outcomes to compute an “optimal” bet size. In this case, the computation is straightforward — the optimal bet size as a fraction of the bankroll is 20%, matching the edge you get on the bet.

Since the payoff is even money the Kelly formula reduces to 2p -1 where p = probability of winning.

2 x 60% – 1 = 20%

The clever formula developed by Bell Labs researcher John Kelly:

provides an optimal betting strategy for maximizing the rate of growth of wealth in games with favorable odds, a tool that would appear a good fit for this problem. Dr. Kelly’s paper built upon work first done by Daniel Bernoulli, who resolved the St. Petersburg Paradox— a lottery with an infinite expected payout—by introducing a utility function that the lottery player seeks to maximize. Bernoulli’s work catalyzed the development of utility theory and laid the groundwork for many aspects of modern finance and behavioral economics. 

The emphasis refers to the assumption that a gambler has a log utility of wealth function. In English, this means the more money you have the less a marginal dollar is worth to you. Mathematically it also means that the magnitude of pain from losing $1 is greater than the magnitude of joy from gaining $1. This matches empirical findings for most people. They are “loss-averse”.

How did the subjects fare in this game?

The paper is blunt:

Our subjects did not do very well. Suboptimal betting came in all shapes and sizes: overbetting, underbetting, erratic betting, and betting on tails were just some of the ways a majority of players squandered their chance to take home $250 for 30 minutes play.

Let’s take a look, shall we?

Bad results and strange behavior

Only 21% of participants reached the maximum payout of $250, well below the 95% that should have reached it given a simple constant percentage betting strategy of anywhere from 10% to 20%

  • 1/3 of the participants finished will less money than the $25 they started with. (28% went bust entirely!)
  • 67% of the participants bet on tails at some point. The authors forgive this somewhat conceding that players might be curious if the tails really are worse, but 48% bet on tails more than 5 times! Many of these bets on tails occurred after streaks of heads suggesting a vulnerability to gambler’s fallacy.
  • Betting patterns and debriefings also found prominent use of martingale strategies (doubling down after a loss).
  • 30% of participants bet their entire bankroll on one flip, raising their risk of ruin from nearly 0% to 40% in a lucrative game!

Just how lucrative is this game?

Having a trading background, I have an intuitive understanding that this is a very profitable game. If you sling option contracts that can have a $2 range over the course of their life and collect a measly penny of edge, you have razor-thin margins. The business requires trading hundreds of thousands of contracts a week to let the law of averages assure you of profits.

A game with a 20% edge is an astounding proposition.

Not only did most of our subjects play poorly, they also failed to appreciate the value of the opportunity to play the game. If we had offered the game with no cap [and] assume that a player with agile fingers can put down a bet every 6 seconds, 300 bets would be allowed in the 30 minutes of play. The expected gain of each flip, betting the Kelly fraction, is 4% [Kris clarification: 20% of bankroll times 20% edge].

The expected value of 300 flips is $25 * (1 + 0.04)300 = $3,220,637!

In fact, they ran simulations for constant bet fractions of 10%, 15%, and 20% (half Kelly, 3/4 Kelly, full Kelly) and found a 95% probability that the subjects would reach the $250 cap!

Instead, just over 20% of the subjects reached the max payout.

Editorialized Observations

  • Considering how lucrative this game was, the performance of the participants is damning. That nearly one-third risked the entire bankroll is anathema to traders who understand that the #1 rule of trading (assuming you have a positive expectancy business) is survival.
  • Only 5 out of the 61 finance-educated participants were familiar with Kelly betting. And 2 out of the 5 didn’t consider using it. A game like this is the context it’s tailor-made for!
  • The authors note that the syllabi of MIT, Columbia, Chicago, Stanford, and Chicago MBA programs do not make any reference to betting or Kelly topics in their intro finance, trading, or asset-pricing courses.
  • Post-experiment interviews revealed that betting “a constant proportion of wealth” seemed to be a surprisingly unintuitive strategy to participants.

Given that many of our subjects received formal training in finance, we were surprised that the Kelly criterion was virtually unknown among our subjects, nor were they able to bring other tools (e.g., utility theory) to the problem that would also have led them to a heuristic of constant-proportion betting. 

These results raise important questions. If a high fraction of quantitatively sophisticated, financially trained individuals have so much difficulty in playing a simple game with a biased coin, what should we expect when it comes to the more complex and long-term task of investing one’s savings? Given the propensity of our subjects to bet on tails (with 48% betting on tails on more than five flips), is it any surprise that people will pay for patently useless advice? What do the results suggest about the prospects for reducing wealth inequality or ensuring the stability of our financial system? Our research suggests that there is a significant gap in the education of young finance and economics students when it comes to the practical application of the
concepts of utility and risk-taking.

Our research will be worth many multiples of the $5,574 winnings we paid out to our 61 subjects if it helps encourage educators to fill this void, either through direct instruction or through trial-and-error exercises like our game. As Ed Thorp remarked to us upon reviewing this experiment, “It ought to become part of the basic education of anyone interested in finance or gambling.”

I will add my own concern. It’s not just individual investors we should worry about. Their agents in the form of financial advisors or fund managers, even if they can identify attractive propositions, may undo their efforts by poorly sizing opportunities by either:

  1.  falling far short of maximizing

    Since great opportunities are rare, failing to optimize can be more harmful than our intuition suggests…making $50k in a game you should make $3mm is one of the worst financial errors one could make.

  2. overbetting an edge

    There isn’t a price I’d play $100mm Russian Roulette for

Getting these things correct requires proper training. In Can Your Manager Solve Betting Games With Known Solutions?, I wonder if the average professional manager can solve problems with straightforward solutions. Never mind the complexity of assessing risk/reward and proper sizing in investing, a domain that epitomizes chaotic, adversarial dynamics.

Nassim Taleb was at least partly referring to the importance of investment sizing when he remarked, “If you gave an investor the next day’s news 24 hours in advance, he would go bust in less than a year.”

Furthermore, effective sizing is not just about analytics but discipline. It takes a team culture of truth-seeking and emotional checks to override the biases that we know about. Just knowing about them isn’t enough. The discouraged authors found:

…that without a Kelly-like framework to rely upon, our subjects exhibited a menu of widely documented behavioral biases such as illusion of control, anchoring, overbetting, sunk-cost bias, and gambler’s fallacy.


Take bet sizing seriously. A bad sizing strategy squanders opportunity. With a little effort, you can get better at maximizing the opportunities you find, rather than needing to keep finding new ones that you risk fumbling.

You need to identify good props and size them well. Both abilities are imperative. It seems most people don’t realize just how critical sizing is.

Now you do.

Last Call

Trevor Noah is leaving the Daily Show. December 8th is his last episode. Noah is one of my favorite observers of humanity.

I know who I want to take the baton.

Comedian Mo Amer.

I’ve been watching his show Mo on Netflix but just watched his 2018 stand-up special Vagabonding. It reminded me of Noah’s Afraid Of The Dark special.

I have a weak spot for comedians that can do voices (and for that matter, I also love it when animals are anthropomorphized with voices. Think any talking animal in a Super Bowl ad. It’s catnip to me.)

Moontower #165

I just got back from the StockSlam Sessions in NYC. It was an epic week of meeting new friends, seeing old faces, and doing something I haven’t done since my 20s — going home at 2 am four nights in a row. If I were drinking these days I could never have done that at this age (not to mention fitting a workout in on 2 mornings).

The sessions themselves were a raging success. The feedback on both fun and learning was super encouraging, so we have plenty to chew on. I’ll circle back on that when it makes sense.

I wasn’t in the writing jumpseat all week so today is a brief one.

An empathetic thought

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Disclaimer: Investing is risky, and you are reminded that futures, commodity trading, forex, volatility, options, derivatives, and other alternative investments are complex and carry a risk of substantial losses; and that there is no guarantee the strategy will perform as intended.

Money Angle

Last Sunday, I mentioned for October I’ll be stringing together a few non-technical posts about trading. Last week I published Trading Vs Investing.

This week I give you:

Celibacy Vs Condoms: The Answer To Whether You Should Trade Options (17 min read)

Here’s the table of contents:

1 Think Before You Even Get Aroused

2 Why Anyone Would Trade An Option?

3 Wear a Condom

4 Conclusion

Last Call

Some random stuff I enjoyed:

  • Notes From An Interview With Serial Entrepreneur Keith Schacht (7 min read)

    I liked the attitude and insights in this pod and took some notes.

  • The Midwit Trap: Why are we so dismissive of simple solutions? (philo.substack)

    This is a cool post demonstrating how people outsmart themselves. A few vectors in particular:

    • Confusing complex for smart
    • Misdiagnosing Pareto distributions
    • Ignoring bottlenecks (ie Theory of Constraints)
    • How “we share 99% of our DNA with chimps” reminds us that just 1% can be a giant difference
    • Hidden “divide by zero” problems where long logic chains become fragile because they rely on every statement being true (this one reminds me of why quarantining risk is an underappreciated tactic — see I Felt Bad For Picking My 3rd Grader Off)

From My Actual Life

Shout out to Chris and Avi who got me to my first death metal show. It was at Monarch in Brooklyn and was headlined by Blood Incantation. Loved the “leave it all on the field” performance. They performed 4 long songs with super-heavy, psychedelic grooves. The drummers of these bands are aliens.

The names of the other bands are also morbid MadLibs:

Full Of Hell, Vermin Womb, Mortuous and God Is War

Stay friggin groovy!

Moontower #164

I threw a $500,000 purchase price and a 7% 30-year fixed rate into a mortgage calculator. That’s a payment of $3,327.

Earlier this year, if you secured a mortgage at 3%, you could have bought a home for $790,000 and had the same payment.

Since housing hasn’t dropped 36% this year homes have gotten much more expensive to own. Considering you can buy 1-year t-bills yielding 4% that are state-tax free and nominally risk-free, the investment case for RE is looking pretty poor unless rents skyrocket or real estate craters to bring cap ratios back up.

If the higher rate environment leads to a recession and lay-offs then I’m doubtful that rent increases are going to be the primary normalization pathway. It feels like employment trends will be a clue to how quickly housing will re-price lower (it’s already started of course). The yield curve is inverted, so the bond market is suggesting that the rate hikes in the near term will slow inflation and the economy.

This is all just simple observation. Like looking out the window. And as one does, when they sit at a window, one muses. And muse I shall.

Musing #1: Bid-Ask Widening

A year ago the people that paid ridiculous prices for RE were market orders. “Fill me at any price”. Many of them were immediately in the money (ie they probably could have turned around and sold a month later for more. Maybe not net of transaction costs but you get the idea). This isn’t shocking. When optimism turns to euphoria, the rate of change of the returns themselves can explode into a parabolic curve. Of course, such curves are unsustainable. The smug moment of being in the money is short-lived in the same way that a fund that buys a ton of stock going into the close usually gets a favorable mark on their daily p/l. Their sloppy buys drove the price higher in a short period of time. The real sellers didn’t have time to react before the close. But as soon as they check the comps overnight, you can be sure the supply is coming tomorrow morning.

I think of it like water going down a drain…once most of the water is through the drain the remaining liquid swirls quickly around the drain before you hear that sucking sound. Whoosh. The last bid is filled. With maximum punnage — the liquidity is gone.

In the meantime, many other buyers were priced out. You can think of them as limit bids. It’s an imperfect analogy but it will suffice. As things go south now, some of those bidders might be anchored to their original bids which were “cheaper” than where the home traded. However, if they get filled on the way down, they actually have more negative edge even though they got this theoretical house for a cheaper price than the original buyer. You could belabor this with a stylized model but understanding this concept is a big step towards understanding trading.

Anyway, the old limit bids are probably the new ask and the real bid/ask spread is wide. Prospective buyers are adjusting their bids much lower to keep the monthly payment constant or at least manageable, but sellers who likely have cheap financing from the prior low rate regime do not have to cross the spread. If current prices are 5% off their highs but the new mortgage math means homes they should be 20% lower (similar to the stock market) the current listing prices are the “asks” of a wide market.

Buyers lifting those offers are giving up edge for convenience/immediacy. That’s the usual reason people willfully give up edge for anything. Sellers hitting bids either need to (relocation, getting laid off, divorce, or any other life thing that shuffles liquidity needs) or they think rents aren’t going to increase as part of the normalization process.

Musing #2: Price Can Ruin Any Investment Idea

Always promotional, the real estate industry in an effort to pump bids, always finds an angle. They look at CPI and rates increasing, and peddle “RE is an inflation hedge”.

I mean, sure. But price matters.

By that logic, RE was also an inflation hedge 6 months ago, so are real estate prices supposed to be higher today given the elevated inflation of the past 6 months?

A few weeks ago Tom Morgan published Eight Investing Gems, which was a list of underappreciated, evergreen concepts sourced from investment professionals. I was flattered to be asked and my response fit well here:

Markets are biology, not physics, and that’s important because every good idea can be ruined by price. For example, real estate with a mortgage might be a good inflation hedge, but if history has taught everyone that lesson then it will be less true going forward. In other words, the price today already incorporates that (imagine paying 3x for your current home… how’s that going to work out as an inflation hedge?)

Prices are what matter. Not blanket, lazy sentences like “RE is an inflation hedge”. You’re not trading sentences.

[It’s also not clear that RE is an inflation hedge during periods of inflation]

Musing #3: Bullwhips Everywhere All The Time


The bullwhip effect refers to a scenario in which small changes in demand at the retail end of the supply chain become amplified when moving up the supply chain from the retail end to the manufacturing end.

With Covid closings followed by re-opening, this effect has received lots of attention. It’s not new. The famous beer game lets you play as a retailer, distributor, manufacturer, or wholesaler to make ordering decisions that balance your inventory against your customer’s demand. Orders are a proxy for demand, but the lag times in delivery lead to over and underreaction in ordering decisions.

Bullwhips feel like an apt analogy for the over and under reactions that happen in our largest markets:

  1. The underbuilding of homes since the GFC. Builders’ PTSD and higher lending standards for the past decade have contributed to a housing shortage. In the past, I might have associated building velocity with the credit cycle, but the excess of the mid-aughts seemed to have chastened builders despite the loose monetary conditions of the 2010s.
  2. Energy prices, in the wake of shale’s “growth at all costs”, busted in the mid-2010s. They surged back recently as the reality that fossil fuel transition will take longer than expected has collided with underinvestment in production. Drillers were scolded both from their investors (overproduction) and would-be investors (ESG).

[Just FYI, def not advice:

I sold my energy overweights in the Spring and recently started dollar-cost-averaging back in as I add investment exposure in this pullback. Overall, still overweight cash which I’ve been moving directly into T-bills. I’m in the midst of trying to do a rebalance from RE to equities but need one leg to close first so I don’t get middled. I hate illiquidity. In case curious, my prior energy exposure was XLE in an IRA, but I’m re-entering via deferred WTI futures. Instead of a div yield, you get a theoretical roll return. I am not an especially active trader/investor so I figure I’ll share stuff like this when I’m actually doing something. Again, I’m more weighted in cash than most sane people and don’t consider myself a good investor — I mostly try to avoid disaster. I just want to have my assets match my future liabilities — if I want to get rich, I’ll try a higher signal route of relying on myself not random number generators.]

  • Musing #4: Too Many Assholes Playing A “Loser’s Game”

Read this essay:

Too Many Assholes (7 min read)
by Jared Dillian

Jared is an author. He’s published a couple books, one was fiction. He was an index trader for about a decade before becoming a full-time writer amongst many endeavors. Jared is an exceptional financial writer. I read his professional letter regularly for most of the past decade.

This particular essay starts out:

This will be the only financial essay I write, I promise.

His substack is about culture and life not investing. So when he paused to write a single finance post in this collection, I paid attention. It felt very familiar. It has the same feel as his paid daily writing.

I want to offer a perspective on his writing. When people ask him for a free sample of the paid letter he doesn’t give them out. It’s for the same reason I give when people ask me if they should sub to his letter. The individual letters are not useful if you are looking for a great stock tip or definitive proof that the letter will make you money. So if you ask for a single letter, you miss the point. He’s capturing the broad strokes and he’s repetitive. And this is valuable in its gestalt.

I’ll re-hash my Twitter thread on Jared’s post:

This essay could have been called “play the cards not the man” but Jared is a snappier writer so he cut to the heart. It sounds like a folksy kind of essay but it’s deep. If you can internalize his essay you risk making small mistakes, you’ll almost definitely get the timing wrong, but there will be no catastrophes. Since survival is the goal in what Charley Ellis called the “loser’s game” this essay is an irreverent treatise in financial self-preservation.

Jared brings up contrarianism which by definition is required fo outsized returns. But at the turns in markets, the contrarian instinct is defensive. Yes, it can be expensive mid-trend but I’m not advocating for perma-contrarianism anyway. Sometimes contrarianism is common sense when LPs in private funds are climbing over each other to pay 20x revenue for profitless companies.

Options trading provides a well-balanced education in contrarianism. You spend a lot of time fading “point spreads that went too far” so you learn to deal with the discomfort of positions that are against the crowd. And of course, you do need to manage risk around that carefully (position limits are key because once a price enters la-la land there’s no restraint on it go to la-la-la land). At some point, you are selling because you are approaching “there’s nobody left to buy” territory and that is the exact point in time when it’s hardest to do that.

Playing the hindsight game, in the Spring I sold my energy stocks (a touch early but again it was a small mistake) despite being bullish. The thinking: Everything about oil looks bullish but everyone else sees that too. It’s insane to be bearish. But then you have to switch into the mind of a seller…there is no opening seller. So the price must contain a massive premium in it to attract any sell flows.

And that is enough to pull the trigger to sell for me. Yes, I could be wrong, but the risk/reward said “sell”. No fundamentals. Pure psychology.

[This isn’t any kind of victory lap. I’m losing money because I’m basically a long only investor and my current life is not a trading seat where I have the advantage of being in the mix.]

The question to focus on is “What psychology is in the price?” The price includes all the spreadsheets already. It’s the sum of the emotions and the nerds.

Jared focuses on sentiment. It’s not too useful when the game is played near the 50-yard line. In that zone, I’m perfectly fine to outsource to passive collection of market risk premium. With stocks, you know the proposition — earn 5% over the risk-free rate, give or take 15%, and experience a double-digit peak-to-trough drawdown every other year, and something like a 50% drawdown once a decade. Fat tails. That’s the deal. Over the long-run you’ll make money, but sizing that proposition is a personal matter.

The psychology matters more at the turns. The edges of the field. Marching through the redzone, from the 20-yard line to the goaline, can feel dramatic in compounding space. The 5-yard line to the goaline — this is the blow off top in Doge or the Volkswagon short squeeze in 2008…where the bulk of a total return can come from a short time. This is when things are obviously unstable. Sticking around to find out which down is gonna be the pick-6 is baggie roulette.

You don’t need to be some market genius when things feel crazy. Just realize that the only way the price can make sense is if someone crazier came along. Unless you have a very special edge in that game (I suspect at these critical turns the internal mechanics of liquidity are understood by a handful of insiders/clearing firms/exchanges, perhaps it’s a short squeeze, that connect the trading world to the credit/banking world. If that’s the case, you, sitting at home in your pajamas, are playing no-limit hold’em with a worse than random hand against people who know their cards.)

If you don’t have a hero instinct and just try to get the broader picture roughly right you can avoid the giant mistakes. That’s 95% of the battle. 2021 was stupid euphoria. That was obvious even in real-time. Sure you could have been early to that realization and looked foolish for a while but zoom your perspective out and ask yourself:

“Am I feeling fomo or fear?”

That will tell you what everyone else feels and that tells you what’s in the price. You know what that’s called: empathy. You are putting yourself in the minds of others and therefore the price. It sounds like soyboi shit. But that shit is full is wisdom if you can channel it.

Today’s letter is brought to you by the team at Mutiny Fund:

How can you access a multi-asset strategy concerned with protecting assets and growing long-term wealth?

The Cockroach Strategy seeks to achieve higher long-term, compound growth compared to traditional stock/bond-focused portfolios with more limited drawdowns. ​ It is intended as a total portfolio, a ‘set it and forget it’ approach that strives to give investors peace of mind and meaningful capital appreciation.

The Cockroach strategy consists of a diversified ensemble of assets including stocks, bonds, commodity trend strategies, long volatility strategies, and gold. It is designed to perform across multiple macroeconomic environments: growth, recession, inflation and deflation.

The Cockroach strategy gives investors exposure to asset classes designed to perform in each of those environments including stocks, bonds, commodity trend strategies, long volatility strategies, and gold.

Click Here to Learn More

Disclaimer: Investing is risky, and you are reminded that futures, commodity trading, forex, volatility, options, derivatives, and other alternative investments are complex and carry a risk of substantial losses; and that there is no guarantee the strategy will perform as intended.

Money Angle

I’ll be squirting out some new posts about trading over the next weeks. They aren’t technical. Here’s the first:

Permalink: Trading Vs Investing

Trading is a business. Like a casino. You spread the risk over a bunch of tables and let the law of averages1 do its magic. Investing, whether it’s as a shareholder, LP, or creditor (ie allocating capital in the primary or secondary markets, but not as a member of management) is something you do in a business. You can invest in a casino. You can invest in a bank. You can invest in a trading business. The point is that investing and trading are actually different.

The distinction seems subtle because the language and mechanics of investing and trading overlap. Traders talk about diversifying as much as investors do. Restaurant owners don’t. Traders and investors both talk about position sizing. Software founders don’t. This makes it easy to confuse trading for investing but the former is a business, not an investment strategy. You would not compare Optiver, Jane Street, or SIG’s returns to a portfolio manager’s. Trading firms think in unit economics just like any business (“how many fractions of a cent of edge do I get per contract?”). The portfolio manager doesn’t have a similar analog. However, if we look at asset management, it collects fees. So if we zoom out, we are at the business-level of abstraction yet again.

There’s an interleaving of concepts that binds notions of “trading” to “investing” in a way that can mislead investors. When they trade are they trading like they are a business, like they are providing a service (temporary liquidity in exchange for a theoretical fee which resolves the desire for a buyer or seller to transact in the absence of a natural counterparty) or are they rebalancing investments? The distinction is one of framing and like all frames, it has a tyrannical grip on one’s downstream decisions. The subtlety can be confusing to new investors who can’t escape terms like “daytrading” or that Robinhood calls itself a “Stock Trading and Investing App”. You wouldn’t take a Porsche off-roading any more than you should confuse these 2 endeavors.

And yet you might for all the superficial similarities I already described. It’s totally understandable. To create the appropriate distance between activities of “trading” and “investing”, I’ll offer 2 thoughts.

  • Time Horizon

In trading, the bets have endpoints. Whether it’s an upcoming catalyst or event, an option expiration, or time to roll a future there is a time when you get to “see the river” to borrow a poker term. Price and reality must converge. Extrinsic values go to zero. Future prices meet spot prices. With equities, the metaphor needs massaging. Perhaps news or earnings is more like the “flop” or the “turn” whereas M&A activity serves as a defacto endpoint.

With investing, the duration of the trades is typically much longer. Stocks are perpetual claims. Perhaps semantically awkward, I prefer to re-brand investing as “re-investing”. This focuses us on a company’s need to compound returns on capital internally. If an oil company sits on massive reserves, but the price of oil shoots to a price that destroys all future demand, the stock would plummet because it no longer has a forthcoming stream of earnings. Yes, its book value would immediately increase, but that is a smaller portion of its discounted perpetuity value.

The “re-investing” frame explains why a market would discount such a one-time windfall. You can even think of a “cheap” stock as a company that the market has decided has a low future return on invested capital. By not increasing their bids, investors are manifesting trader thinking — they are focused on return per trial. Thinking of investments through the lens of how a company re-invests, stretches “repeated game” thinking longitudinally into the future as opposed to traders or casinos who think of edge per trade cross-sectionally.

  • Seeing The Present Clearly

Since the compounded return of an investment depends on how a company re-invests, it requires distant foresight into an inherently complex system. Long-term investing, like long-term weather forecasting has an irreducible bar of uncertainty that sits unpleasantly high off the ground. There’s only so much you can say about a system governed by chaos, biological, and evolutionary forces as opposed to tidy physical properties. Feedback loops are long, causation is opaque, and the signal-to-noise ratios are too low to prove an edge. This leads to a paradox. If a manager’s edge is unprovable, then there’s a chance you can actually access it, you’ll just understand it post-hoc. If the edge was provable, the manager would extract all the excess alpha for themselves by either choosing strategic investors or charging ransom fees.

Trading on the other hand is a provable edge. Because it’s a business. You rake a tournament, take the profits off the table and hunt for new players. Markets might imply or try to tell us something about the future. The business is to find market prices that say something contrary but have visibility to resolving and taking both bets. Arbitrage is an extreme example of this. If one person thinks the USA basketball is 90% to win the gold and another thinks the field is 15% to win the gold you can bet against them both and get paid $105 while knowing you’ll only owe $100.

The business process around this involves measurement, not prediction. There’s no thematic vision of what the world looks like 10, 20, 50 years hence. Instead, you find others who express strong opinions that disagree and build a machine that lets you bet against both of them. You are passionately agnostic. You are in the business of seeing today clearly. Not having visions of the future. That’s your customer’s job. That’s the investor’s job.

A Skinny Bridge

Coming from the trading world, I’ve wrestled with my understanding of investing. I don’t believe in crystal balls. I don’t think any “long term” investor can prove they are special because of the limits of data and sample size. Putting faith in track records feels like betting on coins that just had a long streak. There are a lot of funds out there, it’s inevitable some will have long streaks by chance. Survivorship bias makes the proportion of lucky funds even more visible.

This is a discouraging place to settle. Attempting to invest in a trading business as opposed to doing the trading business, leaves you in the same epistemological rut as choosing any business to buy. They are just businesses, to be compared with any other business. In fact, the search is pointless. Most are capacity constrained which means the best ones don’t need your money anyway. Where does that leave me? I don’t trust most people who would take my money to manage it and I don’t have the expertise to invest to the impossible standard of risk-reward that the business of trading anchored me to. And I need to take myself seriously — I just spent this entire essay explaining how it’s a fallacy to compare trading to investing in the first place.

Is there a reconciliation?

I think so. I see a skinny bridge between the business of trading and what it prescribes for investing. It lies in portfolio construction and asset allocation. At one level of abstraction, the investors with their coherent visions of the future are simply tourists in the traders’ casinos. But if we zoom out and aggregate the consensus of competing investors we end up with a total market price. It’s not one market however, it’s many. There are equities, bonds, and commodities. They exist across geography and sovereign systems. These are the legos that can be stacked to construct payoff shapes — carry, insurance, momentum. Those can be described in other language as well — concave/convex, convergent/divergent.

The asset classes themselves contain a risk premium above risk-free rates (by induction — stocks should earn more than t-bills because you need extra compensation to hold something that tanks every now and then). By combining these asset classes under battle-tested principles of risk management, the hope is to capture the weighted average risk premium of your allocation without relying on forecasts. Just like trading businesses. Just like casinos2.

Wrapping Up

Trading and investing are sufficiently different that you should be conscious of what mode you are in when you click a buy or sell button. The awareness will likely lead you to pressing buttons less often, or systematizing when you push the buttons. Unless you’re in it for the thrill, you want to minimize your points of contact with the fee-generating businesses that want you to feel like you are doing a good thing by “investing”. You are doing a good thing when you invest, but be careful — sometimes what looks like investing is trading. And the bar for doing that productively is much higher than they want you to believe.

Last Call

I’ll be in NYC this week for the StockSlam Sessions with Steiner and Tina.

Paul Millerd recently interviewed Steiner. My favorite thing about talking to Steiner is his experience and perspective on high school kids. It’s easy to focus on negativity, but Steiner teaches at a diverse public school in NJ and sees so much positivity and optimism in how the kids treat one another. I get it, that doesn’t get the clicks. The incentives aren’t really for truth so we shouldn’t be stunned when the happy news is more correct (this would actually make a neat Bayesian homework problem to make the point).

Steiner’s experience is anecdotal so I’m not generalizing. I’m just saying — this isn’t going to be negative, click it anyway:

Training Elite Wall Street Traders (podcast/video)

From Paul:

This conversation was a delight and I think you’ll enjoy it. We cover:

  • Ending up at Penn and not really knowing what he was going to do
  • Figuring out he enjoyed math and finance
  • Getting a job at SIG
  • Joining the training team
  • Leaving finance to spend more time with his kids
  • Becoming a high school teacher
  • How he thinks about teaching & mentorship
  • His 20-year journey in creating his game “Stockslam”

From My Actual Life

I’m going to the Greek in Berkeley tonight for the 3rd time in as many weeks. We are seeing the Aussie band King Gizzard and The Lizard Wizard. They are the most prolific band of the past decade. They release more than 1 album per year. Last month they dropped 3 albums. Not a typo. They have played over 100 different songs on their current tour and the range of music goes from metal, to pop, to spoken word. They are far out. The music videos are a trip too.

Funny thing about these tickets. I bought them a year ago thinking they were for 2021. I didn’t realize the date was off by a year until the morning of. And this worked out for the better because tonight’s a date night. Yinh and I are celebrating our 13-year wedding anniversary. We got married in Mexico and I remember the all-nighter she needed a few days before the flight to get this document to the printer in time to get into to the guests’ welcome bags:

Moontower #163

Lately, I’ve been watching Pirates of Finance episodes during my weekly cardio sessions. Jason and Corey are a special combination when they just riff on whatever pops in their head. A recent episode, The Gamification of People, provoked some musings.

Where Exactly Are We Racing To

The pirates revisit Malcolm Gladwell’s discovery that the best hockey players in Canada were disproportionally represented by athletes whose birthdays were just after the grade cutoff. So children who are the oldest in their class or hit puberty in their class first have an advantage.

If you are a summer birthday you understand this. The school year starts, and some student brings Rice Krispy treats for the class and you think “this mf is a whole year older than me”. Jason remarks that even though he has no kids, he has heard that parents in affluent suburbs hold their kids back at a young age so they can be swept up by the positive reinforcement loop of being a better athlete or student. A ”snowball effect” builds as a confident child draws more attention from coaches, gets into the higher track in class, and is even less likely to be diagnosed with ADHD.

Via WaPo:

Researchers found the youngest children in a grade — those born in August, just before the cutoff — were significantly more likely to be diagnosed with ADHD compared with those who were born the next month and became the oldest in their class.

Corey notes that as knowledge of Gladwell’s chapter in Outliers spread, the efficient market mechanism kicked in. Parents started holding their children back a grade. Jason, who admittedly has no kids, sounded skeptical. Jason, if I was in the comments section of the livecast, I would have told you — the practice is called “redshirting”. Like the NCAA athletes.

Our local school district is extremely strict about not allowing it. By making the date cut-off a redline, they don’t have to deal with every case-by-case plea to hold kids back. In fact this week, I was chatting to a mom of triplets at my kids’ school, who despite a totally valid reason (in my totally unqualified opinion) for holding the kids back, did not get an exception.

The impulse to redshirt your kid, even though you risk them being bored by playing “down” a level, for a competitive advantage is classic Moloch — a race to the bottom. If a parent doesn’t hold back their kid in such a community are they now doing them a disservice? I mean what a miserable question to entertain. But here we are.

A few years ago, schools in our area decided to move the scholastic calendar to start in early August. Why? So they can have more time in class to prepare for the end-of-year standardized state tests. What has been the cost of this intervention? Togetherness. My kids now go to school a full month earlier than their cousins in NJ. The end of August is a classic time for vacation with both camps and school out of session. I know, I know — violins. I won’t turn what amounts to a high-class problem into a crusade, but the point is the school is reaching for an artificial advantage. If every school adopts this calendar, the advantage goes away and we are just worse off. It’s all frustratingly familiar.

Let’s go back to Corey’s point about market efficiency. Mechanically speaking, he’s right. But it’s actually more interesting as a demonstration of the flaws in market-maximalist thinking. If you graduated from U of Chicago, turn back now. You’ve been warned.

The market is a servant of our collective values. If we choose the wrong values we are asking to be consumed by the “paper-clip maximizer”. This is exactly why AI research is so concerned with safety. We tell the system what to optimize for and it will do so faithfully — but without an appreciation for what we forget to tell it.

Market-based thinking needs to be accompanied by a responsible understanding of our values. This runs head-on into an accounting problem — “not everything that we measure matters, and not everything that matters can be measured”.

A specific instance of this is negative externalities. The textbook examples are companies that socialize the costs of pollution while capturing private profit. More oblique examples abound in Corey and Jason’s conversation. How does the UI of investment platforms “nudge” our behavior? Are those nudges good for the clients, the company, or both? They give the example of a robo-advisor that tells you the concrete tax cost of selling appreciated assets. It’s an effective speedbump because investors hate paying taxes. It seems like a win for both the advisor and client. But how do we compare the sure tax savings against the theoretical risk reduction that happens by cutting concentration? This is hardly straightforward. You don’t have to be THAT cynical to think that a tie goes to the robo-advisor’s interest. Would a more nuanced speedbump that considers the trade-offs of different actions fulfill fiduciary responsibility better? Is it worth the brain damage to clients?

I don’t have answers to any of this. One of my beliefs is that our dashboards of cost/benefit are woefully underpowered. Partially because of incentives — commercial interests talk their own book. But also because of irreducibly complicated chains of causation. Even if you could construct higher fidelity models of reality, internalize all the externalities, and identify the “best” values you’d still fail. Because on average people don’t really want the truth. We are cognitive misers. We either want the laziest solutions or we want to keep our delusions intact.

I’m pro-markets. But any platonic idea that they are “free” and not downstream from laws motivated by imperfect actors is an illusion. That markets do a generally effective job in allocating resources reminds me of that Twain bit: It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. Misplaced confidence is more dangerous than things we know are dangerous because things that appear safe become load-bearing. If a money-market account defaults, that is far scarier than BTC going to zero because we size our exposures in proportion to how safe they are.

We need to be careful about what values we ask markets to chase. Free market maxis love to cite the law of unintended consequences against nudgy top-down policy. That’s valid. But the sense that markets, whose guardrails emerge from human negotiation and therefore limited foresight, aren’t immune to unintended consequences is a fantasy.

No idealogy is so important that we can’t inquire — who’s serving who?

Ouija Boards

Corey and Jason struck another nerve. They get into the topic of sales. They acknowledge that while they have an idealistic aversion to sales, that’s not a practical position. Everything is sales because sales is persuasion. From getting clients to finding a mate. No controversy there.

Consider the used car dealer’s tactics — lying, creating urgency, and so on. Yes, it’s cringe, but…it’s also a strawman. The best salespeople don’t look like they are selling. And they often aren’t in the conventional sense. They aren’t trying to convert you, they just cater to your bias. That sounds nefarious but it doesn’t have to be. If I am in the market for an investment fund, tell me why I should want yours. I’m buying one either way, put your best foot forward. It’s hard to distinguish “talking your own book” from “the manager is employing strategy X because they believe in it”. They are already betting their career on it. Where does belief end, and conflicted interests begin? It’s a tough question. Sure, the benefit of a doubt needs to be earned but assuming everything is a scam will leave you in a cave.

Back to the tactics. The pirates mention “mirroring” and saying people’s names (“John Smith, let me tell you something about this car”) as examples of manipulation often found in sales guides or books like Cialdini’s Influence (brief notes from an interview with the author here). Corey acknowledges that some people do this naturally.

I felt seen.

If a server tells me their name, I use it. I tell myself this is a way to be kind. I take the Zeroth Commandment seriously. But am I post-rationalizing an adaptive behavior? Have I figured out that being kind is a way to get what I want? Am I manipulative?

I feel like I’m shooting airballs here because I just don’t f’n know. There are 2 kinds of people. Those that are full of shit and those that admit it. It’s a bit of a cope, but I’m old-fashioned in thinking intentions matter. It makes you sound smart to moan about the road to hell being paved with such intentions. It sounds smart because there’s truth to that. But it has less to do with intentions themselves and more to do with reality being sloppy spaghetti. The arrows of causality are far more bi-directional and recursive than our coherent explanations suggest. Well-intentioned people often come off looking like Steinbeck’s Lennie strangling the objects of their affection by not knowing any better.

Still, discounting intentions fully in deference to optimization is a cope of its own. Incentives are Oujia boards. They guide us to what we want while we tell ourselves stories about how our beliefs make sense. We spell out the letters of whatever serves us individually.

And then we look at one another “Did you move it? I wasn’t moving it. What does it spell?”


Today’s letter is brought to you by the team at Mutiny Fund:

How can you access a multi-asset strategy concerned with protecting assets and growing long-term wealth?

The Cockroach Strategy seeks to achieve higher long-term, compound growth compared to traditional stock/bond-focused portfolios with more limited drawdowns. ​ It is intended as a total portfolio, a ‘set it and forget it’ approach that strives to give investors peace of mind and meaningful capital appreciation.

The Cockroach strategy consists of a diversified ensemble of assets including stocks, bonds, commodity trend strategies, long volatility strategies, and gold. It is designed to perform across multiple macroeconomic environments: growth, recession, inflation and deflation.

The Cockroach strategy gives investors exposure to asset classes designed to perform in each of those environments including stocks, bonds, commodity trend strategies, long volatility strategies, and gold.

Click Here to Learn More

Disclaimer: Investing is risky, and you are reminded that futures, commodity trading, forex, volatility, options, derivatives, and other alternative investments are complex and carry a risk of substantial losses; and that there is no guarantee the strategy will perform as intended.

Money Angle

With the StockSlam Sessions rapidly approaching, I want to thank Jeff Malec at RCM Alternatives for inviting Tina, Steiner, and me to his show. You can listen to the pod or watch on Youtube. Steiner is an offline guy, so foremost this is a nice introduction to him.

  • The Game of Trading with SIG Alums Kris A, Tina L, & Steiner (Link)

    We have a little saying over here on The Derivative, “The More, The Merrier”, and on this week’s episode of The Derivative, we’re not chatting with one guest, but THREE! Class may no longer be in session, but we are taking a trip down the SIG/Susquehanna memory lane and having our own class reunion with Kris Abdelmessih, Michael Steiner, and Tina Lindstrom.

    If you’re interested in learning how big trading firms find and teach their traders, hold on to your seat because these three give you the answer key! Kris, Tina, and Michael are in session with Jeff and discussing competing with peers, finding an option’s fair value, making markets, and being in the game of trading, educating kids with board games, and of course Steiner’s new trading board game: Stock Slam! Discover how the game works and how you can join up with these three in NYC for a live session in this three-of-a-kind episode

We are doing these sessions because trading is a neat laboratory to learn about decision-making. Weighing risk-reward, thinking adversarially (this thread by @0xDoug is in my hall of fame), resisting confirmation/hindsight biases, using probability, considering counterfactuals, not “resulting”, and much more. So much of my writing focuses on these “meta” topics because trading gave me a better education than school ever did.

If we can help people practice thinking this way, it’s a like growing new brain lobe that’s adaptive for many real-life situations.

The following is adapted from a thread I wrote that demonstrates an idea in a trading context:

People understand that even though insurance has negative expectancy it can still improve a portfolio that is focused on compounded returns. It makes no sense to look at the line-item of insurance divorced from the optionality it gives you in the rest of your portfolio.

(I could pull lots of links on this idea, but let’s be brief).

This concept is fractal. Let’s zoom in on the smallest portfolio — a spread. You don’t necessarily care about the p/l of any individual leg of a spread trade but the performance of the spread overall.

Before we consider a spread, let’s just look at the single position. Suppose you buy something for $4 when it’s worth $5 but then sell it for $4.50. You made both a:

  • +$1 expected value trade
  • -$.50 EV trade.

If you knew it was worth $5 you negated half a good trade with a bad trade.

In real life, you often might like the price of a spread but it’s hard to tell which leg is the “good side”. That’s one of the reasons you trade the spread. Once you do the spread you don’t care about the individual p/ls.

Another reason you may do a spread is that you might like a trade (ie maybe vol is cheap in X) but can do it bigger if you spread it. This is one of those questions that comes up a lot on real trading desks. Do I like the outright, or do I like the trade better paired against something else (and assuming I can do the trade bigger if I spread it)? Do I like being long z units of X exposure, or do I prefer 5z units of (X-Y)? The answer depends on understanding the distribution of the outright vs the spread and the relative price of each within those distributions.

Finally, there’s the general lens of how I approach trading (which I discuss in the RCM interview). Liquid markets tell us a lot about “fair value”. If we take fair value as the consensus “outside view”, then we can examine illiquid markets for pricing discrepancies compared to that outside view. Of course, those markets have their own idiosyncracies, so you need to take an “inside view” and normalize as much as possible to the liquid reference asset. This is a standard way to identify possible opportunities. It’s a mix of art and science. The science is in the measurement but the art is in handicapping how much the differences should matter. This isn’t arbitrage. It’s informed betting. If you need certainty, you will either be too late or the strategy will have the lifespan of a mayfly.

[I actually googled “shortest lifespan” and was met with irony:

We often hear that mayflies, like the whiteflies of the Susquehanna River, have the shortest lifespan of any animal on Earth, just 24 hours for many species.

SIG is named after that river.]

Now let’s broaden the concept to investing. For that, I turn to Byrne Hobart’s paywalled post Assuming Efficient Markets to Exploit Market Inefficiencies:

If there’s an efficient market A and an inefficient one B, A is easier to trade in, but B is probably the one that’s mispriced. So that price inefficiency partly represents a measure of how hard inefficiencies are to exploit! In the case of Druckenmiller’s recession call, he actually made the paradoxical judgment that inefficient market B was priced incorrectly relative to A, but that A was the one to bet on—because the specific inefficiency at hand was that a recession was likely and it wasn’t being accurately reflected by anything.

This raises an important point, because there are two broad ways to look at relative inefficiency. One is to just stick with the relative argument: if stocks are pricing a boom and bonds are pricing a recession, bet that one of these will go away. But that’s a frustrating conclusion to draw, because it basically amounts to saying: The market is telling me something important, and I don’t care what it is. The relative-value bet works equally well regardless of which thesis is right, but it’s still outsourcing a lot of judgment to the market. And annoyingly, once the valuation gap closes, you have two problems: first, you haven’t figured out why the discrepancy existed in the first place, and if there’s an inexplicable 1-standard deviation change in some correlation, there is no law of the universe saying it can’t go to 2 or 3. (There is a weaker law saying it can go to 20, when enough levered participants are betting on it.) The other problem is that real-world theses produce additional ideas; an argument that the economy is going into a recession has second- and third-order consequences, and generates more ideas.

This kind of tradeoff, between a low-risk claim that two views are contradictory and a higher-risk claim that one of them is right, extends far beyond finance.

Through games, direct instruction, and making connections between abstract concepts and examples in the wild, Tina, Steiner and I want to see if we can help others get better. And selfishly, I want to think better, so I’m stoked to be a part of this.

*Applications are closed and invitations already went out but these sessions are an experiment to guide how we test and improve the transfer of knowledge. If you didn’t get accepted it’s because space was extremely limited compared to applicants. This is not meant to be exclusive, we are going to figure out how we can spread what we learn. As Axl once said, we just need a little patience [bandana sway].

Last Call

A friend recently mentioned that she willfully puts on blinders about big questions. She prefers to focus on the practical because it can be painful or lonely to dwell on the large problems we see in society.

I’m sympathetic to this view. It brings me to a conclusion I’ve come to over the last few months. You can’t tear down people’s constructs without offering another way. It’s a riff on “the best way to complain is to build.” If you succeed in providing people an alternative the old will crumble away on its own. You don’t blow up someone’s house without having a better one waiting for them. With a bow on it.

It’s the same reason you wouldn’t tell young kids you can’t pay the rent. They can’t do anything about it. Being around Steiner again has been inspiring because he really understands this. Steiner doesn’t criticize unless he has a solution. He can lament, but won’t pontificate. He recognizes that whining without proposing thoughtful solutions is not just annoying, it’s intellectually lazy.

From My Actual Life

Kids are funny.