Friends,

This week I’ll share 2 posts that grabbed my attention.

🔗For The Person Who Has Everything (Tom Morgan)

This is a solid article reminiscent of much of Tom’s writing which I regularly read. But I want to point to a specific bit:

Any of science’s most transformational insights are closely associated with visionary states. Felix Hoffmann’s synthesis of aspirin was influenced by a dream of white willow bark. James Watson’s dream of a spiral staircase played a role in the discovery of the double helix structure of DNA. Dmitri Mendeleev’s arrangement of elements in the periodic table came to him in a dream. Most people think their best ideas come from their own brains, but true visionaries know they come from somewhere else.

This quote recalls observations from folks who know a thing or two about creativity.

• In The Third Eye, I note how much emphasis Rory Sutherland and Rick Rubin put on the idea that “artistic breakthroughs have no sense of proportion.”
• In The Virus With No Vaccine, I explain how the late Cormac McCarthy in his article The Kekulé Problem makes the controversial claim that language is more of a bug than something we were destined for. The clue to this was the origin of all great breakthroughs in mathematics — they weren’t at the end of some chain of logic but arrived as visions. The metaphor of constructed logic getting in the way of our felt insights runs through all of these pieces.[In the Virus link, I relate that idea to how psychedelics are used in therapy, at least according to a Swedish psychologist I met last summer).

  [I have more to say on the topic of creativity inception in a longer piece I’m noodling on. As always, don’t hold your breath on timing]

🔗A Map Is Not A Blueprint: Why Fixing Nature Fails (Nat Eliason)

Ozempic, Fertilizer, Lobotomies, and the dangers of hubris

You’ve heard the expression “the map is not the territory” as a warning about the dangers of extrapolating from compressed representations of reality (ie models). This article is an admonition in the same vein but also fresh and worth a read because it uses the fractal quality of nature’s shapes to make the distinction between building something from a blueprint versus attempting to mimic a portion of a complex system without respecting the whole. A coastline is not a simple geometric shape like a square or circle. It cannot be precisely measured. It is a fractal, an infinitely complex shape where you would have to drill down to the atomic level to get a precise measure of it and maybe not even then.

I’ll get you started with Nat’s metaphor but go the main piece where the argument is concisely and effectively communicated into a model for how you can quickly classify new innovations as either “fertilizer” or “airplanes”.

Drawing a map then becomes a question of how precisely you want to represent it, and how much space you have on the map to do that representation. If the island needs to fit into a 1-inch diagram, you will have to sacrifice considerably more precision than you would if it were fitting into a 10-inch or 10-foot drawing.

A map of a coastline can approach accuracy; it can get infinitely close to accurately representing the coastline, but it can never fully represent it. There is an infinite amount of subtle detail that the map will have to leave out.

This doesn’t matter for normal navigational purposes. It will still help you find the beach, even if it’s only 90% precise. But imagine you had to rebuild the coastline from the map. Now the precision matters quite a lot! The more precise you measure the coastline, the more accurate your reconstruction will be. But here’s the important part: you can never successfully map the coastline well enough to accurately rebuild it.

Money Angle

We started talking about Kelly criterion a couple weeks ago. As you play with the ideas yourself, I’ll point out 2 subtleties. One here and another below in the Masochism section.

Edge/Odds

I posted a couple ways to express the Kelly formula. Because it’s easy to remember, I prefer the simple expression edge/odds.

If you use this version too, let me offer some user notes.

1. It only works when there’s a possibility of lossThis is a technicality but consider the following bet:

   A stock is $100 and you believe it is 90% to worth $100 and 10% to be worth $300.

   The expected arithmetic return is therefore 20% (.90 x 100 + .10 x $300 minus your $100 investment)

   The odds or percent return when you win is 200%

   f* = Edge/odds = 20/200 = 10%

   With this version of the formula…

   

   …you get a divide by zero error. Which is nature’s way of saying “Bruh, you can’t lose with this proposition you should bet 100% why you asking a calculator.”

2. The second user note for using edge/odds is noticing a a counterintuitive idea:For a given level of edge, the optimal Kelly fraction to bet decreases as you get better odds (ie the denominator increases).

   Kelly has a preference for high win rates, an attribute that always arrives with negative skew.

   We’ll address this in the next section.

Money Angle For Masochists

Bias towards negatively skewed bets

Consider 2 bets:

1. A 10% chance of getting paid 10-to-1, 90% chance of losing my betThe expectancy is straightforward. If you start with $10 and play 10x betting $1 on each trial you will lose $9, and your last dollar will get you paid $10 leaving you with $11 total. A 10% total return or 10% arithmetic expectancy.

   Using the spreadsheet:

   

   The prescribed Kelly fraction is to bet 1% of your capital on this proposition.

   This is a positively skewed bet. You lose most of the time, but win a large amount occasionally.

   Let’s look at a negatively skewed bet with the same 10% expectancy.

2. A 90% chance of getting paid 22.22%, 10% chance of losing my betAgain, we start with $10 and bet $1 each time. You will earn $.22 9x or $2 and lose a dollar on the 10th trial. Once again you’re net profit is $1 or a 10% expected return.

   But look what calculator spits out:

   

   The expectancy is the same but now Kelly wants you to bet nearly 1/2 your bankroll.

My intuition is that Kelly conclusions are loaded on volatility as opposed to higher order moments of a distribution. I’ve discussed this many times but to find the links I asked MoontowerGPT:

The first link of the responses is the most relevant (it’s embedded in the second link as well):

🔗Lessons From A Skewed Coin

Kelly’s bias towards negatively skewed bets is already understood:

And here you have Euan’s adjustment:

🔗The Kelly Criterion and Option Trading

[Euan needs no boost from me but I’ll add that his book Positional Option Trading was terrific. My notes here]

In real-life, almost nobody is aggressive enough to bet full Kelly (at least amongst those who would consider using Kelly in the first place). Half or quarter Kelly is more common and Euan’s adjustment will lower the prescribed full Kelly amount even further in the presence of strong negative skew.

This bit from Fortune’s Formula is instructive:

A Kelly’s bettor’s wealth is more volatile than the Dow or S&P 500 have historically been. In an infinite series of serial Kelly bets, the chance of your bankroll ever dipping down to half its original size is 50%.

A similar rule holds for any fraction 1/n. The chance of ever dipping to 1/3 of your original bankroll is 1/3. The chance of being reduced to 1% of your bankroll is 1%.

Any way you slice it the Kelly bettor spends a lot of time being less wealthy than he was.

A Kelly bettor has a 1/3 chance of halving the bankroll before doubling it. – The half Kelly bettor has only a 1/9 chance of halving before doubling.

The half Kelly bettor halves risk but cuts expected return by one 1/4.

• If you have gotten this far, you’ll probably enjoy these poll questions which strike at a lack of strict risk ordering and transitivity in comparing propositions.

• I’m done writing about Kelly and my current take is when faced with a bet whose properties lend themselves to the formula I’d like to see what it prescribes to get a ballpark for the upper bound of how much to bet. The ultimate choice of sizing would incorporate my instincts about the shape of the payoff and personal comfort.
• I’ve shared my summary of the Haghani bet sizing study and the overwhelming conclusion is people, including economists and grad students, instincts are quite poor on bet sizing. Just acquiring the knowledge that Kelly exists would help a reader recruit their “System 2 thinking” even if the details are foggy. This was a widely read post:🔗Bet Sizing Is Not Intuitive

This week the beta for moontower.ai opens to a portion of the waitlist.

Tomorrow, we will also start dripping the second and final unit of the Primer which is an implementation manual that accompanies the conceptual framework.

Here’s a short bridge between the 2 units:

• Intro To The Funnel Process

A quote to start your week

☮️

Stay Groovy

Friends,

A friend in one of the chats I’m in revived the practice of sharing wordle scores. I joined in because I’m playing the NYT games again thanks to my kids. The 7-year-old comes into my bed every morning to do the cycle: wordle, mini, connections, letterboxed and tiles. In that order. Kids + routine are like pb & j.

Anyway, one of the younger members in the chat goes “sometimes i feel like it would be nice to have a kid just so i can teach them everything i know.”

Very cute. But then a dad injected reality:

nah, they don’t want to learn anything from their parents

Ding, ding ding.

Here’s my impression. Kids learn from you by osmosis. Modeling, not direct instruction.

I think it has something to do with your lessons being a “you” thing. They don’t feel like the knowledge is theirs. Like they can smell your desperation in wanting them to learn no matter how chill you are about it.

It seems like a brand of what David McRaney calls reactance.

This is a concept that has been studied extensively in the context of clinical therapy.

They would come to the therapist and the therapist would say, ‘Well, you know what’s your real problem is. You should be doing this.’ Or, ‘I don’t know if you’ve noticed, but you don’t do this very much. You should do this.’..All that feels pretty good. They now call that in psychology the “writing reflex”. And, we’ve all felt that whereas someone is saying something and you’re like, ‘Oh, I have the advice for them. I know what to tell that person.’

But, you also have also experienced this other thing that happens, and this seems to be something that’s universal to human beings across all cultures. It’s just something that the brain that we’re issued at birth, it’s something that’s a feature of human thinking, rationality, psychology. Human brains do this. It’s called reactance. In the psychological parlance, they’ll say something along the lines of, you feel motivationally aroused to remove the influence of the attitude object, which just means: ‘You made me feel a feeling I don’t like and I want it to go away. So, I’m going to push you away,’ or ‘I’m going to disengage.’

What is the feeling that’s causing the motivational arousal? It’s the sense that your agency is under threat–your autonomy is under threat. It’s the ‘Unhand me, you fools,’ feeling. You’ve all felt this. If you’ve ever been a teenager or you’ve ever spoken to a teenager, you know what I’m talking about…”You shouldn’t do this. You should study more.”‘ This is good advice that the person when they’re 35 will go, ‘Man, my parents were right about that.’

But, in that moment it’s just the fact that you’re saying, ‘I have a thing in my head that should be in your head and I want it to be in your head.’

And, oddly enough, it’s the want that creates the reactance. The person’s feeling that you have approached them in some way and said, ‘I want you to think, feel, or believe, or act in a certain way that you’re not doing right now,’ and it feels coercive. It feels like they’d come at you and they’re threatening you. They’ve got a knife in their hand, and they’re saying, ‘Walk this way.’ That’s what it feels like.

We just, at a visceral level, will react by saying ‘no thanks’ to that, and we’ll push against it.

Back to the wise dad in the chat. He goes on to say:

you’re better off teaching someone else’s kid

Despite the reactance thing, this also seems true. My kids’ friends are around a lot or I’m shuttling them somewhere so there’s always an interesting spot to drop a fun riddle or word problem into a dull moment especially if the kid is, I don’t know, a “solver” for lack of a better term. (Some kids have the “ugh, I have to use my brain” reflex. Tread lightly…most kids are solvers at some level but you might need to hide the pill in the peanut butter.)

[My 10-year-old likes to needle me by announcing to his friends “Imagine having to live with this all the time” but I’m getting better at dialing in the dose. I think.]

Meanwhile, some kids are just thirsting for enrichment. I have one friend who asked me to point them to resources for their precocious son (the kid is an alien — genius, super athlete, and socially adept…I wish I could share some of the stories). I figured I could teach them about something I know about or just point them to things that might align with their interests. That might be a more productive frame. Just shepherd them towards sources of intellectual nourishment.

I sent this particular kid Ed Thorp’s bio not just because the action arc will provoke but because Ed’s own childhood will be relatable to a boy who sees through his or her surroundings like an x-ray. The Founders’ podcast is also an effective way to introduce a powerful mind to its greatest lever — the belief that the rules are all just made up. The world is malleable. See The Podcast I Listen To With My 9-Year-Old.

While today’s musing is mostly an off-the-cuff reaction to the wordle chat, I also had a related exchange this week with a college student who DM’d me on Twitter. I got permission to share it here. The first part conveniently flatters Moontower so you’ll have to sit through that for a scrubby second. (I added the hyperlinks for this reprint).

Original DM: Hey Kris, Hope you’re well. I’m a junior at [Ivy] and will be interning at SIG (Bala Cynwyd) this summer. I’ve been reading your posts for over a year now, and they really helped me gain intuition around options (and also other math concepts – like thinking in log space and Jensen’s inequality). I recently joined this mentoring program called Big Brothers Big Sisters, and I got matched with a Little from a middle school in [city]. He really enjoys sports and board games. Today, we played some games from the book Math Games with Bad Drawings (which I found from your blog) – it was really fun! I was wondering if you had any recommendations for fun 2-person activities, which could also teach useful concepts like decision-making and strategic thinking

My response: First glad the site has been useful for you. Cool that you are doing that program. My general recommendation is to just find interesting scenarios to analyze in whatever the kid is interested in. Tree (ie binomial) thinking can be applied anywhere in decision land. For example, whether to punt or go for it if it’s a football fan.

I recently taught some kids about the idea of volatility but in a light way. We were talking about daylight savings time and I told them it actually causes accidents. And I just socratically asked them why that might be true…(people rushing to work, sleeping in, not sleeping enough, etc). But I asked them how they would know that DST was the culprit? And where I’m leading them to is “What does it mean for there to be a number of accidents that exceeds the norm by an amount that isn’t noise”…ie statistical significance.

But I don’t burden them with these words. I just have them propose a guess for the number of typical accidents in a day in say their county or state. Then I make up a fake data set and have them compute the mean and the mean absolute deviation. This is basically what our minds do automatically when deciding if something is abnormal but here we just lay the thinking out step by step. And then maybe on our fake data, they compute some MAD of like 50 accidents a day and then we see that there’s 150 on DST day. That’s how you know DST is the culprit.

Generally, I look for learning moments in everyday stuff or their interests. Better to be socratic not pedantic so they can discover the lessons themselves. Then they “own” them.

And then I attached some resources.

This is one I just published and I will add to over time:

A Collection of Math Riddles/Puzzles (Moontower)

which can be found in this wider portal:

🧠Moontower Brain Plug-In

And here’s a nice thing about helping kids that aren’t your own. They appreciate it. Got this in the mail:

Just a reminder. Do stuff. If you can make it cool that’s a bonus. But even corny with enough persistence eventually endears because it’s authentic. It’s all better than apathy.

Try. The world vibrates back.

Money Angle

Universa Safe Haven Investing Series (Moontower summary)

Universa’s Mark Spitznagel published a series of posts in early 2020 to explain the role of tail hedging and convexity in a portfolio. I enjoyed the series, yet it opens more questions than it answers. That’s reasonable — it’s more of a marketing white paper than a piece of research and should be read with that understanding.

I took some notes on it and gave it the Moontower treatment — I cleaned them up for public use while inserting some of my own musings alongside notable observations.

Money Angle For Masochists

Jensen In Investing

Jensen’s inequality came up earlier in today’s post so I thought I’d share its application in a practical investing example.

The gist of the intuition is that an average growth rate is a poor guide to the average output of the function. The function investors care about is “total return” which is convex because it’s the result of compounding.

In this quote-tweet Robert Martin (a bright quant trader), poses and solves a riddle that begins:

Choose between 2 private cos with the same discount rate, expected cash flow growth rate (both will grow for 10y then enter perpetuity). Difference: one co has a certain cash flow growth rate of 30%, the other could be 25% or 35% with equal prob.

You can find his blog at

https://reasonabledeviations.com/

From My Actual Life

I’m regurgitating this one from the last 49ers Super Bowl (2020):

It’s Super Bowl weekend but as a NY Giants fan I am ambivalent. But I’m going to do my best to override my indifference and cheer for the Niners. Let me explain.

I’m well aware that rooting for a team is just rooting for a uniform. Over the years the players come and go while general managers and coaches play musical chairs. The only constant is the colors. And even those get updated permanently or color-rushed temporarily. Comedian Greg Giraldo used to joke that fandom was the opiate of the masses. It was a tool to keep a person distracted from the fact that they live in Cleveland.

As expected, hipsters would adopt this view. The “sportsball” attitude (life tip: Urban Dictionary is your friend if you don’t know a reference) uses a tinge of truth to supply justification to this contrarian-for-the-sake-of-it crowd. A few weeks ago when I asked a bartender to change the channel to the Patriots playoff game, he said he didn’t even know what sport that was. Pinch me but are people using willful ignorance to signal enlightenment now? (Insert “blinking white guy” gif)

The irony of his elitist irony is that it’s faux-intellectual. It’s a clumsy violation of lindy wisdom. The dismissal of sport and competition as unimportant is a buzzkill that defies centuries of human experience.  I remember exactly where I was in 1990 when LT stripped Roger Craig in the NFC Championship game leading to Matt Bahr’s game-winning field goal. Weeks later I remember jumping in euphoria in a friend’s basement and scratching my suddenly bloodied knuckles on the ceiling when Scott Norwood’s kick sailed wide right. The emotion in those seconds encodes those memories forever. And we become lifelong fans. From childhood.

The highs and lows in sports mirrors life itself. And that’s fun. I can’t explain it but I know this. My 6-year-old likes flag football. He recently got the hang of throwing a spiral and wants to play catch constantly. And he was born in San Francisco. That city’s team is playing for a ring today. This could be the start of his lifelong affection. I’m all for magic we can’t explain.

Go Niners!

Friends,

Stuff worth sharing (none of it is recent):

What I Learned From Writing For The Onion For A Month (6 min read)
Evan S. Porter

You know how it takes like all the water in Lake Superior to grow an almond. That’s how Onion headlines work too.

6 Days To Air (Amazon Prime Video)

Trey Parker and Matt Stone are just different. This documentary chronicles a week in the making of South Park. Wikipedia says “The film follows the show’s hectic, rushed six-day production schedule, in which a 22-minute episode is completed just hours before its original air date.”

A few random observations:

1. The dizzying cadence is why South Park is able to joke about recent events so quickly. Most shows are taped long before they air.
2. Stone admits that Trey is 90% of the special sauce. While Trey doesn’t refute that he says that without the bit Matt brings to the process, the show could never happen. In that case, I see 2 guys who overcame their egos for the sake of a partnership. They have avoided the thing that has broken up way too many bands.
3. They don’t sleep. Insanely hard-workers.
4. I’m convinced the only reason Bill Hader is in the writing room with them is they like having fun people around. He, nor any other writer, contributes a thing. Trey all day.

Becoming A MicroAngel Investor (22 min read)
Cyrus Yari

The insights are terrific and it’s a fun read with a sharp edge.

The sections:

Part 1: My journey to angel investing

Part 2: Why founders prefer taking angel cheques over VCs, and why you should give it to them

Part 3: How you can angel invest starting with $1k cheques

Money Angle

I mentioned last week that our soon-to-be in beta moontower.ai software assumes at least modest experience with options. I haven’t created a resource for going from zero-to-one in options but that is a well-covered area between books, courses and videos.

One particular good, free example is the course from Akuna Capital. They are a large prop shop. The material is accurate and professional.

Options 101 Course by Akuna (Teachable)

Breakout

There was a famous futures trader on the NYMEX when I was there named Mark Fisher. I leased office space from him (his clearing firm had a large footprint) but I only spoke to him once or twice briefly in passing. We didn’t really know each other. Anyway, he wrote a book called Logical Trader and backed people to trade his system. A copy of it was laying around the office (it’s in my garage in boxes I haven’t unpacked since moving over 3 years ago). I read a chapter that happens to be available for free online.

The book was mentioned on Twitter and got me thinking a bit about its core observation:

If you subscribe to the “random walk” theory, which states that the market’s movements are random and totally unpredictable, then the opening range would not be any more important than any other price level during the trading day. Right? For example, crude oil trades from 9:45 a.m. Eastern time until 3:10 p.m. Eastern Time. If you divided that day into 10-minute intervals, you’d have 32 parcels of time (and five minutes left over). So, each 10-minute time interval would account for roughly 1/32 of the market activity. Using random walk theory, you’d expect that the opening range (established in the first 10 minutes of trading) would be the high 1/32 of the time, or it would be the low 1/32 of the time. Therefore, random walk theory would dictate that 1/16 of the time the opening range would be EITHER the high or the low. 16 Now, what if I told you that in volatile markets – not static, and not necessarily trending markets – the opening range tends to be the high or the low 17-23% of the time? Would that get your attention? Yes. Because this observation would tell you that the opening range being at the high of the low of the day roughly one-fifth of the time is what we call “statistically significant.” In complete layman’s terms, this means the opening range is not just another 10-minute interval out of 32 of them in the trading day. It has more weight than any other time interval.

Let’s take another example. Let’s say that you divide the trading day up into roughly 64, five-minute intervals. Random walk theory would state that the opening, five-minute range would be the high 1/64 of the time or the low 1/64 of the time. So it would be either of those extremes 1/32 of the time. However, in volatile markets, that five-minute opening range is actually the high or the low of the day about 15-18% of the time. So instead of about 3% of the time, as random walk theory would predict, the first five minutes of the trading day turns out to be the high or the low 15-18% of the time. Again, statistically significant. And, from a trader’s perspective, if you knew that something was going to market the high or the low 15% of the time, you’d want to know that.

In short, if the opening range is the high or low a disproportionate amount of the time Fisher concludes that the odds are in favor of an intraday breakout strategy. The gist of it is:

• Once the opening range is established, if the futures breakout of the range by say some fraction of a standard deviation then bet that they will continue.
• In the case of an upside breakout, set a stop near the bottom end of the opening range.

The book goes into sizing, money management, where to set levels and other details.

I’m not going to weigh in on the strategy’s merits because it’s not my wheelhouse. I have lots of questions and of course, come from a place of skepticism but that’s just a healthy reaction to any anomaly. It’s not yet the “work”.

But it did get me wondering about how likely you’d expect the opening price in a market to be the high or low.

First, I turned it into a simpler riddle that you could try to solve yourself or (give to some kids to noodle on).

You can dig into how I worked them out here:

Crossing Over Zero

There are a couple of neat ideas in the solutions. (You’ll also find the trick GPT taught me. Satisfying, clever and reusable.)

Based on tinkering with a simple random walk, it does seem that an opening price (or the zero crossover in my toy examples) being the high or low a disproportionate amount of time would not be random.

[Although that isn’t enough to suggest that there is a positive expectancy in the strategy. It’s possible the payoffs on the breakouts times their frequency don’t compensate you for the number of times you get stopped out. If any systematic traders reading this feel like being nerdsniped by researching it I’d love to see the conditional probabilities that surround the different scenarios].

Money Angle For Masochists

Let’s practice option intuition on this same problem.

The setup:

• A 30% vol asset opens at $40
• It rallies to $40.50
• Half the trading day has elapsed

What’s the probability it crosses $40 again today?

If we assume a Black-Scholes lognormal distribution with no skew (not unreasonable for a single day) we can compute the probability by turning $40 into a Z-score.

K = strike price

S = Spot price

σ = volatility

t = time (in years)

ln(K/S) is basically how much percent away $40 is from $40.50.

ln(K/S) = ln(40/40.50) = -1.24%

By dividing by σ√t we scale the 1.24% by standard deviation for the remaining time.

-1.24% / 30% * √(.5/365) = -1.12

$40 is 1.12 standard devs away.

The probability of the asset sliding at least 1.12 standard devs is 13%.

In Black-Scholes world, the probability of a strike expiring in-the-money is known as N(d2). But for short-dated options, delta is valid substitute for N(d2).

So we’d expect the delta of the $40 strike with half a trading day remaining and the asset at $40.50 to be 13%.

In the context of our earlier conversation, you might think that the probability of crossing zero (ie the opening price) is 13% but we need to make a key distinction based on using the option delta:

The delta is telling us the probability of expiring in-the-money…but our riddle is concerned with whether the price or random walk ever breaches zero even if it goes back up.

The riddle is not concerned with the probability of a vanilla option but a one-touch option.

Investopedia defines these exotic options:

A one-touch option pays a premium to the holder of the option if the spot rate reaches the strike price at any time before option expiration.

I’ve never priced one-touch options but I remember a quant trader telling me that their probability of being triggered was approximately 2x the delta of the vanilla option of the equivalent strike.

In this example, the probability of the asset touching a price less than $40 before the day ends is 13% x 2 = 26%

This is intuitive if we consider an at-the-money option that has a 50% delta. The asset is nearly 100% to touch prices on either side of the strike.

[It’s convenient and expected that option trader math gets reduced to rules-of-thumb (“straddle price is 80% of the vol scaled by time”, “multiplying the daily move by 16”, “implied correlation is ratio of index variance to avg stock variance”) since so much of flow trading is making quick decisions and on-the-fly comparisons or normalizations.]

If price changes were a random walk I wouldn’t expect the opening price to be the high or low more than 1% of the time. But the open price, while cannot be predicted, likely holds meaning once it’s established because it is a single clearing price of an auction that accumulated hours of overnight information.

[I spent almost 2 years on NYSE both as a broker in the “garage” if you are familiar with the place, and as a specialist in ETFs (in the “blue room”) . The open is the price that best clears the order book when considering the stack of market and limit orders on both sides. But consider this scenario —

• At a price of $40.23 there’s an imbalance of 10,000 shares for sale
• At a price of $40.22 there’s an imbalance of 75,000 shares to buy

You can expect the stock to open at $40.23 and for the specialist to buy the 10,000 shares for their own account and then to display a market with $40.22 bid for size to induce buyers. The opening price had information in it.]

Further reading:

• Why We Use Logreturn in Finance (Quant Factory)
• Understanding Variance Time (Moontower)This post ties in nicely with another riddle:

  In the option demonstration above I said there was half a day until expiration.

  What time is it?

  Hint: The answer is not the point. And you won’t get it anyway. I’d consider your response a success if you can just identify what the inputs the answer depends on. Godspeed.

☮️

Stay Groovy

This issue:

1. An update on moontower.ai
2. Financial literacy for kids (ie Kiyosaki without the brainworms)
3. Insights from Fortune’s Formula
4. How skewed returns distort mean-variance intuition
5. Resources for option traders and quant job seekers

Friends,

An update on moontower.ai:

We are in the midst of doing private demos with professionals for initial rounds of feedback/iteration before we start inviting the waitlist to sign up for the beta. The feedback from pros has been incredibly flattering which is cool but also just serves as more fuel to make it better — I’d rather commit harikari than underdeliver. And I do caveat that it’s an MVP that we will iterate fast on. As Emi likes to remind me: “if you are pleased with your launch product, you shipped too late.”

A reminder who moontower.ai is for:

The software is geared towards a lop-sided barbell:

• Retail prosumers who use options already (small market) and
• professional money managers who use options but are not “option-natives” (bigger market). Think the RIA who overlays options on behalf of their pool of clients or the fundamental/macro trader that doesn’t have access to a wizard option strategist on staff to help them make more informed choices.

What we’ve learned from these sessions:

Many of the pros have bits and pieces of these tools but haven’t seen them put together in such a coherent way. I don’t expect the hardcore option pros to sign up — they have infrastructures — but many had never seen the tools presented this way. They walked away with new ideas to copy into their own analytics. I encourage it.

Our friend @therobotjames reaction is likely to be our tagline:

“Beautifully opinionated”

The tool is a layer built on top of conventional analytics. It has a point of view and a progression. These tools are the survivors of a decades-long evolutionary tournament for what deserves real estate on my monitor.

The challenge with any visualization is balancing the desire to bring multiple dimensions into a 2d or 3d plane without raising the cognitive load commensurately. Combining the lens of a vol trader with your pre-existing trade ideas and contexts is a going to be a major unlock. You will learn not only the advantages of this lens but the pitfalls. The expected moontower candor about trade-offs, decision-making, and relative value is dyed into the presentation and supporting education.

This is not about getting-rich-quick. It’s not suitable for people who don’t know options at all. There are places that help your option journey from zero-to-one (and to be clear they can only help you — most of the effort will come from you — this is a language and a craft) but that’s not moontower at this time.

This is about helping serious investors, retail or pro, make better choices in option selection and trade expressions. And as a free byproduct, I’m certain it will make you smarter.

🌔🌒🌑Join the waitlist here: https://app.moontower.ai/access

In February, we will start admitting folks in the queue in cohorts to smooth onboarding and debugging as the user base gradually increases.

There are close to 1,100 people in line but if you refer others you can make sizeable jumps because who doesn’t like a fun game.

Financial Literacy for Kids

On Wednesday, a friend and I hosted 30 kids ranging from age 7 to 13 for Financial Literacy session I. Parents had drinks and pizza in the adjacent room. We kept it fun and highly interactive. No grown ups standing in front of a room. The feedback was overwhelming — the kids not only learned but had a blast.

You can do this for your kids’ friend groups too.

I’d describe it as “Kiyosaki without the brainworms”:

🐖Financial Literacy #1: Savings & Compounding (lesson plan)

A summary of the flow:

Start

• why we need money —>
• why we need savings —>
• how do you get money —>
• The floor and ceiling on savings (your savings don’t start until you cover your costs while savings from wages are capped by the number of hours in a day) —>
• how to increase your savings rate (earn more per hour — even when your sleeping via investing or business ownership) —>
• how compounding grows your savings

End

If you seriously decide to do this in your community, I’m happy to offer tips.

A few canned ones:

• One tricky thing was the wide 7-13 age range. Littles run out of gas by 7:30pm and fractions are hard or inaccessible to most…but the 9+ group loved the compounding riddles. When I asked who wanted paper to do a math problem I didn’t expect to get mobbed. Something I learn over and over — give kids credit. They want to be stimulated.
• We had prizes for right answers and some kids were so on point we had to adlib some timed questions to cull the herd because we didn’t have enough prizes.
• No standing in front of the room. Get on their level. Silly is good but be quick to shut down “bottle flipping” distractions or any intra-group condescension. You are trying your best to meet every kid where they are. Also, not all kids are comfortable speaking up, it’s on you to make the environment inclusive the best to your ability as opposed to getting carried away with the energy of the dominants (much of that energy is insecure competitiveness that kids are understandably still navigating — but then again, you’ve certainly met adults wearing the same masks. They’ve just hardened into a “personality”).
• We opened the discussion of compounding with this1. You deposit $100 at 10% interest. You pocket the interest at the end of each year. Repeat for 3 years

  2. You don’t remove any money until 3 years elapses.

  How much do you end up with in each case?

• For the more mathy questions we’d let them work out the questions on paper and work in groups if they wanted.
• It took 75 minutes to do the whole lesson.

Money Angle

I’m about 60% through William Poundstone’s Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street.

It’s a gripping narrative full of 20th century trivia that ties together the birth of information theory, some of the greatest scientific minds of the 1900s, the rise of quantitative finance, and the role of organized crime. These topics come alive in a fresh, memorable way when discovered through the lens of its colorful characters.

It chronicles the history of the efficient market hypothesis (MIT, U Chicago, Paul Samuelson). You can organize its conclusion around this excerpt:

There is much truth in the efficient market hypothesis. The controversy has always been over just how far the claim can be pressed. Asking whether markets are efficient is like asking whether the world is round. The best way to answer depends on the expectations and sophistication of the questioner. If someone is asking whether the world is round or flat, as fifteenth-century Europeans might have asked, then “round” is a better answer. If someone knows that and is asking whether the earth is a geometrically perfect sphere, the answer is no.

A few ideas that struck me:

An industry uses academic research to protect itself from…academic research

In 1959, Harry Markowitz published his famous book on Portfolio Selection. Everyone in finance read that, or said they did. Financial advisers responded to Markowitz’s model. They were growing aware of this new and threatening current in academic thought: the efficient market hypothesis. Markowitz demonstrated that all portfolios are not alike when you factor in risk.

Investopedia aside:

The efficient frontier is the set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return.

Poundstone continues:

Therefore, even in an efficient market, there is reason for investors to pay handsomely for financial advice. Mean-variance analysis quickly swept through the financial profession and academia alike, establishing itself as orthodoxy.

The Problem With Markowitz

1) Indecision

The Hamlet-like indecision of mean-variance analysis

When portfolios are equal on the efficient frontier, the investor’s risk appetite to decide. Unsatisfying.

2) Only useful for single period analysis

Most people do not invest this way. They buy stocks and bonds and hang on to them until they have a strong reason to sell. Market bets ride, by default. This makes a difference because there are gambles that look favorable as a one-shot, yet are ruinous when repeated over and over. Any type of extreme “overbetting” would fit that description.

(emphasis mine)

Standard mean-variance analysis does not treat the compounding of investments. It is, you might say, a theory for Kelly’s dollar-a-week gambler. But as the wealth to be amassed by compounding is so fantastically greater than can be achieved otherwise, a practical theory of investment must largely be a theory of reinvestment.

A solution to both problems

Indecision

I made up this example inspired by a demonstration in the book.

Consider 2 investments that each have 10 possible discrete returns. The balanced one and the skewed one.

Simple mean-variance metrics will mislead you into thinking the skewed asset is superior. It has a

• higher return
• lower volatility
• cheaper straddle price
• higher Sharpe ratio

But the so-called “third moment” of the distribution (the skew) cannot hide from the geometric return which leaves no ambiguity about which investment is superior for a long-term hold.

Aside for masochists

The closer an asset’s return distribution looks to a bell-curve, the closer the straddle price will approximate 80% of the volatility. But when the straddle value is less than .80 of the volatility, you know there is skew or outliers lurking. If you are inspecting an asset’s returns for the first time, a quick trick is to compute the ratio of MAD to Volatility to see if it’s less than .8

A place where this is very handy is in looking at the price changes in inter-month future spreads. If you trade options on them this has important ramifications for pricing. But the lessons extrapolate.

If you need a refresher on MAD and straddles see:

👿The MAD Straddle

Multi-period

In my contrived example, you are bound to get a “whammy” if you keep pressing.

Poundstone writes:

When you try to apply Markowitz theory to compounding, the results can be absurd. One of Ed Thorp’s theoretical contributions to the Kelly criterion literature is a 1969 paper in which he demonstrated the partial incompatibility of mean-variance analysis and the policy of maximizing the geometric mean. Thorp closes his article by declaring that “the Kelly criterion should replace the Markowitz criterion as the guide to portfolio selection.”

Perhaps no economist of the time would have dared such a heresy. It seems unlikely a major economic journal would have published such talk. Thorp’s article appeared in the Review of the International Statistical Institute. Probably few economists saw it. In any event, few economists had heard of John Kelly. That was about to change.

Oft-forgotten history

Defense of Markowitz

Markowitz devoted a chapter of Portfolio Selection to the geometric mean criterion (possibly the most ignored chapter in the book) and cited Latane’s work in the bibliography. Markowitz was virtually the only big-name economist to see much merit in the geometric mean criterion. He recognized that mean-variance analysis is a static, single-period theory. In effect, it assumes that you plan to buy some stocks now and sell them at the end of a given time frame. Markowitz theory tries to balance risk and return for that single period.

The insights derived from the Kelly Criterion have a complex history

Because of this complex lineage, the Kelly criterion has gone by a multitude of names. Not surprisingly, Henry Latané never used “Kelly criterion.” He favored “geometric mean principle.” He occasionally abbreviated that to the catchier “G policy” or even, simply, to “G.”

Breiman used “capital growth criterion,” and the innocuous-sounding “capital growth theory” is also heard. Markowitz used MEL, for “maximize expected logarithm” of wealth. In one article, Thorp called it the “Kelly[-Breiman-Bernoulli-Latané or capital growth] criterion.” This is not counting the yet-more-numerous discussions of logarithmic utility.

This confusion of names has made it relatively difficult for the uninitiated to follow the idea in the economic literature. The person most shortchanged by this nomenclature is probably Daniel Bernoulli. He had 218 years’ priority on Kelly. The unique and unprecedented part of Kelly’s article is the connection between inside information and capital growth. This is a connection that could not have been made before Shannon rendered information measurable. Bernoulli considers a world where the cards are on the table, so to speak, and all the probabilities are public knowledge. There is no hidden information.

Money Angle For Masochists

is a pro option trader I demo’d moontower.ai for.

I asked to show it to him because I find his approach and experience resonant. He writes about trade ideas and structuring. His perspective will be familiar to discretionary option traders whose theses sprout from a relative value vol lens.

He handpicked and unpaywalled these posts so I can share them here:

• Blending IV Rank and VRP: a path to sharpe 2+ in options trading
• How to build a long/short position in volatility

In our discussion, he said something in passing that I deemed profound.

Paraphrasing:

Being a retail trader vs working for a prop shop requires the individual to put extra effort into professionalizing their process. In essence, you must avoid lazy habits that insidiously emerge from a blurred line between work and personal. It’s an idea that is more pertinent in the era of WFH.

He uses writing as a way to impose a disciplined boundary. He publishes several times a week and I can totally see how the cadence can help switch one into work mode.

I gently suggested that a post about this idea would find an eager audience.

He turned it around in a matter of hours. Enjoy:

• Narrow the gap between pro and retail

TikToker Sarah Wu posted a nice trove of trading content especially targeting job seekers. I added some of it to the QuantCodex as well.

Free Trading Resources v2

…and if you were curious what trading interns get paid 💰💵🤯

☮️

Stay Groovy

Friends,

This issue is a one-off departure from regular Moontowers because I have some updates to share.

In October of 2022, I co-hosted an in-person session of Pitbulls (then StockSlam), a mock trading simulation based on the training I received at SIG. It was a serendipitous evening. Serial tech entrepreneur Emi Gal was in attendance.

Emi reached out to me in late December. He explained his stellar ride up in the crypto markets…and how he gave much of it back. After coming to StockSlam (fun fact: he won the night he attended), he realized he didn’t a have a process around his trading decisions. He asked for coaching.

Hmm. I actually get asked this a lot. And I always decline. But based on my limited interaction with him thus far plus reading his website, I can remember telling Yinh — I’m gonna do this because I think I’m going to grow from being around someone like Emi.

As McConaughey says, greenlight.

We became fast friends.

In the months that followed, Emi and I had weekly sessions where I explained my options trading framework to help him improve his process around trading crypto options. As a software engineer, Emi was able to rapidly turn the framework into a suite of tools that I had imagined but didn’t have the expertise to build outside the professional infrastructures I had been accustomed to.

The tools are the instruments in a cockpit. The same lens I used as a full-time options trader. Armed with both the dashboards and a step-by-step manual for using them, Emi immediately recognized that we had a solution for ourselves that others would also want.

And just like that…moontower.ai is born!

What is it?

moontwer.ai is a web-based analytics package to help people who use options to make better decisions. It’s core offering is a set of charts and tables that present cross-sectional and time series volatility measures in a coherent, concise way.

In addition to the analytics, a subscription includes access to the discussion forum as well as any content or live events I do to help users match the tools to their goals.

When you are invited to the beta, you will receive free access (whether you sign up as a paying customer or not) to:

• MoontowerGPTA custom GPT with all published Moontower writing embedded (every night it updates based on updates to any of my web properties).

  ***There is an upgrade in the works that will allow the GPT to query the database on its own so you can ask questions like “I’m interested buying downside protection, where is it priced attractively?” and it will retrieve relevant charts.

  [The upgraded version, MoontowerStrategist (idk, name is tbd) will either be paywalled or implemented like the co-pilot button on perplexity.ai which gives you limited tokens per day]***

• The Moontower Primer

  This primer is an indispensable companion. It organizes the tools into a logical flow to be used as a funnel for prospecting and evaluating option trades within the context of your goals.As a teacher, I hope one of the most satisfying aspects of the primer is how it binds the tools to an overarching philosophy about the nature of markets. Trading and investing are fundamentally about risk transfer, and the lens you are about to adopt promises to level up your thinking about edge broadly.

  The primer is made up of 2 units.

  1) The Conceptual Framework
  2) The Practical Flow — how the tools serve the framework

  The Primer will be dripped out as an extra Moontower issue for all subs weekly for the next couple months.

In summary

A moontower.ai subscription includes:

• analytics
• community
• education access

Signing up for early access (whether or not you convert to a paying sub) includes:

• Basic MoontowerGPT
• Moontower Primer (you also get this as a free or paid sub to moontower.substack)

What happens now?

1. You sign up for early access. Click here
2. This puts you in the waiting list for the beta. (Gamification fun: If you refer others you will jump many spots in line.)
3. In February, we will start inviting the waiting list to the beta. We are following the “ship MVP, iterate quickly” playbook. I’ll be doing sessions or recording to help users onboard. We understand “do things that don’t scale” and I will be hand-holding until I can distill what parts of the hand-holding can be streamlined.Once you are invited to the beta you will have full Primer access as well as free access to the GPT regardless of whether you convert to a paying sub.

   Beta invitees are eligible to sign up for $99/month billed annually (reg price will be $149/month billed annually)

Who is this for?

We see the target audience as being a barbell.

1. The ProsumerThis is a retail investor who already uses options but wants to improve their trade selection and decision-making by using a volatility-aware approach. This requires the type of education and tools that we provide. I am still privately showing this stuff to professional option traders (who are not our target since they already have what they need) and many of them are like “that’s awesome, I’m going to incorporate chart X into our dashboards”. Go for it.

   We have zero interest in selling this to people who don’t need it or people who have no options experience. I’d sooner delete my substack than give car keys to a toddler. I’m not taking people from zero-to-one in options.

   If you already trade options a bit and want to upgrade your thinking and performance, only then you should check this out.

2. The pro trader who is not an option nativeIf you use options when you manage investments as a PM or RIA but don’t have a professional options background this is very much for you. If you run a fundamental pod at Point 72 you probably have access to a terrific options strategist in-house. But if you are managing an emerging $250mm long/short fund and use options, you’ll want to see this.

A quick reflection

When I started on the this internet writing journey it was without any real goal. I am an avid learner and started the letter to share whomever cared. In the beginning it was lots of mental model type stuff you find on the web. Addicted internet citizens find that stuff cringe but when you first learn about it feels fresh. Like reading Taleb for the first time.

If it’s cringe its just overplayed. A victim of its own success. In hindsight, I was accidentally audience-building by arbitraging abundant online wisdom to offline people who are either too well-adjusted or too busy to read the internet all day in-between broker calls.

But it was a 10-12 hour week commitment on my part to write the letters. You might think “damn, it takes you that long to write these things” to which I’d say

1. Umm, sadly this doesn’t include my first capture of the ideas and notes
2. Writing is hard for me. There’s no shortcut. You could do it too if you’re a compelled masochist.

I started writing original content when I’d weave my own thoughts into these curations and realized people didn’t think what I was writing was common knowledge. What I’ve learned, is the grooves in trader thought patterns press a different record than the grooves in others’ thinking. So people interested in cross-disciplinary lenses liked reading this stuff.

This created a virtuous cycle of affirmation and more original writing. Still, I had a pang for something hands-on. I wrote a series of posts structured as Socratic walk-thrus , I helped coordinate several in-person Pitbulls/StockSlam events, and had meetings about games or app possibilities.

The entire time I was following my instinct that if I’m creating value, even for free, the dots will be connected in hindsight. Well, moontower.ai, besides being the dashboard that I wanted for myself, is the application to put the concepts I’ve been writing about for over 5 years to work.

Like I said earlier, we launch as an MVP. But we are going to give users a glimpse of the pipeline. I’m really stoked about what we’re building. The synergies with my weekly writing will bring even more practical examples to Money Angle. I’m fortunate to have found a complementary partner in Emi who has technical chops and business experience to spare. I can focus on what I love to do — teach and craft analytics.

Wouldn’t have happened if I didn’t write online, which revealed an audience that cared about the things I knew about, leading to an audience to invite to StockSlam, where I could meet an awesome friend, who could partner on bringing something special to life.

PSA

On Friday night I was supposed to take the boys to the Warriors-Mavs game as their Xmas gift. The game was postponed because Warriors’ assistant coach Dejan Milojevic died Wednesday from a heart attack at a team dinner. He was 46 years old.

I turn 46 this year. Hits home.

In light of the news, Stanford cardiologist Dr. Maron reminds us that “About half of the people who die suddenly from a heart attack or cardiac arrest never had a symptom before.”

Dr Maron recommends:

a coronary artery calcium scan to find out if you’ve got this disease brewing inside your arteries.

“ He went on to say that the scan is even more important for those with high cholesterol, high blood pressure, diabetes, or a family history of heart disease. Insurance often doesn’t cover that test because there hasn’t been a clinical trial on it but Dr. Maron says there have been thousands of papers showing why it is beneficial. He says that the test is relatively inexpensive.”

You might remember last year that I asked Emi’s company Ezra to sponsor the letter. Ezra does full-body MRI scans for early cancer detection. Emi convinced Yinh and I to do this last year. And it took convincing because I was concerned about digging into incidental findings. On balance I decided the risk/reward here is in favor of being proactive. By far best defense against cancer is early detection.

The experience with Ezra is easy peasy.

And non-obvious benefit — by getting them done regularly (annually, bi-annually) you are also building a baseline for them to track changes and any large deltas are things that you want to be aware of.

If you want to learn more:

• On Incidental Findings by Emi Gal
• Full-body MRI scans are getting popular. A doctor weighs in on the pros and cons (Fast Company)

If you want to book an appointment go to Ezra.com.

Use code MOONTOWER250 for $250 off.

Disclosure

After getting to know Emi and going through the scans I asked Ezra to sponsor the letter for a month in early 2023 and to let Yinh and I invest in the private shares. Emi agreed to both.

I realize in this age of pump, this can be a reason to discount my recommendations. My stance against those accusations — you have the causality backwards. It’s here because I believed in it first. I have protected you and myself from some would-be sponsors (at one point you couldn’t swing a cat without hitting a crypto marketer) which would have been selling bits of trust for a quick buck.

Ethics aside, that’s a bad trade. Although, I’m not denying there’s at least some price for everything. I mean for enough money I’ll tell you Moontower THC-Infused Tequila might make you smarter. And you wouldn’t fault me for it because, let’s be honest, that be cool af).

☮️

Stay Groovy

Friends,

Happy MLK weekend.

Some inspiration:

My friend RPC started a foundation 4 years ago when he was 25 that provides mentoring and grants to students graduating from large public high schools.

He wrote reflection that bursts with highly practical insights that apply to anyone or any organization that needs to develop or guide students or employees. I found it powerful and well-written and intend to draw from it whenever I find myself in the role of shepherd (including as a parent). It also directly relates to organizational behavior, interviewing, even and some of the challenges I see in make our local community club the best it can be for members.

Four Years Running A Scholarship Foundation (RPC3)

Excerpts of note (emphasis mine):

• I don’t worry about finding meaning in my life because I don’t have the time…I don’t ever lack motivation in my main career, because I always have something obvious I can do with more money.
  
• An old manager once told me that his only real job as a manager was to figure out how to fire himself.
  It’s not enough to understand what needs to be done and be able to explain it to others; you need to be able to explain it so well that the person you’re explaining it to can explain it to some third party. That might seem like a small distinction, but I’ve found that one extra step requires an entirely different mental muscle group than what is needed for building personal understanding. I’ve also found that last step to be one of the most important for being an effective leader in this role. The foundation is a part-time effort for everyone involved — all of the board members have other jobs, and we go weeks or months between discussions depending on the application cycle. Deeply distilling the understanding of what needs to be done is essential to building continuity across those time gaps.
  The fact is, people are busy and there’s a lot competing for their attention. You can’t just mention something once and have people latch onto it; you have to introduce the idea, remind people about it, and make it easy for them to participate.
  
• On the application process
  • Nothing here is really new or exceptional in any way, and I’m happy leaving it like that. It’s important to be picky about where you feel like you have unique insight and really want to invest the time and energy into being innovative, because otherwise you’ll stretch yourself too thin. For the ALF I just don’t think it’s that important for our application process to be groundbreaking, especially since students are still finishing their senior year of high school when they apply.
  • The one other point I’d call out here is that our essay prompt asks students to choose from a selection of films and compare or contrast themselves with their choice of character in that film. This was a very deliberate decision to push students to write in a way that expresses their personality more while still giving them enough structure within the prompt to help their writing. At 17-18 years old, most people will struggle with writing into a totally open-ended format; giving them choices within a defined structure can help focus their thinking and actually bring out more of their personality than asking them to just talk about themselves.
  • Most of our time and energy in the application cycle bucket is currently focused on promoting the scholarship and getting students to actually apply, and I expect this to continue to be true.
    
• On the mentoring program
  • Every board member contributes time to the program. Personally, I’m currently averaging about 2 meetings a month, generally lasting somewhere from 1-2 hours, with text follow ups and ad hoc discussions as needed, e.g. for certain internship application deadlines. I’ll typically talk to any given grant recipient somewhere between 2-6 times a year depending on their circumstances, with the general trend that I hear less from students as they get situated into a major and career path that they’re happy with. Long-term, I expect the mentoring program to be the single most important facet of the ALF, though it’s also been the most ambiguous and challenging to figure out.
  • Some things are pretty straightforward. When a student knows what field they want to work in, it’s not too hard to help them figure out what internships they should be applying for, or who someone on the board knows that might be able to help them get their foot in the door. [Kris: Reminder to ask RPC if they’d open source those resources!]
  • Helping with things like writing résumés and cover letters, doing mock interviews for internships, or figuring out good budgeting strategies are easy wins that help develop the relationship with our students while also delivering simple benefits. What’s trickier, but still worth doing, is coaching students on bigger topics of personal development. The cross-over points tend to be pretty obvious and intuitive. We can help students find and get internships when they know what field they’re interested in, which inevitably leads to some students asking what they should be interested in. When you’re just graduating high school and don’t have much or any work experience, even the question of what to major in can feel vague and daunting [Kris: we adults struggle with this too with many probably not giving this enough thought and then wondering why they find themselves in existential crisis]. Some students definitely do come to us having a pretty clear plan of what they want to do and why they want to do it; talking to them, you can feel a certain level of conviction in them and realize all you have to do is support them in their vision, maybe pointing out some tips or shortcuts along the way. There are other students that benefit a lot from someone talking to them in an open ended way about different possibilities — one major distinction of the ALF vs other scholarship programs is that we don’t have any focus on students going into certain professions, which means we’re well positioned to have those open ended conversations and help people pursue anything that’s right for them. I don’t go into any of these conversations with any set agenda in mind. I keep notes while we talk, mainly as a way to cue myself to actively pay attention, and I’ll have threads from previous meetings to follow up on, but I try to focus on these discussions being as useful of a service to the student as possible. That usually means trying to listen and be reactive to the life circumstances of the day rather than proactively lay out how they should be living their lives.
  • Core competencies we can teach them about:
    • Developing an internal locus of control
    • Executive functioning skills
    • Growing in confidence and assertiveness
    • Focusing on what’s important, not just what’s salient
  • One of the most interesting and most challenging aspects of the mentoring program has been the difficulty of isolating what really delivers impact in student lives. From a purely material perspective, almost all of the benefits and best outcomes stem from a very small set of the conversations I have with a student. A single conversation where I push a student to be more ambitious in what internships they’re applying to might account for all of the concrete benefit that the mentoring program provides to them…it’s probably less than 10% of my time talking to students that is directly responsible for virtually all of the positive outcomes. The tricky part is just that those 10% of conversations usually rely on the relationship we develop during the other 90%. [Kris: This is an idea that is broadly underappreciated if you don’t look at relationships holistically and try to mastermind efficiency] Building trust and mutual understanding is fundamentally a time intensive process, but you need that trust and understanding to have a real impact in someone’s life rather than just address surface-level details.
  • Of the 17 grant recipients, I’ve had my connection with 3 of them fizzle out over time. I mostly attribute those cases to inherent differences of personality — you can never get along with everybody — but reflecting on those experiences has been useful for finding ways I can continue to grow. One small thing that’s been extremely helpful has been making a point of finding out every student’s birthday in one of my first conversations with them. I add each one to my calendar and make it a top priority to send some kind of well wishing text at least. (I do this with ordinary friends, too.) Everyone likes to be remembered, and it adds a no-pressure touch point with each student every year. Some large percentage of my happy birthday texts end up leading to us scheduling a catch-up call when a student has been busy with classes and clubs etc.
• On the organization
  • When you start reading about these things, though, you realize there’s a fair amount of diversity within the “tax exempt organization” umbrella. Do you want to start a public charity? A private foundation? A social welfare organization?
  • There’s a lot of thoughtfulness in the essay about making the org self-sufficient without relying on a single person’s energy: A funny contrast between non-profit work and business is that you have a lot of different ways you can succeed in business. Your company doesn’t necessarily have to become a behemoth and IPO on the New York Stock Exchange — being quietly acquired at some multiple of invested capital can be a great outcome for everyone involved. With non-profits that’s a lot less true. You either build an institution that endures or you end up winding yourself down and dispersing the funds to other people who did. And you can’t build an institution without eliminating your key man risk. [Kris: This is also critical for small business owners who want to sell their company at retirement, a timely topic in the age of the silver tsunami]

From the closing thought:

Our first cohort of grant recipients is graduating from college in 2024, and the early successes there have been a huge confidence boost for me. I feel like I’m seeing that effort come to fruition in a way that’s more deeply satisfying than I can explain. But I would feel negligent if I gave you the impression that I never had doubts. Preparing a 50 page application for tax exempt status was never my idea of a good time; trying to improve our application process and figure out how to get our applicant numbers up is always stressful; trying to show up and be my best self with every grant recipient in every mentoring meeting can be utterly exhausting, even when it goes really well.

There are still times when I get a little nagging voice in my head that asks me why I bother with any of this stuff. What am I trying to prove? Who am I trying to impress? Truthfully, I basically never interact with anyone in my day-to-day life who cares at all about the foundation. It’s not even been a helpful résumé entry for me.

But it’s not about me — that’s the point.

To the extent that it is about me, it’s about my desire to genuinely be an altruistic person and a net-positive presence in the world. That means putting in the work; that means getting stubborn, digging in, and solving real problems; that means telling the little nagging voice to shut up if it’s not going to be helpful.

You have to believe in yourself in order to be the best version of yourself.

It can be really easy to feel lost in the world’s problems like some great lake. You just have to get your feet underneath you and look for a bit of sand. Refuse to drown. Find a foothold and push.

Money Angle

This interview is great. My notes:

Excerpts From Byrne Hobart on Hedge Funds, VC, and Finding Alpha (Moontower)

My excerpts cover:

• On Alfred Winslow Jones first hedge fund being similar to the modern pod shop
• Contrasting hedge fund strategies
• Risk-parity and 60/40 being implicit macro bets on low inflation (and how any strategy is an implicit bet on the yield curve)
• Why shorting overvalued or fraudulent companies is a weak hedge from a correlation point of view
• Framing the competition between retail and professional investors (inc retail advantages)
• What is a hedge fund solving for fundamentally? (And what it means for employees’ career satisfaction as they progress)
• “Peak-pod thesis” and efficiency
• Understanding the good and bad of the job can help you determine if pro investing is for you

☮️

Stay Groovy

Friends,

In year 5 of this online writing adventure, I will continue my annual tradition of shutting down for the holidays. I get to recharge that particular battery and readers who complain that they are behind can catch up if they so care.

This post is an organized recap with a few “user notes”.

Personal Favorites

1. The Worst Game Ever Made: This was a journey down the rabbit hole of Georgism which I basically think is the platonic ideal of capitalism. California’s eventual future, with its disparity between haves and have-nots, is a Central American country with drug-lords digital addiction merchants’ compounds surrounded by beggars. It is also glaring to me that it is the epitome of anti-Georgism with a tax code that perpetuates a landed gentry. Remember vassals, send your landlord a holiday card. CRE is in the dumps and those low fixed-rate mortgages are a year shorter in duration. They can use the cheer.
2. Sentimental: A letter to my son on his 10th birthday. Children are humbling.
3. Born On Third: Hating on nepos is an American sport and I don’t want to deny anyone a good time. But genuine envy of rich kids is resource curse amnesia. This post is about what it really means to be born on third.
4. The Alpha Player Problem: Games contain an elegant metaphor for common organizational behavior malfunctions

In 2023 I created or made substantial additions to these portals:

1. Affirmations And North Stars
2. Moontower Money
3. Moontower Brain Plug-In

Money Angle

I wrote a lot of educational posts this year. It’s affirming to find out that the Moontower treatment of this material:

• helps readers break through a learning barrier
• is used to train juniors
• inspires novel thoughts in adjacent contexts

Moontower’s Top Money Education Posts from 2023:

Understanding Return Math

1. Examples Of Comparing Interest Rates With Different Compounding Intervals
2. Understanding Log Returns
3. Geometric vs Arithmetic Mean In The Wild
4. Well, What Did You Expect?
5. A Simple Demonstration of Return Vs Volatility

Nuances of Measuring In Options

1. Using Log Returns And Volatility To Normalize Strike Distances
2. Understanding Implied Forwards
3. Understanding Variance Time
4. You Think You’re Trading Vol But Are You Even?

Financial Reasoning

1. Mock Trading
2. It’s Not The Merit, It’s The Price
3. Insights From The Warrant Puzzle Via Financial Hacking
4. The Beauty Of Option Theory
5. The Creep Of Arbitrage Means Investing Is Mostly A Faith Exercise
6. I’m Not Saying Do This Going Forward

Hands-On Socratic Tutorials For Basic Option Concepts

1. A Socratic Dissection Of An Option Trade
2. The Snake Eyes Option
3. What We Can Learn From Vertical Spreads
4. Covered Calls Are Still Just A Vol Trade

Practical Investing Topics

1. Reasoning Through A Housing Trade Out Loud
2. On Active Management And Private Investments
3. BOXX: Access Options Funding Rates in an ETF
4. I Tried To Buy TIPS And Failed

Money Angle For Masochists

I added Money Angle for Masochists to the letter this year. The alliterative phrase is going to stay but only because I didn’t know I should have called it the “Bridge of Asses.”

In A Coder Considers the Waning Days of the Craft, James Somers writes:

Medieval students called the moment at which casual learners fail the pons asinorum, or “bridge of asses.” The term was inspired by Proposition 5 of Euclid’s Elements I, the first truly difficult idea in the book. Those who crossed the bridge would go on to master geometry; those who didn’t would remain dabblers.

Wikipedia says the pons asinorum or “bridge of asses” is:

used metaphorically for a problem or challenge which acts as a test of critical thinking, referring to the “ass’ bridge’s” ability to separate capable and incapable reasoners.

The entry later states that economist John Stuart Mill called Ricardo’s Law of Rent the pons asinorum of economics.

Well…that’s just because he didn’t live to see option theory. I don’t mean the math details. I mean the conceptual rails of looking at a web of branching future payoffs, seeing how they could be replicated, and measuring the cost of that replicating portfolio today. It is the formalization of finance’s deepest truth — you cannot eradicate risk, but only change its shape.

With that, I push you onto the bridge.

[As always, I write these with a motivated high schooler in mind. I’m not sure I always get here and I do think these would be well adapted to video explainers but it’s just hard to prioritize that.]

1. Understanding Risk Neutral Probability
2. The Intuition Behind The Black Scholes Equation
3. The MAD Straddle
4. Short Where She Lands, Long Where She Ain’t

Each of these posts is a little world of editorials embedded in explanations. I want to bring extra attention to Understanding Risk Neutral Probability because its editorials pull in ideas that are profound but relatively underexposed.

Within that post you’ll find:

👽Real World vs Risk Neutral Worlds

🌷Appreciative Reasons

🎺Instrumental Reasons

Final boss

My response here is a useful test of your understanding of some of these concepts. Can you identify the posts that best embody my claim?

Stay groovy ☮️

Friends,

I decided to do an experiment this week. I recorded my thoughts. It’s a mix of life and Money Angle. It’s about making yourself future-proof.

The thoughts were a mix of some ideas I discussed at Cal a week ago and a recent New Yorker article by polymath James Somers:

A Coder Considers the Waning Days of the Craft (7 min read)

It’s a fantastic piece with an evergreen message:

So maybe the thing to teach isn’t a skill but a spirit. I sometimes think of what I might have been doing had I been born in a different time. The coders of the agrarian days probably futzed with waterwheels and crop varietals; in the Newtonian era, they might have been obsessed with glass, and dyes, and timekeeping. I was reading an oral history of neural networks recently, and it struck me how many of the people interviewed—people born in and around the nineteen-thirties—had played with radios when they were little. Maybe the next cohort will spend their late nights in the guts of the A.I.s their parents once regarded as black boxes. I shouldn’t worry that the era of coding is winding down. Hacking is forever.

I’ve linked to Somers before. He (was/is?) a developer at Jane Street but also an exceptional writer.

From 2011:

On the Floor Laughing: Traders Are Having a New Kind of Fun (The Atlantic)

And then a pile of ridiculous writing on his own blog. Word nerds will love:

You’re probably using the wrong dictionary (jsomers.net)

A few relevant references from the audio file:

• Byrne Hobart on Tradables vs Non-Tradeables (Capital Gains)This is the chart I reference:

  

• PMarca’s Guide To Career Planning (from 2007)
• My notes on Euan Sinclair’s Positional Option Trading (Moontower)
• A transcription of the audio for Future Proof (Moontower)

Stay groovy ☮️