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 ☮️

2 quick thoughts:

1. I spoke to a quant investing club at Cal this past week. Lots of seniors in the room so the one bit of advice I wanted to make sure I left them:

   Optimize for learning when choosing your first job. 2 components to this:

   a) Mind your inputs

   Specifically, surround yourself with the best people you can both in terms of character/courage and ability). Your environment will shape you (tyrannically so — its incentives, values, and culture will be absorbed) so make sure you are deliberate in choosing one.

   b) Get to having real responsibility as fast as possible

   Responsibility = risk and risk accelerates learning. A little more responsibility than you think is appropriate will stretch you — if you want to rise to that you likely will. If you don’t feel stretched, even if you’re making good money, the human capital part of your ledger is being docked. Rest-and-vest attitudes are deceptively expensive in the long run — don’t ever adopt one in your 20s and 30s (and probably not after that either).

2. Paul Bloom, from his chat with Russ Roberts, on chosen suffering:

   I think there’s a wise point there, which is: one of the — it may be the major theme of my book — is about the importance of chosen suffering. I have a very different opinion about unchosen suffering, we can talk about that. The importance of choosing suffering as part of a good life is, I think, the projects that make life worth living involve suffering. We often know this ahead of time. And, having kids is such an example. For one thing having kids, at least for me–maybe I’m prone towards anxiety–is really an experiment in feeling mild dread for the rest of my life. Loving such fragile creatures–and they remain fragile even into their 20s — it is like there is a hangman’s noose sitting around your neck all the time. And then they will separate from you. If you do it right, if you are lucky, and if you do it right, these creatures that you love and devoted your life to, will leave you. And, actually, if you do it right they will think a lot less about you than you will think about them, because they’re into their own lives. It’s such a perverse project. And I think it’s a very human one.

   Russ Roberts: Yeah. I agree with that, obviously. What you said reminds me of a quote I heard from Elizabeth Stone. It’s the following: ‘Making the decision to have a child–it is momentous. It is to decide forever to have your heart go walking around outside your body.‘ I thought that captured the kind of anxiety you’re talking about there.

   [Kris — choosing responsibility is a form of chosen suffering. But it’s so obviously a privilege. I am tediously dramatic about this — the kids and I were bringing in the garbage bins to the tune of their whining and I banged them over the head with “you should be happy you get to do this…would you rather not have legs and not be able to be helpful?” I wish I uttered a more sensitive example on the spot but that’s what happened.]

Money Angle

I added another post to this Moontowermoney.com series:

Checkpoint: Risk Tolerance (moontowermoney.com)

Full post:

In a Word About Goals and Risk is unavoidable. Let’s get to the good news, we established 2 cornerstone axioms:

Risk is personal

If you need ransom money by Friday betting your savings on a hand of blackjack or borrowing cash from a loan shark become prudent alternatives in light of your singular goal.

On the other hand, a comfortable person who risks what they need for something they merely want is setting themselves up for failure. Even if the gamble pays off, that decision pattern eventually catches up with them.

Doing the inner work to distinguish “need to haves” from “nice to haves” is a personal exercise. Looking over the fence at your neighbor leads to miswanting and disappointment. We cannot fully see what practical and mental constraints others have that lead to their choices. You must ruthlessly “do you”.

A bright side of personal investing is that it is solitaire. You do not need to worry about competitors the way professional investors do. Professionals are compared to benchmarks which introduces tracking error risks (”why are you only up 8% when the SP500 is up 11%?”) and path dependency. Employees are more likely to browse LinkedIn job boards when you don’t keep up, which aggravates your competitive position further.

💡The personal investor is unburdened by the expectations of others

Risk is unavoidable

Examples of this reality:

• If you don’t invest your cash its purchasing power will erode. In the past 100 years, cash has lost >95% of its value. Not investing is surrendering to an inevitable, maybe slow, but quite inevitable loss.

• If you do invest, you open yourself to the possibility of a faster loss. This is true in both nominal and real (ie adjusted for inflation) terms. In the 21st century alone we’ve seen sharp drawdowns from the Dot Com bubble, the 2008 GFC, and the covid pandemic in 2020. Drawdowns of these magnitudes, while rare, are inevitable and part of the investing experience. As Meb Faber shows, this is true even in real terms:

• The trade-off between “failing fast” and “failing slow” shifts as you age. If you lose 40% of your assets at age 24 you have your whole adult life to recover. If you’re in your 60s such a sharp loss could impair your standard of living throughout retirement. This is commonly referred to as sequence of return risk. It’s the basis of “glide paths” that slip your investment mix from higher to lower risk holdings as you age.

Wrapping Up With Helpful Framings

By now we have laid out the nature of markets as well as the investing “problem”. The strategy we employ needs to be well-matched to our risk tolerance. Investment returns are carrots for us to take risk and solve our “problem”. There is no way to fully remove risk from a strategy but we can imagine a frontier of strategies that require lesser units of risk for the same potential reward. For example, if a fair coin flip offered 2-1 odds then this is a great investment. But if you bet all your money on it you turn this great investment into one that is not worth the risk since losing all your money is not an acceptable outcome.

💡We want to avoid strategies that are inferior with respect to our goals

Our tolerance for risk is a personal function of our emotions and our stated goals. Financial advisors try to match their approach to a client’s risk appetite with questionnaires such as the Grable & Lytton Risk Assessment (link). A common though cynical take is such gauges are more about covering their liability than actually zeroing in on risk tolerance. A charitable view is that asking someone to predict how they’d feel if their account lost 25% is a doomed exercise from the start. We are not Vulcans capable of such reasoned foresight.

When it comes to goals, the problem is more tractable, especially for near-term objectives. If you are saving for a down payment on a house in the next few years, you can compare your savings rate to the fluctuations of your account to decide how much risk is reasonable. If you have $450k saved for a $500k down payment and you are able to save $25k per year, then if you took no risk you are about 2 years from affording a home. If you invest the $450k in BTC you could lose many years worth of savings in a single swoop. You should match your the riskiness of your investments to what you consider a “need to have” vs a “nice to have”. A common sense approach is a robust balance between being simple enough and effective enough.

When it comes to personal finance, optimization suffers from garbage-in, garbage-out problems. The idea is not to make perfect the enemy of the good. It’s to find an approach that mostly works that you can stick to. It is easy to get bogged down in FIRE-esque micro-budgeting or dazzled by promises of easy money in rental properties or option selling. But before you even consider an investing strategy, it’s critical to establish your goals for both your wealth and your time. If eeking out an extra 1% on a $500k portfolio takes 100 hours, you are working for $50/hr with no guarantee that you are focused on the right levers.

2 qualitative frameworks that can help define your investment mission:

• Jeff Bezos’ regret minimization framework Imagine you are old or at your funeral looking back in time. What did you want to give the world or your family? What would you regret not having done? The idea is simple — don’t take risks that close those doors. Structure your life so you can take the risks that open those doors. The key to this is defending your aspirations with a mix of personal courage plus resistance to distraction and comparison.

• Venkatesh Rao’s fixed point futurism This is the antidote to the inherent spreadsheet nihilism of efficiency, optimization, and “paper-clip maximization”. It is deeply personal.
  • Fixed-point futurism is related to the idea of inventing the future rather than predicting it…It’s simple: don’t make plans, choose fixed points. Choose one thing to make true, force to be true, about the future. Something that is likely to be within your control, no matter how the future plays out. Something that isn’t rationally derived from something else more basic, but is sort of arbitrary and self-defining. It sounds silly, but it’s really amazing how such small assertions of personal agency, far short of putting a “ dent in the universe ” can magically make life feel more meaningful. You’re arbitrarily using your life to declare that futures, where you wear blue shirts, are better than ones in which you don’t. Many people intuitively do fixed-point futurism. In fact, in the U.S ., the so-called American Dream has historically been based on the standard fixed point of homeownership. As in, “no matter what happens in the future, I’ll be a homeowner. ” A way to understand fixed-point futurism is to think of it as a priceless commitment. No matter what happens, and no matter what else goes wrong or off-the-rails in weird ways, you’ll make sure one thing goes really, really right, even if you have to go crazy making sure it does. The nice thing about fixed-point futurism is that you don’t have to worry about tradeoffs. You don’t have to constantly revisit cost-benefit analyses. You don’t have to worry about competing priorities. The fixed point is priceless, so you can commit to it without knowing lots of important things about the future.
  • This type of thinking says “I’m going to play in a band even if there’s no reward. I just want to do it”. It could mean taking an insurance policy knowing that no matter what your kids will have X even if it’s not as “smart” as self-insuring the future via a separately managed investment account. A reckless person can use fixed-point thinking to rationalize poor decisions, but overly analytical people can benefit from pulling their noses out of Excel to think more approximately. The whole “it’s better to be roughly right, than precisely wrong” thing.

🔗Learn More

• Newfound Research’s Failing Slow, Failing Fast, and Failing Very Fast (Link)

• Nick Maggiulli’s A Change in Perspective (Link)

• Alpha Architect’s Even God Would Get Fired As An Active Manager (Link)

• Venkatesh Rao on Fixed Point Futurism (Link)

Money Angle For Masochists

I knocked out Euan Sinclair’s Positional Option Trading in a few hours which is to say much of it overlapped with my own knowledge. It takes the approach professionals start with but adapts it to the constraints of retail (you probably aren’t delta-hedging for example).

You can see my notes:

Positional Option Trading by Sinclair (Moontower)

I want to direct your attention, especially to these 10 points (emphasis mine):

1. “Option pricing models don’t really price options. The market prices options through the normal market forces of supply and demand. Pricing models convert the market’s prices into parameters.”
2. If we pay the wrong implied volatility level for an option, we might still make money, but we would have been better off replicating the option in the underlying.
3. Risk premiums versus inefficiencies discussion from chapter 2

   [Kris: I appreciate how Sinclair attempts to categorize each source of edge as either a risk premium or inefficiency. He’s also candid about the difficulty in categorizing some of them, but the thought process is useful to observe for understanding what kind of evidence he needs to sort the edge.]

   1. A risk premium is earned as compensation for taking a risk. If the premium is mispriced, it will be profitable even after accepting the risk. A risk premium can be expected to persist, as the counterparty is paying for insurance against the risk.
   2. In contrast, inefficiency is a trading opportunity caused by the market not noticing something. An inefficiency will last only until other people notice it.
   3. Differentiating a risk premium from an inefficiency can be challenging.
4. Behavioral explanations can be used as part of a checklist for why an inefficiency might exist. For example, together with historical data and a theory of underreaction, one can have enough confidence that post-earnings drift is a real edge. The data suggests the trade, but the psychological reason gives a theoretical justification.
5. In the long term, values are related to macro variables such as inflation, monetary policy, commodity prices, interest rates, and earnings. These change on the order of months and years. Worse still, they are all codependent. A better way to think of market data might be that we are seeing a small number of data points that occur a lot of times. This makes quantitative analysis of historical data much less useful than is commonly thought. [Kris: This is the old “Thinking in N not T” where we recognize that samples drawn from the same regime reduce N. This is also why I think the concept of attractor landscapes is important.]
6. Calendar spreads have a similar payoff diagram to a butterfly at the expiration of the front-month option. [Kris: This intuition can guide one’s thinking about how the skew in the front month relates to the slope of the term structure]
7. A method for choosing the strike to sell [Kris: paraphrasing Sinclair in my own lingo: choose the strike that has the greatest dollar premium to a flat vol surface (as opposed to the highest vol, which will correspond to a low premium option)
8. Despite views to the contrary, skew trades are not particularly useful for speculating on the movement of the implied skew itself. The fluctuations in implied skew are dwarfed by the effects of stock movement and the level of implied volatility. [Kris: I’ve said this before and strongly agree. Sinclair offers a math justification based on the order of magnitude comparing Greeks]
   1. Skew trades might make more sense with longer-dated options that have more vega and less gamma, but the skews are also more stable. It’s possible to make money with this trade, but the edge is likely overwhelmed by noise.
   2. Ratio trades have all the same problems mentioned with skew trades and are an even worse vehicle for trading. An idea that isn’t very good to start with. [Kris: In my opinion, risk reversals and ratio spreads are “path trades” and should be framed as bets on spot/vol correlation. In fact, a great demonstration of this point is the challenge of calibrating your delta in the presence of strong spot/vol correlation. Actually, buying the ratio to sell the single skewed option, which will have a higher skew premium in dollar, not vol, terms could be a better expression of the skew trade!]
9. Stops don’t just stop losses. They drastically change the shape of the return distribution and can lower the average return. Adding stops won’t transform a losing strategy into a winning strategy. The only reason that we would add a stop is that we prefer the shape of the stopped distribution.
10. A position should be exited when we are wrong. Sometimes this will coincide with losing money. In this case, a stop is harmless. But sometimes losing money corresponds to situations for which we have more edge. Here, a stop is actively damaging and contrary to the idea behind the strategy. [Kris: Fully agree and why I believe in risk rules that are independent of P/L for option trading. Instead, focus on ex-ante risk shocks].

From My Actual Life

I’m introducing the boys to the first 2 Terminator movies and they are into it (we are about halfway through the first movie. We put them to bed last night right after Arnold removes his eye and dons the Gargoyle shades for the first time).

I was curious about what the internet thought of how age-appropriate these movies are (they’re not) and got a nice chuckle about one reviewer reminding readers that Terminator was an “Eighties R” — which means a “hard R”.

In the olden days, getting a VHS from the rental shop (pre-Blockbuster) is one of those memories that I can trace the footsteps of. When I was in first grade a friend slept over and my mom rented Terminator for us to watch. My youngest is in 2nd grade. He hasn’t looked away once from the screen. Which reminded me that I’ve gotten more squeamish as I’ve gotten older.

To bring things around from today’s open, nobody has ever had more responsibility resting on his shoulders than this annoying kid:

Stay groovy ☮️

Friends,

For the past 3 years, the Berkeley Chess School has done a weekly lesson in our backyard. About 15 kids attend. They are mostly 2nd and 5th graders because we know the families through our kids.

I walk home from school with all the kids on chess day. I usually throw out a math question or riddle and by now the kids just ask for them on our strolls. Lately, the questions deal with rates, percentages/fractions, exponents/roots, or some basic number play stuff (“How do you know if a number is divisible by 9?”)

Some examples:

• Start with $100. If you earn 10% then lose 10%, how much money do you have?
• What’s larger 3⁴ or 4³ and similar questions?
• If you travel 5 miles in 12 minutes, how fast are you going?[I haven’t dropped this one on them: “If I drive around a one-mile track and average 30 mph for the first lap, how fast do I have to drive the second lap to average 60 mph for both laps combined?” (Solution)]
• If you have 5 kids on your team and only 4 kids start how many possible starting lineups are there?
• If you lose 25%, how much do you have to make to get back to even?[I like that one because it’s a useful elasticity idea. If X is the loss percentage, you need to earn back X/(1-X).

  If you are selling lemonade and you cut your price by 20%, you need to sell 25% more cups to be revenue-neutral.]

I started giving these questions because, well it’s just play. Riddles are inherently satisfying. But I’m also conscious of imparting some durable concepts. It’s not quite as deliberate as hiding the dog’s pill in the peanut butter but there’s some overlap. Honestly, the main motivation is keeping the kids who aren’t into sports engaged. There’s about 40 minutes between the kids getting to my house and the start of chess. The 2nd graders usually play soccer and the 5th graders hoop it up. A few kids aren’t into either but they gravitate to the riddles (my boys just wanna play sports and my 5th grader, Zak, with sass tells his friends “This is the stuff I deal with all the time”).

Lately, I’ve been doing more exponent stuff because I know they aren’t doing that yet in 5th grade but it’s reachable for them. Zak is taking the online Pre-Algebra I course on Art of Problem Solving which is comprised of 7 chapters. He just wrapped chapter 2 which is all about exponents so that’s been top-of-mind for coming up with the questions.

The challenge question to end the chapter was to solve for the 2 possible values of X (see below). But keep in mind, they haven’t learned how to compute square roots or any other kind of roots. You can do this without any involved computations and without roots. You can find the solution at the end of the post.

Find the 2 possible values of x:

Anyway, I didn’t give the kids that question but by this past week, they understood the basics of computing a simple exponent or taking a square root. So I took a stab at base 10 logarithms. I just explained it as the power you need to raise 10 to get to the target number.

“So if our target is 100, what do you have to raise 10 to? How about a target of 1,000?”

They had no trouble with this. So I explained how both the Richter and decibel scales were log scales that compressed a wide range into a smaller ruler. A 6 on the Richter is not twice the energy of a 3 but 1000x more energy. Every integer increase in the scale is just a higher order of magnitude.

The most pleasant thing happened. The kids that gravitated to this stuff were stoked. As it it settled in their brains they were all Keanu Reeves “Whoa, that’s so cool”.

I texted one of the parents:

Putting aside the pure joy of watching a kid unlock, exponents and logs are fundamentally important operations like adding and subtracting. Our first formal introduction to them outside a math class is usually science (exponential growth/decay) but more prosaic to this audience is the topic of investing, specifically the idea of compound growth. It’s an idea you’d love to see people internalize as young as possible.

Typically when someone (and I’ve done this too) writes about compounding they reference Einstein’s 8th Wonder of the World quote or talk about how our minds think linearly and find exponential growth unintuitive. [This was a common conversation at the start of the COVID pandemic with VCs patting themselves on the back for lateral thinking about how coefficients of virality applied to…the domain where exponential growth is usually people’s first contact with the topic. Like twisting a eulogy into a chance to talk about yourself. I’m not even mad, it’s the whole wheel of cheese].

With that in mind, I’ll leave you with an excerpt from Grant Sanderson, the mathematician behind the 3Blue1Brown YouTube channel. This is from his appearance on

excellent Lunar Society Podcast:

Have you come across those studies where anthropologists interview tribes of people that are removed enough from normal society that they don’t have the level of numeracy that you or I do? But there’s some notion of counting. You have one coconut or nine coconuts like you have a sense of that. But if you ask what number is halfway between one and nine, those groups will answer three whereas you or I or people in our world would probably answer five and because we think on this very linear scale.

It’s interesting that evidently the natural way to think about things is logarithmically, which kind of makes sense. The social dynamics of as you go from solitude to a group of 10 people to a group of 100 people have roughly equal steps in increasing complexity more so than if you go from 1 to 51 to 102 and I wonder if it’s it’s the case that by adding numeracy in some senses we’ve also like lost some numeracy or lost some intuition in others, where now if you ask middle school teachers what’s a difficult topic to teacher for students to understand they’re like logarithms. But that should be deep in our bones right so somehow it got unlearned

What a cheeky observation. Gives a second entendre to the expression “natural log”.

Money Angle

I’m using this space to invite you to play PitBulls (formerly StockSlam) online this coming Friday evening. It’s totally free but space is limited.

Reserve your spot (choose Friday November 3rd if you want to play with me)

• Click here to run through a tutorial. <— the app improves daily; you can now practice on your own against bots!
• Host your own game for free

This is my testimonial for the game:

One of the most fortuitous decisions I made in my career was accepting a job from SIG out of college. Back in 2000 going to Silicon Valley or I-Banking was all the rage. While trading was a coveted job, the idea of going to an exchange floor to sling options was not a mainstream career choice. And SIG was not a well-known company outside this narrow world.

The job offer I got from them was the lowest paying, but the interview process stood apart from the banks and other firms I talked to. It was clear that working for SIG meant a serious education in decision-making commensurate with the objective — to take responsibility for risking the partners’ own money after as little as 9 months of training.

I was placed at the American Stock Exchange where I would learn from senior traders including their head of education in NY, Mike Steiner, simply known as Steiner.

Steiner was a natural teacher, able to communicate complex ideas with simplicity and frankly, joy. It was no surprise when I discovered 20 years later he retired to become a physics teacher in public school.

In 2022, we reconnected and he showed me the prototype for what would become Pitbulls. Pitbulls is a game distilling the essence and mechanics of the mock trading program we used in training. Pitbulls is a fast-paced game requiring players to think quantitatively while building intuition and understanding investor psychology. Steiner focused on making it fun — it’s a game first. But when I saw it I was immediately struck by its potential to bring investing principles to life!

Skills that will immediately develop from the very first game:

• market making in an open outcry market
• tracking multiple quotes from competitors
• managing a rudimentary portfolio
• reacting to new information

Deeper concepts embedded in Pitbulls:

• arbitrage pricing, inter-dependent pricing
• expected value and probability
• the concept of edge as the foundation of a business
• how you can be profitable without relying on prediction
• making trading decisions under uncertainty
• risk and diversification
• the role, wisdom, and conditions of a healthy market
• an introduction to derivatives
• a bridge from trading to investing principles

Steiner has been hosting in-person playshops for years and I helped organize larger events in NYC, SF, and Chicago to overwhelmingly positive feedback. Unsurprisingly, the most universal suggestion was “give us an online version”. People wanted to play on their own and host their own sessions.

Starting now, you can play online!

I’ve been writing about financial education topics for years. These posts go into how Pitbulls and its underpinnings can improve your thinking in powerful ways.

• Finance As A Laboratory For Decision-Making [StockSlam Preview]
• If You Wait For All The Info You’ll Be Too Late
• Mock Trading
• The Benefits Of Betting Culture
• Lessons From Susquehanna
• Thinking Like A Trader
• Calibrated Confidence

Money Angle For Masochists

Quant legend Peter Muller wrote a candid, somewhat irreverent post 20 years ago that holds timeless wisdom.

🔗Proprietary trading: truth and fiction (Link)

Excerpts:

1. But the most important risk is the possibility of our models not working correctly. To minimize that risk, we set loss targets for strategies — if we lose more money than the pre-specified target then the strategy is re-evaluated and shut down for a while (perhaps forever). This is not that different from the old school of proprietary trader management: ‘Go ahead and trade, don’t do anything too risky, and if you lose more than $x we’re going to shut you down. ’Our strategies are evaluated by looking at reward/risk measures. For symmetric, market-neutral strategies without significant tail events, the Sharpe Ratio (SR) is probably the best ex-ante measure. SR is defined as the portfolio annual excess return divided by the annualized standard deviation of that return. Our benchmark is cash, hence measuring excess returns is appropriate for our portfolio. For long-only managers, the Information Ratio—which measures excess returns relative to a benchmark—is more appropriate. When we evaluate past performance, we also look at peak-to-trough drawdowns (a measure of the maximum drop between consecutive maximum and minimum values of return over the life of the strategy) as an additional risk variable. This can help pick up serial correlation in portfolio returns that the Sharpe Ratio doesn’t capture. Also of interest is the fraction of expected gross profits consumed by expected transaction costs. The higher this number, the more money we expect to lose if our model stops working. At least some of our edge comes from opportunities that are created in the market by institutional managers who trade too much. Their trading is usually based on either an exaggerated view of how well they can predict investment returns or a misunderstanding of how trading costs increase with size. The strategies of institutional managers can still be perfectly rational despite providing us with opportunities through over-trading, simply because of the huge agency issues in portfolio management.
   
2. In Grinold and Kahn’s book on Active Portfolio Management, the authors describe the ‘FundamentalLaw of Active Management’: a strategy’s Sharpe Ratio is proportional to the number of independent bets taken by the strategy multiplied by the correlation of those bets with their outcome. To get a higher SR, you need to increase the number of your bets or increase the strength of your forecasts. In my opinion, it is far better to refine an individual strategy by increasing both the number of bets within the strategy and the strength of the forecasts made in the strategy, than to attempt to put together lots of weaker strategies. Depth is more important than breadth for investment strategies…I would much rather have a single strategy with an expected Sharpe Ratio of 2 than a strategy that has an expected Sharpe Ratio of 2.5 formed by putting together five supposedly uncorrelated strategies each with an expected Sharpe Ratio of 1. In the latter case, you’re faced with the risk that the strategies are more correlated than you realize (think Long Term Capital). There is also the increased effort of ascertaining whether each individual strategy really has a Sharpe Ratio of 1.
   
3. An important choice for many proprietary traders is whether to focus on shorter or longer-horizon strategies. Typically, shorter horizon strategies get their edge from providing temporal liquidity to a marketplace or predicting short-term trends that arise from efficient trading. Longer-term models focus on asset pricing inefficiencies. How does the implementation of these strategies compare? Shorter-horizon investment strategies are desirable because they tend to create higher Sharpe ratios. If your average holding period is a day or a month, you have the opportunity to place many more bets than if you hold positions for three months to a year or longer. On the flip side, shorter horizon strategies tend to have capacity issues (it’s easy to make a small amount of money with them, but harder to make a lot of money). Shorter horizon strategies also require serious investments in trading infrastructure, since quick and inexpensive execution is much more important than for longer horizon strategies. Risk management for shorter-horizon strategies tends to occur through position trading rather than portfolio construction. Assets are not held for long periods of time and portfolio characteristics change quickly. The biggest risk for shorter horizon strategies model risk, or the risk that the trading strategy deployed has stopped working. Since even the best trading strategies experience periodic drawdowns, the hardest challenge for the short-term model-based trader is to figure out whether his model is going through a regular drawdown or has stopped working altogether. Longer-horizon model-driven investment strategies have different issues. Since assets are held for longer periods of time, execution costs (although still important) are not the primary focus. Statistical inference becomes more difficult and the danger of overfitting or mining data becomes larger. Risk management for longer-term strategies happens in portfolio construction: since rebalancing occurs less frequently, more care needs to be taken to ensure the portfolio is not exposed to unintended sources of risk. Because they tend to have lower Sharpe ratios, longer horizon strategies have a different kind of capacity issue—the capacity for pain. However, there is one advantage: because trading occurs less frequently it’s possible to lead a much better lifestyle than if you’re running shorter horizon strategies!

2 ways I came up with to solve the AoPS question

Method 1:

x could also be -243 since it’s being raised to an even power.

Method 2: