Moontower #146


Last week I hinted at a framework for deciding what to pursue if you started with a blank sheet of paper.

Before I continue, I want to briefly address headspace. As we travel through life there are periods where we are head down with specific outcomes in mind. It could be printing money at your job, training for a marathon, building a business, surviving residency, or writing a thesis. Whether consumed by a grueling grind or a creative fever, it’s not the time for introspection.

Don’t interrupt momentum in between checkpoints. Even if it’s a slog, be gracious for the conviction. It’s a gift that comes and goes. Don’t squander it. Just like true learning, personal progress is uncomfortable. Ron Burgundy said it best — “it’s a deep burn”. The only way is through.

Conversely, if you are at a checkpoint, looking for your next sprint, you’re in explore mode looking for your next exploit. I don’t love the word exploit here but it’s a classic framing of the problem (see my notes on an interview with AI researcher Brian Christian). Part of that search is self-search. “Why” overtakes “how”. If this is where you find yourself, I hope this essay offers a perspective to turn over in your mind. If you are full speed ahead on your current jam, you can skip ahead to today’s Money Angle.

Otherwise, let’s make our way toward the framework.

It comes from a meatspace friend who I admire for a brutal amount of intent in how he lives. He’s not an online guy but has one of the Tim Urban visuals from The Tail End printed out in his office. I have an offline in-law who has the number of weekends he has left with his kids on the front page of his digital dashboard. Besides being impressed with Tim Urban’s reach, I’m struck at how conscious these people are about time. I remember listening to an interview with investor Chris Cole where he talks about the watch he wears — it counts the days until his expected actuarial death.

Personally, I don’t feel compelled to inhabit this level of morbidity, but I can appreciate its life-affirming focus. If they sound quasi-extreme, it’s only because it’s easy to take time for granted. But you can’t put more sand in an hourglass1.

Acknowledge Your Agency

Complacency is a warm blanket. It soothes and coddles. Until you get itchy. Then it becomes the very source of your discomfort. Once you notice, you can’t get it off fast enough.

Agency is choosing which discomfort you want to confront. Fear or complacency. Fear of what? I don’t even want to type it out because it sounds ridiculous, but here it goes:

You are afraid of your own potential.

It still sounds ridiculous. So why indulge the thought? Two reasons.

  1. If it’s true, then finding out has an outrageous expected value in terms of fulfillment.

    I doubt fulfillment is a destination. It’s more of the feeling of pushing against something and having it push back in a way that makes you feel like you are alive. That you are in a conversation with existence rather than just watching it.

  2. Others have this thought as well. And that’s a clue that it could be real and worth confronting.

As evidence of this second thought, I strongly urge you to read the entirety of Nat Eliason’s short post:

✍️Shadow Careers and Unembracing Failure (4 min read)

I want to zoom in specifically on the back half of the post (boldfaced is mine):

We should want to work on things where failing terrifies us. If you feel nothing when a relationship ends, why were you in it in the first place? If you wouldn’t be devastated by failing to succeed at your mission, what kind of mission are you spending your limited years pursuing?

It’s a bit lofty, sure, but it provides a useful heuristic. Assuming your basic needs are met it might not be worth working on anything where you aren’t terrified of failing. If you know a project is going to succeed, or you’d be fine if it failed, then it’s not a true calling for you.

There’s a concept I think about from time to time, that hell would be meeting the person you could have been. Who you could be if you ignored the shadow careers, the side quests, the failures you were okay with.

Imagining that person can often be helpful. You’ll almost immediately fill in certain gaps, probably related to what you’re most insecure about. What would you expect them to say they did? What would they tell you they accomplished that would make you immediately overcome with self-loathing at your own shortcomings?

I know my answers, and I bet you do too. It’s not fun to think about, but it is certainly useful. Most of us are in shadow careers. Shadow careers are the defaults. We have to spend some time imagining that person, seeing what they could say that would make us the most embarrassed, to start to tap into a potential level of fulfillment we’re passing up for what’s easy.

“What happens when we turn pro is, we finally listen to that still, small voice inside our heads. At last, we find the courage to identify the secret dream or love or bliss that we have known all along was our passion, our calling, our destiny.”

And lest it gets confused, achieving these secret dreams won’t bring any lasting happiness. Finding the right challenge to struggle against, though… that’s a game you can play for life.


So back to the “framework” I keep mentioning. Its purpose is to take our ridiculous premise and map it to target opportunities. We want to find the “right challenge to struggle against”.

To do that, we find the overlap of 3 concepts:

  • Constraints
  • Terms
  • Worldview


These are your “must-haves”. For example, your endeavor must satisfy or have an acceptable chance of satisfying your financial and geographic needs. You must account for your family’s needs. It sounds straightforward because these are conversations you should have already had but it’s worth checking assumptions. If you define your constraints too narrowly you will rob yourself of paths. This step carries the risk of guiding the Ouija board right back to where you are now by making it the only choice.


This is similar to constraints but more aspirational. These map to “nice to haves” but without the “take it or leave it” air of negotiability that phrase carries. There’s urgency here. If your terms are not serious goals, why bother with this exercise in the first place?

What’s an example of a term?

A basic example is genuinely liking what you do. Being excited to work. Another example is defining how much time you spend with your kids. Imagine what you want that to look like. This is not easy because “time with kids” is a complicated idea. Some parts of it are a drag. This is not a time to let guilt define your terms. We all have different levels of patience. Some parents prefer their kids in smaller doses than others. It’s ok. Be honest with yourself.

If this reflection isn’t mentally or emotionally demanding you are not doing it right. At the same time, there needs to be flexibility. We don’t have perfect track records of predicting what we want.


This one is a doozy because it’s something I’ve only started thinking about in the past few years directly. And some part of that is because I didn’t realize it was ok to have worldviews. Or maybe I just didn’t find it useful to be anything other than agnostic about everything. This has been gradually changing. While I’m not interested in spelling my worldviews out, you can spot some of them by reading between the lines of this letter every week.

Still, I want to be more concrete about what worldview means. I will share my friend’s as an example. He was happy to lay them out for me (and if any local friends are reading this there’s a decent chance they can figure out who it is. He lives it.)

His life and work place an emphasis on 3 aspects of life that he never tires of exploring. To him, they hold the keys to human flourishing.

  1. Culture/Identity
  2. Community
  3. Learning

His hobbies and businesses orbits these three ideas. It’s not an accident. His ethnicity and religion are visibly different than what you typically find growing up south of the Mason-Dixon line as he did. He spent time touring the world as part of a band you likely know. These experiences shaped his worldview. His most recent startup was born out of things he was already doing with his 3 kids. Prior businesses were born out of community building.

Wordviews, like terms and constraints, are deeply personal. I only shared the ones above for example. Your own views can be miles apart. This pluralism is the basis for both bonds and frictions. This leads to an interaction between the three concepts. Your terms or constraints may preclude you from exposure to certain worldviews. The truth is there are some worldviews you are never building a bridge towards.

But the stakes aren’t always that high. We make compromises.

You can spend 8-10 hours a day unaligned with your collaborators’ views or doing work out of sync with your own views. If your choices are limited, your tolerance for this might be high. It’s a tough spot to be in. If you are fortunate enough to have options then a sense of alienation will gradually gnaw at you. You might tolerate it. You might rationalize. You’ll definitely compartmentalize.

Until a point.

The cost of that self-alienation builds. I once had a colleague, older than me, both seasoned and successful who quit because dealing with brokers all day (in a prior gig he purely focused on electronic trading) affected him negatively. He couldn’t compartmentalize. “I’m not who I want to be when I’m here”. I will never forget when he left. If I were 25, I would have thought “what a soft thing to say… suck it up”. Instead, I have profound respect for his choice. I suspect it cost him a lot of money.

You may believe it’s a luxury to adhere to your values. The logic reminds me of how Milton Friedman theorized that racism would be self-correcting because if a bigot chose to not sell products to or hire from a segment of the population the bigot would hurt themselves. I think Friedman was wrong because he was assuming that dollars were the sum of our values. Similarly, your values might cost you dollars, but your soul feels the cost when you ignore your values.

[That reminds me — one of my worldviews is that accounting is super important. Because what we measure gets managed, accounting is actually the art of representing the full picture of costs and benefits. Since decisions in all aspects of life are downstream of accounting, we need to measure better. We need holistic accounting. If your heart and body “disagree” with an outcome that was supposed to make you happy, I suspect your decisions fell out of a narrow accounting framework.

So I lied. I did share a worldview.]

Ok, this is getting long and I’m feeling pedantic. I mentioned last week that I’m still working through stuff. I know this might all sound a bit pompous and snowflakey. I’ll never apologize for snowflakism (another worldview in there probably). But I also appreciate that many people are dutiful without overthinking. Life can sometimes feel like a parade of sterile transactions that pay the bills. There’s grace in just being reliable. The older I get the more inspired I am by the unsung elders who just get it done without too much introspection. There’s tremendous beauty in that and they don’t even realize it.

But this essay is for those trying to sleep in an itchy blanket. It’s warm but you’ll never rest.

Living is risk. Your potential is indeed fearsome. March straight into it if you want to live.

“When in doubt, have a man come through a door with a gun in his hand.”

-Raymond Chandler’s advice to writers who get stuck

Further reading:

✍️How to Pick a Career That Actually Fits You (60 min read)

This is another Tim Urban classic. He penned it in 2018. In a pensive weekend, while Yinh was at Coachella I actually printed out the worksheets and worked though them while I streamed the festival on YouTube. I forgot the name of the post but was able to search for it according to how I remembered it — as the “octopus” model.

The resources at the end are also worth checking out, especially 80,000 Hours. Tim describes it as:

dedicated to helping young, high-potential people make big career choices—is an awesome resource. The site is run by super smart, thoughtful, forward-thinking people, and can be digested in video or book format in addition to on their site.

Money Angle

I liked this post by Morgan Housel:

✍️How People Think (29 min read)

He explains:

This article describes 17 of what I think are the most common and influential aspects of how people think.

It’s a long post, but each point can be read individually. Skip the ones you don’t agree with and reread the ones you do – that itself is a common way people think.

My obsessive need to consolidate and refactor required transposing his list to this one (I re-titled them all for compression):

1) Tribalism

2) We only see the tip of icebergs

3) All probability gets represented as yes or no

4 and 5) We expect trees to grow to the sky (which leads us to overreaction)

6) We are surprised when geniuses disappoint us

7) Unhealthy competition makes us short-sighted. The antidote is extending the horizon to create space.

8) Stories FTW

9) Complexity sells

10) Motivated reasoning is the rule

11) Experience is the raw material for empathy

12) Heisenberg makes us poor self-evaluators. Seek other’s input

13 and 16) Innumerate about extremes [compounding & inevitably of rare occurrences ie the birthday problem]

14) Simple but not easy

15) When imagining change we fail to consider the full context [for example when you are younger you imagine being older as your current life with grey hair but you don’t consider the mental and emotional evolution that comes with aging]

17) Idealism is seductive but counterproductive often leading to isolated demands for rigor

I want to zoom in on #7. It’s our child-eating friend Moloch again. I covered him several times this year:

Recall how Moloch symbolizes the tendency to overoptimize on a single value to the detriment of all others, swallowing everyone in its unhealthy path.

I tend to be pretty laid back in general. For better or worse, I tend to be a satisficer rather than a maximizer. A charitable interpretation of that trait (there are non-charitable ones too but I’m the host of this here party at the Moontower) is I appreciate ergodicity. See Luca Dellanna’s What Is Ergodicity? for a quick explanation that word.

But it turns out, humans likely grok the idea in their DNA. In fact, this appreciation forms the basis of pushback against some of the cognitive bias research, especially loss aversion. Contrived behavioral economics experiments assume agents maximize single-trial expected value instead of median expectancy. What behavioral economists label as design flaws are more of Chesterton’s Fence to protect you from self-destruction in the name of maximization. The expected value of saved seconds from jayrunning across the street might be positive. But you only need one ill-timed fall to negate the sum of those optimized moments.

So when I say that “slack” is the answer to Moloch, it has nothing to do with being lazy. It’s appreciating that any one trial is just a single draw in a repeated strategy and the merits of the strategy cannot be graded on isolated outcomes.

Since we are on the topic of behavioral economics, there is another common knock against cognitive bias research.

Via Notes From Todd Simkin On The Knowledge Project:

Shane points out a paradox in cognitive science. Knowing our biases doesn’t seem to help us overcome them.

Todd concurs:

It is definitely true that it is sort of descriptive of the past. A lot of these heuristics and biases are things that we can see when we after we’ve already identified that a mistake has been made. And we say, Okay, well, why was the mistake made? Say, oh, because I was anchored, or because of the way the question was framed, or whatever it might be, we have a really hard time seeing it in ourselves.

But we know the cure for this. I wrote:

This is a topic the brilliant Ced Chin has studied in depth. Ced told me that the literature suggests the only way cognitive bias inoculation works is via group reinforcement. I told him that was exactly the cultural DNA when I was at SIG which makes me believe there is a lot of value in being aware of bias. Anytime you replayed your decision process, it was a cultural norm to point out where in the process you were prone to bias.

Todd reinforces Ced’s conclusions:

We have a really easy time seeing when someone else is making that type of stupid mistake. A big part of our approach to education is to teach people to talk through their decisions, and to end to talk about why they’re doing what they’re doing with their peers, the other people on their team. If we can do that real-time, that’s great. Often in trading, you don’t have that opportunity, because things are just too immediate. But certainly, anytime things have changed. If you’re doing things differently, it’s a really good time to turn to the traders around you. And the quantitative researchers around you and the assistant traders and your team and say, Hmm, it looks like all the sudden Gamestop is a whole lot more volatile than it was a week ago. Here’s how I’m positioning for this trading. What do you guys think? And have someone say, oh, it seems like you’re really anchored to last week’s volatility. If things have changed that much, you need to move much more quickly than you’re moving right now.So you don’t realize that you’re anchored, that’s the whole nature of being anchored, is that you don’t recognize the outsized importance that the anchor has on your decision, but somebody else who’s a little bit more distant from it can. So if we’re good at encouraging communication, then we’re going to be really good at getting other people to help improve your decision process.

I add:

There it is. The key — communication. It’s not some magic formula. Even after I left SIG I spent my whole career working with SIG alum. This culture and these types of communications happen all day on the desk. Despite the common perceptions of “trading”, I have always found it to be a team game and communication skills are paramount.

Todd expands:

I know that you are fond of pointing out that you are the sum of the five people that you spend the most time with. So if the people that you’re spending the most time with are your co-workers who are thinking about trading the same way you are, then maybe you’re going to combine the same types of errors, it’s certainly better than then trying to act on your own. But even better is if you have a culture that rewards truth-finding, as opposed to rewarding action. If nobody feels personally attacked, because of somebody else pointing out their error, but instead feels like we together have now done more to get closer to, to some truth to the better way to act or the you know, the more accurate, fair value of this asset that we’re trading, then everybody feels like it’s a win. And they will therefore encourage the involvement of the people around them.

If you work in a Molochian, credit-stealing environment you face a prisoner’s dilemma as to whether you even want to even correct others’ biases. (I suspect this gets worse as the fiefdoms that emerge in large hierarchies rot the spirit from the inside). Teamwork and its antecedent, alignment, are devilishly hard, but critical because they hold the key to improving decisions.

When Shane asks what the most important variables are for being a better decision-maker, he expects Todd might say “probabilistic thinking”. But Todd did not hesitate with his answer:

Talk more is number one, that beats probabilistic thinking. That beats sort of anything else. Truth-finding is being able to bring in other people in the decision process in a constructive way. So finding good ways to communicate, to improve the input from others. Thinking probabilistically I think is definitely a very, very important piece of trying to diagnose what works by trying to think of where where things fall apart, where people fail. The other place that people fail is falling in love with their decision process and not being open to being wrong. So an openness to feedback to finding disconfirming information to actively seeking out disconfirming information, which is really uncomfortable. But that I think is the other piece that is super important for being a good trader.

If I were to try to be a prop trader from my pajamas, I’d form a Discord channel of sharp, open-minded, truth-seeking, humble, teachable teammates before I even opened a brokerage account.

Trading is not a single-player game.

You need honest mirrors. Not the ones you find in fancy dressing rooms.

Stay groovy squad

Moontower #145


Soooo…getting back into the groove after vacation has been a failure. Been hard to conjure any productivity. While I was in Hawaii, I left my phone in the room most of the time. Was nice to mostly unplug. But vacation is fantasyland and then you come home. Instead of building on a healthy habit, I gave myself permission to guiltlessly hang out on Twitter as if I earned something. My history of swallowing a pint of ice cream after the rare cardio session is ample warning that in my personal constitution no good deed goes unpunished.

The upshot of all this?

Instead of having some tidy, prepared essay I’m gonna just overshare about life today. If you’re here for nerd stuff feel free to skip ahead to Money Angle, no hard feelings.

Ok. So there was a Twitter thread where a friend and a stranger were talking about me. The stranger was asking the friend why a portfolio manager (don’t mind me as I adjust my imaginary tie) would share insight about trading publicly. The tone, insofar as one can detect tone in text, was “traders shut up and trade, grifters teach”.

It’s not the first time I’ve seen something like that and I usually let it slide. I suspect I normally don’t get too much suspicion directed at me because it would be really hard to fake 21 years of prop trading with a massive sample size of daily trades and then write about risk and options in a way that other verified pros find value in. This is not me defending myself. This is you, beloved readers, especially the professional peers amongst you who are so supportive.

But this particular conversation did spark a reaction in me because it was a friend that was stuck in some isolated thread trying to defend me. So I chimed in to give him a break.

This is how I think about my writing about trading:

If you are a pro options trader reading me, then I’m reinforcing what you already know. Sometimes the articulation gives you a vocabulary that clarifies your thinking. I’m not turning over new rocks, but if I scramble them a bit, you may see something new.

If you are a novice trader/investor, you are learning things that are table stakes for the risk-taking side of the industry. The decision-making principles are not secrets. You can find any number of sources to learn from. People prefer to be communicated to in different ways. I’m just one of those many ways.

I would never write about secrets while I was working. I chose to write about the meta. The website is literally called MoontowerMeta. So if you are not violating any policies, you’re not exposing info that your friends use to make money, and you can still find angles that are helpful to readers then you have value to share. Aspiring writers sitting on trading desks, that’s your cue.

[An aside that is gonna trigger some set of people: I could hand over all my professional dashboards and tools, and it wouldn’t make a difference. You won’t get the same results. Experience, discipline, and creativity are not something you can take from another. And they are foundational to a discretionary strategy. Think about this from a game-theoretic point of view. If I could codify (I tried and couldn’t) what I did, then it would be easy to prove the edge. The strategy would then be automated and be oversubscribed or its owners would never sell it to an investor. The fact that it’s discretionary and cannot be proven except by its eventual outcomes means an investor must always worry that I’m full of shit. But that’s also why there’s some middle ground where I want outside funding and investors are willing to fund it. If a purely automated, systematic strategy is a money-printing machine you’ll never see it. And if you do, its legibility will be its eventual downfall as it gains assets]

Still, a big question remains —why share? The stranger was hinting that I had an ulterior motive. Like maybe I had flamed out and was setting up my next job. There’s some truth to that but not in the way he insinuated. (The last year of my career was my best and it was not even close.)

I decided to tweet a thread on why I share. To do that I needed to back up and explain the decision process behind quitting.

The bizarre result was the thread went totally viral. I also realized the way I wrote it must have made people think I just quit. Tsk, tsk. If they were subbing to Moontower they know that is old news. If you didn’t receive this letter in your email don’t make that mistake:


Before I quit trading, I framed the decision: I’m 43 yrs old. I can stay, make more $$, racing for 10 more years. Or I can leave now, while I have energy, reasonable health and less ageism against me to work towards something that I’m not in a race to get over.

It will take some time to figure out my next step but since my kids are 5 and 8, it’s a great time to take time. When I start my second professional life, it won’t be a race. It’s something I can do til I drop dead.

I’ve written about my lack of interest in any conventional retirement (I don’t play golf, I like to work and write with my free time as long as it’s on my terms). So a sustainable journey reduces my need for a large nest egg to carry through many non-working years. (I also put little trust in market returns as an arbiter of my financial destiny so I’m conservative about how long I need to work). If you know you can work say 20 years longer than if you raced in a finance career, then a lot of pressure is relieved.

Suddenly leaving isn’t so risky.

2 other points:

1. If I stayed I’d be in the same boat at 53 years old. What do I do with myself? I’d have more money, but also so what. Money is not an issue if you are happy working (and you don’t crave caviar every meal)

2. If I’m wrong, I can always get a finance job. It won’t pay what I used to make because the seniority you have with people you know for a long time is a special sort of trust and goodwill. I had a long leash (in finance speak that probably earns you 2 years of underperformance cushion).

I prefer not to take my mortality for granted and when you are in your 40s it becomes far more real. When you receive a phone call instead of a text out of the blue your pulse quickens a bit. I don’t obsess about $ like I did even 10 years ago and definitely not like 20 years ago. I didn’t grow up with it, but have fought the urge to see it as a security blanket catch-all for every kind of anxiety.

Scarcity mindset is adaptive when you are young and broke, because the scarcity can be quite real. The mindset is protection. Like a 40d put. But as you earn, that put becomes further OTM. You are going to be ok. No need to pay theta in the form of suboptimal decisions because you feel the need to service that put as if it’s 40d when it’s really 1 delta.

Everyone gotta do what they gotta do. But if you are unhappy with your fancy job, that’s on you. There are no excuses for that. It’s understandable to feel otherwise but I do believe you need to work through that. It’s really hard to develop a healthy relationship with $. I’m trying to get better at it all the time. Because I have to. It’s not wise to do a job you don’t want to do to allay irrational fears of being broke.

Twitter is a tool for relationships and to spread proof of work. I did one thing for 21 years. When I try to do something else I’m a major underdog. I’m not going back to school. I don’t enjoy school. My online presence is like a proof of work, so when I try to convince someone to take a chance on me in a new field I can show something that looks like a resume to someone that’s open-minded. If you wonder about my incentives on Twitter, I’m being open about it: relationships, proof of work, & optionality in distribution.

There it is. I tweet and write to “find the others” and to make myself marketable to future collaborators and clients. I don’t know if that makes it any less “ulterior” if it’s not in pursuit of a trading gig (if I was going to stay in trading I already had a ridiculous seat. There are not a lot of places to go unless I was going to be a founder, but I have no interest in that. Trying to be an emerging manager is institutional masochism. Respect to my friends on that journey. I love it for them. Not for me. I know enough to never say never, but my mindset is far away from that and I’m not getting any younger.)

This thread went viral because it struck a nerve with so many people. I’m a size 150 bid on how many DMs, texts, emails, and requests for phone calls I received. Many were just extending support but many wanted to discuss their own crossroads.

If you are curious, the replies to the thread are the less vulnerable versions of private messages.

Some made similar leaps in the past, some are in the midst of such a leap, some just starting to hear the whispers from their inner selves, and some were younger people with enough maturity to already anticipate how they might feel in their 40s. It was weirdly overwhelming to get such a candid glimpse of people’s feelings.

I’m happy to discuss any aspect of all this if any of you feel that’s what you need. I had many conversations before making my final decision. One of my local friends is a serial entrepreneur a decade removed from corporate America. He’s similar in age, with a family, and is particularly thoughtful about aligning who he is with his work. Over the course of several hangouts and long morning hikes I came to understand his framework. And parts of it were foreign in interesting ways. I never considered thinking about the problem the way he does. It unlocked thoughts within me but even now I’m still processing it. It’s a bit painful to think through because you need to be so honest with yourself. If you are not rattled, you’re doing it wrong. But I knew he understood me, just based on the questions he asked. In the next week or two, I’ll discuss the framework as well as what I’m thinking about most these days.

Since it’s Twitter, a number of trolls who must hate-follow me said it was a mid-life crisis as if I was defective. I suppose I am. In many ways, it would be easier to have just stayed in my job. But if there’s a defect I’d rather take over from the autopilot and intentionally try to go to the right destination than accidentally land in the wrong one with no fuel left in the tank.


In the public domain, the 2 friends I found especially helpful were Paul Millerd and Khe Hy.

Paul’s book, Pathless Path, which came out in January is going to be canon on this topic. My notes and review are here. I’ll even buy you a copy if you want. Paul is kind and brilliant. He’s had so many discussions with others on these topics that chatting with him is like plugging yourself straight into a current of flowing wisdom.

Khe’s path was extremely resonant because he was in the same field (in fact long after he left finance I learned that he was in meetings 20 feet from where I was standing in my office). Khe’s writings make him one of the OGs about thinking about our relationships with ourselves and our careers. He has successfully navigated the long path from corporate America to a business that sustains both his clients’ and family’s needs. For the better part of a decade, his writing has put you in the sidecar. I’ve plugged his work at every opportunity because it’s outstanding and he’s the kind of giving soul you love to see crush it. The next cohort of his $10k Work Bootcamp starts in a few weeks. The testimonials are ridiculous and I’m not surprised. He’s taken everything he’s learned and combined it with easy-to-use technology to turn you into a high-leverage weapon. Give it a look hereIt’s 100% free.

Money Angle

One of the best threads I’ve seen in a while. It’s important because it shows how betting strategies vary based on your goals.

In the basic version, the “Devil’s Card Game” is constrained by the rule that you must bet your entire stack each time.

You can maximize:

  1. expectation
  2. utility (in the real world Kelly sizing is the instance of this when utility follows a log function)
  3. the chance of a particular outcome.

At the end of the thread, we relax the bet sizing rules and allow the player to bet any fraction of the bankroll they’d like. This is a key change.

It leads to a very interesting strategy called backward induction. In markets, the payoffs are not well-defined. But this game features a memory because it is a card game without replacement. Like blackjack. You can count the possibilities.

The thread shows how the backward induction strategy blows every other strategy out of the water.

If we generalize this, you come upon a provocative and possibly jarring insight:

The range of expectations simply based on betting strategies is extremely wide.

That means a good proposition can be ruined by an incompetent bettor. Likewise, a poor proposition can be somewhat salvaged by astute betting.

I leave you with musings.

  1. Is it better to pair a skilled gambler with a solid analyst or the best analyst with a mid-brow portfolio manager?
  2. How confident are you that the people who manage your money would pick the right betting strategy for a game with a known solution?

    Maybe allocators and portfolio managers should have to take gambling tests. If analytic superiority is a source of edge, the lack of it is not simply an absence of one type of edge. It’s actually damning because it nullifies any other edge over enough trials assuming markets are competitive (last I checked that was their defining feature).

From My Actual Life

We went to the Kaanapali region of Maui for Spring Break with 4 other families.

We ended up hanging out with 13 total families that we knew, nearly half were totally random encounters. With so many friends around, the kids didn’t notice mom and dad drank their 529s in the form of Mai Tai’s.

Fun bit: this pic was taken from the backyard of a friend’s place that also has quite the poker room. The friend was renting it from a certain celeb who liked to host card nights well attended by professional athletes and…Woody Harrelson.


(If you need any recommendations let me know. Also, with rental cars so expensive Turo was the way to go for many of us.)

Stay groovy!

Moontower #144

[I’m touching down in Maui this morning with my family for Spring Break. I won’t open the laptop this week so Moontower will be off next Sunday.]


It’s been a crazy “Q1” as the suits say (seasonal references that favor fiscal orbits over solar ones still can’t escape the “time is a flat circle” vibe. A semantic loss all around, well-played all of us). In keeping with my Spring Break, I’ll re-post links to the more popular articles I wrote in the past few months in case any new or old readers want to catch up. There won’t be new content in the next 2 weeks.

Drawing Better Outcomes From Fat-Tailed Distributions

✍️There’s Gold In Them Thar Tails: Part 1 (13 min read)

✍️There’s Gold In Them Thar Tails: Part 2 (24 min read)

A meta-comment about the process of writing these. The thinking behind the posts was heavily inspired by Rohit Krishnan’s Spot The Outlier. When I first read his article, I knew it was deeply insightful but I struggled to fully grok it. I saved it in my task dashboard so I would re-visit it occasionally. By keeping it top of mind, I was more primed to “see” it in the wild. There was a back and forth between exposing myself to the post, following his references, and trying to reason about it in the context of what I already knew. This brings me to an encouraging point (I think). Understanding an idea you don’t get fully get is often just a matter of repetition broken up by rests and just enough space in your RAM to give your attention filter a chance to see it around you. It’s a mix of focused and diffuse thinking.

I imagine some readers are thinking “Kris, that post was not hard to understand…you’re supposed to be an options trader?!” I found it hard, what can I say. The journey to comprehend it (at least enough to write a few thousand words on it) is more encouraging than the distress of being dense in the first place. Which is a roundabout way of saying to understand something just keep trying from different angles. Give yourself rest. And trust in repeated exposure. I hope that advice helps next time you try to bang a concept into your skull. Fluid intelligence peaks in your 20s so knowing how to learn requires believing that you can. I’m 100% sure you can.

If you enjoyed this ensemble of concepts (finding outliers, Berkson’s Paradox, correlation breakdown in the extremes), I encourage you to read another treatment that adds to and reinforces the conversation:

✍️ Searching for outliers (22 min read)
by @benskuhn

The post is about better decision-making in fat-tailed distributions. Since they exist in many real-world matters, you should care. The end of the post has good recommendations while the beginning helps you differentiate between thin and fat-tailed distributions.

Some highlights:

  • As the dating example shows, most people have some intuition for this already, but even so, it’s easy to underrate this and not meet enough people. That’s because the difference between, say, a 90th and 99th-percentile relationship is relatively easy to observe: it only requires considering 100 candidates, many of whom you can immediately rule out. What’s harder to observe is the difference between the 99th and 99.9th, or 99.9th and 99.99th percentile, but these are likely to be equally large. Given the stakes involved, it’s probably a bad idea to stop at the 99th percentile of compatibility. This means that sampling from a heavy-tailed distribution can be extremely demotivating, because it requires doing the same thing, and watching it fail, over and over again: going on lots of bad dates, getting pitched by lots of low-quality startups, etc. An important thing to remember in this case is to trust the process and not take individual failures, or even large numbers of failures, as strong evidence that your overall process is bad.
  • Often, you’ll have a choice between spending time on optimizing one sample or drawing a second sample—for instance, editing a blog post you’ve already written vs. writing a second post, or polishing a message on a dating app vs. messaging a second person. Some amount of optimization is worth it, but in my experience, most people are way over-indexed on optimization and under-indexed on drawing more samples.
  • This is similar to how venture capitalists are often willing to invest in the best companies at absurd-seeming valuations. The logic goes that if the company is a “winner,” the most important thing is to have invested at all and the valuation won’t really matter. So it’s not worth it to the VC to try very hard to optimize the valuation at which they invest.

Finally, I can offer an example sitting right under everyone’s nose: choosing which books to read. In How to Read: Lots of Inputs and a Strong Filter, Morgan Housel writes:

The conflict between these two – most books don’t need to be read to the end, but some books can change your life – means you need two things to get a lot out of reading: Lots of inputs and a strong filter…A good reading filter is more art than science. You’ll have to find one that works for you. The bigger point is that the highest odds of finding the right piece of information comes from inundating yourself with information but very quickly being able to say, “that ain’t it.”

The Moloch Series

You cannot unsee the god of unhealthy competition.

✍️Don’t Look Up, It’s Moloch (10 min read)

Once you feel sufficiently Moloch-pilled you need the serum:

✍️Putting Moloch To Rest (7 min read)

To reinforce the cure (again, repetition folks) see this quirky and enjoyable post:

✍️ Slack (4 min read)
by Zvi Mowshowitz

Zvi’s writing has an almost poetic cadence and sticky phrasing. His blog is a minimalist rabbit hole. He’s in the Magic: The Gathering Hall of Fame and a former market maker so I’m probably biased towards his kind of geekery.


✍️Lessons From Susquehanna (5 min read)

Todd Simkin’s interview re-hashed a collection of deeply influential ideas regarding learning and communication from my professional career

✍️Being A Pro And Permission To Be Serious (12 min read)

Discipline and earnestness feel quaint in the theater of memes modernity hyper-manufactures. Don’t fall for it.


✍️From CAPM To Hedging (16 min read)

Ideas in this post:

  • Variance is a measure of dispersion for a single distribution. Covariance is a measure of dispersion for a joint distribution.
  • Just as we take the square root of variance to normalize it to something useful (standard deviation, or in a finance context — volatility), we normalize covariance into correlation.
  • Intuition for a positive(negative) correlation: if X is N standard deviations above its mean, Y is r * N standard deviations above(below) its mean.
  • Beta is r * the vol ratio of Y to X. In a finance context, it allows it allows us to convert a correlation from a standard deviation comparison to a simple elasticity. If beta = 1.5, then if X is up 2%, I expect Y to be up 3%
  • Correlation is symmetrical. Beta is not.
  • R2 is the variance explained by the independent variable. Risk remaining is the volatility that remains unexplained. It is equal to sqrt(1-R2).
  • There is a surprising amount of risk remaining even if correlations are strong. At a correlation of .86, there is 50% unexplained variance!
  • Don’t compute robotically. Reason > formulas.

✍️If You Make Money Every Day, You’re Not Maximizing (28 min read)

Part stories and part technical discussion of how to think about reducing risk.

Money Angle

Finance Guilt

I’ve said several times that finance is really just code. Like software, it’s an abstraction skin pulled over physical features. One can feel a bit disembodied if their formulation of the world for 8-12 hours a day are prices. Prices that collapse all of human enterprise, from the dirt under its fingernails to the sunrises and sunsets between now and some expiration date, into some Excel number format.

Just as software intermediates for less, financial innovation lowers the cost of go-betweens. In finance, the things went-between are people paying to offload risk to people looking to get paid for warehousing risk. In software and finance, skimming a tiny bit of rent on those transactions is lucrative.

How good or bad we can feel about the degree of skimming depends on how much surplus is created versus the higher friction model. The value of information liquidity is fairly obvious so Google enjoyed a positive reputation for at least its first decade in business. Meanwhile, finance feels like a constant barrage of “what did Wells Fargo do now?” or words that rhyme with Fonzi. People outside finance can be excused for having a dim, albeit biased, view of the profession since nobody reports on people doing an honest job.

With that in mind, I leave you with Mitchell’s understandable question:

Here’s my quick response:

Agustin’s response:

I’ll wrap with a footnote from a recent post:

The slicing and dicing of risk is finance’s salutary arrow of progress. Real economic growth is human progress in its battle against entropy. By farming, we can specialize. By pooling risk, we can underwrite giant human endeavors with the risk spread out tolerably. People might not sink the bulk of their net worth into a home if it wasn’t insurable. Financial innovation is matching a hedger with the most efficient holder of the risk. It’s matching risk-takers who need capital, with savers who are willing to earn a risk premium. Finance gets a bad rap for being a large part of the economy, and there are many headlines that enflame that view. I, myself, have a dim view of many financial practices. I have likened asset management to the vitamin industry — it sells noise as signal. But the story of finance broadly goes hand in hand with human progress. It might not be “God’s work” as Goldman’s boss once cringe-blurted, but its most extreme detractors as well as the legions of “I wish I was doing something more meaningful with my life” soldiers are discounting the value of its function which is buried in abstraction. Finance is code, so if software is eating the world, financialization is its dinner date.

Last Call

December 1984:

✍️The Day Los Angeles’ Bubble Burst (4 min read)


✍️Is the Housing Market Broken? (4 min read)
by Ben Carlson

See y’all in 2 weeks!


Moontower #143


This week I published the longest post I’ve ever written. It’s long because it was liberal with stories. This is the long-winded story I used to introduce the concept of hedging.

If You Make Money Every Day, You’re Not Maximizing

This is an expression I heard early in my trading days. In this post, we will use arithmetic to show what it means in a trading context, specifically the concept of hedging.

I didn’t come to fully appreciate its meaning until about 5 years into my career. Let’s start with a story. It’s not critical to the technical discussion, so if you are a robot feel free to beep boop ahead.

The Belly Of The Trading Beast

Way back in 2004, I spent time on the NYSE as a specialist in about 20 ETFs. A mix of iShares and a relatively new name called FEZ, the Eurostoxx 50 ETF. I remember the spreadsheet and pricing model to estimate a real-time NAV for that thing, especially once Europe was closed, was a beast. I also happened to have an amazing trading assistant that understood the pricing and trading strategy for all the ETFs assigned to our post. By then, I had spent nearly 18 months on the NYSE and wanted to get back into options where I started.

I took a chance.

I let my manager who ran the NYSE floor for SIG know that I thought my assistant should be promoted to trader. Since I was the only ETF post on the NYSE for SIG, I was sort of risking my job. But my assistant was great and hadn’t come up through the formal “get-hired-out-of-college-spend-3-months-in-Bala” bootcamp track. SIG was a bit of a caste system that way. It was possible to crossover from external hire to the hallowed trader track, but it was hard. My assistant deserved a chance and I could at least advocate for the promotion.

This would leave me in purgatory. But only briefly. Managers talk. Another manager heard I was looking for a fresh opportunity from my current manager. He asked me if I want to co-start a new initiative. We were going to the NYMEX to trade futures options. SIG had tried and failed to break into those markets twice previously but could not gain traction. The expectations were low. “Go over there, try not to lose too much money, and see what we can learn. We’ll still pay you what you would have expected on the NYSE”.

This was a lay-up. A low-risk opportunity to start a business and learn a new market. And get back to options trading. We grabbed a couple clerks, took our membership exams, and took inventory of our new surroundings.

This was a different world. Unlike the AMEX, which was a specialist system, the NYMEX was open outcry. Traders here were more aggressive and dare I say a bit more blue-collar (appearances were a bit deceiving to my 26-year-old eyes, there was a wide range of diversity hiding behind those badges and trading smocks. Trading floors are a microcosm of society. So many backstories. Soft-spoken geniuses were shoulder-to-shoulder with MMA fighters, ex-pro athletes, literal gangsters or gunrunners, kids with rich daddies, kids without daddies). We could see how breaking in was going to be a challenge. These markets were still not electronic. Half the pit was still using paper trading sheets. You’d hedge deltas by hand-signaling buys and sells to the giant futures ring where the “point” clerk taking your order was also taking orders from the competitors standing next to you. He’s been having beers with these other guys for years. Gee, I wonder where my order is gonna stand in the queue?

I could see this was going to be about a lot more than option math. This place was 10 years behind the AMEX’s equity option pits. But our timing was fortuitous. The commodity “super-cycle” was still just beginning. Within months, the futures would migrate to Globex leveling the field. Volumes were growing and we adopted a solid option software from a former market-maker in its early years (it was so early I remember helping them correct their founder correct the weighted gamma calculation when I noticed my p/l attribution didn’t line up to my alleged Greeks).

We split the duties. I would build the oil options business and my co-founder who was more senior would tackle natural gas options (the reason I ever got into natural gas was because my non-compete precluded me from trading oil after I left SIG). Futures options have significant differences from equity options. For starters, every month has its own underlyers, breaking many arbitrage relationships in calendar spreads you learn in basic training. The first few months of trading oil options, I took small risks, allowing myself time to translate familiar concepts to this new universe. After 6 months, my business had roughly broken even and my partner was doing well in gas options. More importantly, we were breaking into the markets and getting recognition on trades.

[More on recognition: if a broker offers 500 contracts, and 50 people yell “buy em”, the broker divvies up the contracts as they see fit. Perhaps his bestie gets 100 and the remaining 400 get filled according to some mix of favoritism and fairness. If the “new guy” was fast and loud in a difficult-to-ignore way, there is a measure of group-enforced justice that ensures they will get allocations. As you make friends and build trust by not flaking on trades and take your share of losers, you find honorable mates with clout who advocate for you. Slowly your status builds, recognition improves, and the system mostly self-regulates.]

More comfortable with my new surroundings, I started snooping around. Adjacent to the oil options pit was a quirky little ring for product options — heating oil and gasoline. There was an extremely colorful cast of characters in this quieter corner of the floor. I looked up the volumes for these products and saw they were tiny compared to the oil options but they were correlated (gasoline and heating oil or diesel are of course refined from crude oil. The demand for oil is mostly derivative of the demand for its refined products. Heating oil was also a proxy for jet fuel and bunker oil even though those markets also specifically exist in the OTC markets). If I learned anything from clerking in the BTK index options pit on the Amex, it’s that sleepy pits keep a low profile for a reason.

I decided it was worth a closer look. We brought a younger options trader from the AMEX to take my spot in crude oil options (this person ended up becoming a brother and business partner for my whole career. I repeatedly say people are everything. He’s one of the reasons why). As I helped him get up to speed on the NYMEX, I myself was getting schooled in the product options. This was an opaque market, with strange vol surface behavior, flows, and seasonality. The traders were cagey and clever. When brokers who normally didn’t have business in the product options would catch the occasional gasoline order and have to approach this pit, you could see the look in their eyes. “Please take it easy on me”.

My instincts turned out correct. There was edge in this pit. It was a bit of a Rubik’s cube, complicated by the capital structure of the players. There were several tiny “locals” and a couple of whales who to my utter shock were trading their own money. One of the guys, a cult legend from the floor, would not shy away from 7 figure theta bills. Standing next to these guys every day, absorbing the lessons in their banter, and eventually becoming their friends (one of them was my first backer when I left SIG) was a humbling education that complemented my training and experience, illuminating some ways of thought that would have been harder to access in the monoculture I was in (this is no shade on SIG in any way, they are THE model for how to turn people into traders, but markets offer many lessons and nobody has a monopoly on how to think).

As my understanding and confidence grew, I started to trade bigger. Within 18 months, I was running the second-largest book in the pit, a distant second to the legend, but my quotes carried significant weight in that corner of the business. The oil market was now rocking, with WTI on its way to $100/barrel for the first time, and I was seeing significant dislocations in the vol markets between oil and products. This is where this long-winded story re-connects with the theme of this post.

How much should I hedge? We were stacking significant edge and I wanted to add as much as I could to the position. I noticed that the less capitalized players in the pit were happy to scalp their healthy profits and go home relatively flat. I was more brash back then and felt they were too short-sighted. They’d buy something I thought was worth $1.00 for $.50 and be happy to sell it out for $.70. In my language, that’s making 50 cents on a trade, to lose 30 cents on your next trade. The fact that you locked in 20 cents is irrelevant.

You need to be a pig when there’s edge because trading returns are not uniform. You can spend months breaking even, but when the sun shines you must make as much hay as possible. You don’t sleep. There’s plenty of time for that when things slow down and they inevitably will. New competitors will show up soon enough and the current time will be referred to as “the good ole’ days”. Sure enough, that is the nature of trading. The trades people do today are done for 1/20th the edge we used we used to get. That’s not fully explained by falling costs. That’s progress of human knowledge and returns to scale.

I started actively trading against the pit to take them out of their risk. I was willing to sacrifice edge per trade, to take on more size (I was also playing a different game than the big guy who was more focused on the fundamentals of the gasoline market, so our strategies were not running into one another. In fact, we were able to learn from each other). The other guys in the pit were not meek or dumb. As I said earlier, they were bright. Many simply had different risk tolerances because of how they self-funded and self-insured. My worst case was losing my job, and that wasn’t even on the table. I was transparent and communicative about the trades I was doing. I asked for a quant to double-check what I was seeing.

This period was a visceral experience of what we learned about edge and risk management. It was the first time my emotions were interrupted. I wanted assurance that the way I was thinking about risk and hedging was correct so I could have the fortitude to do what I intellectually thought was the right play.

Money Angle

The rest of the post gets into a proper discussion of hedging:

What Is Hedging?

Investopedia defines a hedge:

A hedge is an investment that is made with the intention of reducing the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting or opposite position in a related security.

The first time I heard about “hedging”, I was seriously confused. Like if you wanted to reduce the risk of your position, why did you have it in the first place.? Couldn’t you just reduce the risk by owning less of whatever was in your portfolio? The answer lies in relativity. Whenever you take a position in a security you are placing a bet. Actually, you’re making an ensemble of bets. If you buy a giant corporation like XOM, you are also making oblique bets on GDP, the price of oil, interest rates, management skill, politics, transportation, the list goes on. Hedging allows you to fine-tune your bets by offsetting some of the exposures you don’t have a view on. If your view was strictly on the price of oil you could trade futures or USO instead. If your view had nothing to do with the price of oil, but something highly idiosyncratic about XOM, you could even short oil against the stock position.

Options are popular instruments for implementing hedges. But even when used to speculate, this is an instance of hedging bundled with a wager. The beauty of options is how they allow you to make extremely narrow bets about timing, the size of possible moves, and the shape of a distribution. A stock price is a blunt summary of a proposition, collapsing the expected value of changing distributions into a single number. Imagine a typical utility stock that trades for $100. Now imagine a biotech stock that is 90% to be worth 0 and 10% to be worth $1000. Both of these stocks will trade for $100, but the option prices will be vastly different.1

If you have a differentiated opinion about a catalyst, the most efficient way to express it will be through the options. They have the most urgent function to a reaction. If you think a $100 stock can move $10, but the straddle implies $5 you can make 100% on your money in a short window of time. Annualize that! If you have an even finer view — you can handicap the direction, you can score a 5 or 10 bagger allocating the same capital to call options only. Conversely, if you do not have a specific view, then options can be an expensive, low-resolution solution. You pay for specificity just like a parlay. The timing and distance of a stock’s move must collaborate to pay you off.

So options, whether used explicitly for hedging or for speculating actually conform to a more over-arching definition of hedging — hedges are trades that isolate the investor’s risk.

The Hedging Paradox

If your trades have specific views or reasons, hedging is a good idea. Just like home insurance is a good idea. Whether you are conscious of it or not, owning a home is a bundle of bets. Your home’s value depends on interest rates, the local job market, state policy. But also on some pretty specific events. Your house value depends on “not having a flood”. Insurance is a specific hedge for a specific risk. In The Laws Of Trading, author and trader Agustin Lebron states rule #3:

Take the risks you are paid to take. Hedge the others.

He’s reminding you to isolate your bets so they map as closely as possible to your original reason for wanting the exposure.

You should be feeling tense right about now. “Dude, I’m not a robot with a Terminator HUD displaying every risk in my life and how hedged it is?”.

Relax. Even if you were, you couldn’t do anything about it. Even if you had the computational wherewithal to identify every unintended risk, it would be too expensive to mitigate2. Who’s going to underwrite the sun not coming up tomorrow? [Actually, come to think of it, I will. If you want to buy galactic continuity insurance ping me and I’ll send you a BTC address].

We find ourselves torn:

  1. We want to hedge the risks we are not paid to take.
  2. Hedging is a cost

What do we do?

Before getting into this I will mention something a certain, beloved group of wonky readers are thinking: “Kris, just because insurance/hedging on its own is worth less than it’s actuarial value, the diversification can still be accretive at the portfolio level especially if we focus on geometric not arithmetic returns…rebalancing…convexi-…”[trails off as the sound of the podcast in the background drowns out the thought]. Guys (it’s definitely guys), I know. I’m talking net of all that.

As the droplets of caveat settle the room like nerd Febreze, let’s see if we can give this conundrum a shape.

Reconciling The Paradox

This is a cornerstone of trading…

Edge scales linearly, risk scales slower

Continue reading:

✍️If You Make Money Every Day, You’re Not Maximizing(28 min read)

From My Actual Life

A month ago I started tutoring elementary school students in math. These kids are in vulnerable communities that were hit extra hard by the impact of remote learning. They are one or more grades behind standards.

One-on-one instruction is effective but a luxury. The non-profit always needs more volunteers. Without volunteers, this cannot happen.

The organization offers training before you start as well as all the supplies you need. There are opportunities to teach in-person for reading and remote for math.

If you live in CA you can help!

You only need to get your fingerprints done for a background check and be willing to commit 30 minutes a week. You can do more if you like. I do 2 sessions a week with a second-grader and a third-grader. You don’t need to be “good” at math. If you can count backward from 10 to 5, you already know things that these kids need help with. Seriously.

Ping me if you are interested. This will give you time to get your background check and training (training is just a few hours).

The next sessions will be summer and then the return to school in the fall.

Moontower #142

First, a giant thank you for reading this letter. This is Moontower’s 3-year anniversary. This week the 3,000th subscriber joined. Thank you to the 45 people or so who agreed to read that very first issue.

Writing online allowed me to unlock myself in ways that I couldn’t without your support. So truly, thank you.

Ok friends, let’s proceed.

This week, I published the sequel to There’s Gold in Them Thar Tails.

It begins with a recap of part 1:

  1. We saw that an explosion of choice whether it’s a job or college applicants, songs to listen to, athletes to recruit has made selection increasingly difficult.
  2. A natural response is to narrow the field by filtering more narrowly. We can do this by making selection criteria stricter or deploying smarter algorithms and recommendation engines.
  3. This leads to increased reliance on legible measurements for filtering.
  4. Goodhart’s law expects that the measures themselves will become the target, increasing the pressure on candidates to optimize for narrow targets that are imperfect proxies or predictors of what the measure was filtering for.
  5. Anytime we filter, we face a trade-off between signal (“My criteria is finding great candidates”) and diversity. This is also known as the bias-variance trade-off.
  6. Diversity is an essential input to progress. Nature’s underlying algorithm of evolution penalizes in-breeding.
  7. In addition to a loss of diversity, signal decays as you get closer to the extremes. This is known as tail divergence. The signal can even flip (ie Berkson’s Paradox).
  8. The point where the signal noise overwhelms the variance in the candidates is an efficient cutoff. Beyond that threshold, selectors should think more creatively than “just raise the bar”.

Part 1 ends with a discussion of strategies for selectors and selectees.

Part 2 extends the discussion with what tail divergence says about life and investing.

✍️There’s Gold In Them Thar Tails: Part 2 (24 min read)

It’s a long post including footnotes, but there is a large section about options trading that will only appeal to masochists.

The post roadmap:

  1. We begin with the challenge of scaling our moral intuitions up to an age where our ethics must be explicitly coded. AI and automation require making species-level questions less rhetorical.
  2. The prescription is humility. The simple math of regression shows this as correlations break down or invert in the extremes. The CAPM to Hedging post was actually a diversion that ended up being a stand-alone post as I was writing the tiny math section in Part 2.
  3. From there we move into trading and investing strategies to exploit our misunderstanding of extremes. 2 words: respect path. We start with a story of a famous investor/governor who stubbornly didn’t respect path.
  4. We then talk about familiar path-respecting approaches to investing: care with leverage, appreciating “rebalance timing luck” (hugs to@choffstein) and finally thinking about path vs terminal value.
  5. This opens the door to a discussion of trade expressions and the need to map them tightly to our isolated trade premises. I use options to demonstrate 3 path-aware approaches: static, dynamic, combined.
  6. The combined approach is touched on briefly. It’s technical but not complicated and lends itself more to a video (maybe one day). It’s also an example of why it’s useful to understand option structures and the basic arbitrage relationships.
  7. Then we move to general investing styles that respect path: venture and “gorilla” investing. They both know what they don’t know about extreme outcomes and construct strategies that are robust to that reality.I’m not an expert in those approaches but was drawn to their common link of manufacturing convexity. Convexity is not volatility or leverage. It’s the slope of your p/l steepening in the direction of the market because your position size changes.

    When your signals are weak as they are for extreme outcomes, you want to preserve convexity into the unknown. If you can do that, you can funnel wider. This can be higher yielding than tuning your signals harder.

  8. Review and concluding remarks — Happy prospecting!

Money Angle

Speaking of Corey Hoffstein:

His tweet brought my attention to @cobie and his masterful description of psychology.

I also appreciated Josh Brown’s take on the sell-off in so-called growth or momentum names. Here’s an excerpt from Jan 31’s It’s not over yet.

I’m less interested in the real-time action. Focus the evergreen psychology instead:

Where do bounces come from in a midst of a correction?

Sometimes it’s just that stocks have fallen too far for sellers to want to keep selling. This isn’t bullish. In fact, this type of bounce can suck people back in by creating the appearance that the worst is over. Growth stocks in particular. Because belief dies hard and enthusiasm for cutting edge technologies fades slowly, not suddenly. Which mean the give-up process is long and drawn out – even after a stock is cut in half sometimes the worst is still yet to come. The slow bleed after is often worse than the initial shocking drop that preceded it.

Over at Verdad Capital, Dan Rasmussen revisits their “Bubble 500” list of overpriced growth stocks, originally created in the Summer of 2020. It’s filled with money-losing companies working in exciting areas of technology such as electric vehicles and gene editing therapy and so on. Needless to say, this list of bubble stocks has gotten absolutely destroyed year-to-date, after having run straight up in Verdad’s face through the middle of 2021.  Dan explains two very important things in his update this week: The first is that sell-offs for growth stocks differ from sell-offs for value stocks in one very important way:

This breakdown is significant, especially for growth stocks. Remember, growth stocks trend, and value stocks mean revert. The psychology is simple. People hear about a hot stock that’s gone up 3x, they buy some, it goes up 2x, they buy more: the whole attraction of buying a hot growth stock is the historic return trajectory. Value stocks are the opposite: you do well buying them when they’re down…

This idea is counterintuitive – that some stocks actually become worse buys as they are falling to lower prices, but the explanation is psychological, not financial. Stocks trading at excessive valuations require a fan base to sustain their share prices. That fan base is often a bandwagon-jumping melange of traders and investors who are attracted to recent gains. Yes, they’ll latch onto the fundamental story, but the fact that the stock has been and currently is going up is the main thing. When the stock breaks, so too does the fandom. And when the fan base moves on to greener pastures or runs out of money, a new fan base will not form for this stock with its chart in decline. Broken growth stocks become orphans. There is no natural place for them to find a home.

Momentum is a divergent strategy while “value” is a mean-reverting strategy. Several years ago the research team at OSAM published edifying papers on how these approaches work. I wrote a summary here:

✍️ Notes on OSAM’s Factors from Scratch (6 min read)

Value works by fading overreaction. Momentum is attributed to underreaction. In a name trending higher, the sellers are discounting the substance of new information too aggressively. In dork world, we call this anchoring. If you pay attention to “anomalies” you may recognize the concept of post-earnings drift as an acute example of anchoring. Wikipedia even has an entry for it.

Fear or FOMO in markets cuts both ways. On the way down, we fear a loss of wealth. On the way up we fear social embarrassment — we aren’t keeping up with our neighbors. We are caught between self-preservation and shame. I wonder if being part of the herd is any consolation on the way down while everyone loses. Or is this just another miserable psychological asymmetry inseparable from speculation?

Anyway, I don’t have much to add. Investing requires you to be honest about your desires, constraints, and emotional tolerance. If you can get honest with yourself, you can initiate a plan that you can stick to. You want to avoid ad-hoc decisions with the bulk of your savings (I’m not gonna poo poo on gambling with 1 or 2% of your wealth, especially if it suppresses wider risk-seeking behavior. Agustin Lebron’s Laws of Trading has a provocative section about “risk set points” that operate like weight set points. If your life becomes too dull in one way you spice it up in another and vice versa. Maybe Alex Honnold’s portfolio is all in bonds 🤷🏽).

Oh and just a quick observation that you can ponder in the context of those flashy, earningless momentum stocks. If you start at $1 and double 6x you get to $64. If the stock drops 50%, you’ve only erased 1 halving.

Be careful knife catching.

From My Actual Life

I wrote this 1 year ago but I’m reprinting it with updated ages. I flew into NYC on St. Patrick’s day this week, 6 years after this story. I spent yesterday at my nephew’s birthday in NJ.

St. Patrick’s Day now reminds me of a story that is now 6 years old…

March 17, 2016. I flew into NYC for a 36-hour business trip. I was hopping around the city meeting with bank derivative sales desks. Routine relationship maintenance. I planned poorly. I was late to every meeting since you can’t cross 5th Ave during the St Patty’s parade.

Anyway, that evening I was at dinner as a client. When I went to the restroom I checked my phone. My family chat was blowing up.

My sister just had a baby.

I hadn’t told my east coast fam I was in NYC because it was just a quick trip. But right then, I called my mom in NJ and stunned her with the knowledge that I was an hour away in NYC.

When I returned to the table, I excused myself from dinner, hopped on a bus to my childhood house in Hazlet, borrowed my mom’s car and drove down to Jersey Shore Medical Center.

It was close to midnight.

When I walked into the hospital room I’ll never forget my sister’s look of ‘what are you doing here?’

I got to meet my new nephew, spent an hour chatting with my sis and her husband, and made it back to NYC with enough time to grab my bags and get back to JFK.

Since then, St Patrick’s Day has meant much more than day drinking.

Happy 6th birthday to my nephew!

Moontower #141

Let’s start with a question from Twitter:

This is a provocative question. Patrick was clever to disallow Berkshire.

As I was working on the second part of There’s Gold In Them Thar TailsI got distracted by that tweet.

My Reaction To The Question

I don’t know anything about picking stocks. I do know about the nature of stocks which makes this question scary. Why?

  1. Stocks don’t last forever

    Many stocks go to zero. The distribution of many stocks is positively skewed which means there’s a small chance of them going to the moon and a reasonable chance that they go belly-up. The price of a stock reflects its mathematical expectation. Since the downside is bounded by zero and the upside is infinite, for the expectation to balance the probability of the stock going down can be much higher than our flawed memories would guess. Stock indices automatically rebalance, shedding companies that lose relevance and value. So the idea that stocks up over time is really stock indices go up over a time, even though individual stocks have a nasty habit of going to zero. For more see Is There Actually An Equity Premium Puzzle?.

  2. Diversification is the only free lunch

    The first point hinted at my concern with the question. I want to be diversified. Markets do not pay you for non-systematic risk. In other words, you do not get paid for risks that you can hedge. All but the most fundamental risks can be hedged with diversification. See Why You Don’t Get Paid For Diversifiable Risks. To understand how diversifiable risks get arbed out of the market ask yourself who the most efficient holder of a particular idiosyncratic risk is? If it’s not you, then you are being outbid by someone else, or you’re holding the risk at a price that doesn’t make sense given your portfolio choices. Read You Don’t See The Whole Picture to see why.

My concerns reveal why Berkshire would be an obvious choice. Patrick ruled it out to make the question much harder. Berkshire is a giant conglomerate. Many would have chosen it because it’s run by masterful investors Warren Buffet and Charlie Munger. But I would have chosen it because it’s diversified. It is one of the closest companies I could find to an equity index. Many people look at the question and think about where their return is going to be highest. I have no edge in that game. Instead, I want to minimize my risk by diversifying and accepting the market’s compensation for accepting broad equity exposure.

In a sense, this question reminds me of an interview question I’ve heard.

You are gifted $1,000,000 dollars. You must put it all in play on a roulette wheel. What do you do?

The roulette wheel has negative edge no matter what you do. Your betting strategy can only alter the distribution. You can be crazy and bet it all on one number. Your expectancy is negative but the payoff is positively skewed…you probably lose your money but have a tiny chance at becoming super-rich. You can try to play it safe by risking your money on most of the numbers, but that is still negative expectancy. The skew flips to negative. You probably win, but there’s a small chance of losing most of your gifted cash.

I would choose what’s known as a minimax strategy which seeks to minimize the maximum loss. I would spread my money evenly on all the numbers, accept a sure loss of 5.26%. The minimax response to Patrick’s question is to find the stock that is the most internally diversified.

This led me to write a post launching into the basics of regression, correlation, beta hedging and risk. Especially the concept of “risk remaining” which contains practical and surprising intuition.

It is a topic that affects traders and investors. It also ties back poignantly to the ideas of tail divergence I’m writing about in part 2 of There’s Gold In Them Thar Tails.

The little detour involves math but I move slowly and try to offer footholds of intuition along the way.

[Trying to simply difficult topics is absolutely my intention. If I’m writing over your head, I’m doing something wrong. Tell me. Help me help you.]

Here you go:

✍️From CAPM To Hedging (16 min read)

Money Angle

I recently read Laws Of Trading by Agustin Lebron. It’s exceptional.

Here’s my review. There’s a link with my notes at the end.

If I ran a trading firm this would be Day 1 reading. After finding out where the bathroom is and filling out your W-4, you would be handed this book and told to finish it by tomorrow. After 1 year on the job, you are required to re-read it. There are many sentences in this book that serve as somewhat off-hand or connecting, but are deeply insightful. The kinds of things that would not be perceived by a novice but veterans will recognize they are reading something by a deeply experienced professional. As a veteran of options trading, I found this feature makes the book transcend being informative into being delightful. Trading is the art of decision-making turned into a high-rep game. It requires:

  • multi-level thinking
  • sound epistemology
  • discipline
  • self-awareness
  • self-honesty
  • alignment
  • humility
  • curiosity
  • competitiveness
  • collaboration
  • creativity
  • comparing

It is deeply intertwined with technology, math, and economic reasoning. This book is an instant classic. The rules in the book are reductions of vast, hard-fought institutional knowledge and the leading edge of thinking about risk. The author combined his training and experience at Jane Street, a legendary quant trader and market-making firm, with a broad intellectual acumen. Both his engineering background and affinity for liberal arts and philosophy come through to create a guide that transcends a single discipline. Personally, reading this book left me with nostalgia as the type of thinking was the water I swam in when I was at SIG (Jane Street’s lineage traces to SIG alumni who became under-the-radar legends themselves). My second personal feeling is, “damn, I wish I wrote that book.” Except I couldn’t. The author is an elite synthesizer with a nuanced comprehension for coding, organizational behavior, interviewing, and data analysis.

My notes are below. They are sparse compared to the depth of insight crammed into 250 pages. Every chapter covers a “rule”, situates that rule in the context of finance, then applies it to decisions all people face in the course of life.

✍️Notes on The Laws Of Trading (Notion.MoontowerMeta)

Last Call

I’ve watched this a lot. What a natural.

Moontower #140


I’m in SoCal again this weekend visiting with family and getting a couple nights away with Yinh.

I didn’t get around to publishing part 2 of how to think about finding opportunities in the extremes of the distribution. For background see last week’s There’s Gold In Them Thar Tails: Part 1.

This week I’ll share a thought I jotted down after reading a rousing post by scientist Michael Nielsen. Hopefully, this is a dose of local, actionable inspiration.

✍️ Unlock One Another: The Right Compliment At The Right Time (6 min read)

This post is not science. It’s not rigorous. It is a simple belief, both self-evident and load-bearing. Itself the proof of its premise because believing it is my own generative force.

Stated as I see it:

The closest thing we have to a perpetual motion machine is inspiration.

  1. Inspiration creates its own energy for action.
  2. Action creates information.
  3. Information generates inspiration.


A finance-dork way of saying this is inspiration is the cheapest source of capital.

One of the ideas economist Tyler Cowen is recognized for comes from his short post, The high-return activity of raising others’ aspirations, where he writes:

At critical moments in time, you can raise the aspirations of other people significantly, especially when they are relatively young, simply by suggesting they do something better or more ambitious than what they might have in mind.  It costs you relatively little to do this, but the benefit to them, and to the broader world, may be enormous.

This is in fact one of the most valuable things you can do with your time and with your life.

I’m interested in education and how people learn. There’s nothing more invigorating than the moment of empowerment in a child’s eye when they realize “they can”. As a parent, my proudest moments are the goofy smiles on the boys’ faces when they found themselves able to do what they didn’t think they could. Swim their first lap, add in their head, not panic when they got stuck on a zipline (my 7-year-old was calmer than I would have been).

Learning is the receipt you get for courage.

Courage is virtue. It takes courage to see clearly. To empathize. To put aside your preconceptions. To not give into malformed ideas about yourself or others without a challenge. To face your insecurities. To step outside your comfort zone.

I’m as fallible as the next person but I try to live in a way that takes what Cowen says seriously. It’s something I try to keep top of mind especially when I can feel my patience fray. That’s when I need to recruit that belief the most. This is part of being charitable. Giving people credit for wanting to be better. Sometimes a jerk is just a jerk. But sometimes a jerk is someone who wants to be better but doesn’t know how. They are scared but don’t know it. Behind that defense mechanism is an insecure soul that once crawled on all fours, just like you. I don’t want to let go of the rope until the last second when it’s clear they want to take me over the cliff with them. Sometimes I do. I can’t live up to my own ideals.

But I and all of us must continue to try. Noah Smith, a writer and professor, explains why (emphasis mine):

I think our society has moved a huge amount in the direction of meritocracy — of being open to talent. I think we’re really good at that at this point. But I think our pursuit of meritocracy has caused us to neglect a few important things. One is ambition; the people whose talent we discover are the people who come to us, who shove their talent in our faces, because their parents instilled drive and ambition and confidence in them. But there are a lot of talented people out there whose abilities never get discovered because no one ever told them they should aim high, or because they didn’t have parents to push them, or because they simply lacked confidence. My brother-in-law grew up poor in a trailer park, no one in his family had ever been to college. But my sister instilled him with a little more ambition, and he just graduated from a top law school. Without the luck of meeting my sister, he might still be in a trailer park! So our system is so focused on setting up these tournaments for ambitious people that we fail to go out and nurture the ambition of people who have undiscovered talent...A successful society rests on a broad foundation of human capital; it does not place all its hopes on a thin sliver of genius. I see too many people in Silicon Valley — both liberals and conservatives — tacitly accept the notion that only a few people have real potential. And maybe that’s because venture-funded software is such a winner-take-all market. I don’t know. But that’s not the attitude that will bring this country a broad industrial renaissance or social revitalization.

Scientist Michael Nielsen offers an idea anyone can borrow. Nielsen contends that if you give specific compliments to people instead of generic platitudes you are capable of doing far more good than you think. It kicks off a spiral of inspiration in its target. It can validate what they think they are good at, a source of energy that pays off 10-fold as they lean even harder into their gifts. And if that recipient didn’t realize they had some special gift in the first place? You just hit’em with a defibrillator. They just gasped to life.

And maybe. For the first time.

I leave you with his essay. It hit hard because my love language is compliments and since I’m not special I assume it is for many people. It’s a simple thing you can do for others. It takes being present. A dash of vulnerability. And a few words.

On Volitional Philanthropy (a short essay!)

by Michael Nielsen

T. E. Lawrence, the English soldier, diplomat and writer, possessed what one of his biographers called a capacity for enablement: he enabled others to make use of abilities they had always possessed but, until their acquaintance with him, had failed to realize. People would come into contact with Lawrence, sometimes for just a few minutes, and their lives would change, often dramatically, as they activated talents they did not know they had.

Most of us have had similar experiences. A wise friend or acquaintance will look deeply into us, and see some latent aspiration, perhaps more clearly than we do ourselves. And they will see that we are capable of taking action to achieve that aspiration, and hold up a mirror showing us that capability in crystalline form. The usual self-doubts are silenced, and we realize with conviction: “yes, I can do this”.

This is an instance of volitional philanthropy: helping expand the range of ways people can act on the world.

I am fascinated by institutions which scale up this act of volitional philanthropy.

Y Combinator is known as a startup incubator. When friends began participating in early batches, I noticed they often came back changed. Even if their company failed, they were more themselves, more confident, more capable of acting on the world. This was a gift of the program to participants [1]. And so I think of Y Combinator as volitional philanthropists.

For a year I worked as a Research Fellow at the Recurse Center. It’s a three-month long “writer’s retreat for programmers”. It’s unstructured: participants are not told what to do. Rather, they must pick projects for themselves, and structure their own path. This is challenging. But the floundering around and difficulty in picking a path is essential for growing one’s sense of choice, and of responsibility for choice. And so creating that space is, again, a form of volitional philanthropy.

There are institutions which think they’re in the volitional philanthropy game, but which are not. Many educators believe they are. In non-compulsory education that’s often true. But compulsory education is built around fundamental denials of volition: the student is denied choice about where they are, what they are doing, and who they are doing it with. With these choices denied, compulsory education shrinks and constrains a student’s sense of volition, no matter how progressive it may appear in other ways.

There is something paradoxical in the notion of helping someone develop their volition. By its nature, volition is not something which can be given; it must be taken. Nor do I think “rah-rah” encouragement helps much, since it does nothing to permanently expand the recipient’s sense of self. Rather, I suspect the key lies in a kind of listening-for-enablement, as a way of helping people discover what they perhaps do not already know is in themselves. And then explaining honestly and realistically (and with an understanding that one may be in error) what it is one sees. It is interesting to ask both how to develop that ability in ourselves, and in institutions which can scale it up.

[1] It is a median effect. I know people who start companies who become first consumed and then eventually diminished by the role. But most people I’ve known have been enlarged.

Note, by the way, that I work at Y Combinator Research, which perhaps colours my impression. On the other hand, I’ve used YC as an example of volitional philanthropy since (I think) 2010, years before I started working for YCR.

Money Angle

The Moontower Money Wiki is a project to help people who don’t know how to invest their savings. I plan to turn these write-ups into a series that starts with the “nature of investing” and holds their hand through implementation. The final form of the series is TBD. Maybe in-person lectures, exercises, videos. I don’t know how this will unfold.

Right now I’m just interested in helping people think better about investing. The first step of that is to help people unlearn the garbage they are bombarded with because of FOMO, punditry, and “democratization” apps laced with dopamine.

Investing is not about “engagement”. It’s actually brain damage if you cannot anchor yourself to goals and plans. People are not wired to navigate random number generators, so we need to form a qualitative basis for why we invest in the first place and how investing actually leads to returns.

Many readers here are sophisticated, so it will be beneath them. Yet, I want to make something even HSers can understand. When I complete a post for it, I will share them in this letter. It takes me longer than I’d like to get anything done so I won’t venture a guess on how often I’ll publish one.

So after all that blathering here’s the most recent write-up:

✍️The Challenge Of Outperformance (Link)



Last Call

Today is also an opportunity for global inspiration.

Our friend Tina and her organization All Hands And Hearts are procuring buses to evacuate children from Ukraine to Poland which is accepting refugees with open arms.

Every little bit helps. Every bus they procure can make many runs back and forth. 300 kids per run. The money is being used for buses, diapers, food and water.

Re-tweet to spread the word as well.


I just have to shout fellow fintwitter, Jessica. Mostly known for shitposting (and math wizadry when she feels like it), Jess is absolutely boss when it’s time for action.

From My Actual Life

The world feels big and scary. Everyone deals with it in their own ways. For better or worse, I keep my focus on what I think I can handle but try to do my best within that narrow aperture.

A few personal thoughts I had this week.

Yinh reminds me that you can’t have all the things at the same time. Matthew McConaughey (you should listen to the Greenlights audiobook or see my takeways from his commencement speech…Wooderson’s self-help advice stands with the best) recognizes that as well. He recommends “checking in” with each category intermittently to see how well you are tracking compared to where you’d like to be. It’s inevitable that you will lag in various categories at various times. A smattering of conscious effort, even if contrived, can keep you from orphaning a category you once told yourself matters.

Stay groovy!

Moontower #139

If you were accepted to a selective college or job in the 90s, have you ever wondered if you’d get accepted in today’s environment? I wonder myself. It leaves me feeling grateful because I think the younger version of me would not have gotten into Cornell or SIG today. Not that I dwell on this too much. I take Heraclitus at his word that we do not cross the same river twice. Transporting a fixed mental impression of yourself into another era is naive (cc the self-righteous certain they’d be on the right side of history on every topic). Still, my self-deprecation has teeth. When I speak to friends with teens I hear too many stories of sterling resumes bulging with 3.9 GPAs, extracurriculars, and Varsity sport letters, being warned: “don’t bother applying to Cal”.

A close trader friend explained his approach. His daughter is a high achiever. She’s also a prolific writer. Her passion is the type all parents hope their children will be lucky enough to discover. My friend recognizes that the bar is so high to get into a top school that acceptance above that bar is a roulette wheel. With so much randomness lying above a strict filter, he de-escalates the importance of getting into an elite school. “Do what you can, but your life doesn’t depend on the whim of an admissions officer”. She will lean into getting better at what she loves wherever she lands. This approach is not just compassionate but correct. She’s thought ahead, got her umbrella, but she can’t control the weather.

My friend’s insight that acceptance above a high threshold is random is profound. And timely. I had just finished reading Rohit Krishnan’s outstanding post Spot The Outlier, and immediately sent it to my friend.

I chased down several citations in Rohit’s post to improve my understanding of this topic.

In the post, we tie together:

  1. Why the funnels are getting narrower
  2. The trade-offs in our selection criteria
  3. The nature of the extremes: tail divergence
  4. Strategies for the extremes

continue reading…

✍️ There’s Gold In Them Thar Tails: Part 1 (13 min read)

Money Angle

A collection of links

✍️ Matt Levine’s “Everything Is Securities Fraud” Compilation (Link)
by @RabbiJacob16

I’ve suggested multiple times on Twitter that someone should compile Matt Levine’s Money Stuff articles by topic and sell it as a book. RabbiJacob16 compiled all of Levine’s writing on his “Everything is Securities Fraud” theme and made it free.

✍️What explains the rise of AMMs?(17 min read)
by Haseeb Qureshi

This is an ancient post by crypto standards (1.5 yrs old) yet remains a lucid explanation of automated market-making. You’ll find lots of fun reading on Haseeb’s site regardless.

I also published 2 posts that are exhaust from an article I’m writing. I’ll publish that next week.

✍️Notes From Mauboussin’s “Who Is On The Other Side?” (7 min read)

These are notes from a report where:

Michael describes a taxonomy of inefficiencies, supported by a rich vein of academic research. The goal is to have a clear idea of why efficiency is constrained and why we believe we have an opportunity to generate an attractive return after an adjustment for risk.

✍️ On Contrarianism (3 min read)

A collection of quotes and ideas on the importance and difficulty of being contrarian.

From My Actual Life

I saw War on Drugs Friday night at Bill Graham in SF with Jake.

The song Under The Pressure (below) is all rise, but when the drop comes, that’s an ethereal experience live. Both times I’ve seen WoD that moment stays with me.

Moontower #138

Trading is just decision-making under uncertainty. I suspect that the most advanced thinking on reasoning about risk/reward comes from areas where the stakes are high and there are many reps. Military, medicine, markets.

I got my professional start out of college at SIG (Susquehanna Investment Group). They were and remain one of the largest trading firms globally. In the derivatives world, their training program is legendary.

While I only spent 2000-2008 at SIG, I continued to work with SIG alum until I left trading a year ago. My writing is deeply influenced by my career and the thinking I absorbed from SIG’s education and its culture.

Shane Parrish of The Knowledge Project recently interviewed long-time SIG director Todd Simkin. Todd has a hand in many of SIG’s functions including trading, education, recruiting and determining compensation (option traders negotiating comp with option traders would make an amazing YT channel btw…bonus season is a steady brigade of Moroccan bazaar tactics and brinksmanship).

The institutional knowledge leaking from the interview is hard to come by. SIG is famously secretive which should give you a hint about Todd’s lessons: they are hard enough to implement that there’s little risk in sharing them. The infrastructure and know-how to teach people to make good decisions is a high leverage activity. It is a competitive advantage and it is expensive (before going to SIG’s boot camp in Bala Cynwyd, PA for 3 months we signed 3-year non-compete agreements so they could protect their investments in us).

I did a write-up of the interview dotted with my own commentary. I refactored the lessons into 3 broad categories: decision-making, education, communication. The 3 are deeply intertwined. Only after listening to this interview did I appreciate just how deliberate SIG’s leaders were about education. The interview left me feeling somehow hacked and grateful.

SIG’s influences on me are self-apparent. But I want to highlight imprints that were not obvious until I heard Todd explain their dogma. For example, my own beliefs about education being “socio-cultural” is something I picked up by osmosis. The way I talk to my kids is reminiscent of how I communicate at work (minus the occasional f-bomb lobbed at an anthropomorphized futures ladder). As I listened I was thinking, “wait a minute, is that where I got that from”?

It’s hard to separate SIG’s influence from the lessons anyone would pick up from surviving any high-rep trading career. Still, the lessons from the interview are evergreen and conveniently encapsulated.

Here’s what to expect:

On Decision-Making

  • Why SIG’s approach to markets starts with humility and Bayesian thinking: update hard!
  • Trading is not about opinions or theses. It’s about finding disconfirming propositions. See what that means.
  • How to minimize confirmation bias and “resulting”.
  • Tribalism as a short-circuit in an otherwise useful shortcut. The tension between heuristics and “first principles”.
  • Addressing a paradox — knowledge of cognitive bias doesn’t inoculate you from it.
  • Todd was put on the spot to name the single most important variable to making better decisions. He doesn’t even hesitate. It has to do with the next section.


  • Truth-finding is the raw material needed to make better decisions. Creating a culture of truth-finding requires a deep appreciation of how to communicate. How does SIG foster such a culture? What does constructive communication look like? Unconstructive communication is subtle and dangerous because it can actually look like constructive communication. Find out the difference.
  • What is “reflective listening”? Why does it sound stupid? Why does it actually work? (This will be a familiar topic to anyone who has read Chris Voss’ negotiation manual Never Split The Difference).
  • The power of “how do you feel about that?”. When my wife listened to that part she told me “It sounds just like you”.
  • The principle of “charity” in both life and trading and why it’s the base of the negotiation pyramid.
  • An amazing example of “modeling behavior” — the story of Todd’s dad when he tried to quit lacrosse.


  • How SIG’s training class is organized
  • SIG’s education philosophy: Traders are made, not born. What they look for in recruits and why.
  • SIG’s application of Lev Vygotsky’s idea that all learning is “socio-cultural”. What that means and the emphasis on modeling behavior.
  • When teaching, a master needs to find a student’s “zone of proximal development” so they can provide suitable “scaffolding”. By using the Socratic method, a teacher can zero in on where the student’s boundaries are. This idea even extends into their interview process.


  • Todd was on Jeopardy (won once and lost once). The conversation he had with SIG co-founder Jeff Yass before and after his competition is comically revealing of SIG’s culture.
  • Todd’s experience with depression and emphasis on mental health.

✍️My Commentary on Todd Simkin’s Interview On The Knowledge Project (31 min read)

If you prefer to skip directly to the interview:

🎤 Todd Simkin – Making Better Decisions (The Knowledge Project)

I tend to believe that the most advanced thinking on risk-taking in markets comes from trading firms operating at scale betting their own money. There is plenty of cross-pollination between prop firms and traditional bank trading desks as well. Many of these firms have training programs to form a solid basis for decision-making.

You can find a list of prop trading firms here:

📜 Listing of Proprietary Trading Firms (

Their websites tend to be sparse but if you are looking for a rigorous foundation in markets it would be hard to find a better education than spending some time at one of these shops.

Fair warning:

Like college admissions, I expect it’s harder to get into these firms than when I graduated. The business has a brutally high attrition rate as well. If any of that deters you, you likely saved yourself from a career that wasn’t going to work for you anyway.

You can see SIG’s gaming blog for a glimpse into what they find fun.

🔖Raise Your Game (Link)

One last personal note.

I am grateful for everything I learned at SIG and from the brilliant people I was able to work alongside throughout my career.

But I’ve written before about how I “overlearned” some lessons. This wasn’t SIG’s fault so much as me being dense. Trading and investing are sufficiently similar that you can port your thinking directly from trading to investing. But they are different enough to screw with how you map concepts from one to the other.

This is especially true for derivatives traders. Derivs folk will tend to start with a much stronger prior of market efficiency. It’s partly an expression of SIG’s humility credo and partly reinforced by the daily grind of the job. Everything they trade is on its way to being arbed with respect to underlying securities. Arb pricing is always relative. It does not share the same undiversifiable or systematic risk premium that the underlying has.

This leaves derivatives traders blind to underlying risk premiums. That is not their business. That’s the business of investors.

I’ve written before about how my narrow understanding of derivatives hindered me in the domain of investing.

✍️ How I Misapplied My Trader Mindset To Investing (14 min read)

Money Angle

A couple of months ago I discovered software to construct ETF portfolios called Composer. It allows you to implement strategies without typing code. Instead, you stack logic with easy-to-understand blocks. Think children’s programming languages like Scratch or ScratchJr.

It’s an idea I wanted to see exist. It addresses a gap in the market. People who want to automate the risk management of their portfolios but don’t actively trade. It sits halfway between robo-advisors and Robinhood. It’s the sweet spot of what I want. I doubt I’m alone.

When I met the team I offered to write about it on their blog. This was published on Thursday:

✍️ On Having an Edge (9 min read)

Composer is lowering the friction to manage the risk of your investments. No coding, no external spreadsheets, and no maintenance to keep up. You can take an active role in designing your own risk management strategies known as “symphonies”, you can borrow snippets from other symphonies, or simply subscribe to symphonies that align with your own goals and tolerances.

Discovering Composer was important to me in another way. It re-invigorated my effort to flesh out the Moontower Money Wiki. I’ll back up a second to re-hash my inspiration for the wiki. A few years ago I went online to learn more about investing. Despite being a trader, investing felt like a separate craft even if it employed familiar tools. Finding the intersection of what resonated and what I understood about risk, I envisioned a guide that could take a curious person from a basic understanding of what investing is to implementation. The target audience I had in mind was “college-friend-who-knows-what-a-stock-is-but-doesn’t-know-how-to-start-investing-their-savings”.

The concept of investing is not complicated but the details are challenging. The largest is implementation. How does one size positions or modify the portfolio as needed? There’s a cold soup of decisions right down to generating buy and sell orders, executing, tracking.

My enthusiasm for the project waned because I thought I’d be building a bridge to nowhere. Maybe I could get someone to an initial heading, but they would be lost as far as course-correcting. Composer is a bridge from the guide to the implementation.

The guide remains a work-in-progress and I expect it to take the bulk of this year to finish since it’s one pet project of many. You can see the outline below. Some of the sections are already written. I have ideas on how to make it actionable and useful once I’ve filled it out and workshopped it.

Many of you are already knowledgeable or sophisticated investors. I think you can connect the dots between the direction of the wiki and why a software like Composer fit together. For novice investors, I’ll learn how best to hold your hand.

✍️ Moontower Money Wiki (Link)

From My Actual Life

We are visiting family and went to the Getty Center for the first time. Highly recommend it. Breathtaking location on LA’s westside.

After getting cultured,

we drove through Bel Air. My older kid was hoping to see Lebron and figured this is where the Lakers live since I told him this is where super-rich people have houses.

This is us climbing the hills of opulence in a rented Mustang which definitely did not fit in with the local whips.

The only other time I’ve been to Bel Air was 30 years ago. I entered a mansion with aspirations of going into medicine and left hearing about a thing called “Wall Street”.

Happy President’s Day weekend.

Stay groovy.

Moontower #137

The Best Way To Complain Is To Make Things

Here are 5 minutes of inspiration to inject into your veins.

h/t @jposhaughnessy

If you found that resonant, I’d like to point you to a book by friend and Moontower reader Paul Millerd. It is a must-read if you feel like there is a “pebble in your shoe” on your current path. If you have thought about trying on a different version of yourself. If something feels off about your direction, this book can help you sort your thoughts and take a step towards a new heading.

It’s called Pathless Path (Amazon).

I’ve sent it to several people.

I wrote a document (about as close as I get to making “fan art”) of excerpts re-factored by topic and interspersed with my commentary:

✍️ Notes On Pathless Path (link)

The document is meant to memorialize my takeaways but is not a substitute for reading what is a profoundly personal story. A story that vibrates with personal agony.

Please consider buying a copy.

I’ll even buy you a copy if you promise to tell me what you learned from it 🙂

Here’s my Amazon review:

Money Angle

I’ve used several of 10kdiver’s threads as launching points to dive into a quantitative topic. If you are trying to learn about investing and associated math, his work is a goldmine.

Last month, he hosted a call-in show (he does these every weekend), where he taught about how volatility affects returns. He generously asked me to join because of my option’s background. Jump to specific topics from this thread:

🎤 Understanding Volatility (70 min)

The bulk of my contribution to the show came from 2 topics.

The first was a 2-part question that I’ll paraphrase:

  1. With all the great option content freely available, what do retail options traders still misunderstand about volatility?
  2. What aspect of the institutional experience is still missing for the average retail trader?

I spend 12 minutes answering these questions starting at the 40:25 mark. For the second part, I focused on where retail has the best chance for an advantage.

The second area I was able to help with was in discussing why volatility matters. For regular readers here, this feels self-evident, but 10kdiver’s much larger audience was raised on value-investing and Warren Buffet.

If you narrowly interpret Buffet you will get the impression that he is dismissive of volatility. In Buffet: Volatility Is Not A Risk, we find this quote (emphasis mine):

“Volatility is not a measure of risk. And the problem is that the people who have written and taught about volatility do not know how to measure — or, I mean, taught about risk — do not know how to measure risk. And the nice about beta, which is a measure of volatility, is that it’s nice and mathematical and wrong in terms of measuring risk. It’s a measure of volatility, but past volatility does not determine the risk of investing…in stocks, because the prices jiggle around every minute, and because it lets the people who teach finance use the mathematics they’ve learned, they have — in effect, they would explain this a way a little more technically — but they have, in effect, translated volatility into all kinds of — past volatility — in terms of all kinds of measures of risk.”

Volatility is a measure of risk. Is it incomplete? Of course. Literally, nobody thinks it’s the definition of risk with a capital R. No single measure can encapsulate risk or for that matter the merit of any investment.

I’ve discussed these points in various ways before:

I’ve noticed that 10kdiver threads sometimes get push back like “why are you talking about this volatility math, don’t you know Buffet said it doesn’t matter”.

That attitude reflects misunderstanding so in addition to my prior posts, here are a few additional ways to show why volatility matters:

  • In one of my favorite all-time papers, My Top 10 PeevesCliff Asness places this one as #1: “Volatility” Is for Misguided Geeks; Risk Is Really the Chance of a “Permanent Loss of Capital”.

    His conclusion is less cranky than his characteristic style:

    “I still think this argument is mostly a case of smart people talking in different languages and not disagreeing as much as it sometimes seems.”

    The root of the argument is quants are decomposing risk from return and more deferential to mark-to-market, while Buffet refuses to separate risk from return.

  • Another one comes from a real vs nominal illusion.

    It is also conveniently addressed in Asness’s Peeves. Specifically #10: “Bonds Have Prices Too”.

    You may hear some people say they want to buy an individual bond rather than a bond fund. They worry that bond fund prices move around and have no real expiration, so when interest rates rise your losses are somehow more real. But if you buy a bond and hold it to maturity you can put your head in the sand, and never lose.

    This is nonsense.

    You have lost in a real sense since the money you are being returned is worth less in a world in which rates have risen to compensate for inflation. The bond fund is effectively taking your loss today rather than later.

    If you sell your bond for a loss, you can reinvest at a higher yield going forward. That’s a similar experience to just being in the bond fund.

    Holding to maturity does not mean you have less risk. It’s an illusion.

  • This brings me to mark-to-market.

    Having a preference for private assets that are less volatile simply because their marks are stale is bizarre (although it’s understandable if there is a principal-agent problem at play…hmm, couldn’t possibly be that could it?). They are still volatile. The fundamentals of the private business are correlated with the public market volatility.

    Even if you don’t believe your investment should be marked down, then you should be sad you can’t redeem your private investment at par to rebalance into public stocks after the market drops 20%. Giving up liquidity without a premium because it will behaviorally “save you from yourself” sure feels like you sold the option to rebalance at zero.

    Further reading: How Much Extra Return Should You Demand For Illiquidity? (7 min read)

  • Speaking of options…

    I’ve seen the argument that holding cash means you don’t have to care about volatility. After all, you can dollar-cost-average into drawdowns.

    Um, what?

    To say that holding cash means you don’t have to worry about volatility is to misunderstand the arrow of causation. The reason you have cash is because you are concerned about volatility! Cash is liquidity. It’s the ultimate option (its cost is inflation). What maximizes the value of any option including cash?

    You guessed it. Volatility.

Last Call

You know I’m a big user of Notion. I published the Pathless Path notes in Notion. If you’re interested in checking Notion out, here are a few links for inspiration.

✍️ How I Use Notion (19 min read)
by Robert Andrew Martin

Leave it to an astrophysicist to be this thorough.

And then you have my latest Notion experiment…slightly less intellectual:

🍸 Moontower Cocktails (database)

If you filtered the database for the ingredients you have at home you will see which cocktail recipes you can make. My repertoire is sparse but the use of Notion is more interesting.

I adopted the template from Notion ninja Ben Smith. I’m not using the word “ninja” lightly. Spend a few minutes clicking around over there.

Stay groovy,