COVID stream of conciousness

It’s fair to expect a mini baby boom in about nine months from now. Zak is actually a Sandy baby. Born July 13, 2013. Do the math. Although we were already living in SF we had close friends from NJ visiting during Sandy week and they re-scheduled their flights to get back home before the storm hit. Anyway, you are probably reading this. You already knew Zak’s birthday, but not sure if you counted the months backwards before. TMI maybe.

COVID stream of consciousness…

…feels too big.
…Friday I worked from home for the first time. I kept a Google hangouts video chat open with my partners so I don’t get too lonely.
…find ways to support your local businesses. Gift certificates has been a popular idea floating around.
…landlords, making rent is going to be hard for people. some leniency especially in what is bound to be a soft real estate market is not just a way to shoulder some burden but may very well be optimal.
… support your favorite small bands. Buy merch. Nobody makes money selling music. So no performance, no money.
…find a way to cut a deal with people who give lessons.
…check on elderly neighbors.
…homeschooling will be even less stigmatized as resources their upscale war-machine-style
…some people who always wanted to work from willfind the fantasy underwhelming. Perhaps dreadful.
…everyone is stressed but if this just feels like a snow day you have extra bandwidth. Meanwhile, there’s someone close by who is facing crushing pressures, anxiety, or just dire decisions.

Embrace the tech

We are all lucky to have smartphones and video calling. Recent shows I’ve enjoyed have been Cheer on Netflix (Ladarius is extra af) and Ramy on Hulu (very edgy comedy about a 22-yr old Egyptian kid in NJ navigating modernity, Islam, and dating). The Arabic on the show is perfect Egyptian Arabic Ramy’s parents’ accents is humor that you can only appreciate if you have had a shib-shib thrown at you during dinner. Thanks to my cousin Gaby for finding that gem.

Don’t forget to go outside but don’t touch the jungle gym. Maybe order a kettlebell and a jump rope for at-home WODs.

A RadReads Testimonial

My friend Khe has been a big inspiration and helping hand. I got to know him by simply reaching out in response to his letters which I’m an enormous fan of. Besides being super smart, prolific, and epically competent he has a big heart. When I didn’t even know him he took the time to respond to my question with a personal vid. There’s no quid pro quo, he just has a big giver mindset as I came to learn. He’s a kindred spirit and I just wanted to recognize that’s he’s been not only influential but directly helpful.

You should definitely subscribe to his letter. He doesn’t need a plug from me. This is for you. (Subscribe Link)

But if something can top the letter it’s truly the community he built. Hundreds of people joined in that spirit of mutual aid and vulnerability. Entrepreneurs, artists, designers, educators, developers, financiers. Outside my private chats with old friends, it’s the coziest place on the web for me. If you email him, he can invite you. For people looking for a spark, my number one rec is to join the RadReads Slack group.

I’m pretty active in there so you’ll find a familiar handle. But everyone in there is insanely friendly. Lurk around, you’ll understand.

There’s a new #remote-work channel in there for folks looking for a virtual watercooler with video chats. Lots of experiments in our new world.

Finally, he did a brief but terrific letter this week on dealing with COVID distancing. (Link)

The Distance Learning Links You Need

Resources for parents with kids at home

Start Here

  • Outstanding tips and resources for kids both offline and online (Link)
  • Shane Parrish’s crowdsourced thread of learning resources (Link)
  • List of all education companies now offering free subscriptions (Link)


  • Outschool: Live online learning for all grades and subjects (Link)
  • A Guide to Using Khan Academy Kids for Remote Learning (Link)
  • Beanstalk: Distance learning made free for the duration of the COVID threat (Link)

Focused Resources

  • Mystery Science: elementary science videos (Link)
  • Kurzgesagt: animated science videos  (Link)
  • 3Blue1Brown: animated math concepts (Link)
  • Moontower list of resources to teach kids about money & business (Link)

Game Focus

  • Moontower guide to game-based learning (Link)
  • Moontower reader Erik Berg’s favorite board games and why (Link)


  • Nicky Case has the best explorable games to learn about complex phenomena (Link)
  • Nicky is building an explorable COVID game to understand how infections spread (Link).
  • Science Buddies: A great site for finding science projects by interest and age level. We want to do the one about germ spread. (Link)


  • Khan Academy’s Recommended Schedules (Link)
  • That schedule floating around social media:

Get Unstuck and Move

A Chance To Break Inertia

We are all anxious. The spread of possible outcomes is well outside the range of future outcomes that we imagine. We automatically presume that each year will be similar to the previous year give or take. We underestimate the volatility. After all, the chance of any particular bad thing happening is small. But if the count of all those particular things is N then (1-p)^N math means it’s only a matter of time before you are faced with something dire that you never planned for.

If a global pandemic doesn’t remind you to be an active participant in choosing your life, then the road you’re traveling is nothing more than a stretch between toll booths. We are not just here for the scenery.

“There Are no ‘Adults’. Everyone’s making it up as they go along. Figure it out yourself, and do it.” – Naval Ravikant

Raise your hand if you were told this when you were young. I wasn’t. I don’t blame my parents. They were just trying to fit in this country. To get along you need to go along. That whole idea. Hard to imagine someone who fought to get to this country thinking otherwise once they finally arrived. The downside is it’s a recipe to live someone else’s life. The fact that it could be a good life is actually a trick. Because it makes you feel guilty when you wake up and realize it’s not the one you would have chosen. Nobody will understand if they see you achieving that ‘model’ life that they themselves are chasing.

Actually, it’s worse than that. If you start chipping away at the idea that this dream was ever yours, you will scare your peers. Especially those who underneath it all feel exactly the way you do. By re-evaluating your priorities you remind people they are trapped in a cage of their own making. It makes them immediately accountable for how they feel.

Imagine you live in one of those zip codes with 10-rated public schools. You tell your friends you are selling the house and are choosing to rent a tiny house. Some will praise you, even though on the inside they think you are a leper. Or worse, they’ll think you got fired. Then there’s that couple using a line of credit to install an open kitchen with that red-knobbed range. They secretly envy your freedom. Not financial freedom. Your mental freedom. Remember if you woke up tomorrow with cheaper tastes you just got a giant pay raise.

So what was it that you wanted before all the adults told you what to want?

Search and Experiment

This issue is the 1 year anniversary of Moontower. This weekend last March I sent the first email to 40 people who indulged me. I asked 100 people total and I was thrilled 40 said yes. It was an experiment. I’m always reading, taking notes and trying to connect dots. Why not share these remixes of others’ originals to see what happens?

Well, a lot happened. Today, there are nearly 500 Moontower readers (help me find 5 more!). Small but beyond what I imagined. I don’t even have that many Facebook friends. It’s a lot of work but it’s so worth it. I have been delighted by the rekindling of many friendships. In some of these cases, it could be described as mutuals who I saw a lot in the past but actually only became friends with recently because of the letter. Looking back it doesn’t surprise me that someone who earns a regular place in your inbox might also be someone you’d want to be friends with. And that works in both directions as you start having more regular dialogues. In many cases, the conversations have led to in-person friendships. All the inbound prompted me to tag many of them with an “Encouragement” label in Gmail. It’s a little self-care hack I picked up that might help on a rainy day. Overall, lots of positivity. More than I could reasonably anticipate.

Beyond the relationship aspect, the letter set a few things in motion. The combination of a forced weekly writing practice plus encouraging feedback gave me confidence. That led to writing more personally and originally (I’m not getting ahead of myself — this a work-in-progress). This, in turn, uncovered a seed I want to water — the joy of teaching. By far my favorite feedback has been when somebody says they learned something from me. So I tilt the letter in that way when I can. What’s something abstract that I can take down a notch? Or what’s a principle that exists in one area that can be applied to another? I didn’t know I could do this until others told me I could.

Moontower gives me a chance to learn new things and use that to spread understanding. So I discovered I liked explaining things. I know I love boardgames. And having a 1st grader always leaves me thinking about how games can be used to educate children. So I’ve meandered into the world of games-based teaching as a side pursuit. I’d say I’m in the research phase, but in the meantime, I’m going to take a week off work in June and host a boardgame camp for about 12 kids. Other than coaching a few kids sports teams this is way out of my element but you have to start somewhere. This chain of events brings me towards a new lesson.

You Can’t Introspect Your Way Towards Fulfillment

Life feels best for me when I’m in a flow. Building. Producing not just consuming. And if this experiment taught me anything, it’s to introspect a bit less. Have more of a bias towards action. This isn’t my default. I’d say shoegazing was more my thing (I won’t lie, I do dig Jesus and Mary Chain). To people who are naturally wired for action, like Yinh who many of you know is a first-ballot Hall of Famer at getting sh%t done, this sounds obvious. Subeasy even. But I know I’m not alone. I know from conversations with many readers who are struggling with inertia.

There are people of all ages searching for what they are good at. What they should be doing. People that don’t know their strengths. They are curious and eager but don’t know how to direct their energy. The prescription for all of them is to just take a small step and do something. If you want to get fit, don’t wait until you buy the running sneakers you think you need. Just do a few pushups right this second. The action muscle needs to be trained. I’m working on it too. Readers, if you fall in this camp and you hang with me every week in this letter, I’d bet you have a lot to give inside you. But you can’t introspect it out. You have to take a step. And you need to continue. Like a dumb mule. Forward. Why? Why is a shoegazing question. Drop it. The why will come to you later. The only formula that matters today is effort x reps equals something big. If you multiply either by zero, you get zero.

Concepts To Help You Get Started

1) Remix

Copy what I did. I started with the simple goal to be an ambassador of ideas to people who aren’t reading what I am. I take things from Twitter or my favorite blogs and show them to people who don’t read Twitter. Anyone can be a bridge. Your millennial friends are probably reading Dave Perell but that doesn’t mean everyone you know is. What insights from your career generalize to be useful to others? There’s no limit to how many people can say the same thing because everyone has a unique experience to bring to bear on subject matter. All the best self-help is just ancient philosophy that the Greeks pondered thousand of years ago anyway. But people need to be communicated to in different ways and through different formats. So the lessons can be repackaged with modern case studies or new stories that may stick in new ways. The Yoda of financial journalism, Jason Zweig, writes:

I write the exact same thing between 10 and 60 times a year, making sure none of my readers can tell that I’m repeating myself. That’s because there are only a handful of enduring truths about investing, but editors demand more than a handful of columns each year. Sooner or later, you must either lie or repeat yourself. Since I prefer the latter choice, I scour websites and journals in neuroscience, evolutionary psychology and animal behavior, looking for research that will give me new ways of saying the same old things. That way, the only person who knows I’m repeating myself is me. (Link)
2) Collect Your String. Build Your Fire

Khe Hy cites the journalistic practice of “collecting string”. These are “the random threads of thought that could someday be spun into a larger story.” Collecting string is hearing a new phrase for the first time and wondering where it came from. It’s a digging up an old anecdote that you’re convinced will resonate with your tribe. It’s the intuition that a “fleeting thought or observation” could someday lead “lead to another story, whether that’s a quick blog post or a book.” (Link)

Nick Maggiulli reminds us that building your fire takes time.

The analogy I like to use is building a fire. Most of your life you gather firewood. It’s not useful by itself, but it has potential. You keep gathering. You keep storing away information, memories, thoughts, opinions. You do this until one day you get a spark of inspiration and decide to start a fire.

Your fire starts small. A few people see it, but most ignore it. You keep throwing more logs on the fire and it burns brighter. Maybe more see it and take notice, but it’s still mostly unknown.  You keep at it day by day, night by night until you have a roaring blaze. Then they can’t ignore you. (Link)

Nick’s blog is one of my favorites. But he wrote one post a week and it wasn’t until #71 that it caught fire (staying away from “going viral” until fire season is back in CA).
3) Get numb so you can be consistent

Cedric Chin writes:

If people offer you advice, shut it out. It’s not that feedback is bad, or that advice is terrible, it’s that none of it is useful until you’re numb. You must get over the fear of launching before you focus on the disgust you feel about the quality of your work. When the disgust is all that’s left, that’s when you know to seek feedback.

Radio producer Ira Glass has a famous quote where he says:

“Nobody tells this to people who are beginners, I wish someone told me. All of us who do creative work, we get into it because we have good taste. But there is this gap. For the first couple years you make stuff, it’s just not that good. It’s trying to be good, it has potential, but it’s not. But your taste, the thing that got you into the game, is still killer. And your taste is why your work disappoints you. A lot of people never get past this phase, they quit. Most people I know who do interesting, creative work went through years of this. We know our work doesn’t have this special thing that we want it to have. We all go through this. And if you are just starting out or you are still in this phase, you gotta know its normal and the most important thing you can do is do a lot of work. Put yourself on a deadline so that every week you will finish one story. It is only by going through a volume of work that you will close that gap, and your work will be as good as your ambitions. And I took longer to figure out how to do this than anyone I’ve ever met. It’s gonna take awhile. It’s normal to take awhile. You’ve just gotta fight your way through.”

The most important thing, in the beginning, is to establish a cadence before you can focus on improving quality. But you can’t ‘fight your way through’ if you have a problem with producing. Get numb, then get good. (Link)

For more links to help you get unstuck:

  • When you learn an instrument you usually start by learning other people’s songs. I paraphrase in my own words when I take notes. I think of paraphrasing as doing a cover of the original. The writing is mine but the idea isn’t. Ben Franklin arduously did this to train himself to write. Austin Kleon recommends this approach as well. Try to reproduce others’ work so you can get in their headspace. By reproducing and reverse-engineering you learn the craft. Your voice will come later. David Laing explains in Covers Shouldn’t Just Be For Musicians. (Link)
  • The odds you notice someone else’s bad hair day is negligible. Don’t fall for the spotlight effect — overestimating how much people pay attention to our behavior or appearance. Remember, nobody cares. Most of your thoughts revolve around “I”. That’s true for everyone. The only people who notice you have a crush on you.
  • Perhaps you’d rather be anonymous. You can still capture the same benefits and perhaps even more efficiently. Dave Perell explains how as well as some of the history behind pseudonyms. (Link)
  • The very first Moontower started with a bit about dealing with “imposter syndrome” in the modern world. (Link)


A Virus of Cognitive Errors

You may have seen this question:

In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half of the lake? 

It’s a variation of the “how many times would you need to fold a paper in half for the thickness to reach the moon?” that you have probably heard. There’s also the rice on a chessboard version.

Why are there so many covers of the same idea? Because even when people know it’s a trap they still get it wrong. Like watching someone smell something that you warned was gross. This never gets old. These questions don’t get old because we have no intuition for geometric growth.

Jacob Falkovich writes:

Before Rationality gained a capital letter and a community, a psychologist developed a simple test to identify people who can override an intuitive and wrong answer with a reflective and correct one.

Feel free to take that “test” here. (Link)

A Fatal Combination Of Cognitive Errors

So it appears our System 1 thinking is restricted to linear intuition. This is not an issue in isolation. It’s more of a problem if most people are incapable of passing a CRT and overriding this System 1 thinking. I’m not well-versed on CRT literature but I suspect most subjects don’t even have an intuition for when a growth problem lives in Mediocristan or Extremistan. There’s another angle though. If it turns out most people are at least socially aware that these questions are traps and they are still getting them wrong then I’m extra sorry. That means we can recognize something’s up but the bottleneck is 2nd-grade arithmetic.

So we don’t know when our slower, methodical thoughts should take the reins from our gut reactions. Or worse, our slower thoughts don’t even know how to drive. But really getting stuck in the mud requires a wider community cognitive failure.

Falkovich continues:

Most people sitting alone in a room will quickly get out if it starts filling up with smoke. But if two other people in the room seem unperturbed, almost everyone will stay put. That is the result of a famous experiment from the 1960s and its replications — people will sit and nervously look around at their peers for 20 minutes even as the thick smoke starts obscuring their vision.

The coronavirus was identified on January 7th and spread outside China by January 13th. American media ran some stories about how you should worry about the seasonal flu instead. The markets didn’t budge. Rationalist Twitter started tweeting excitedly about Rand supply chains. (Link)

So let’s sum up:

  • We have poor intuition about geometric processes.
  • Many people don’t override this intuition because they don’t realize when they should.
  • Even if they realize they should, they often can’t add.
  • And those who do override it are socially inhibited

The devil is too smart to knock on each person’s front door. He waits for people to get together then slips the poison in the punch — remember, alarmism about any 1% event has a 99% chance of indistinguishable from crying wolf.

The Flu Kills More People

Wrong logic. A frequentist will look at zika, Sars, ebola, swine flu and conclude overblown. This is the definition of survivorship bias. The fat, happy turkey who thinks November will be just like the prior months. Two people can come to opposite conclusions if one merely counts past results while the other goes below the surface to find the underlying dynamic.  Tyler Cowen generalizes the camps into “base raters” vs “growthers”. (Link)

This has been my favorite thread quantifying the trajectory and timing of CoVid penetration, hospital bed and mask shortages, and the interaction of these variables. (Link)

The Canine Uprising?

I was supposed to be in the Dominican Republic, not your inbox this weekend. We bailed on the trip. We didn’t want a remote chance of being quarantined in the Caribbean. Some people might think that’s paradise. Those people don’t have 3-year-olds.

Without any local plans, we just took care of some chores and most nights we played Quacks of Quedlinburg with Zak. For the game nerds, it’s a bit like a deck builder. It’s known as a bag builder but with a don’t-bust-press-your-luck mechanic. To most of you, that means nothing but for the remaining, you should know this an outstanding game. It’s fun, and seasoned gamers won’t like this necessarily, but it has enough luck to allow a first grader to compete with an adult. I found myself thinking quite a bit about the value of the “options” (they’re actually chips representing ingredients in a potion recipe) in the game and their respective costs. The concepts of theta, volatility, and vega would be visible to someone with a finance background if they looked past the game skin.  An engineer would see this game as a very pure simulation (most likely AI) based problem especially since the game has no trading interactions. Avi tells me the designer is coming out with a much heavier follow-up catering to a less casual crowd.

Here’s a random bit.

My 3-year-old, Maxen, is obsessed with dogs. He constantly pretends he is one, barking and crawling on all fours. He can never let one pass by without giving it the full Pepe Le Pew treatment. Friday he asked for one. He doesn’t know this is never happening. His grandmother lives with us. She believes all dogs are members of a sleeper cell waiting for their chance. Actually, that’s the wrong metaphor. This is more widespread. More like a canine Skynet. We think we have programmed our “best friends” but it’s only a matter of time before the pack becomes self-aware. I’m not kidding. She doesn’t even trust puppies.

So cohabitation with grandma and Sparky is a non-starter. I keep trying to explain to her how ridiculous she is. If Arab Spring taught us anything, a networked rebellion would require large-scale coordination. Twitter. Smartphones.


Do Books “Work”?

You will probably relate.

Picture some serious non-fiction tomes. The Selfish Gene; Thinking, Fast and Slow; Guns, Germs, and Steel; etc. Have you ever had a book like this—one you’d read—come up in conversation, only to discover that you’d absorbed what amounts to a few sentences? I’ll be honest: it happens to me regularly. Often things go well at first. I’ll feel I can sketch the basic claims, paint the surface; but when someone asks a basic probing question, the edifice instantly collapses. Sometimes it’s a memory issue: I simply can’t recall the relevant details. But just as often, as I grasp about, I’ll realize I had never really understood the idea in question, though I’d certainly thought I understood when I read the book. Indeed, I’ll realize that I had barely noticed how little I’d absorbed until that very moment.

Andy Matuschak is a designer, engineer and researcher. I’m a fan of his writing and his cred is impressive. He helped design iOS and ran R&D at Khan Academy. He describes his work as:

building technologies that expand what people can think and do. I explore ideas by expressing them in real-world systems, juggling approaches from industry and academia to seek insights they can’t see alone. Thinking through making.

In his essay Why Books Don’t Work he makes claims that provide a basis for his career. It may force you to revalue your impression of familiar activities. (Link with my highlights)


  • Books are surprisingly bad at conveying knowledge, and readers mostly don’t realize it.


  • Lectures don’t work because the medium lacks a functioning cognitive model. It’s (implicitly) built on a faulty idea about how people learn—transmissionism—which we can caricaturize as “lecturer says words describing an idea; students hear words; then they understand.” When lectures do work, it’s generally as part of a broader learning context (e.g. projects, problem sets) with a better cognitive model. But the lectures aren’t pulling their weight. If we really wanted to adopt the better model, we’d ditch the lectures, and indeed, that’s what’s been happening in US K–12 education.

Education is changing.

To understand something, you must actively engage with itThat notion, taken seriously, would utterly transform classrooms. We’d prioritize activities like interactive discussions and projects; we’d deploy direct instruction only when it’s the best way to enable those activities. I’m not idly speculating: for the last few decades, this has been one of the central evolutionary forces in US K–12 policy and practice.

This is a topic I’m thinking about a lot these days. Whether we are re-training adults or experimenting with childhood learning, this is a thread worth watching.

If interested, know that Matuschak’s claims about books are contested. (Link)

A Recipe For Overpaying

On the Gestalt University podcast, Chris Schindler has an intuitive explanation for the CAPM-defying empirical result that says higher volatility assets actually exhibit lower forward returns. Very simply explained — a large dispersion of opinion leads to overpaying. He points to private markets where you cannot short a company. The most optimistic opinion of a company’s prospects will set the price.

Options markets don’t care about CAPM. They model geometric returns. Higher volatility explicitly maps to lower expected geometric returns. I’ve referred to this idea as a “volatility drain” before. But here’s another way to see this. If you hold the price of an asset constant and raise the volatility the median expected outcome is necessarily more negative. Why? Because a stock is bounded by zero, so increasing the volatility should seemingly make the expected value of the asset higher. But if the market thinks the stock price is worth the same despite the higher volatility, that implies the probability of the asset declining must be higher.

(In reality, markets are constantly voting on the price, the volatility, and the left and right skew which allows an inclined observer to impute a continuous distribution.)

Back to Schindler’s point, if you want to fetch a high price for an asset, you want its value to be highly uncertain. Then sell it in an un-shortable auction with many bidders.

Dinosaur Markets

This past Wednesday, a NYT oped wrote:

..But after watching the stock market plummet on Monday and governments struggling to get hold of the contagion, I’ve begun to smell doom.

A response to this quote on Twitter:

“Hilarious. He only needs reactions of others to react, not basic facts.”

What do you think of that Twitter response? Is the oped author guilty of herd thought?

Let’s take a detour first, I promise it will re-connect in the end.

What Are Markets

There are various ways humans self-organize. Home life is an autocracy. Parents wield absolute power. If the kids get to vote on what’s for dinner it’s because the elders signed off on a temporary puppet democracy. In broader civilization, there are networks and governments. Plutocracy, theocracy, monarchy, parliament, communism, fiefdoms, tribes, democracy. No matter which backdrop they must operate in, one of humanity’s most clever constructs was the marketplace.

Through trade and barter, markets focus a multiplicity of needs, desires, and trade-offs into prices. Prices allocate resources. High prices attract supply and ration demand. A consistent ability to shrewdly respond to prices either as a company, investor, or consumer leads to profit. The potential and motive to profit certify prices as honest signals.

The Dinosaur Question

Democracies are controlled by votes. All votes are equal. But, markets are not democracies. To understand the difference I’ll recount a lesson I was taught as a trader trainee 20 years ago.

It was explained:

If you poll the population, “Did humans walk the earth at the same time as dinosaurs?”, the responses come back split about 50/50. That’s democracy.

Now imagine there is a contract that trades openly on an exchange that is worth $100 if it is true that dinosaurs and humans co-existed and $0 if that is false. Even though the population is split, this contract is not going to trade for $50. It’s going to zero. Why? Because the small percentage of people and scientists who know the truth are going to see a profit from selling this contract even down to $1 since they know this proposition is false. And if the scientists don’t have enough money, they will be able to convince or get hired by people with more money to back this venture of selling this contract to zero.

That is the value of markets. You get correct answers. While a democratic poll may tell you what people believe or desire, it does not assign the proper truth value to the proposition. Now consider the implications of being correct. You make more money which gives you more resources to continue being more correct. The marginal price in markets is set by the market participants with the most money and as a group, they have the best-calibrated assessment of what fair value is. And these groups are in the minority of the total betting population. Markets are not a democracy. To dismiss prices is an impressive act of arrogance.

An Aside For Finance Folks

You may recognize traces of strong-form efficient market hypothesis in this view. It is fashionable to point to market failures and bias which can distort the truth value of prices in our economy. Markets are nested within laws that are nested within our democracy. There are many joints in the structure subject to friction or even corruption which dilute the purity of markets. But for a market to be efficient doesn’t mean its truth value is decreed by the all-knowing. The standard to be efficient is simply to what extent you can earn an excess risk-adjusted profit betting against it. Well, by that standard market prices have a sterling track record revealing most players to be nothing but tourists. It could be wrong, but that doesn’t mean you can do better.

When Prices Seem Irrational

The correct reaction to strange prices is not to say “that’s stupid”. It’s “why is somebody paying that?” Prices are amazing discovery tools to explore “why”. When Vancouver condos are trading at egregious multiples over local wages, rather than presume the buyers were suckers, you may have discovered that Chinese nationals were restricted in how much Yuan they could expatriate. Real estate is a convenient store of value, not just shelter. While it’s not as stable as a savings account, the price of real estate as a safe haven for cash is not being set at the margin by someone like you. It’s set by a family across the world who finds its local savings account a bit too close to its government’s paws. The extra volatility is seen as nothing more than a convenience fee.

Ok, back to the tweet:

“Hilarious. He only needs reactions of others to react, not basic facts.”
Record scratch. Stop right there, freethinker.

When AAPL releases earnings, you don’t read the 10Q unless that’s your job. You look at the price after-hours to see how the market understood it. When a star player is placed on an injury report you look at the game line to see if the odds changed. These are correct reflexes for good reasons.

When you hear people lament that market prices in response to COVID-19 are being set by traders who know nothing about virology instead of doctors, pause for a moment. Are the sharps who set betting lines doctors capable of handicapping recovery times of turf toe or patellar tendons? Of course not. Their expertise is in looking at past data, pattern-matching, and propagating newly calibrated parameters through proven models to generate bets. A sharp’s long-term track record is a self-evident testimonial.

The best investors are information-synthesizing odds setters. This is being done across decentralized domains. The option guys are betting on volatility surfaces, the macro gals are thinking about growth rates and international money flows, while the fundamental folks are thinking about how many people are going to be watching Netflix, buying Purell, and working remote. VCs are Slacking their biotech founders while reporting back to their investors on calls. Those same investors close the loop back to the hedge fund managers who look up from their own war room analysis. The emergent consensus from all this hive activity is in fact what finance is. A networked machine optimized for pricing future states of the world. This optimization likely includes being networked to medical intelligence through its fastest pathways. The fact that it’s not all medical professional pathways should not offend. Instead, it speaks to how efficient this architecture is.

They say when you write to imagine who you are writing to. I feel like I just wrote to that person who has a market take based on what his rheumatologist uncle told him about viral infections. I’ll take my chances that the smartest people setting prices have access to the smartest minds in epidemiology.

The topic of market efficiency, the validity of prediction markets, and the wisdom of crowds would take several scholarly lifetimes to sift through. Who has time for that? I’ll just give you the tl;dr based on my professional experience.

  • Markets are very smart. If you cannot make sense of what they are doing most of the time you are missing something. I could fill a blooper reel of me getting served this lesson.
  • In the cases when you seemed to outsmart the market you are not actually on solid ground. You have probably just found seen an oasis in an epistemological desert.
  • Give prices their due. Understand your basis for mistrusting them when you do and see if you can test the supports for that basis with data as it emerges.
  • Finally, do not feel bad when you defer to liquid prices for an opinion. You will likely be in the smartest company.


If you are interested in the study of when to diverge from consensus, then muster some courage to read Inadequate Equilibria: Where and How Civilizations Get Stuck by Eliezer Yudkowsky. I plan to write a summary blog post of it one day but in the meantime read it for free online (Link).

I don’t follow the news much but keeping up on COVID-19 is one of those times. I subscribed to Taylor Pearson’s Twitter list which includes many smart voices ranging from scientists to investors. (Link)

For a single great follow on COVID-19, check out Balaji Srinivasan. He has been very on point in synthesizing the intelligence he’s gathered from various nodes in the system. He’s trying to steer a multi-disciplinary response to the virus (Link).

COVID-19 and Markets

I’ve explained in a past letter how the expensive put skew embedded in SPX option prices reflects 2 realities. First, the average stock in the index will see its volatility increase but more critically the cross-correlation of the basket will increase. Since index option variance is average stock variance times correlation, there is a multiplicative effect of increasing either parameter. The extra rocket fuel comes from the parameters themselves being positively correlated to each other.

In other words, correlation increasing leads to volatility increasing. Since volatility is a practical restraint on position sizing you can think of investment exposures as secretly levered to low correlations. Any battle-tested risk manager will pay close attention to not just net exposures of a hedged book but the gross exposures. The absolute size of the longs and shorts regardless of how offsetting they appear to be. Those gross exposures jump out of the closet to scare you at the worst times. When correlations rip higher.

Check out this bit from Byrne Hobart’s letter this week. First on correlation:

It’s a commonplace observation in finance that when markets go down, all correlations go to one. This makes perfect sense from a Minskian perspective: investors feel safe levering up when they expect economic fundamentals to stay healthy, but the more they lever up, the more any one fundamental change can break the entire system. But it’s also a broader truth: “Black Swans”—extreme events that blow up the assumption of a normal distribution—really only happen if a lot of seemingly-unrelated things are serially correlated. The reason models of the 2016 election underrated Trump was that they underrated the chance that the polling error could go in the same direction in every swing state. The reason credit default swaps on real estate-backed structured products were cheap in 2006 was that most investors didn’t realize that cheap credit had raised the correlation between housing markets, and that asset selection raised the correlation further within each structured product.

Correlation. A cute number between -1 and 1 upon which numbers with many more zeros rest. This can feel abstract if Excel is not your first professional language. When trying to adjust the current virus crisis to compare with historical ones, it’s useful to search for hidden forms of leverage including non-financial types.

Hobart continues:

The outcome of this is that every technology entrepreneur and investor needs to care about the global economy. The trends you’re counting on—free flow of capital, goods, information, and people—are dependent on a set of conditions that might not hold. And they’re correlated. Most useful macro discussions revolve around China, since it’s the axis around which the world economy revolves. But it’s also the lynchpin of the global electronics supply chain. Any plan that presupposes continuous improvements in smartphones and continually cheaper components assumes that China keeps on growing at the same pace, and remains tightly-coupled to the US, Europe, and emerging markets.

Manufacturers are realizing, and consumers are about to realize, that supply chains offer their own sort of leverage, with their own potential for a “Minksy Moment” in which a disruption in one place causes cascading chaos everywhere else. Coronavirus might be a minor speedbump, but it, or something like it, will eventually force a wholesale change in the pace and nature of globalization.

This week concerns of economic slowdown and supply chains as single points of failure are gripping markets. Wall Street is getting way in front of this one, calling for zero economic growth in 2020. Do we just jump to visions of empty planes and restaurants? Morgan Housel likes to remind investors of Napoleon’s definition of military genius: “The man who can do the average thing when everyone else around him is losing his mind.”

From Headlines To Numbers

Slow down to break it down. Consider what variables are being pushed around. Have a model. If your model maps variables to outputs then start turning the knobs to see how sensitive the outcomes are to different scenarios. The point here is not to do numeric Mad-Libs then believe the silly story you wrote. It’s an exercise in thinking. A model turns emotional headlines into dispassionate inputs so you can actually reason about them probabilistically.

My favorite analysis in this vein comes from the philosopher-king of valuation Professor Aswath Damodaran. He starts with his general model then shows at which nodes COVID-19 developments have an impact.

Again the actual numbers aren’t the point. It’s the calming process of seeing how abstract arguments which threaten to shut our minds down into fight-or-flight mode can be safely downshifted into cold digits. Type into cells, hit F9, generate an opinion that can just change with the facts. The full article including Damodaran’s spreadsheet. (Link)

I don’t have a strong corporate finance background. Damodaran’s website is one of the best resources on the web for learning. You can take his NYU course online or just go through his prolific writing. Tying together how growth rates, discount factors, reinvestment, and payout ratios all interconnect before arriving at valuation is actually fun to understand. I found it demystifying to work through this spreadsheet and I recommend it to anyone trying to understand the basics of how to think about share values. (Link)

If you want to see how he adjusts to new facts step through this post from Q42018 (Link)