Liquidity Ostrich

I have a friend who turned $2k into $6.5mm, eventually cashing out of the crypto markets with about $2.5mm. Because of the path, his framing is “what could I have done better?” He came to me looking for perspective on risk management.

I began my reply with a story I recounted in Talking To The Diamond Hands. In 2017, I was at dinner with a young product manager at Coinbase and an older tradfi friend that brought us all together.

At some point, the product manager who was about 22 went to the restroom. The senior guy, in a hushed tone, turned to me.


“So one of the reasons [the 22-year-old] wanted to talk to you is he has a high-class problem. He’s sitting on a giant pile of ETH he’s been mining since college. At current prices, he’s rich, but doesn’t know anything about investing. He needs advice and we thought you could help.”

As I was soaking that it in, our young tycoon was returning. There was no need to tippy-toe. The whiz kid cut right to it. He explained respectfully and with great maturity his “problem”.

What did I say to him?

“I don’t have much to say. If you listened to my opinion years ago you would never be in this beautiful predicament. I would never have held on this long, so there is nothing I can say that you should listen to. But now that you are here, I can offer one way to think about it — sell an amount that makes you feel like you never have to take a job just for money. You are 22 and achieved freedom.”

I don’t even know if this is good advice. It feels like such a dowdy perspective that it can only come from someone who would never have scored that big.

I re-told this story because I wanted to highlight an important point — there is no risk management rule forged from the business of trading that condones having most of your eggs in one basket. In other words, there’s no vetted risk management framework that would have let you turn $2k into $6mm so the entire conceit of “what could I have done better?” is misplaced.

That doesn’t mean it was wrong necessarily. It depends on your goals.

If you need ransom money by Friday, not betting everything on a roulette wheel tomorrow might be the riskiest course of action.

I’ve explained how bet sizing is not intuitive. I’m reading a Man For All Markets now, and there’s a scene where a 38-year-old Richard Feynman explains to Ed Thorp how he agreed to “be the house” for another friend who wanted to play roulette. Playing as the house, Feynman taps out after losing $80, underestimating the short-run variance of the game despite his advantage. The Nobel Laureate’s failed gambling intuition cautions us mortals that in some areas you should “work out the math”.

Now notice that my friend’s pickle is really not even at the level of bet sizing where we can triangulate on a reasonable range of answers given some constraints. My buddy’s dilemma is philosophical. What are constraints and the goals? His first task is to back up and find the inputs that reduce to “what matters to me”.

It reminded me of another conversation with a family member who was trying to solve what I’d call a “thymos-question” with a spreadsheet. Look, if you have a high income but feel the burning call to press your full potential in something that is just not lucrative, Excel isn’t going to help. You can’t generate a 3-D chart with a binary z-axis labeled “living the one life I got” and “dead”.

Luck is not a strategy. But it exists. If you want to bet on variance maybe the most practical thing to remember is “trade less when you don’t have an edge”. You are in the exact mirror situation of a casino with a small edge that wants you to pull the handle every day.

Once you know you’re gambling and decide that even long odds are the only acceptable way forward, try to minimize your contact with the rake, and shoot your shot.

Money Angle For Masochists

All option traders have stories about days they regret going into the office because they had a massively winning option position that they mitigated by hedging too aggressively. A $1 OTM put that goes $10 ITM, but they bought stock the whole way down hedging the delta. Or a short straddle that pins on expiration but the stock’s daily range meant they bought the high and sold the low. In the long option case, liquidity was the enemy — you would have preferred the stock gapped down $10.

Think now what this means for options backtests that pretend closing prices are the only prices. Your sampling frequency should align with the frequency by which your p/l matters. If you sample daily but your intraday risk and p/l matter you are acting like an ostrich.

This observation is rarely overlooked in short option strategies, at least by non-charlatans, but it’s worth noting that long options strategies that over-index on gapping price charts will overstate their attractiveness since the gaps are a gift in “not being able to rebalance”.

Since long option p/l’s can have highly skewed distributions (ie most of the profits coming from a few trades) this is not just a theoretical concern. Consider the expected value computation for optimal video poker play:

The Royal Flush, an event that happens 1 in 40,000 hands (if you played a hand every 10 seconds and didn’t sleep from Monday to Friday you’d expect to get one Royal Flush) contributes 2% of the game’s return. Said differently, if there was no possibility of a Royal Flush the house edge goes from .5% to 2.5%. This would be like the bid-ask spread in a $10 stock going from a nickel to a quarter. Annualize that churn in any strategy and see what happens to the “alpha”.

There’s a Wario world perspective (cc private equity) in which the downside of illiquidity gets moral equivalence with its upside. If you can’t re-balance you are safe from yourself and behavioral trading biases. Like pretending that every gap comes back. That’s the unsaid assumption that discourages you from selling at in-between prices. (If close-to-close vol is much lower than OHLC or tick vol then you want to sell straddles and go on vacation. Basically betting on mean reversion. Too bad this volatility behavior is only known in hindsight. Conversely, if you are long gamma you want to hedge more frequently if you know that close-to-close vol computations are smaller than range or tick vol computations of realized vol. If only you could know in advance.)

Well, this week Matt Levine wrote a banger called Structure. First an echo:

One cynical way to understand private investing generally is that private investment firms — venture capital, private equity, private real estate, etc. — charge their customers high fees for the service of avoiding the visible volatility of public markets. If you invest in stocks, sometimes they go up, and other times they go down. If you invest in private assets, they don’t trade; sometimes they go up (because companies raise new rounds of capital at higher prices), but the companies and the investment managers take pains to keep them from going down. This makes the chart of returns look much nicer — it mostly goes up smoothly — so the private investment managers can charge higher fees. We talk about this theory from time to time around here.

The real meat of the post is describing how start-ups, rather than taking a down-round in funding, prefer “structure”. Levine walks through the mechanics, but the gist is that the new investors who subscribe at the stale, overpriced valuation are getting an embedded put option (it’s more of a put spread since it only protects you so far). This gives the illusion that the valuation is unchanged, but only because you didn’t assign the put value. If you wanted to compare valuations over time, you’d need to back out the value of the put, to see how much the private company’s value has actually fallen.

Instead, we are left with the optics that the valuation is the same but the economic reality is that it’s lower. That should tell you quite a bit about the dog-and-pony culture around private investing. (In fairness, Levine explains how most insiders understand all this but that makes the gaslighting even darker in my axiological naivety).

I’d accept the pushback that it’s all made up anyway so who cares if we decompose the price of the glitter from the measure of fairy dust.

White Lotus Rorschach

Welcome to year 4 of this party at the Moontower. I took a 3 week holiday break from writing and the universe sent locusts. Well, a different bug at least — Covid and RSV which I’m pretty sure is bronchitis rebranded from the 1980s when I was a kid. Our house was a petri dish and the rain has been non-stop, although as a Californian you’re not allowed to mention precipitation without the solemn acknowledgment “we really need it”. I’m inside playing a lot of NBA2k23 with the kids and as much fun as that is, I’m done with winter. But like Pepé Le Pew, I doubt it’s done with me. Bah.

One silver lining was doing stuff I don’t do as much as I would sometimes like to — play guitar (1,2,3 songs with friends), watch movies (Bardo stood out) and binge TV (Classic Concentration reruns). I watched some mainstream stuff too. Avatar 2 and…White Lotus season 2.

I enjoyed and would recommend season 2 (I haven’t seen season 1 but it’s not necessary). White Lotus is a murder mystery but the mystery is actually not central to the show. The characters and dialogue are the draw. I recently watched this ancient but outstanding interview with Tarantino where he contrasts how American cinema [used to be] best at storytelling while “Europe was where you had character-based or mood-based films”. (Eddie Izzard’s old bit about British vs US movies implants the distinction with the stickiest mind-adhesive — side-splitting laughter). White Lotus is more in the spirit of a European film with a cheap Coen Brothers-style plot pushing the series forward.

The scenery in Italy is a timeless luxury. The acting is exceptional. Sure, the references to “mimetic desire” and “dark triad” felt focus-grouped from Twitter but it totally works even as a nod to the terminally online. The show provoked a lot of thoughts that I expected would have been covered in reviews. I don’t normally read reviews until after I watch something so I can see how my interpretation squares with English majors with much better literary comprehension skills than I do. In this rare case, I found the quality of reviews to be unsatisfying, lacking the depth clenching the show. (If anyone has a review probably from a Substack that stood out pass it on…I’m too lazy to write one myself because it would require a second watch. It’s a weak-sauce excuse. I’m torn between saying “sorry” and “tough”).

The editorial The White Lotus Nails How We Struggle To Reassess Classic Cinema does an admirable job of covering one of the show’s remarkable repartees:

Grandpa Bert Di Grasso planned the trip to get in touch with the family’s Sicilian roots, including worshipping at the altar of “The Godfather.” He lights up with absolute glee when telling Portia why their lunch location is so important, reveling in how Al Pacino cries out “Apollonia!” as the Corleone character watches his wife explode before his eyes. “It’s a great scene,” Bert declares. Portia, having zero nostalgia or cultural kinship to the film pushes back. “She blows up? Like, blows up? It’s a little tasteless maybe,” she says.

Bert immediately tries to double down by saying, “Well, look, they’re trying to make a buck. They own the house where they shot the best American movie ever made,” but Portia finds a (possible incel) softboi ally in grandson Albie, who confidently disagrees with his grandpa about the film’s brilliance, telling him he only likes it because:

“you’re nostalgic for the solid days of the patriarchy…men love ‘The Godfather’ because they feel emasculated by modern society. It’s a fantasy about a time when they could go out and solve all their problems with violence and sleep with every woman and then come home to their wife who doesn’t ask them any questions and makes them pasta.”

My favorite part of the scene is the chicken-egg tension that follows:

Bert and Dom Di Grasso then go on to say that “The Godfather” is a “normal male fantasy,” which Albie disagrees with and instead says, “No, movies like that socialize men into having that fantasy.” His father pushes back: “Movies like that exist because men already do have that fantasy. They’re hard-wired,” and Bert agrees. “Mm-hmm, comes with the testosterone.” Albie can’t let it go, and either because he genuinely believes what he’s saying or because he’s trying to impress Portia by coming off as “one of the good ones,” he declares, “No. Gender is a construct. It’s created.”

The article continues…

The scene is magnificent because it’s a circle of three generations of men being so loudly wrong about the message of “The Godfather,” while simultaneously nailing why conversations surrounding classic films are never-ending and consistently complicated. All three of the Di Grasso men were introduced to “The Godfather” in different eras, and their relationships to masculinity are completely different because of not only the changing social climate, but the types of masculinity modeled for them by the men in their lives.

The interpretation of historical figures through contemporary values is a guaranteed click-bonanza as people who think they can anticipate “the right side of history” battle with those who take an unnecessary apology so far that they come out the other side of the Pac-Man map needing to actually apologize.

The scene ends with a line that could have been captioned with “to be continued all-the-time and forever on the internet”:

“They used to respect the old. Now we’re just reminders of an offensive past.”

Does the Godfather’s masculinity reflect or culturally manufacture our apparent nature? I hate the trading advice if you don’t know what to do “sell half”, but I feel like bi-directional causation is embedded in so many forms of expression that any broad concept that devolves into a nature/nurture argument is hard to lay long odds on.

My “sell half” cop-out in this particular example is to recognize that men’s physical dominance is a thing but that it explains many behaviors rather than justifies them. “Explains but does not justify” is a phrase I picked up from Russ Roberts’ Do I Deserve What I Have Series which I reference in Why ‘Deserve” Makes My Skin Crawl. Russ asserts:

Accomplishments explain results; they don’t justify them 

Explanations are not justifications anymore than temptations determine outcomes. There’s a layer of personal agency that resides between eating a pint of Salt & Straw every day and not fitting in your jeans. Id vs ego.

Collectively, there’s a layer of cultural agency. Impulse vs laws. We like, decide, about stuff.

Decisions are never justified “just because [insert banal observation about nature]”. Discussion and debate are part logic, but that’s still only downstream from our value weightings. And those weightings can’t always be reconciled. In fact, if you take the wide-angle view of the human experience, it’s a miracle that we can agree enough to have any kind of general order. I have Oliver Sacks’ 1985 book The Man Who Mistook His Wife for a Hat and Other Clinical Tales on my nightstand. It’s a reminder that our perceptions and values are widely different cross-sectionally. This short post When Childhood Was Discovered explains that childhood as a concept is a fairly modern idea. It’s pretty clear that despite 23 pairs of chromosomes being a common denominator throughout history, we, as in the anthropological “we” change much faster than the 8th-grade life science “we”.

Arguments that pretend otherwise, leaning their full bodyweight on one side of the nature/nurture divide, collapse as soon as a second perspective enters the room. If the internet “dress” from 2015 taught us anything, it’s that we don’t even perceive colors the same. Good luck with the Godfather.

Moontower #175

Welcome to year 4 of this party at the Moontower. I took a 3 week holiday break from writing and the universe sent locusts. Well, a different bug at least — Covid and RSV which I’m pretty sure is bronchitis rebranded from the 1980s when I was a kid. Our house was a petri dish and the rain has been non-stop, although as a Californian you’re not allowed to mention precipitation without the solemn acknowledgment “we really need it”. I’m inside playing a lot of NBA2k23 with the kids and as much fun as that is, I’m done with winter. But like Pepé Le Pew, I doubt it’s done with me. Bah.

One silver lining was doing stuff I don’t do as much as I would sometimes like to — play guitar (1,2,3 songs with friends), watch movies (Bardo stood out) and binge TV (Classic Concentration reruns). I watched some mainstream stuff too. Avatar 2 and…White Lotus season 2.

I enjoyed and would recommend season 2 (I haven’t seen season 1 but it’s not necessary). White Lotus is a murder mystery but the mystery is actually not central to the show. The characters and dialogue are the draw. I recently watched this ancient but outstanding interview with Tarantino where he contrasts how American cinema [used to be] best at storytelling while “Europe was where you had character-based or mood-based films”. (Eddie Izzard’s old bit about British vs US movies implants the distinction with the stickiest mind-adhesive — side-splitting laughter). White Lotus is more in the spirit of a European film with a cheap Coen Brothers-style plot pushing the series forward.

The scenery in Italy is a timeless luxury. The acting is exceptional. Sure, the references to “mimetic desire” and “dark triad” felt focus-grouped from Twitter but it totally works even as a nod to the terminally online. The show provoked a lot of thoughts that I expected would have been covered in reviews. I don’t normally read reviews until after I watch something so I can see how my interpretation squares with English majors with much better literary comprehension skills than I do. In this rare case, I found the quality of reviews to be unsatisfying, lacking the depth clenching the show. (If anyone has a review probably from a Substack that stood out pass it on…I’m too lazy to write one myself because it would require a second watch. It’s a weak-sauce excuse. I’m torn between saying “sorry” and “tough”).

The editorial The White Lotus Nails How We Struggle To Reassess Classic Cinema does an admirable job of covering one of the show’s remarkable repartees:

Grandpa Bert Di Grasso planned the trip to get in touch with the family’s Sicilian roots, including worshipping at the altar of “The Godfather.” He lights up with absolute glee when telling Portia why their lunch location is so important, reveling in how Al Pacino cries out “Apollonia!” as the Corleone character watches his wife explode before his eyes. “It’s a great scene,” Bert declares. Portia, having zero nostalgia or cultural kinship to the film pushes back. “She blows up? Like, blows up? It’s a little tasteless maybe,” she says.

Bert immediately tries to double down by saying, “Well, look, they’re trying to make a buck. They own the house where they shot the best American movie ever made,” but Portia finds a (possible incel) softboi ally in grandson Albie, who confidently disagrees with his grandpa about the film’s brilliance, telling him he only likes it because:

“you’re nostalgic for the solid days of the patriarchy…men love ‘The Godfather’ because they feel emasculated by modern society. It’s a fantasy about a time when they could go out and solve all their problems with violence and sleep with every woman and then come home to their wife who doesn’t ask them any questions and makes them pasta.”

My favorite part of the scene is the chicken-egg tension that follows:

Bert and Dom Di Grasso then go on to say that “The Godfather” is a “normal male fantasy,” which Albie disagrees with and instead says, “No, movies like that socialize men into having that fantasy.” His father pushes back: “Movies like that exist because men already do have that fantasy. They’re hard-wired,” and Bert agrees. “Mm-hmm, comes with the testosterone.” Albie can’t let it go, and either because he genuinely believes what he’s saying or because he’s trying to impress Portia by coming off as “one of the good ones,” he declares, “No. Gender is a construct. It’s created.”

The article continues…

The scene is magnificent because it’s a circle of three generations of men being so loudly wrong about the message of “The Godfather,” while simultaneously nailing why conversations surrounding classic films are never-ending and consistently complicated. All three of the Di Grasso men were introduced to “The Godfather” in different eras, and their relationships to masculinity are completely different because of not only the changing social climate, but the types of masculinity modeled for them by the men in their lives.

The interpretation of historical figures through contemporary values is a guaranteed click-bonanza as people who think they can anticipate “the right side of history” battle with those who take an unnecessary apology so far that they come out the other side of the Pac-Man map needing to actually apologize.

The scene ends with a line that could have been captioned with “to be continued all-the-time and forever on the internet”:

“They used to respect the old. Now we’re just reminders of an offensive past.”

Does the Godfather’s masculinity reflect or culturally manufacture our apparent nature? I hate the trading advice if you don’t know what to do “sell half”, but I feel like bi-directional causation is embedded in so many forms of expression that any broad concept that devolves into a nature/nurture argument is hard to lay long odds on.

My “sell half” cop-out in this particular example is to recognize that men’s physical dominance is a thing but that it explains many behaviors rather than justifies them. “Explains but does not justify” is a phrase I picked up from Russ Roberts’ Do I Deserve What I Have Series which I reference in Why ‘Deserve” Makes My Skin Crawl. Russ asserts:

Accomplishments explain results; they don’t justify them 

Explanations are not justifications anymore than temptations determine outcomes. There’s a layer of personal agency that resides between eating a pint of Salt & Straw every day and not fitting in your jeans. Id vs ego.

Collectively, there’s a layer of cultural agency. Impulse vs laws. We like, decide, about stuff.

Decisions are never justified “just because [insert banal observation about nature]”. Discussion and debate are part logic, but that’s still only downstream from our value weightings. And those weightings can’t always be reconciled. In fact, if you take the wide-angle view of the human experience, it’s a miracle that we can agree enough to have any kind of general order. I have Oliver Sacks’ 1985 book The Man Who Mistook His Wife for a Hat and Other Clinical Tales on my nightstand. It’s a reminder that our perceptions and values are widely different cross-sectionally. This short post When Childhood Was Discovered explains that childhood as a concept is a fairly modern idea. It’s pretty clear that despite 23 pairs of chromosomes being a common denominator throughout history, we, as in the anthropological “we” change much faster than the 8th-grade life science “we”.

Arguments that pretend otherwise, leaning their full bodyweight on one side of the nature/nurture divide, collapse as soon as a second perspective enters the room. If the internet “dress” from 2015 taught us anything, it’s that we don’t even perceive colors the same. Good luck with the Godfather.


Money Angle

I have a friend who turned $2k into $6.5mm, eventually cashing out of the crypto markets with about $2.5mm. Because of the path, his framing is “what could I have done better?” He came to me looking for perspective on risk management.

I began my reply with a story I recounted in Talking To The Diamond Hands. In 2017, I was at dinner with a young product manager at Coinbase and an older tradfi friend that brought us all together.

At some point, the product manager who was about 22 went to the restroom. The senior guy, in a hushed tone, turned to me.


“So one of the reasons [the 22-year-old] wanted to talk to you is he has a high-class problem. He’s sitting on a giant pile of ETH he’s been mining since college. At current prices, he’s rich, but doesn’t know anything about investing. He needs advice and we thought you could help.”

As I was soaking that it in, our young tycoon was returning. There was no need to tippy-toe. The whiz kid cut right to it. He explained respectfully and with great maturity his “problem”.

What did I say to him?

“I don’t have much to say. If you listened to my opinion years ago you would never be in this beautiful predicament. I would never have held on this long, so there is nothing I can say that you should listen to. But now that you are here, I can offer one way to think about it — sell an amount that makes you feel like you never have to take a job just for money. You are 22 and achieved freedom.”

I don’t even know if this is good advice. It feels like such a dowdy perspective that it can only come from someone who would never have scored that big.

I re-told this story because I wanted to highlight an important point — there is no risk management rule forged from the business of trading that condones having most of your eggs in one basket. In other words, there’s no vetted risk management framework that would have let you turn $2k into $6mm so the entire conceit of “what could I have done better?” is misplaced.

That doesn’t mean it was wrong necessarily. It depends on your goals.

If you need ransom money by Friday, not betting everything on a roulette wheel tomorrow might be the riskiest course of action.

I’ve explained how bet sizing is not intuitive. I’m reading a Man For All Markets now, and there’s a scene where a 38-year-old Richard Feynman explains to Ed Thorp how he agreed to “be the house” for another friend who wanted to play roulette. Playing as the house, Feynman taps out after losing $80, underestimating the short-run variance of the game despite his advantage. The Nobel Laureate’s failed gambling intuition cautions us mortals that in some areas you should “work out the math”.

Now notice that my friend’s pickle is really not even at the level of bet sizing where we can triangulate on a reasonable range of answers given some constraints. My buddy’s dilemma is philosophical. What are constraints and the goals? His first task is to back up and find the inputs that reduce to “what matters to me”.

It reminded me of another conversation with a family member who was trying to solve what I’d call a “thymos-question” with a spreadsheet. Look, if you have a high income but feel the burning call to press your full potential in something that is just not lucrative, Excel isn’t going to help. You can’t generate a 3-D chart with a binary z-axis labeled “living the one life I got” and “dead”.

Luck is not a strategy. But it exists. If you want to bet on variance maybe the most practical thing to remember is “trade less when you don’t have an edge”. You are in the exact mirror situation of a casino with a small edge that wants you to pull the handle every day.

Once you know you’re gambling and decide that even long odds are the only acceptable way forward, try to minimize your contact with the rake, and shoot your shot.

Money Angle For Masochists

All option traders have stories about days they regret going into the office because they had a massively winning option position that they mitigated by hedging too aggressively. A $1 OTM put that goes $10 ITM, but they bought stock the whole way down hedging the delta. Or a short straddle that pins on expiration but the stock’s daily range meant they bought the high and sold the low. In the long option case, liquidity was the enemy — you would have preferred the stock gapped down $10.

Think now what this means for options backtests that pretend closing prices are the only prices. Your sampling frequency should align with the frequency by which your p/l matters. If you sample daily but your intraday risk and p/l matter you are acting like an ostrich.

This observation is rarely overlooked in short option strategies, at least by non-charlatans, but it’s worth noting that long options strategies that over-index on gapping price charts will overstate their attractiveness since the gaps are a gift in “not being able to rebalance”.

Since long option p/l’s can have highly skewed distributions (ie most of the profits coming from a few trades) this is not just a theoretical concern. Consider the expected value computation for optimal video poker play:

The Royal Flush, an event that happens 1 in 40,000 hands (if you played a hand every 10 seconds and didn’t sleep from Monday to Friday you’d expect to get one Royal Flush) contributes 2% of the game’s return. Said differently, if there was no possibility of a Royal Flush the house edge goes from .5% to 2.5%. This would be like the bid-ask spread in a $10 stock going from a nickel to a quarter. Annualize that churn in any strategy and see what happens to the “alpha”.

There’s a Wario world perspective (cc private equity) in which the downside of illiquidity gets moral equivalence with its upside. If you can’t re-balance you are safe from yourself and behavioral trading biases. Like pretending that every gap comes back. That’s the unsaid assumption that discourages you from selling at in-between prices. (If close-to-close vol is much lower than OHLC or tick vol then you want to sell straddles and go on vacation. Basically betting on mean reversion. Too bad this volatility behavior is only known in hindsight. Conversely, if you are long gamma you want to hedge more frequently if you know that close-to-close vol computations are smaller than range or tick vol computations of realized vol. If only you could know in advance.)

Well, this week Matt Levine wrote a banger called Structure. First an echo:

One cynical way to understand private investing generally is that private investment firms — venture capital, private equity, private real estate, etc. — charge their customers high fees for the service of avoiding the visible volatility of public markets. If you invest in stocks, sometimes they go up, and other times they go down. If you invest in private assets, they don’t trade; sometimes they go up (because companies raise new rounds of capital at higher prices), but the companies and the investment managers take pains to keep them from going down. This makes the chart of returns look much nicer — it mostly goes up smoothly — so the private investment managers can charge higher fees. We talk about this theory from time to time around here.

The real meat of the post is describing how start-ups, rather than taking a down-round in funding, prefer “structure”. Levine walks through the mechanics, but the gist is that the new investors who subscribe at the stale, overpriced valuation are getting an embedded put option (it’s more of a put spread since it only protects you so far). This gives the illusion that the valuation is unchanged, but only because you didn’t assign the put value. If you wanted to compare valuations over time, you’d need to back out the value of the put, to see how much the private company’s value has actually fallen.

Instead, we are left with the optics that the valuation is the same but the economic reality is that it’s lower. That should tell you quite a bit about the dog-and-pony culture around private investing. (In fairness, Levine explains how most insiders understand all this but that makes the gaslighting even darker in my axiological naivety).

I’d accept the pushback that it’s all made up anyway so who cares if we decompose the price of the glitter from the measure of fairy dust.


Last Call

  • Martin Shkreli Explains Why Sam Bankman-Fried Got Lucky With His Judge (80 min)

    One of the YT comments says it best: This episode was fascinating. Martin is an amazing narrator. Like the David Attenborough of prison.

    Martin loves to talk. It’s surreal how much he tells us.

  • My friend Khe is hosting a free 3-day free event called Your Roadmap for an Epic 2023. The only disclosure I have for promoting this is that Khe is a damn ninja. If you need help unlocking this is your jam. It starts January 10th.Sign up here

    What to expect:

    • Day 1: A Productivity System that Works For You
    • Day 2: Find Your Focus and Achieve Clarity with “Radical Prioritization”
    • Day 3: The 20-Minute Productivity Plan

From My Actual Life

New Years’ energy comes with resolutions. I deleted the Twitter app on my phone. Using it on my desktop only has cut my usage dramatically. I don’t know how much free time this creates but I’d be embarrassed to admit it even if I did. Better late than never.

I’m combining this resolution with another: write or work on writing projects for 2 hours a day. (In addition to an essay backlog, I have 6-8 writing projects in various stages of progress. They lean towards being guides/educational wikis.)

Being more explicit about this is a personal necessity. The more I get done in the general (if still poorly defined) pull of my ambition the better I feel. For better or worse, this is my wiring. I probably only love myself conditionally. I’ll deal with the fallout of that one day, but today’s not that day. Writing feels like a large component of that — it’s best to give imposter syndrome the finger once and for all.

Part of the productivity kick is checkboxing daily fitness, even if it’s just an hour’s walk, and reading books or technical material. My goal is an hour a day there, and reading substacks and articles doesn’t count towards that goal. I have about 70 books on my nightstand that I want to read and need to build that muscle again. Plus it’s a critical complement to improving my writing.

Separately, I’ve used also turned these projects into stand-alone websites:

The Moontower Volatility Wiki —> https://moontowerquant.com/

The Moontower Money Wiki —> https://moontowermoney.com/

These will continue to see progress. In addition, I will be rolling out another website that is a bit of a learning wiki. As I work on projects related to education/teaching/learning that site will be a companion where I will share stuff I learn in public. It will be a living document. Open source ethos and all that. I’ll share it in this letter when I publish it.

I’ll wrap with this:

We watched the Chris Hemsworth Limitless series on Disney+. Chris basically works with a different personal wellness expert in each episode to learn about stress, brain health, physical performance, and increasing your healthspan not just lifespan. It’s educational and often poignant. Australia is also shot beautifully. Eye candy. So is Chris (dudes you know it’s true too). Thor also seems shockingly down-to-earth.

There’s a scene in the death episode where he asks a stage 4 cancer patient in her 20s what she thinks about aging. Her response is pure perspective:

Aging is beautiful. I’d love to age.

Let’s have a groovy 2023, thanks for coming along!

The Paradox Of Provable Alpha

The reason for this short post is there’s an idea I’ve formulated in a couple of places that I just wanted an isolated link to.

From Why I Share Online And The Decision To Leave Trading:

An aside that is gonna trigger some set of people: I could hand over all my professional dashboards and tools, and it wouldn’t make a difference. You won’t get the same results. Experience, discipline, and creativity are not something you can take from another. And they are foundational to a discretionary strategy. Think about this from a game-theoretic point of view. If I could codify (I tried and couldn’t) what I did, then it would be easy to prove the edge. The strategy would then be automated and be oversubscribed or its owners would never sell it to an investor. The fact that it’s discretionary and cannot be proven except by its eventual outcomes means an investor must always worry that I’m full of shit.

Do you see the paradox?

If the edge is provable, it doesn’t exist for you. So the only hope of finding edge is in your judgment of a discretionary strategy.

 

From Trading Vs Investing:

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

 

Calibrated Confidence

Author and veteran trader Brent Donnelly’s recent post, #37, in his highly educational, free Substack series 50 Trades In 50 Weeks dissects common traits of successful traders:

Week 37: Common Traits of Top Traders (10 min read)

It’s a terrific read for what it validates, but also for what is surprising (“You can succeed in trading with any level of risk appetite.”) It’s also a great read to see how he constructs a survey to challenge his beliefs.

I want to zoom in on one of the key 5 key traits he identifies: “calibrated confidence”.

When we hosted the StockSlam sessions in October we gave a couple of homeworks before the in-person events. One of the homeworks involved this module:

You will be asked to make 90% confidence intervals on some facts.

90% confidence interval can be understood with an example:

I have not been outside for a few hours, and without looking up the answer, “I’m 90% confident that the temperature outside my window is between 45°F and 60°F, or (45,60).”  If I wanted to be more (like 99%) confident, I would widen the interval, and conversely a tighter interval would coincide with less confidence.

Example questions included:

  • Without looking anything up, what is your 90% confidence interval on the number of bones in the human body?
  • What is your 90% confidence interval on the length (# of letters) of the longest word in English?

Note what you are doing. You are making markets where you think fair value is 90% to be inside your bid/ask spread.

This is highly relevant to trading and handicapping.

If you get 10 out 10 markets “right” then you are more conservative than we asked you to be. In other words, you were too wide. In markets, this means you will never trade. You are bidding $50 for a stock trading $60. You will get no market share.

If you get say 5 out of 10 markets right, then you were too confident. In markets, everyone will trade with you and you will be sadder for it.

Trading is only partially about knowing “fair value”. It’s in your meta-knowledge about fair value that the magic happens. You are always dealing in uncertainty…your feel for the degree of uncertainty is how you recognize opportunity or defend yourself. This is not just market-maker talk. It’s the essence of what Buffet understood when he said “margin of safety”.

Google “Paul Slovic’s horse bettor study” and you will find several posts such as:

How Can Confidence Kill Investment Returns? (4 min read)

They all talk about a 1973 study where experienced horse handicappers are given a few pieces of data of their own choosing. Armed with their preferred data, they are able to make good bets, but critically, they are well-calibrated about their accuracy. Their confidence and accuracy were in agreement.

However, as the bettors are given increasing amounts of data their accuracy falls, but their confidence shoots up. No bueno.

Presumably, they were less experienced in weighing the additional data which turns out to be noise to their handicapping process, but the presence of more info gave them the illusion that they would be better. A disastrous combo.

Improving Our Handicapping Skills

It sounds discouraging to realize that decision-making is not just an exercise in accurate prediction but also judging how wide our error bars should be. But there’s plenty of good news. This is not a skill anyone is born with. It is learned.

[This is why prop trading firms who recruit elite students from top schools screen for teachability which I suspect is randomly allocated across skill. There are elite students or athletes who can remain humble learners despite the advantages of their talents and there are insufferably overconfident talents who have yet to get hit by the Mack truck of peak competition. This latter group is dangerous to themselves and if given enough rope, to their backers too.]

3 suggestions to get better:

  1. Self-diagnose. You can take a fun calibration test to establish some context:
    http://confidence.success-equation.com/

    This thread includes my results as well as many others including several side threads of interpretation and discussion.

  2. Read Superforecasting: The Art and Science of PredictionThis book is a great primer on what it takes to predict but most importantly frames prediction as a skill we can improve at. I took extensive notes which weave my thoughts into some of the key points.
  3. Bet on stuffHow long will it take to finish your school or work assignment?What percent of random sample of people from your contact list knows what date the winter solstice falls on?(My wife and I bet on what facts are “common knowledge” when one of us gets defensive to the other’s attack “how did you not know that?” We’ll poll some people with a text message and bet on the consensus. These “studies” are highly correlated with one of us having “one drink too many”.)

    Calibration is a nice benefit of a betting culture (1 min read).

Skynet’s Already A Better Dad Than Me

Let’s start with a math puzzle from Martin Gardner’s Entertaining Mathematical Puzzles:

THE SILVER BAR

A silver prospector was unable to pay his March rent in advance. He owned a bar of pure silver, 31 inches long, so he made the following arrangement with his landlady. He would cut the bar into smaller pieces. On the first day of March, he would give the lady an inch of the bar, and on each succeeding day he would add another inch to her amount of silver. She would keep this silver as security. At the end of the month, when the prospector expected to be able to pay his rent in full, she would return the pieces to him.

March has 31 days, so one way to cut the bar would be to cut it into 31 sections, each an inch long. But since it required considerable labor to cut the bar, the prospector wished to carry out his agreement with the fewest possible number of pieces. For example, he might give the lady an inch on the first day, another inch on the second day, then on the third day he could take back the two pieces and give her a solid 3- inch section.

Assuming that portions of the bar are traded back and forth in this fashion, see if you can determine the smallest number of pieces into which the prospector needs to cut his silver bar.

Don’t read further unless you want the solution.


This is the solution:

The prospector can keep his agreement by cutting his 31-inch silver bar into as few as five sections with lengths of 1, 2, 4, 8, and 16 inches.

You’ll note that you can sum to any length up to 31 with that set of bars.

Disclosure: I read this problem aloud to my kids on Wednesday night at bedtime and none of us got the answer.

The key to this problem is it can be expressed cleanly using binary or a base-2 number system instead of using the base-10 system we are used to.

Earlier that afternoon I taught Zak (9) how to count in binary. I made these charts to summarize how I explained it to him.

It’s useful to remember that when you hear “tens place” what is really meant is the [symbol occupying that space] x 10¹

  • In base-10: there’s a one’s place, tens place, hundreds place…
  • In binary: there’s a one’s place, twos place, fours place, eights place…

Once Zak understood this he could represent our family members’ ages in binary. I had him do the same thing using base-8 by following the same pattern.

  • In base-8: there’s a one’s place, eights place, sixty-fours place, five hundred and twelve place…

So representing my age of 44 in base-8 = 54 because there are 5 eights + 4 ones.

Computers do calculations in binary because electrical signals on a chip are either on or off. So representing numbers can be thought of like a morse code of “on”/”off” at light speed or something. Feel free to correct me, that’s my armchair impression.

Now a brutal coincidence.

Despite teaching binary that afternoon, I did not recognize it was the key to answering the riddle! Zak was flabbergasted by the coincidence that the solution was in “what’s that word you keep saying…binary?” after he just learned it. Baader-Meinhoff on steroids. (It was really cute that he kept shaking his head about the coincidence that the thing he just learned showed up in a random problem I chose that night. The coincidence hit him just as hard, maybe even harder, than it did me.)

The silver bars cut into 5 lengths as a binary solution:

This is all about to get better (or worse depending on what temperature you run at on the techno-optimism thermometer).

Yesterday, I started tinkering with OpenAI’s recently released ChatGPT. I found this concise description of ChatGPT:

A large language model trained by OpenAI is a machine learning model that has been trained on a large dataset of natural language text, typically using a deep learning approach. This allows the model to learn the patterns and structures of human language and to generate text that is similar in style and content to human-generated text.

You can sign-up to try it for yourself here.

This is a Twitter thread of prompts I’ve given it and its responses. Everything from a Kelly Betting problem to imagining if DMX wrote the hook for No Scrubs.

I also gave the bot a condensed version of the riddle.

Prompt: If I have a 31 inch silver bar but I need to make the minimum number of cuts so I can create a new bar any length up to 31 inches, how many cuts do I need?

It responded:

To create a bar of any length up to 31 inches, you would need to make five cuts to your silver bar. This is because the minimum number of cuts required to create a bar of any length up to a given length is equal to the log base 2 of that length, rounded up to the nearest whole number. In this case, the log base 2 of 31 is 4.8, which rounds up to 5. Therefore, you would need to make five cuts to your silver bar to create a new bar of any length up to 31 inches.

“log base 2”?! It knew it was a problem for binary.

Lacking the vision to peer around corners, my small mind can only see the 6 inches in front of my face. And I can see turning to ChatGPT over Google for many types of searches. But with the explosion of “generative AI” in the past year (GPT engines, Dall-E, Stable Diffusion or Midjourney for images), it’s clear the times they are a-changin’

Moontower #173

Let’s start with a math puzzle from Martin Gardner’s Entertaining Mathematical Puzzles:

THE SILVER BAR

A silver prospector was unable to pay his March rent in advance. He owned a bar of pure silver, 31 inches long, so he made the following arrangement with his landlady. He would cut the bar into smaller pieces. On the first day of March, he would give the lady an inch of the bar, and on each succeeding day he would add another inch to her amount of silver. She would keep this silver as security. At the end of the month, when the prospector expected to be able to pay his rent in full, she would return the pieces to him.

March has 31 days, so one way to cut the bar would be to cut it into 31 sections, each an inch long. But since it required considerable labor to cut the bar, the prospector wished to carry out his agreement with the fewest possible number of pieces. For example, he might give the lady an inch on the first day, another inch on the second day, then on the third day he could take back the two pieces and give her a solid 3- inch section.

Assuming that portions of the bar are traded back and forth in this fashion, see if you can determine the smallest number of pieces into which the prospector needs to cut his silver bar.

Don’t read further unless you want the solution.


This is the solution:

The prospector can keep his agreement by cutting his 31-inch silver bar into as few as five sections with lengths of 1, 2, 4, 8, and 16 inches.

You’ll note that you can sum to any length up to 31 with that set of bars.

Disclosure: I read this problem aloud to my kids on Wednesday night at bedtime and none of us got the answer.

The key to this problem is it can be expressed cleanly using binary or a base-2 number system instead of using the base-10 system we are used to.

Earlier that afternoon I taught Zak (9) how to count in binary. I made these charts to summarize how I explained it to him.

It’s useful to remember that when you hear “tens place” what is really meant is the [symbol occupying that space] x 10¹

  • In base-10: there’s a one’s place, tens place, hundreds place…
  • In binary: there’s a one’s place, twos place, fours place, eights place…

Once Zak understood this he could represent our family members’ ages in binary. I had him do the same thing using base-8 by following the same pattern.

  • In base-8: there’s a one’s place, eights place, sixty-fours place, five hundred and twelve place…

So representing my age of 44 in base-8 = 54 because there are 5 eights + 4 ones.

Computers do calculations in binary because electrical signals on a chip are either on or off. So representing numbers can be thought of like a morse code of “on”/”off” at light speed or something. Feel free to correct me, that’s my armchair impression.

Now a brutal coincidence.

Despite teaching binary that afternoon, I did not recognize it was the key to answering the riddle! Zak was flabbergasted by the coincidence that the solution was in “what’s that word you keep saying…binary?” after he just learned it. Baader-Meinhoff on steroids. (It was really cute that he kept shaking his head about the coincidence that the thing he just learned showed up in a random problem I chose that night. The coincidence hit him just as hard, maybe even harder, than it did me.)

The silver bars cut into 5 lengths as a binary solution:

This is all about to get better (or worse depending on what temperature you run at on the techno-optimism thermometer).

Yesterday, I started tinkering with OpenAI’s recently released ChatGPT. I found this concise description of ChatGPT:

A large language model trained by OpenAI is a machine learning model that has been trained on a large dataset of natural language text, typically using a deep learning approach. This allows the model to learn the patterns and structures of human language and to generate text that is similar in style and content to human-generated text.

You can sign-up to try it for yourself here.

This is a Twitter thread of prompts I’ve given it and its responses. Everything from a Kelly Betting problem to imagining if DMX wrote the hook for No Scrubs.

I also gave the bot a condensed version of the riddle.

Prompt: If I have a 31 inch silver bar but I need to make the minimum number of cuts so I can create a new bar any length up to 31 inches, how many cuts do I need?

It responded:

To create a bar of any length up to 31 inches, you would need to make five cuts to your silver bar. This is because the minimum number of cuts required to create a bar of any length up to a given length is equal to the log base 2 of that length, rounded up to the nearest whole number. In this case, the log base 2 of 31 is 4.8, which rounds up to 5. Therefore, you would need to make five cuts to your silver bar to create a new bar of any length up to 31 inches.

“log base 2”?! It knew it was a problem for binary.

Lacking the vision to peer around corners, my small mind can only see the 6 inches in front of my face. And I can see turning to ChatGPT over Google for many types of searches. But with the explosion of “generative AI” in the past year (GPT engines, Dall-E, Stable Diffusion or Midjourney for images), it’s clear the times they are a-changin’


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

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

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

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

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

Click Here to Learn More

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


Money Angle

Author and veteran trader Brent Donnelly’s recent post, #37, in his highly educational, free Substack series 50 Trades In 50 Weeks dissects common traits of successful traders:

Week 37: Common Traits of Top Traders (10 min read)

It’s a terrific read for what it validates, but also for what is surprising (“You can succeed in trading with any level of risk appetite.”) It’s also a great read to see how he constructs a survey to challenge his beliefs.

I want to zoom in on one of the key 5 key traits he identifies: “calibrated confidence”.

When we hosted the StockSlam sessions in October we gave a couple of homeworks before the in-person events. One of the homeworks involved this module:

You will be asked to make 90% confidence intervals on some facts.

90% confidence interval can be understood with an example:

I have not been outside for a few hours, and without looking up the answer, “I’m 90% confident that the temperature outside my window is between 45°F and 60°F, or (45,60).”  If I wanted to be more (like 99%) confident, I would widen the interval, and conversely a tighter interval would coincide with less confidence.

Example questions included:

  • Without looking anything up, what is your 90% confidence interval on the number of bones in the human body?
  • What is your 90% confidence interval on the length (# of letters) of the longest word in English?

Note what you are doing. You are making markets where you think fair value is 90% to be inside your bid/ask spread.

This is highly relevant to trading and handicapping.

If you get 10 out 10 markets “right” then you are more conservative than we asked you to be. In other words, you were too wide. In markets, this means you will never trade. You are bidding $50 for a stock trading $60. You will get no market share.

If you get say 5 out of 10 markets right, then you were too confident. In markets, everyone will trade with you and you will be sadder for it.

Trading is only partially about knowing “fair value”. It’s in your meta-knowledge about fair value that the magic happens. You are always dealing in uncertainty…your feel for the degree of uncertainty is how you recognize opportunity or defend yourself. This is not just market-maker talk. It’s the essence of what Buffet understood when he said “margin of safety”.

Google “Paul Slovic’s horse bettor study” and you will find several posts such as:

How Can Confidence Kill Investment Returns? (4 min read)

They all talk about a 1973 study where experienced horse handicappers are given a few pieces of data of their own choosing. Armed with their preferred data, they are able to make good bets, but critically, they are well-calibrated about their accuracy. Their confidence and accuracy were in agreement.

However, as the bettors are given increasing amounts of data their accuracy falls, but their confidence shoots up. No bueno.

Presumably, they were less experienced in weighing the additional data which turns out to be noise to their handicapping process, but the presence of more info gave them the illusion that they would be better. A disastrous combo.

Improving Our Handicapping Skills

It sounds discouraging to realize that decision-making is not just an exercise in accurate prediction but also judging how wide our error bars should be. But there’s plenty of good news. This is not a skill anyone is born with. It is learned.

[This is why prop trading firms who recruit elite students from top schools screen for teachability which I suspect is randomly allocated across skill. There are elite students or athletes who can remain humble learners despite the advantages of their talents and there are insufferably overconfident talents who have yet to get hit by the Mack truck of peak competition. This latter group is dangerous to themselves and if given enough rope, to their backers too.]

3 suggestions to get better:

  1. Self-diagnose. You can take a fun calibration test to establish some context:
    http://confidence.success-equation.com/

    This thread includes my results as well as many others including several side threads of interpretation and discussion.

  2. Read Superforecasting: The Art and Science of PredictionThis book is a great primer on what it takes to predict but most importantly frames prediction as a skill we can improve at. I took extensive notes which weave my thoughts into some of the key points.
  3. Bet on stuffHow long will it take to finish your school or work assignment?

    What percent of random sample of people from your contact list knows what date the winter solstice falls on?

    (My wife and I bet on what facts are “common knowledge” when one of us gets defensive to the other’s attack “how did you not know that?” We’ll poll some people with a text message and bet on the consensus. These “studies” are highly correlated with one of us having “one drink too many”.)

    Calibration is a nice benefit of a betting culture (1 min read).


Last Call

I saw this tweet by one of my favorite accounts:

In light of the extreme timeline we seem to be living in these days, I’ll share a spot-on observation from Rohit Krishnan’s most excellent post How VCs Can Avoid Being Tricked (emphasis mine):

Don’t fall in love [with founders] more than necessary:

Try to internalise the following: “human ability is normally distributed but the outcomes are power law distributed”. What this means is that just because someone builds a company that produces extraordinary outcomes, 10000x the average, doesn’t mean that they were 10000x as capable. Achievements are created from multiplicative outcomes of many different variables. So if you’re investing in a “10x founder” it doesn’t mean that they themselves are 10x the capability of everyone else, but what it means is that their advantage, combined with everyone else’s advantage, can get you to a 10000x outcome. Which means the adulation we pour on top of some folks creates its own gravitational field, and makes others susceptible to falling in love. The most difficult task is to not let someone else control your decision making for you, which is what you give up. If your job is to get seduced by the right narrative by the right-seeming person, guess what you’ll get seduced by anyone who can tell a compelling narrative.

I think the advice, written in an investment context, can be generalized to apply to Visa’s concern.


From My Actual Life

I hate shopping. I don’t pay attention to Black Friday or Cyber Monday. Until this year. I just went bonkers and spent all of Monday incinerating cash while feeling exactly what the gods of retail want me to feel like — “I’m getting a bargain!”

This might help your gifting:

How To Become A Truly Excellent Gift Giver (9 min read)
by Eliza Brooke

Anyway, I’m in charge of buying all the kids in our lives gifts and no parent wants clutter, so books it is.

crowdsourced books for kids 9-12 and compiled the results in a table which I will add to over time.

Book Ideas For Kids

I’ll add a special mention for Rookie Bookie which I read with Zak this year. It’s written by a Wall Street quant with a sports analytics love. This observation from the book is a nice demonstration of how the book is fun for the adult reading with the kid:

Announcers say a team has won 3 out of the last 4 because it sounds more impressive than saying they won 3 out of the last 5. Even though that’s actually what happened.

Another famous Wall Street quant and author did a better book review than I could:


Last thing…Moontower reader Murph got inspired by my incessant advocacy of Notion combined with Potion.so to quickly turn your into a website. Here’s what he built:

https://rebalanced.finance/

Never been easier to scratch your generative itches folks…

Stay groovy!

Moontower #172

This is going to be a short issue. I meant to publish it on Thanksgiving and punt on the Sunday letter but I didn’t spend any time in front of a laptop this week.

Instead, I’ll share a file I have been adding to in my private notes for years. It used to be nothing more than a list of quotes but it’s morphed into something of a compass and manual.

I won’t say anything else about it. You can explore it if you like. If you find something useful, take it. If you find stuff you hate, ignore it or tell me. The beliefs are survivors of my internal tournament of ideas but I’m happy to enter your criticism into the coliseum.

Have at it…

Moontower Affirmations and North Stars


Money Angle

You’ll probably get sucked into some online shopping tomorrow. Here are some finance book recs from a great writer who happens to write about investing for the WSJ.

A few other lists of recommendations:

  • The Investing Pro’s Library (Moontower)In over 20 years of option market-making, trading, and portfolio management I’ve been fortunate to meet many talented risk-takers. I took the opportunity to ask some of them what the most influential books or papers they have read in their careers.

    I asked a cohort of 25 investors. They are CIO’s, PMs, and independent investors whose livelihood depend on the bets they take. Half of the respondents have had an options focus and more than 80% would be classified as quantitative…

  • For Investing Beginners (Moontower)My 25-year-old cousin is interested in going into the investing world and asked me where to start. He has taken some business courses in college so I was able to presume some very basic knowledge.

Finally, I’ve sent this list of 8 books to 2 separate friends who have middle and high-school-aged kids who wanted to learn about investing, personal finance, business in general, and economic rationale:

Investing

The Four Pillars of Investing by William Bernstein

Just Keep Buying by Nick Maggiulli

The Most Important Thing by Howard Marks

Investing with a personal finance slant

The Psychology of Money by Morgan Housel

I Will Teach You To Be Rich by Ramit Sethi

Economics and Business

The Invisible Heart: An Economic Romance by Russ Roberts
(I took notes on this novel)

The Rebel Allocator by Jake Taylor
(I took notes on this novel)

And because investing is a super low-signal endeavor, you need some protection from the sales machine:

Fooled by Randomness by Nassim Taleb

If you are a seasoned pro, many of these titles will make you groan. That’s because you are already “cursed with knowledge”. These books are highly approachable and can quickly elevate a total novice’s understanding. The 2 novels are an original and effective way to communicate economic and business contexts by turning the discourse into a conversation instead of a lecture.

If they finished these, I’d recommend Joel Greenblatt’s Little Blue Book That Beats The Market. Not because of the strategy specifics but as a tangible example of process while introducing important business metrics in a usable context.


Last Call

  • I’m Pretty Sure I Broke Linkedin: Satire makes for an excellent IQ test (10 min read)Jack Raines has been raising hell over at LinkedIn. This post is hilarious. But Jack’s writing about the culture of LinkedIn is even better than the satire. It’s a perfect-pitch articulation of his observations in the wild that is the LinkedIn timeline. Jane Goodall would be proud.
  • Jason Zweig On Writing (11 min read)I mentioned WSJ writer Jason Zweig above. He’s a masterful writer masquerading as a financial columnist. He wrote a 3-part series on the craft of writing. This post captured my favorite takeaways.

     


From My Actual Life

I stayed north of San Diego this past week where my sister’s family, my mom, my dad and my family all convened for vacation. We went to Sea World, hung around the pool, saw a theater performance of the Grinch, and hit up the Air & Space Museum in Balboa Park (there was a fantastic exhibit on Galileo…inspiring and a reminder that the breadth of what is going on inside people’s minds is incomprehensible).

The only negative was the underwhelming Korean barbecue we ate on Thanksgiving Day instead of cooking. News flash: Escondido isn’t Flushing, Queens. All in all the trip still delivered — it wasn’t about the excursions.

It was watching reruns of PasswordPlus and SupermarketSweep with my sis (and being shocked at how young some of the contestants were despite their appearance. Seriously, that Cheers meme is a thing. People looked so much older way back when).

It was chatting with my brother-in-law about both his career and personal business while sitting on the balcony. So many decisions that have nothing to do with a spreadsheet. Decisions that would be hard to discuss unless you could match the vulnerability of, well, a brother.

It was listening to my parents, who have been divorced since I was in high school, talk to each other as different people but also the same people.

It was trying to find myself in their stories. How much of them is in me? How much did I keep? How much did I unlearn? Physically speaking, how do I think about my future health when I see their struggles today? I’ve talked about some of my interventions this year. Seeing them is a reminder not to parabolically discount the future. It’s here before you know it.

When I brought my dad back to his apartment I noticed this picture.

My dad has green/blue eyes. With my parents in the same room, I tried to determine some of my blood lineage (both their presence was helpful — I have a bit of a reliable witness issue to navigate and I don’t get these chances often). Long story short, I thought I was like 98% Egyptian but the working theory is more like 80% Egyptian, with the rest mostly Greek plus a sliver of French. Seriously, anything to make me more of a mut feels like a congenital health win. As far as I can see from the community I grew up around, Egypt isn’t exactly Blue Zone.

Overall, Thanksgiving was a welcome slowing of time. I’m grateful for the time we get. You don’t know what tomorrow’s got. You should live like there’s no tomorrow. Except for that if you do that and tomorrow comes, you’ll wish you lived like you knew it all along.

In the Olympics of unsatisfying paradoxes, this ranks right up there with “I guess I’ll sell half the position”.

Stay groovy.

Moontower #171

I didn’t mince words last week:

There’s way too much obsession with investments as a way to get rich in the first place. It’s misallocated attention. It’s misplaced energy…Don’t obsess about investing beyond the point of diminishing returns.

Yes, you should absolutely learn about:

  • compounding
  • saving
  • fees
  • taxes
  • diversification
  • implementing or getting help to construct a portfolio with simple rules

Now stop and go home.

I was forceful about this because the exceptions to this are rare enough that caveats shouldn’t minimize the message.

I also recognize that “real talk” like this can feel like I’m putting a lid on your habitat without the courtesy of breathing holes. That’s why I added an emphasis on your human capital in preference to financial capital:

If you want to go big or go home, it’s best to do so on your skills or personal edge.

This brings me to a recommendation that will inspire, educate, and entertain:

David Senra’s Founders Podcast.

It’s some of the best content I’ve discovered in a long time. The premise is simple. David reads biographies and tells you about them.

It’s hard to explain how well done this is. David’s enthusiasm, tone, synthesis, and identification of a few common themes throughout these stories are immensely satisfying. The stories are inspiring even when they deserve admonition.

The narratives remind us that the exertion of our will on the world is murky but ultimately pursuit is a mother’s hand pulling a 7-year-old through the crowded sidewalks of life’s confusion. Yes, it takes time. It takes bumping into pedestrians’ butts. You often don’t know what direction you’re headed in. But eventually, there’s daylight. You are growing. You will get taller to weave through the crowd yourself.

The podcasts are empowering without any pep talks. The subtext binding them all together is enterprise. The primacy of action. The undisputed sense that the world is malleable and you can bend it.

Getting Started with Founders

With nearly 300 episodes, there’s something for everyone. I’ve listened to these:

#207: Claude Hopkins, Scientific Advertising

#189: David Ogilvy, The Unpublished David Ogilvy

#111: David Geffen, The Operator: David Geffen Builds, Buys, and Sells The New Hollywood

#66: Henry Kaiser, Builder in the Modern American West

#21: John Carmack & John Romero, Masters of Doom: How Two Guys Created An Empire And Transformed Pop Culture

My favorite so far — inspiration straight into my veins:

#18: Yvon Chouinard, Let My People Go Surfing: The Education of a Reluctant Businessman

#245: Rick Rubin, In The Studio

…and these episodes were worth heavy note-taking:

  • David Senra On Invest Like The Best (Moontower notes)

    This episode is not on Founders but instead is Patrick O’Shaughnessey interviewing host David Senra. I listened to it 3x. It was this interview that got me into listening to Founders and my favorite podcast episode this year.

    There’s more.

    I asked my 4th grader to listen with me and take notes (he’s learning note-taking in school this year). I’ve never asked him to listen to an interview before but I wish someone might have asked me to listen to a discussion like this when I was at such an impressionable age. In my link, I include his notes too! It was fascinating to see what bits stood out to him. (Since the episode is 90 minutes, we broke it up into 3 sessions of 30 minutes over 2 weeks).

    [One of the reasons the episode might have been especially fun for him is we just finished watching The Men Who Made America series on the History Channel and Senra discusses many of the “captains of industry” or “robber barons” featured on the TV series.]

    My notes discuss some of the common Founders themes that stand out to both Senra and I.

  • #93: Ed Thorp, A Man For All Markets (Moontower notes)

    An oft-repeated theme on Founders is that the subjects are deeply flawed, often miserable. You are warned to not glorify them but instead extract their deep but narrow wisdom, instead of copying their lives. This episode is special because Ed Thorp is the one person, Senra uses as his own personal blueprint.

    And I agree. Thorp in his entirety (or at least what we can know from his public action and writing) is an admirable and impressive individual.

    I immediately purchased Thorp’s book and I’m reading it to Zak at night before bed. Thorp’s life is a movie.

I’ve recommended Founders to several friends and the reaction has been universal — “where has this podcast been hiding?” If it gives you half as much joy as I’ve gotten from it it’ll be worth it.


Ok, so recapping.

  1. Don’t spend any more time than you need to on investments.

    They are numbers that go up and down and nobody can prove than know anything. From Why I Share Online And The Decision To Leave Trading:

    An aside that is gonna trigger some set of people: I could hand over all my professional dashboards and tools, and it wouldn’t make a difference. You won’t get the same results. Experience, discipline, and creativity are not something you can take from another. And they are foundational to a discretionary strategy. Think about this from a game-theoretic point of view. If I could codify (I tried and couldn’t) what I did, then it would be easy to prove the edge. The strategy would then be automated and be oversubscribed or its owners would never sell it to an investor. The fact that it’s discretionary and cannot be proven except by its eventual outcomes means an investor must always worry that I’m full of shit.

    Do you see the paradox?

    If the edge is provable, it doesn’t exist for you. So the only hope of finding edge is in your judgment of a discretionary strategy. This is not a worthy use of your time because your confidence can never be high enough a priori to bet an amount that was commensurate with moving the needle. You’re flirting around the edges of a low SNR problem. Unless this is fun, assassinate the FOMO right now by directing your Superman “rationality” eye beam at the paradox, and move on to the next obstacle holding you back from worthy pursuits.

  2. Gather energy

    Check out Founders.

    Check out Bill Gurley’s Runnin’ Down A Dream: How To Succeed and Thrive in a Career You Love speech that inspired Founders. (YouTube)

    That speech also inspired hedge fund manager Alix Pasquet’s presentation:

    Learning for Analysts and Future Portfolio Managers (2 hour video)

    Despite the investing-focused title of the speech, its central theme is broader:

    Learning Is behavioral change!

    The video is long but I found it worthwhile. The notes will let you judge for yourself.

    • Moontower notes (9 min read)

    • Frederik Gieschen’s notes (7 min read)

    • Presentation slides (download)

  3. Strike

    This old post includes links to light your fire.

    • Get Unstuck and Move (10 min read)


Money Angle

A question I posed last week:

I suspect, despite positive track records in return space, their total dollar p/l is very negative. Sometimes the simplest benchmark is useful — what are your net dollar profits? There are fund managers that have probably made more from fees than their investors have made in p/l.

Anyone know the money-weighted returns of ARKK or crypto investors?

My buddy Aneet has a strong clue to this in this post:

  • ETFs are the new stocks — mind the creation/redemption gap (4 min read)

Performance-chasing flows are a nail in their own coffin. If everyone is bulled up on an idea, the price must reflect a fat premium that sellers command to do the out-of-consensus thing. The article focuses on flows, but flows are downstream of sentiment.

You’d be wise to think about what the sentiment is before you buy any shiny investment.

I’ve discussed this before in Staring Out The Window.


Last Call

Rounding out the personal growth theme this week:

The Art of Fermenting Great Ideas (paywalled)
by Nat Eliason

Nat’s post is paywalled but it’s a banger that uses fermentation as a fitting metaphor for the process of idea generation. You can’t force it, but you create the conditions for it. Some bits with my occasional commentary.

  • If you want all of the ideas that pop into your brain to be clever responses to that person who was WRONG on Twitter today, then, by all means, scroll Twitter all day. If you want all your mental RAM to go towards fearing for your life over this year’s new armageddon myth, go for it. But if you want to come up with useful brain farts that move your life forward, you will have to stop feeding your mailroom dog shit. Garbage in, garbage out.
  • Removal is only the first step, though. You must replace it with the fresh juicy jalapeños you want your brain to be fermenting.

    You’re probably assuming I’m going to say “read great books” or “read old stuff” here, but no, that’s not the answer. That helps shift your thinking in a more interesting direction. But it doesn’t necessarily help generate great ideas.

    The most important food to constantly feed your brain is the problems you want it to be solving. These problems do not need to be grand like “solving world hunger.” Maybe one of your problems right now is what to get people for Christmas. You have to define clearly what those problems are and then constantly remind your brain to think about them. You need to be sending all-caps memos down to the mailroom fifty times a day saying COME UP WITH GIFT IDEAS!!! Otherwise, the mailroom is thinking about whether you’d rather fight 100 duck-sized horses or 1 horse-sized duck.

    [This works for getting better at anything including relationships]

  • Output time is creating the space and boredom for those inputs to ferment into something interesting. Staring at a blank page of your journal, opening a document to start writing, going for a (no headphones) walk with a notebook, working out without music, or sitting in the sauna. However you create bored, quiet space for your brain to finally get some processing room to spit ideas out; you must create that space if you want the ideas to form.

    The ways we fail at this are obvious. We never give ourselves output time because we’re terrified of silence and boredom. We need a podcast while working out. We need music while working. We keep social media up in another tab. We have notifications on our phones. We let ourselves be interrupted.

    If your first response to boredom is to seek out another input to sate the longing for stimulation, then your brain never has to make shit up to entertain you. The idea muscles will atrophy and never produce anything of worth. But if you can respond to boredom by leaning into it, keeping the blank page open, and seeing what pops out, the muscle gets stronger over time.

    [Maybe shower thoughts are shower thoughts because there are no other times when we would have such thoughts. Corollary: A good use of money is to buy time so you can be idle and have more ideas.]

  • We all want our problems to be solved quickly, and we want to neatly move through a checklist of tasks to retain the illusion of control over our lives, but great ideas don’t seem to work like that. Sometimes you need to be exceedingly patient with them.

    You can’t always have all the time in the world, but when you have the space to noodle on something, take it. I’ll narrow down what I’m going to write about in this newsletter by Monday or Tuesday of the week before, then spend the rest of the week seeing what ideas pop up about the various topic ideas. By Monday, I’ll typically have the skeleton of a post fully flushed out in one of them. If I waited until Monday to start jotting ideas down, it would be much harder, and the post would certainly be much worse.

    So give the great ideas time to pop up. Even if you know you have weeks or months to figure something out, start priming your brain with those questions now so it has time to process them.

    [This is exactly what I do. I keep several ideas brewing top-of-mind at the same time]

  • Recipe:
    1. Find the best ingredients possible to ferment into great ideas, and aggressively prune everything you don’t want your brain to process.
    2. Give your brain the boredom and output time it needs to figure out what to do with that information. Don’t keep opening the jar and packing more into it.
    3. Finally, be patient with the process. The more you can reduce the amount of information you’re taking in, and the more boredom you can give your brain to work, the better your results will be.


From My Actual Life

One of the blogs I guest posted on asked for a headshot. I got tired of using this one:

So I went to my wife Yinh. “I need help. I need like a headshot for the internet crap I do”.

Like a prepper before a Cat 5 storm, her day had arrived. “I got you. Come to my office”. Yinh’s IG story game is A+. Whenever I meet a friend or colleague of hers they always feel like they know me because her stories are prolific, but they are clever and well done (you can follow her. It’s a locked account but she accepts the requests and she knows I’m sharing it here today).

Sometimes when technology shapes us we snatch a victory. In this case, her commitment to the IG story has sharpened her photography eye over the years. So when I went to her office she posed me in different settings, lighting, and a couple of costume changes. I have no eye for design or aesthetics. I know what I like but struggle to map that to creation, whether it’s photography, decor, or even Powerpoint. I have yet even more appreciation for those skills today, as she made me look as good as I can possibly look.

After an hour and hundreds of photos (with an iPhone too), we narrowed to these 3:

Tell me you wouldn’t fork over all your life savings for a Moontower Coin or invest in my blood transfusion start-up.

(I have been told I look like Ross from Friends my whole adult life. An older lady asked me for an autograph on a subway platform in Brooklyn about 15 years ago even.)

Happy Thanksgiving and stay groovy fam!

The Podcast I Listen To With My 9-Year-Old

I didn’t mince words last week:

There’s way too much obsession with investments as a way to get rich in the first place. It’s misallocated attention. It’s misplaced energy…Don’t obsess about investing beyond the point of diminishing returns.

Yes, you should absolutely learn about:

  • compounding
  • saving
  • fees
  • taxes
  • diversification
  • implementing or getting help to construct a portfolio with simple rules

Now stop and go home.

I was forceful about this because the exceptions to this are rare enough that caveats shouldn’t minimize the message.

I also recognize that “real talk” like this can feel like I’m putting a lid on your habitat without the courtesy of breathing holes. That’s why I added an emphasis on your human capital in preference to financial capital:

If you want to go big or go home, it’s best to do so on your skills or personal edge.

This brings me to a recommendation that will inspire, educate, and entertain:

David Senra’s Founders Podcast.

It’s some of the best content I’ve discovered in a long time. The premise is simple. David reads biographies and tells you about them.

It’s hard to explain how well done this is. David’s enthusiasm, tone, synthesis, and identification of a few common themes throughout these stories are immensely satisfying. The stories are inspiring even when they deserve admonition.

The narratives remind us that the exertion of our will on the world is murky but ultimately pursuit is a mother’s hand pulling a 7-year-old through the crowded sidewalks of life’s confusion. Yes, it takes time. It takes bumping into pedestrians’ butts. You often don’t know what direction you’re headed in. But eventually, there’s daylight. You are growing. You will get taller to weave through the crowd yourself.

The podcasts are empowering without any pep talks. The subtext binding them all together is enterprise. The primacy of action. The undisputed sense that the world is malleable and you can bend it.

Getting Started with Founders

With nearly 300 episodes, there’s something for everyone. I’ve listened to these:

#207: Claude Hopkins, Scientific Advertising

#189: David Ogilvy, The Unpublished David Ogilvy

#111: David Geffen, The Operator: David Geffen Builds, Buys, and Sells The New Hollywood

#66: Henry Kaiser, Builder in the Modern American West

#21: John Carmack & John Romero, Masters of Doom: How Two Guys Created An Empire And Transformed Pop Culture

My favorite so far — inspiration straight into my veins:

#18: Yvon Chouinard, Let My People Go Surfing: The Education of a Reluctant Businessman

#245: Rick Rubin, In The Studio

…and these episodes were worth heavy note-taking:

  • David Senra On Invest Like The Best (Moontower notes)

    This episode is not on Founders but instead is Patrick O’Shaughnessey interviewing host David Senra. I listened to it 3x. It was this interview that got me into listening to Founders and my favorite podcast episode this year.

    There’s more.

    I asked my 4th grader to listen with me and take notes (he’s learning note-taking in school this year). I’ve never asked him to listen to an interview before but I wish someone might have asked me to listen to a discussion like this when I was at such an impressionable age. In my link, I include his notes too! It was fascinating to see what bits stood out to him. (Since the episode is 90 minutes, we broke it up into 3 sessions of 30 minutes over 2 weeks).

    [One of the reasons the episode might have been especially fun for him is we just finished watching The Men Who Made America series on the History Channel and Senra discusses many of the “captains of industry” or “robber barons” featured on the TV series.]

    My notes discuss some of the common Founders themes that stand out to both Senra and I.

  • #93: Ed Thorp, A Man For All Markets (Moontower notes)

    An oft-repeated theme on Founders is that the subjects are deeply flawed, often miserable. You are warned to not glorify them but instead extract their deep but narrow wisdom, instead of copying their lives. This episode is special because Ed Thorp is the one person, Senra uses as his own personal blueprint.

    And I agree. Thorp in his entirety (or at least what we can know from his public action and writing) is an admirable and impressive individual.

    I immediately purchased Thorp’s book and I’m reading it to Zak at night before bed. Thorp’s life is a movie.

I’ve recommended Founders to several friends and the reaction has been universal — “where has this podcast been hiding?” If it gives you half as much joy as I’ve gotten from it it’ll be worth it.


Ok, so recapping.

  1. Don’t spend any more time than you need to on investments.

    They are numbers that go up and down and nobody can prove than know anything. From Why I Share Online And The Decision To Leave Trading:

    An aside that is gonna trigger some set of people: I could hand over all my professional dashboards and tools, and it wouldn’t make a difference. You won’t get the same results. Experience, discipline, and creativity are not something you can take from another. And they are foundational to a discretionary strategy. Think about this from a game-theoretic point of view. If I could codify (I tried and couldn’t) what I did, then it would be easy to prove the edge. The strategy would then be automated and be oversubscribed or its owners would never sell it to an investor. The fact that it’s discretionary and cannot be proven except by its eventual outcomes means an investor must always worry that I’m full of shit.

    Do you see the paradox?

    If the edge is provable, it doesn’t exist for you. So the only hope of finding edge is in your judgment of a discretionary strategy. This is not a worthy use of your time because your confidence can never be high enough a priori to bet an amount that was commensurate with moving the needle. You’re flirting around the edges of a low SNR problem. Unless this is fun, assassinate the FOMO right now by directing your Superman “rationality” eye beam at the paradox, and move on to the next obstacle holding you back from worthy pursuits.

  2. Gather energy

    Check out Founders.

    Check out Bill Gurley’s Runnin’ Down A Dream: How To Succeed and Thrive in a Career You Love speech that inspired Founders. (YouTube)

    That speech also inspired hedge fund manager Alix Pasquet’s presentation:

    Learning for Analysts and Future Portfolio Managers (2 hour video)

    Despite the investing-focused title of the speech, its central theme is broader:

    Learning Is behavioral change!

    The video is long but I found it worthwhile. The notes will let you judge for yourself.

    • Moontower notes (9 min read)

    • Frederik Gieschen’s notes (7 min read)

    • Presentation slides (download)

  3. Strike

    This old post includes links to light your fire.

    • Get Unstuck and Move (10 min read)