Knowledge Project: Adam Robinson

Link: https://fs.blog/adam-robinson-pt1/ and https://fs.blog/adam-robinson-pt2/

About Adam: Author, educator, founder of the Princeton Review, and hedge fund advisor


Purpose and happiness

Modernity may not be making us happier

  • Quantitative measures that suggest the “average person today lives better than the average king centuries ago”
  • Technology is engineered to hijack your attention.
    • Either confirm your biases or enrage you (reminds me of how we ended up with Ben Hunt’s “widening gyre“)
  • Gandhi: “There’s more to life than making it faster”
  • Top 5 google search: “Teach me how to love myself

Conclusions for himself after battling depression

A life paradox: to be happy, to find love, to be successful is to not look for it. It’s to be fully engaged in your life. Only two places to direct your attention in life:

  1. the task at hand
  2. others
  • His metaphor is breathing. When he is home he is focused on his work. Breathing in. When he goes into the world, his focus is on others. Breathing out.
  • The problem with self-help books is they focus on yourself, but you find yourself in your value to others.
  • Engagement in others
    • “Create fun and delight for others”. Lean into the moments. If this is your goal, you turn life into a fun game which holds unseen rewards for you and others.

2 ways to change someone’s thinking:

  1. Change their question
  2. Give a more inspired answer
  • Usually easier to supply number 2 then re-direct someone’s question.
  • Every institution is an answer to a question. Slavery is the answer to the question “how can I extract economic value with compensating a person?” The answer is horrific but the question is valid. The answer “Wikipedia” is an inspired answer to the same question.

An algorithm for finding opportunity

  • Appreciate limits to logic
    • Niels Bohr: “You’re not thinking, you’re just being logical”
    • Paradoxically using logic to show that logic is not the key to life’s answers: The fact that after thousands of years of pondering we still haven’t been able to use logic to reveal a universal understanding of life’s meaning
  • Insights are spontaneous
    • After the insight, we reverse-engineer the logic.
    • GK Chesterton: “You can discover truth by logic only if you have discovered it first without it”
  • A hint that you are on to something is the insight will surprise you.
    • The surprise is evidence that something is wrong with your model of how things work. It is the breadcrumbs to a learning moment.
    • Look deeply at situations that don’t make sense

Applying this algorithm to investing opportunities

  • The best opportunities occur when something seems inconsistent.
    • This reminds me of Josh Wolfe’s observation that all best investments were always polarizing at the outset. If the idea was obvious and everyone agreed it would have been fully priced or overpriced.
  • Markets are smart. When people or in disagreement with prices or confused they are in denial or are missing something from their model
    • Fundamental value investing relies on Ben Graham’s undefined notion of “intrinsic value”
      • It is defined by “the value justified by the facts”. This is a meaningless definition. Like “gravity is when things go down”.
      • In order to think fundamental investing works is hubris. You must believe:
        1. There is a true value
        2. You can ascertain it
        3. Others will come around to your view in a reasonable timeframe
      • What about Buffet and Munger?
        • They hold things forever.
        • They are geniuses.
        • It is a stretch to attribute their success to this idea of fundamental investing.
    • Technical analysis
      • Exercise in confirmation bias and data mining
    • Adam’s approach: Game theory
      • He doesn’t try to predict market prices. He follows the smart money
      • The market is a predatory ecosystem. Books like Peter Lynch “One Up on Wall Street” give retail the illusion they can win in what is a ‘gladiatorial pit’
      • Keynes who was also a great investor described investing: “How do we anticipate the anticipation of others?”
      • What pattern of behavior have you seen that correlates with a different future?
        • People placing bets are wagers on a view of the future
        • His favorite investing book is not an investing book: 1962’s Everett Roger’s “The Diffusion of Innovation”
          • A trend at its core is the spread of ideas
          • Roger’s decomposes the lifecycle of an idea. Early adopters are ridiculed, the masses begin to come around, the idea is enshrined and seen as ‘self-evident’
      • His ordering of traders and how they express their views. Traders near the top of the order will be “right” on a lagged basis. The giant caveat is that these orderings may not have applied as strongly before the 2000s because he claims the world was different (different investment flows, presence of EU, etc). But he makes the case they still held. He looks for strongly divergent views between asset classes to make probabilistic bets on the future. He prefers this because it is the expression of bets vs say using economic statistics. You don’t trade statistics, you trade assets.
        1. Metals traders sentiment is proxied by the copper/gold ratio. They are the “Forrest Gumps” of the investing world —simplistic. They are the closest to economic activity. They are very far-sighted because of mine timelines. They have never been wrong in the past 18 years on the direction of interest rates. In September 2018, during this conversation, the copper/gold ratio implied that interest rates should be at 1-year lows instead they were at 1-year highs. He thinks the metal traders will again be right, they are just early. (9 months later as I write this, interest rates have gone back to 1-year lows!)
        2. Bond traders sentiment proxied by the ratio of LQD/IEF. Basically, credit spreads
          • When they disagree with equity traders, the bond traders tend to be right and early
        3. Equity traders
        4. Oil traders sentiment reflected in XLE vs SP500 spread. The price of oil is less reliable because of sovereign intervention
        5. FX traders sentiment reflected in commodity currency crosses
        6. Economists: Always wrong as a group
        7. Central Bankers: not in touch with the real economy; rely on models only. And economists
      • 3 Ways a Trend Can Form
        1. A stock very sharply reverses a long-standing trend. The trend needs to have been in place for a long time (long is ambiguous; he says ‘months’ or ‘years’). The stock will retrace after its sharp move but if it runs out of gas then the early adopter of the new direction are starting to win converts
        2. Parabolic moves precede a change in direction and a new trend in the opposite direction (reminds me of dynamics of a squeeze)
        3. An asset in a long-established, tight range starts to break out. The less patient hands have been transferring their position to hands that have more conviction evidenced by them willing to wade into a dead name.

      His ranking model jives with how I think about trading.

      • The science part of trading is the constant measuring of market prices and implied parameters.
      1. Rank which markets are the most efficient
      2. Find the parameters which are in conflict with one another
      3. The parameters in the less efficient markets that conflict with more efficient markets represent an opportunity set
      • The art part is to then investigate why those parameters are priced “inefficiently”.
        • Flow-based?
        • Behavioral?
        • Is there an aspect of the inefficient market that is unaccounted for and the not normalized for in the comparison to the efficient market?

    His work in education and founding the Princeton Review

    • Cracking the SAT
      • Questions get more difficult as you proceed thru the test. On a later question, if you narrow to 2 choices, pick the one that makes less sense. The lack of intuitiveness is what makes the question hard. On easy questions go with the intuition. He created a mythical first-order thinking character named “Joe Bloggs”.
        • “He asks the student what would Joe Bloggs do?”
      • Princeton Review was very advanced in using large data sets to A/B test for every possibility
        • Study of NYC school data and using custom questionnaires of teens across the world testing into Stuyvesant HS
          Cutting to the conclusion: Groups that overcame socioeconomic factors to improve on tests (test improvement is more sensitive to those factors than outright performance) had the following factors:

          • immigrant father
          • US-born mother

          Speculation to why this mattered? One parent to impart work ethic, one parent to impart language. The gender didn’t matter, it just turned out that the father typically tended to be the immigrant. This combo even outperformed both parents being born in the US.

          • Students improvement was inversely related to their confidence in their ability to improve. Want drive and counterintuitively pessimism!
      • The best lesson here was students learned they can improve! In the US we “deify” intelligence, but we should deify hard work. So when you don’t achieve something it is viewed as a choice.
        • Kipling: “If you don’t get what you want, you either didn’t really want it, or you tried to negotiate over the price”
        • Hard work is not passively learned. It’s modeled. You need to model experimentation and persistence. Need a detached, scientific process to experiment for solutions. (example of urging the kids trying to raise money on the streets to try different approaches, since their script was failing. If they find a good script they should share it with the whole organization. This is how “do you want fries with that?” became part of McDonald’s process)
        • Schools favor rote learning. LSAT selects for people who can memorize the answer to a test but not for people who can see multiple sides of an issue. GMAT interestingly favors people who can handicap the right answer fastest since getting the right answer to each question to the decimal is impossible in the time allotted. The test design favors understanding the concepts.
        • Men outperform women in both verbal and math of standardized tests because women are on average more prepared. This leads to paradoxical behavior — they are more rattled by questions which try to trip you up because they don’t expect to feel unprepared, whereas men are more used to feeling that way and simply choose an answer and move on.

        Improve Learning and Decisions

        • Distill variables that matter
          • Study of horse handicappers found that the accuracy of their predictions did not improve from the original 5 variables they desired and as they were given more variables there confidence went up (confirmation bias effect) although their accuracy did not! The handicappers with only 5 variables were well-calibrated. They were close to 2x better than chance at predicting winner 20% vs 10% and they estimated their confidence as such. When they were given more variables their accuracy remained 20% but confidence grew to 30%!
        • Importance of rehearsal
          • Re-reading rote notes is not useful for studying. You need to connect your notes to things you know, re-phrase your learnings, and practice tests and questions.
          • The closer your practice is to the desired application of the knowledge the better. Practice a language, music, writing code, writing, playing sports in the context you want to be good at. Rehearse your speech in as similar a condition as possible. Record yourself. [this has been my experience in taking music classes that force me to perform on stage]
          • Playing over chess games to copy what your idols did. Reminds me of Austin Kleon’s advice to start out copying your heroes. Not to plagiarize but to get in their heads.