5 Ideas By Matthew Clifford on the Infinite Loops Podcast

Introduction by Infinite Loops host Jim O’Shaughnessey:

Matt is the Co-founder & CEO at Entrepreneur First, and Co-founder & NED at Code First Girls. We talk with Matt about:

  • Internet in an era of “dampened variance”
  • Increasing democratic participation
  • Bull and Bear case for creativity
  • What Matt looks for in people before investing
  • Role of geography in entrepreneurship
  • And MUCH more!

Episode link

(Bold is mine)


  1. Variance dampening institutions

    Matt flips Jim’s question by explaining that “weird” has been the default until the last few hundred years

    Jim O’Shaughnessy: Why has the world gotten so fucking weird? So, I like weird. I’m an anomaly, I guess, and because I’m 61 and I love weird, but I’m super excited about what’s going on. I think that we are on the cusp of a golden age, not just in one sector, but in many, many sectors. But to get there, you have to go through some turbulence. You basically tell us that we are in the middle of this turbulence. And so what I’d like you to do is explain your thesis for what got us here, what should we expect?

    Matt Clifford: That’s a big question. I think the way I would think about this is if you zoom out, maybe the first question should be, how did the world get to be not weird? Why should we take that the natural state of affairs is non-weirdness? One way of thinking about this is to say that modernity, however you want to define that… let’s say the last 250ish years, is really about the triumph of non-weirdness. It’s about constant or apparently constant, apparently unstoppable motion towards the reduction of variance in our lives. And if you want to get out of that Hobbsian nightmare, you need to find ways to reduce variance. Liberal democracy, incredible reducer of variance. No longer do you hand over power by having a war or an assassination, you have an election. It’s reduced variance. Monetary economics is a way to tame the business cycle over some period of time. Reduced variance, reduced variance… we’ve developed all these institutions, the rule of law, constitutional rights, all these things make life somewhat more predictable. And so for most of, let’s say, the second half of the 20th century post Second World War, anyone who lived in, for one of a better term, the west, had a life of far less variance than say 3, 4, 5, 10 generations before that. You could call that the triumph of modernity. And then something happened in the midst of these fantastic variance dampening institutions, we somewhat accidentally unleashed the mother of all variance amplifying institutions, and it’s called the Internet. And what the Internet does, is it selects the weird and amplifies it. And so I’ll stop talking, but I think the brief history of the last decade is that we suddenly introduced this variance amplifying institution right into the middle of our somewhat peaceful variance dampened lives and chaos has ensued.

  2. The internet as variance amplifier and ambition

    Matt Clifford: One slightly provocative framing would be that the rise of modernity, the rise of variance dampening institutions was really bad for ambitious people. It was really good for the average person and if you’re a utilitarian, maybe on balance, that’s a trade that we want to take. But why is it bad for ambitious people? Because one of the main ways to reduce variance is to stop a Napoleon invading Europe every time they want show you how smart they are. Insert your favorite example here. And so the apotheosis of this, if you like, is the idea of the career. Napoleon, didn’t set out to have a career. He wasn’t looking to impress his boss. And yet if you look at what the 20th century was about from the perspective of work and ambition, it was really about having these more or less formalized tracks for ambitious people to climb. And it doesn’t mean that if you got to the top of that, you couldn’t be wealthy, powerful, insert your favorite adjective here. But what it did mean was that we more or less knew what someone at the top of that hierarchy could do and what they couldn’t do. In the age of variance amplifying institutions, what you see is the Internet selecting for people that are not willing to have careers. Like if you take Donald Trump, Elon Musk, these are people that were not built to have 20th century careers. They were not built to make their boss look good, to fill in the engagement performance review card at the end of every project and climb up the ladder. And so, one of the reasons… it’s a slightly different point, but one of the reasons I think there’s been such an enormous Renaissance of founding entrepreneurship. I mean, it was partly technologically determined. Partly it’s just that if you’re a super ambitious person today, you actually look back historically, I think, and look, well, actually it was possible to do more as an ambitious person. It was possible to find more leverage, to have fewer constrains in the past. It was then a period of about 50 years, like the great moderation, if you’d like, where a lot of that was constrained. And again, I’m not totally against that, despite both being an ambitious person and spending my entire career, trying to amplify the ambitions of ambitious people. I think in some ways it’s a good thing for the world, but we’re now in this new era where Elon Musk can tweet what he likes and send the pigeons flying and several regulatory agencies flying. Or Donald Trump can be the most powerful man in the world and do what he likes. And these are examples of the Internet as sort of a anti-career institution. An institution that breaks a lot of the assumptions of what ambition should look like.

  3. Bull vs Bear view of the internet as a net good

    Matt Clifford: You can make a bull and a bear case for where we are today in terms of how do we think about allowing each human to fully express all aspects of who they are as you were describing in this sort of internet age. I think the bull cases, well, actually, what you’re talking about, you already alluded to this earlier in the conversation you’re talking about. How do you let each person find hierarchies in which they are comfortable in which they can express who they are, but they have a chance to compete and to rise given that in the world at large, it’s very hard to do that. It’s most of us, if we constrained to the physical world, we’re just going to be in state hierarchies where we always feel unhappy. One of the great things about the internet is it allows these extraordinary niches of interests to come together where, I could be working minimum wage in a job that I hate, but maybe I’m in the top three, most celebrated commenters on this sub Reddit for this interest that I have. And I’m not trying to pretend that we don’t need to do something about the material conditions that person’s life, right. That’s clearly a different question, but there is an extraordinary, if you think about almost the equivalent of biodiversity for ecosystems of interest, genuine hierarchy, diversity, you can be someone within a particular group. I think the internet is the greatest force for that, that there has ever been. And you can even extend this idea into this very fashionable idea of the Metaverse. We can imagine and creating world, whole worlds in which people can fulfill their ambitions and like the fullness of who they want to be in a way that is less damaging to others potentially. I mean, again, like you could say, that’s a very bullish case. There’s lots to critique in that, but there is something about the idea of virtualization as a way to enable many more people to achieve what they want to achieve, because we move from scarcity to abundance or potentially to abundance. Again, lots of footnotes on that, whether actually the metaverse as it is to actually emerging will permit that. I think the bear cases well, actually what the internet does is exposes us to, as you’ve already said, like a global competition where previously there was a local one, it sort of amplifies inequalities rather than dampening them. And so, really, I think the question is, can we get to material abundance quickly enough that the sort of satisfaction of people’s holistic needs beyond the material world is enough where actually being, finding your tribe on the internet is enough because we have co selected, successfully created enough material, abundance that people aren’t worried about where the next meal is coming from. I think if we can, I actually feel very optimistic about the internet as a way of providing outlets for exactly what you’re describing.

  4. This bit reminded me of the efficiency vs equality trade-off in economics (see tweet)

    Jim O’Shaughnessy: That’s just the way networks work. It’s not just human beings, it’s any complex adaptive learning system. The nodes that are finding the right answers, get the most connections and the nodes that are not finding the right answers die. And so, I’ve really had to sit and think about that one for a long time, because, so for example, I changed my opinion about universal basic income, because I think for the first time, really in human history, there is going to be a group of people, and the part I underline is through no fault of their own, who have a harder time adjusting and thriving in this new environment. And so your point that you just made, we can’t have them worried about where their next meal is coming from, because that human is a desperate human and desperate humans are destructive humans and violent, and listen, you don’t really even have to know too much about history to understand that [Kris note: notice this is a pragmatic not moral argument]. So there’s a lot of reasons why, universal basic income is not liked by both sides of the political spectrum in person. But I think that the term that I’ve often used is symbol manipulators. So I am a symbol manipulator. I don’t make anything with my hands. And so if you look at the Forbes 400, the list of the wealthiest people, if you look at the original one in 82, it was all physical things. That generated wealth, it was real estate, it was steel. It was, shipping and or inherited. In fact, I think the majority of the list was inherited sort of this dynastic wealth being passed down and down, which creates an aristocracy, whether you have a formal one or not. Look at the list today, there are, there’s virtually no one on that list who is not a symbol manipulator. Right. I personally think that’s great. You know what? I love Amazon. I love the fact that I can get any (beep) thing I want in at most two days. And if I’m in the city in 15 minutes, right. So I like that, but we do have to figure out a way, which, and I guess maybe it’s just like these conversations bleeding into higher conversations, bleeding in, because without that there could be chaos that we don’t come back from.

    Matt Clifford: Totally. Well, I think its worth sort of thinking about what are the objections that we might have to growing economic inequality and I’m not going to be comprehensive because I’m sure there are people who would have others, but I think one is actually political as though with great economic inequality, be kind of calms, great political inequality. And most of us have an instinctive sense that how rich you are, shouldn’t be the measure of political power that you have. And most of us have a pretty intuitive affinity for the idea of one person, one vote. And so, I think there’s like a set of things that we should worry about as people gain wealth, particularly extreme wealth, does it mean too powerful? And there’s then like a sort of almost like aesthetic thing of what do we do about a world where, like Bezos can fly to space and there are people that can’t eat or whatever. I call that aesthetic because I think it’s, you could frame it as justice, but I think it’s just, for most of us, the idea of sort of waste or maybe that’s actually a bad example that, but frivolous consumption versus like people not being able to eat that feels wrong. And then I guess there’s a thing about sort of lock-in, does it get to the point where a sufficient level of economic advantage closes off the ability for others to ever compete. Because I think most of us have an instinct that dynamism is good and mobility is good. Now I think what’s interesting about all those three things is they’re not actually in my view, objections to economic inequality per se. They’re actually to the conditions within which it occurs. So if we can find ways to have our politics less influenced by economic power, if, as you’ve already said, we can get to the point of economic abundance that no one starves however many rockets, Elon and Jeff flying to space, whatever. And if we can figure out what are the rules of the game, that means that however wealthy people become, you don’t have to be them or be related to them to be successful. Now I’m not saying they’re easy problems, but I think that sometimes, you see people default, the idea that we have to break the underlying creators of variance, the underlying economic engine, that’s allowed people to build in Amazon or a Microsoft or an apple or whatever. I think that’s the wrong instinct. I think it comes back to this, how do we make sure error correction actually functions? Well, we can’t have any of these things that are irreversible, we don’t want to have a static society. And so I would, I think people like you and me should be using our energy to think about how can we craft the rules of the game, such that we still allow people to build enormous companies and therefore enormous fortunes, but they don’t break the system. And it’s the second bit that I think we sort of let go of and I think they’re, without getting too political, I think we are missing a trick. If we jump straight to the idea that there’s something intrinsically broken, if someone becomes a billionaire that that’s not what we should care about, what we should care about, or what are the consequences of that. I don’t think every billionaire is a policy failure, but I do think that if only the children of billionaires can become billionaires, as you were saying, if it, then that’s a policy failure. And so I think it’s how do we harness wealth creation in a way that doesn’t violate those things that we kind of, most of us in intrinsically care about.

  5. Moral luck (a parallel to kindness as epistemic humility)

    Matt Clifford: The idea of moral luck, meaning I think it’s very easy to go through life feeling that you deserve kind of various things, although you don’t deserve various things. Most of us have an intuition that we want to live in a world where people get their just desserts one way or another. But I think, we’ve talked a lot in this conversation about sort of epistemic humility, the idea that we don’t really know anything. I also feel there’s a kind of moral luck humility, which is like, we don’t really get to choose who we turn out to be in many, many ways. And I think if that makes us a little bit more humble in the face of the suffering of others, the success of others, the ups and downs, a little more tolerant of like, what are the, you know… Go back to this idea of error correction. What are the systemic things that we need to prevent anyone falling too far off the edge in one direction? I believe in a world where, to my innovation point, anyone should be allowed to try anything. And if they build something phenomenally valuable, they should be allowed to reap the rewards of that in a pretty unconstrained way. And I think the offsetting force of that is the reminder that the fact that they were the person that could do that, that’s nothing they deserved. And it doesn’t mean that they shouldn’t benefit from it, but it should bring with it a humility that allows us to design institutions and systems that mean that none of us can fall too far. [Kris: Super resonant because you know how I feel about the word “deserve”].


The rest of the interview talks about qualities Entrepreneur First looks for when funding founders. The qualities themselves are not surprising but the list is surprising because of how mundane it is. And that is actually uplifting. They have tremendous data on founders and are quite certain it takes at least 6 months of close observation to actually know if a founder will be effective (even after 3 months the data is noisy!). The implication is you should widen the top of the funnel, make low cost bets on many founders which is in direct opposition to overly strict selection criteria. I’ve written about this idea and the math behind it in:

  • There’s Gold In Them Thar Tails: Part 1 (13 min read)
  • There’s Gold In Them Thar Tails: Part 2 (24 min read)

Part of widening the funnel is by expanding geographic search. Matt shares this story of Iranians in Singapore:

It’s an amazing story is that if you look at the list of nationalities by how frequently we’ve invested in people of that nationality, it’s quite surprising. I guess in some places, not that surprising. Like in Bangalore, it’s nearly all people who are Indian. But in Singapore, it’s quite surprising. So, actually in Singapore, the number one nationality we fund is Indian. The number two is Singapore. I think third might be Indonesian. I forget. But in the top four is Iranians, people from Iran. That’s kind of crazy, right? Because how come there are so many Iranians in Singapore? And the answer is there aren’t. I think there’s only about 250 Iranians in Singapore, and we funded about 50 of them. Why is that? Well, basically because if you are an incredibly smart, ambitious Iranian, the single biggest drag on your life outcome, sadly, is that you were born in Iran. And so getting out is very important for a certain type of person. And in particular, if you skew technical, which is a lot of what we do, good luck getting a visa these days to study, I don’t know, nuclear physics in the US or whatever. Maybe slightly facetious, but not very. If you write a list out of the world’s top universities and start to cross off the ones where Iranian grad students will struggle to get a visa, the number one university left in the world is the National University of Singapore, which is actually a very good university anyway. It’s top 20 globally even before you do the crossing out, but it’s the number one that’s very accessible to really smart Iranian science grads. And so there’s this very tight knit community of exceptionally smart graduate students from Iran in Singapore. And we’ve ended up funding as a sort of nontrivial proportion of them. Now, why do I tell that story? Because to me, it points to the ability to overcome geography without remote. Now, actually I’m very bullish on remote as an overall system. Lots of our companies are remote first. I think it’s very possible to do. But I think for the act of building, co-founding teams from strangers, which is the core of our IP, if you like, we really believe in the power of the physical for that, at least for now. So I think watch this space, probably some experimentation to come on that, but we think there are lots of ways to transcend geography while retaining the sort of physicality of what we do.

5 Ideas by Eric Crittenden on the Mutiny Investing Podcast

Mutiny founder and host Jason Buck’s introduction:

In this episode, I talk with Eric Crittenden, Founder and Chief Investment Officer of Standpoint, an investment firm focused on bringing all-weather portfolio solutions to US investors. Eric plays an active role in the firms’ research, portfolio management, product innovation, business strategy, environments and client facing activities. He believes using an all-wealth approach is the most effective way to prepare for a wide rage of market environments, while producing meaningful investment returns with limited downside risk.

Eric has over 20 years experience researching, designing, and managing alternative asset portfolios on behalf of families, individuals, financial advisors, and other institutional investors. Eric and I talk about circuitous paths with multi-year dead-end rabbit holes, simplicity can be the ultimate sophistication, what clients want, what’s wrong with the investing industry, and strategy scaling.

Episode link

All bold emphasis is mine.


  1. Investing opens your mind

    Jason Buck: Well, like you said, you don’t have to be overly prescient to talk about negative oil or negative interest rates. What I’ve always loved about macro trend is that you just follow price, right? And so if price goes negative, you just keep following it negative if that’s the direction of the trend. You don’t have to have any global macro narrative. And that’s the point, is you’re just offsetting narratives and people love narratives, so they didn’t like the idea that you said it could potentially go negative. You weren’t calling for it. You’re like it’s just within the realm of possibility. And I wonder, do you think that following trends for so long just opens up your mind that anything’s possible?

    Eric Crittenden: I think doing the research around it and seeing what actually happened. I mean, you can see with your own eyes what happened historically, like the sugar trade in the 1980s, where the price was below the cost of production. And the price didn’t actually go any lower, but you made a boatload of money being short because of the contango and the futures curve. Right? So today, you fast forward to today, and I talk to emerging CTAs or people that want to start trading their own account, they’ll do the same thing over and over. It’s always the same thing. They come up with all these filters to filter out trades and they say, “Well, if the price is too low, it won’t go short. If the price is too high, it won’t go long.” Well, okay, so one of these days you’re going to experience this phenomenon, and the greatest trade of the decade will be the one that your filter filters out.

  2. Breakouts vs moving averages

    I looked at many, many different ways to measure and identify a developing trend, and what I found, and you know this, is that they all basically pick up on the same thing. They’re just different ways of measuring the same thing. It’s like if there’s a wave coming in and you’re in Santa Barbara and you’ve got a guy from Hawaii and a guy from Oregon and a guy from California, and one guy says it’s four and a half feet, the other one says it’s five feet, and the other one says it’s four, they’re all measuring the same thing, they’re just doing it the Hawaiian style or the Oregon style or whatever.
    So there’s not a lot of benefit from diversifying your entry/exit style, moving average crossover, breakout. There’s a whole bunch of different styles. That being said, you could develop a strategy that uses a moving average crossover that doesn’t have a lot of … in other words, they’re not all created equal.

    I like breakouts. So I’m kind of in the minority there. I like breakouts because they’re pure trigonometry. They’re just triangles, essentially. And you know the price that would force you to get in, and then your stop-loss is some other price, and you know what that is. And you know what both of those prices are every single day. And that means you can calibrate your risk. You can lean on that. We call that the risk range. So I know approximately how much risk I’m taking to market because I know what both of those prices are. When it comes to a moving average crossover, I don’t know what price is going to force those two moving averages to crossover without doing some really advanced, or not advanced but tedious math to come up with a bunch of different scenarios about how they might crossover in the future. So because they all basically pick up on the same thing, but the breakout approach is very clean from a risk management perspective, I gravitate towards that, and I didn’t see a lot of benefit from diversifying meaningfully beyond what I’m already doing when it comes to entries. [Kris: This is resonant with what I saw at a fund that ran a breakout trend strategy.]

  3. Approach to risk management depends on whether you come from the relative vs absolute return crowd

    Jason Buck: Is like CTAs have always been pointing out, or macro trends specialists, have always pointed out that this is what actually matters is your aggregate drawdown risk, not your volatility metric. But that just doesn’t seem to translate well to everybody else, and everybody still seems to care most about sharp ratios versus max drawdown.

    Eric Crittenden: I think in the securities world, stocks, bonds, mutual funds, it’s historically been a relative game rather than an absolute game. In a relative game, anytime you sell, you’re putting yourself into a position to get left behind. If you get left behind, it’s game over for you, everyone loses confidence in you. Futures guys, derivatives guys, live in a very different world or grew up in a very different world where it’s all about survival. Some of these guys are using leverage and quite a bit of it, so it really was essential that they control the amount of risk they’re taking. So, and when CTAs is drone on, and on, and on about risk management, it drives advisors crazy, because they don’t even really know what you mean when you say that.

    [Kris: I’m biased but I agree with this from my life as a derivatives trader. Risk management is the #1 focus, but I had never thought about why the beta world might not think that way]

    It’s not that important in their world, because a balanced portfolio of stocks and bonds, it’s more important to not manage risk, because you don’t want the taxes, you don’t want the turnover, and you don’t want to get left behind. You can look at these psychological studies, and I’ve had people tell me it’s okay to be down 50% once every 10 years, as long as the market’s down 45, or 50, or 55%, I won’t lose my clients. But if I manage my risk along the way, the way you guys do, and I’m up 20 when the market’s up 25, and then the next year I’m up six when the market’s up 11, it’s game over for me. That’s unfortunate, but that’s how it is in the securities industry. So, but when you’re looking at alternatives, and in particular all-weather investments, frame the right way, that all goes away.

  4. “All weather” and uncorrelated risk premia

    Dalio coined that term or made it popular and he sometimes will say, “You need upwards of 16 uncorrelated return streams,” do you think that’s even possible?

    Eric Crittenden: No, it’s not, and I like Dalio, I like his writings, I modeled a lot of what we do off of what their firm did in the ’80s. So, I have a lot of respect for what he achieved, and how he did it, the how is very important. That being said, anyone with a plain vanilla copy of Excel can use a random number generator and realize that three uncorrelated variables are pretty much all you need to be the best money manager out there. So, I don’t know where the 21’s coming from. I’ll tell you hit on something though that there’s only one thing in this world that actually that I’m jealous of right now. There’s one risk premia out there that I can’t source, but it would be so valuable if I could.  So, I’m really just getting three, and I feel like that’s all we need, it’s the best I can do. I think it solves a lot of problems for people, but there’s one more out there that I think is big and sustainable, but you can’t get it from Phoenix, Arizona, and that is the market-making style risk premia. Where you need economies to scale, you need poll position, co-locate your servers, you got to be big, and have a solid network. You got to be basically like Amazon or Costco, where you can just muscle your competitors out of the way. You’re like, “Nope, get out of here, this is my real estate, and I’m doing…” It would be so valuable, but there’s just no way we could pull it off.

    Jason Buck: You said three return sources, so eliminate the three return sources that you believe you have?

    Eric Crittenden: So, I feel like there’s capital formation markets, like stocks and bonds, which are kind of a one-way street, the risk premia is kind of a one-way street. I mean, the bulk of the risk premia is your long stocks. The futures, whether it’s metals, grains, livestock, energy, these are risk transfer markets and risk transfer markets are different than capital formation markets. I feel like risk transfer markets, you need to be symmetrical, you need to be willing to go long or short, because they’re a zero-sum game. They have term structures, so they’re factoring expectations, storage costs, cost of carry, all that stuff. And then there’s the risk-free rate of return, which used to be a great way to kind of recapture inflation, it’s not so much anymore. We can get into that later on, it’s a fascinating time to be managing money, because there’s a huge gap between inflation and risk-free. But, historically speaking, those are the three that I think makes sense, especially in the context of an all-weather portfolio that uses futures to get its commodity and derivative exposure, because it leaves a lot of cash lying around. So, to go source that risk-free rate of return costs you nothing, there’s no opportunity cost, because you were going to be sitting on that cash anyways.

    When I look at all the different risk premium on this computer or the one behind me, historically, I see those three blending together more beautifully, and there’s other ones out there, they just don’t move the needle for me. Things that are related to real estate, credit, they just all have that same trap door risk that the equity market has when the equity market’s going down. So, and then the rest of the time they’re expensive, they’re tax inefficient, they’re illiquid, and then they disappear on… Sometimes they get crowded, I mean, they just cause more problems than they solve. That’s how I feel about corporate bonds, credit, all that stuff. I mean, I wish there was something there, I know other people strongly feel that there is, but I’ve looked at the data until my eyes are blurry, for decades, and I don’t see it.

  5. Capital formation vs risk transfer markets

    This is an important concept to me, because it goes to the point of why I do what I do, or why I think that macro trend oriented approaches expect a positive return over time, because the futures markets are a zero-sum game or actually, a negative-sum game after you pay the brokers, and the NFA fees, and all that stuff. So, in a negative-sum game, you better have a reason for participating. For you to expect to make money, you better be adding something to that ecosystem that someone else is willing to pay for, because somebody else has to mathematically lose money in order for you to make money. So, in studying the futures markets, and I’ve been on both sides, I’ve been on the corporate hedging side, I’ve been on the professional futures trader side.

    I believe I understand who that somebody is, that has deep pockets, and they’re both willing and able to lose money on their future’s position. A trend oriented philosophy that’s liquidity weighted is going to be trading opposite those people on a dollar-weighted basis through time. It does make sense that they would lose money on their hedge positions, I mean, in what world would it make sense for people who hedge, which is the same thing as buying insurance, to make money from that? It makes no sense, that would be an inverted, illogical world. So, anyone who’s providing liquidity to them should expect some form of a risk premia to flow to them. It’s just up to you to manage your risk, to survive the path traveled, and that’s what trend following is. I don’t know why that is so controversial, and more people don’t talk about it, because I couldn’t sleep at night if I didn’t truly believe that what we’re doing deserves the returns that we’re getting.

    Jason Buck: CTA trend followers, or whatever, just they don’t really know how they make money. They’re like, “It’s trending, it’s behavioral, it’s clustering, it’s herd mentality, and that’s how we make money.” You’ve accurately portrayed it as these are risk-transfer services, speculators make money off of corporate hedgers. But the only thing I would push back, and I’m curious your take on this, is like you said, zero-sum game or negative-sum at the individual trade level. But when we look more holistically, those corporate hedgers are hedging their position for a reason, and it’s likely lowering their cost of capital for one of the exogenous effects. So, my question always is, is it really zero-sum or negative-sum, or is it positive-sum kind of all the way around? In a sense that the speculator can make money offering these risk transfer services that the hedgers are looking for that liquidity, and then the hedgers are also… If we look at the rest of their business, they’re hedging out a lot of their risks, which can actually improve their business over time, whether that’s cost of capital, structure, or other exogenous effects.

    Eric Crittenden: Absolutely, I wish I had… You did record this, so I’m going to steal everything you just said. In the future’s market, it’s negative-sum. If you include the 50% of participants that are commercial hedgers, it’s no longer zero-sum. But most CTAs, and futures traders, and futures investors don’t even concern themselves with what’s going on outside the futures market. So, but if you pull that in and look at it, you can see, or at least it’s clear to me, we’re providing liquidity to these hedgers. They’re losing some money to us, and the more money they lose to us, the better off their business is doing, for a variety of reasons. Tighter cash flows, more predictable cash flows results in a higher stock price, typically. But you brought one up that almost no one ever talks about, and that is if they’re hedged, their cost of capital, the interest rate that they have to pay investors on their bonds is considerably lower. Eric Crittenden: Oftentimes, they end up saving more money on their financing than they lose on their hedging, and they protect the business, and they make Wall Street happy at the same time, so who’s really the premium payer in that, it’s their lenders? So, by being a macro trend follower in the future space, the actual source of your profits is some bank that’s lending money to corporations that are hedging these futures. So, it’s the third and fourth order of thinking, and you can never prove any of this, which is great, because if you could prove it, then everyone would do it, and then the margins would get squeezed.

    [Kris: As a commodity options trader, this framing is spot on. I was typically trading with flow that was constrained or price-insensitive. Corporate hedgers must hedge because of the covenants in their loan financing. I had never thought about the edge being spilled in the option market is coming from the lenders ultimately! I guess if we follow that logic even deeper it’s the bank shareholders that are giving up expectancy by requiring less loan defaults and it’s an open question as to whether the hedging activity is worth the lower cost of capital at the bank share level]

15 Ideas From Morgan Housel’s Interview with Tim Ferriss

Morgan Housel is one of my favorite finance writers who happened to make it to the mainstream with his massive hit book Psychology of Money. It’s a book I like to gift people even though I haven’t read it myself. That probably sounds weird, but I’ve read almost every blog post he’s written in the past 5 years and cite his writing in my newsletter constantly. I am just bad better at buying books than reading them. My nightstand has more than 50 books on it. That’s not a typo, it’s a problem (since I moved to CA I read about 5 books per year which is about 1/3 of what I used to back when I had an NYC subway commute).

Anyway, Morgan is great and his big-time interview with Ferriss is worth the 3 hour listen (transcript).

Here are 15 parts I felt like sharing. Bold is my own emphasis.

  1. Who’s the greatest investor of all time?

    It doesn’t seem like a hard question to answer. It should be an analytic answer, it’s just like a number who’s had the best performance, but then you can split this different ways. So who is the wealthiest investor of all time? That answer is Warren Buffett. Who’s the greatest investor of all time in terms of like long term average annual returns? It’s Jim Simons by a mile. And like it’s not even close. Warren Buffett’s long term average annual returns are about 21 percent per year. Jim Simons’ are like 66 percent per year after his ridiculous fees. He’s like in a different universe, but Warren Buffett is like way wealthier. And Jim Simons is like a deca-billionaire himself. And to say like he’s not as rich sounds crazy, but to parse out the reason that Warren Buffett has earned one third of the returns, but he’s like 10 times as wealthy, is because Warren Buffett has been investing for 80 years.

    And so even though he’s not the greatest investor of all time in annual returns, he has so much endurance in terms of what he’s done that by a mile. He’s the wealthiest, which to me, that gets into a really interesting point, which is how do you become a great investor? And most people when they hear that, what they think of is like, how can I earn the highest returns? What are the highest returns that I can earn this year and over the next five years, and over the next 10 years. And that’s not bad, that can be a great thing to do. But to me, if the goal is to maximize the dollars that you have, just like what’s the way that maximize the amount of dollars I accumulate over the course of my life. Then the answer to that question, the huge majority of the time is not earning the highest returns.

    It’s what are the best returns that you could earn for the longest period of time, which usually aren’t the highest returns that are out there because maybe you can double your money this year, but can you do that for 50 years in a row? Like probably not, but could you earn 10 percent annual returns for 50 years? Yeah, you can totally do that and generate an enormous sum of wealth. All compounding is, is returns to the power of time, but time is the exponent. So that’s to me what you want to maximize and that’s why Warren Buffett is in my mind, and it seems like an easy answer, the greatest investor of all time, even though his returns are probably not even in the top 20 percent of annualized returns among professional investors.

  2. Investors Morgan admires besides Buffet

    John Bogle, who started Vanguard, I think is probably the most admirable because it was so selfless what he did.

    A lot of people don’t even know this, Vanguard is owned by the people who own Vanguard Mutual. There’s no Vanguard shareholders. There’s no profits. There’s no dividends that are played to the owners. Vanguard was made for the benefit of the people who own the ETFs, the people who own the mutual funds and John Bogle did not make that much money for himself because of that. And you could almost think that Vanguard’s low fees, all of that is — the amount that you saved in fees is money that could have gone to John Bogle and John Bogle’s estate that didn’t. He’s like this undercover philanthropist of finance that I really admire just because there’s so few other people like that.

    And I think someone like James Simons, who we mentioned earlier. I think in every field, there’s only one person who’s claimed a fame, who’s competitive advantage is “I’m smarter than everyone else”. In tech, for 20 or 30 years, that person was Bill Gates, and I think in finance for the last 20 or 30 years, that person has been James Simons. The only person in the field who can say, if you ask them the question, “What is your competitive advantage?” They can say, “I’m just smarter than everyone else.” Only one person can say that, and it’s James Simons. If you look at what Renaissance Technology has done and just the results that they’ve accumulated and the consistency of what they’ve done, it’s like LeBron James times Michael Jordan times Tiger Woods to the power of Mikaela Shiffrin. It’s just such a different universe compared to what anyone else has done that it’s just, it’s astounding to watch.

  3. Admiration but not copying

    So I think most of the people who I really admire as investors, it’s more that I admire just how they’ve lived their lives, and their general life philosophies, and their investing philosophies stems from that. That’s true for Buffett as well. Actually, there’s an interesting thing about Buffett, which is that it was so easy to admire him and still is. But when the book The Snowball came out, which is a biography written about Buffett by an author named Alice Schroeder, and it came out, I want to say 2009, something like that. It really makes clear the case that Buffett has not lived a perfect life by any means. And in a lot of instances, his family life has been a disaster. I think that’s the right word to use. It’s kind of rude to say that, but I think it’s really true. In some ways, it’s good to hear that, that like everyone puts their pants on one leg at a time in the morning. Everyone is human. Everyone deals with the ups and the downs of living a life. And that he’s a human.

    And also that a lot of the reason that his family life was troubled at times is because he was, had a singular devotion in life, which was picking the best stocks and everything else came second to that. Everything from his family on down came second to that, in a way that a lot of people, including myself at one point said, “I want to be Warren Buffett. I want to be the next Warren Buffett.” But then you read about what it took to get there, and I’m like, “No, I want to stay 10 miles away from that.”

    …In The Making of an American Capitalist, and I read this decades ago, but the story that really stuck out to me and I’m probably getting this wrong, but someone on the internet will correct me. I remember his meeting, Warren’s routine was to work at the office and then come home and basically just walk straight upstairs, and begin reading like S-1 filings or annual reports of one type or another, quarterly reports. And that was his routine.

    And one day, he came home after work and I want to say his son, but one of his kids was like splayed out at the bottom of the stairs and had clearly like fallen down the stairs, and he just stepped over this child and walked up to his office to read reports. Like it didn’t even register to attend to his child.

    That’s a really important insight to learn is that a lot of these people who you admire, the reason that you admire them is they’re so successful, and that success that they had had enormous costs associated with it that are easy to ignore. And when I look at that, it’s like, I can look at pieces of Buffett’s life that I admire and pieces of Jim Simons’ life that I admire, but I don’t want to be them. Because that mega success had so many costs attached to it that I want to avoid in my life. That’s been an important observation too, for me.

  4. Compounding

    [Kris note: A reminder that geometric growth is N² and exponential growth is 2ᴺ…compounding deals with exponential growth. For example, if you grow at 10% per year for 30 years you end up with 1.10³⁰ = 17.4]

    The math behind it is 99 percent of his wealth was accumulated after his 50th birthday and 97 percent came after his 65th birthday, which is a really obvious thing. If you think about how compounding works, like it’s always in the extreme later end of year, is that the numbers just start getting ridiculous. Compounding is just like, it’s just like, it starts slow and then it’s boring. And for 10 years it’s boring, for 20 years it starts to get pretty cool. And then 30 years you’re like, wow. And then 40, 50 years, it’s like, holy, like it just explodes into something incredible. There’s a friend of mine named Michael Batnick, who its explained compound growth, I think the most easy way to comprehend, which is, if I ask you: “What is eight plus eight plus eight plus eight?” you can figure that out in your head in three seconds, like anyone can do that.

    That’s no problem. But if I say, “What is eight times eight times eight times eight times eight?” Like, your head’s going to explode trying to think about it. All compounding is never intuitive. And that’s why, if we look at someone like Buffett, we in the financial industry have spent so much time trying to answer the question: how has he done it? And we go into all this detail about how he thinks about moats and business models and market cycles and valuations, which are all important topics. But we know that literally 99 percent of the answer to the question, how has he accumulated this much wealth, is just that he’s been a good investor for 80 years. It’s just the time. And if Buffett had retired at age 60, like a normal person might, no one would’ve ever heard of him. He would’ve been like one of hundreds of people who retired with a couple hundred million bucks and like moved to Florida to play golf.

    He never would’ve been a household name. He would’ve been a great investor, of course, but there’s a lot of great investors out there. The only reason he became a household name is just his endurance and his longevity, that’s it. And that’s why if you go back to like, even the late 1990s, not that long ago, Warren Buffett was known within circles. Like within investing circles, people knew who he was. He didn’t become a household name until the early and mid-2000s, which is that’s when the compounding took his net worth to become worth 20 billion, 50 billion, a hundred billion where he is right now. It’s just the amount of time he’s been doing it for.

  5. Tim describes the letter Morgan wrote to his son while the boy was still a child

    “You might think you want an expensive car, a fancy watch, and a huge house. But I’m telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it. It almost never does — especially from the people you want to respect and admire you.”

    Here’s the paragraph that stuck out to me:

    “When you see someone driving a nice car, you probably don’t think, ‘Wow, that person is cool.’ Instead, you think, ‘Wow, if I had that car people would think I’m cool.’ Do you see the irony? No one cares about the guy in the car. Have fun; buy some nice stuff. But realize that what people are really after is respect, and humility will ultimately gain you more of it than vanity.”

    Now the last sentence has some counter examples maybe. But the point that we rarely look at the person in the cool car and say, “Wow, that person must be cool.” Rather, we apply it to ourselves is I think a very profound observation.

    …Morgan adds:

    I was a valet at a high-end hotel in Los Angeles. So I was in my early 20s and there were people coming in in Ferraris and Lamborghinis and Rolls-Royces, like the whole thing. And it dawned on me one day that when those cars pulled in, that I had really admired, I’m a car guy, I love that. Never once did I look at the driver and say, “That guy is cool.” What I did is I imagined myself as a driver and I thought people would think I’m cool. And this was like, I was in my early 20s, but I’m just thinking like that was my first kind of light bulb into how wealth works, that everyone thinks that they want to be the driver, but no one actually is paying attention to the driver.

    They’re imagining themselves. People think about themselves way more than they think about other people. But we all think that everyone’s looking at us, I think that’s like a universal thing. Everyone thinks like, oh, this person’s looking at me, they’re impressed with me. By and large they’re not, they’re thinking about themselves and how other people might want to be impressed with them.

    [Kris note: I describe this effect as the “bad hair day”. The ratio of people noticing someone else’s hair is messy divided by people mentally derailed by their “bad hair day” is indistinguishable from zero]

  6. Purpose of wealth

    I think if there is a universal trait of money that’s true for like not a hundred percent of people, but let’s say 90 percent of people, is that, what people really want in life is independence and autonomy. I think no matter where you’re from, what you do, your aspirations are, that’s a common denominator. That people just want to wake up every morning and do what they want to do on their own terms. And whether they’re able to do that, whether they can actually do that today, or that’s a goal. I think that’s a universal trait among people is just independence and autonomy. And so to the extent that we can use money to gain that, to gain independence and autonomy, that is, I think, as close as it comes to a universal want and thing that we can use money for. The interesting thing to me is that among huge numbers of people, educated people, financial professionals, the purpose of money is to buy stuff. It’s to accumulate more stuff, bigger house, nicer car, whatever it might be, which is great.

    I love all that stuff too. But to me, the most powerful thing that money can do and the most universal benefit that it can bring us is systematically overlooked, like using it for independence and autonomy is so overlooked. And that to me has always been kind of a sad thing that we are so accustomed and attuned to just wanting to use our money, whatever money that we have, whatever savings that we have, to go out and buy more stuff when we could be using it for freedom and autonomy. And then when you come to a period like in March and April 2020, or October 2008, when millions of people lose their jobs and you see during those periods, like the early day of COVID, how many people are just on the razor’s edge of insolvency. And it does not take them much, one or two weeks of unemployment to be in a really bad financial spot, whether that’s for an individual or a small business, it does not take them much to be thrown over the edge.

    And you realize how dependent so many people are on their jobs, their salaries, their theirs customers in a short period of time. And there’s just not a lot of room for error throughout most of the world. And I think for the huge majority of people, not everyone, but for the majority of people, there could be a lot more. And the reason that they don’t want to have more savings is because to them, the knee jerk reaction is “Why would I just keep my money in the bank or even invest it? Like, the purpose of money is to go out and buy more stuff to enjoy my life.”

    I get that, I understand it, but it’s usually once every five or 10 years that people realize how important independence and autonomy is. And having that wealth that you have not spent, having the money that you haven’t spent that was just lying around doing nothing, becomes the most valuable thing in the world when it lets you gain control of your time and just wake up every morning and say, “I can do whatever the hell I want today.”

    I want to wake up every morning and hang out with my kids and I want them to be happy and I want to do it on my own schedule. If it’s a Wednesday morning and I don’t want to work, then I’m going to sit on the couch all day and watch Netflix. And if it’s a Sunday and I got a good idea, I’m going to spend all day working. It’s all my own schedule on my own time, whatever I want to do. It’s that independence and autonomy.

    Tim Ferriss: Can you not do that right now?

    Morgan Housel: Yes. Yeah, I can. There was a point when I couldn’t and that’s why I feel like I’m pretty happy, and I feel like I’ve done a decent job of doing that. Now I do have, as a lot of people would, a tendency to be like, “Oh, what if I got that Porsche? What if we got the bigger house? What if we did this? What if we did that?” And it’s fun to think that because I love nice cars, I love all of that. It’s just so easy to realize. There was a great quote that I love that’s, “The grass is always greener on the side that’s fertilized with bullshit.” I think that’s really what it is. That’s the accurate phrasing of that well-known quote, and I think that’s really what it is. The idea that all that nicer stuff is going to make you necessarily happier, I think is just so easy to disprove.

    Especially once you’ve experienced a little bit of it yourself and that actually what is going to make people happy is that independence and autonomy, that once I remind myself of that, I’m like, okay. And then the game of earning more just becomes a game, it’s less about like, oh, if I have more money, I’m going to be happier. No, if my net worth is 10 X what it is today, I’m not going to be any happier. That was not true at one point in my life, but I think it’s true today, it’s probably true for you right now, it’s true for a lot of people listening. And therefore you can admit that a game is fun and a game is fun to play, but just admit that it’s a game and it’s actually not going to make you happier.

  7. Risk is personal

    The takeaway from that is most investing debates, where people are arguing with each other, is this a risk? Is that a risk? Should I buy this stock? Is the market going to go up next week? By and large, those debates are not actually debates. It’s people with different risk tolerances and different time horizons talking over each other, talking over one another. And that’s why. I think to me, the most important part about risk is that the definition is different for everyone. My definition’s going to be different from yours, which is different from anyone else who’s listening.

    And it’s not because we disagree with each other. It’s just because we’re different people, with different goals and different ages and different family situations, etc. And so, risk is a very personalized calculation for everyone whether that’s in investing or other areas of your life.

    [Kris: I always say that if you need $1mm tomorrow, the biggest risk is not flying to Vegas and betting 500k on red]

  8. “Tails drive everything” demonstrated without math

    Tim: Am I recalling correctly that a bulk of his career returns came from concentration in GEICO? Am I getting that right?

    Morgan Housel: That’s true. The last page of Benjamin Graham’s book, The Intelligent Investor, tells us little tale about an investor who earned basically his entire career success off of one investment. And that one investment broke every rule that this investor had laid out. And then kind of in the last paragraph on the last page of his book, he says, “By the way, that investor is me.”

    And if you look at Benjamin Graham’s track record, his career track record is incredibly good. And if you remove GEICO, it’s average. And like I mentioned, GEICO by Graham’s own saying, breaks every rule that he just laid out in that book to buy it. And so that’s a really interesting thing is like, not only was it one company, but it’s a one company that broke all the rules. So if you’re reading that book and looking for rules to follow, like by definition, you are not going to achieve Benjamin Graham’s success.

    And so, I think that’s really telling, and I don’t know what the takeaway from that is. If you could say, “Well, then clearly he’s just lucky.” If all of the success was due to one company that broke the rules, you could say, he’s just lucky.

    The other thing you could say is that’s just how capitalism works. And that’s true for Buffett. It’s true for a lot of people. That if they make a hundred investments, you’re going to make the huge majority of your money on probably five of them. That’s true for anyone. That’s even true if you’re investing in an index fund. That within the index, most of the games are going to come from five percent of the companies that you invest in. That’s always the case.

    I think it just kind of changes how people view success though. Like if your view of success is that every stock that Warren Buffett or Chamath or Jim Chanos or all these big name investors, that every time they make an investment, then it’s clear that, that company’s going to be a winner.

    And that’s just not how this success plays out at all. That even among the top names, the best investors over time, the majority of the picks that they make do not do very well. And the reason that they’re so successful is because one or two or maybe five investments they’ve made are ultra home runs. People associate that with venture capital. That’s how it works in NVC. But it’s actually true in all stages of investing.

    The stat that I’ll share with you here is that if you look at the Russell 3000 index, which is an index of large public stocks in the United States, over time, from I think, 1980 to 2010, 40 percent of the stocks in this large cap, like mom-and-pop index, 40 percent of the companies went out of business, not merged, not BAPA, but they went bankrupt, 40 percent of them.

    But the index did very well because seven percent of components were huge winners. It was like Amazon, Microsoft, Netflix, those companies. So even in a boring old index fund, almost half the companies are going to go out of business. But you’ll still do well because a few do very well. And so that was true. And I think the more successful you are, the more you see that.

    Even at a company like Apple or whatnot, what percentage of Apple success is the iPhone? It’s enormous. But they’ve experimented with dozens of different products over time. Amazon has experimented with the Fire Phone, which is a total flop, and they’ve done things in music which were flops. They’ve done all these flops, but they’ve also done Prime and AWS, which matters more than anything else. So almost anywhere you look, you will see that a tiny number of activities, apply for the majority of success. And it’s so hard to wrap your head around that when you’re trying to emulate these people who you look up to and admire.

  9. Safety net vs fuel approach to inheritance

    I’m quoting Buffett again, I don’t want to do this ad nauseam for the whole podcast, but he has a great quote on wealth where he says he wants to leave his kids enough money that they can do anything, but not so much money that they could do nothing — I think that’s really the key. And that’s how I think about my own kids who are very young, but when my wife and I think, how do we want to use whatever savings that we have to benefit them? Giving them a safety net, but not a fuel is a — that’s what my parents did for myself and my siblings, I always knew — when I was a teenager and in my early 20s, I always knew they would be there if I fell on my face and they would — I would never just completely fail, I’d never be homeless, I would never — they would always catch me, but they were never going to be a fuel. They’re never just going to give me money just to make my life better, that was never going to be the case.

  10. Against optimization

    Even if you look at the periods that in hindsight we think were the greatest that existed, which for most Americans is the 1950s and the 1990s, that’s what we remember as the golden age of prosperity and happiness and peace. Even if you look at those periods, like in the 1950 people were high, kids were doing nuclear bomb drills under their desks, and there was a lot of pessimism and negativity. Even if we know in hindsight, it was great at the time, by and large, they did not know that maybe it was good economically, but there was a lot to be worried about in the 1950s. Same in the 1990s, which we today it’s like, oh, the booming 1990s, the bull market. But even people forget in 1994 there was a big interest rate calamity where a bunch of bond interest rates rose and then the stock market crashed.

    And then in 1998 a big hedge fund went out of business and almost took the whole global economy down with it. There was a lot to worry about during these periods, so how do you protect yourself from that? How do you actually become buy and hold? I think there’s one thing to do here, there’s a friend of mine named Carl Richards, who’s a financial advisor, and he has a quote where he says, “Risk is what is left over when you think you’ve thought of everything.” And I think that’s the definition of risk is whenever we’re done planning and forecasting, everything that’s left over that we haven’t thought about, that’s what risk actually is. And the takeaway from that, the actual practical takeaway is that if you are only planning for risks that you can think about and you can envision and you can imagine, then 10 times out of 10, you’re going to miss the biggest risk that actually hits you.

    The biggest risk is always something that nobody sees coming, including something like COVID where it’s actually not fair to say no one saw it coming, but by and large — it’s like in financial circles, not a single investor in 2019 in their economic outlook had a viral pandemic as something that they were worried about, not a single one, or 9/11, or Lehman Brothers going bankrupt, all the big events that actually mattered, it’s pretty much true to say no one saw them coming. I think that’s generally true. And therefore, the takeaway is you have to have a level of savings in your asset allocation that doesn’t make sense. You have to have a level of conservatism that seems like it’s a little bit too much. That’s the only time that you know that you are prepared for risks that you cannot envision.

    And if you are only prepared for what you can imagine, again, you’re going to miss the biggest risk every single time. Whenever people look at my asset allocation, if I share that with them, it looks a little bit too conservative and they say, “Ah, you could be taking a little bit more risk,” and they’re right. I probably could, but I want to be prepared for the risks that I can’t imagine, or the risk that is possible but I don’t want to even think about it, it’s too painful to think about. That’s the only time that you can be prepared for the surprises in life. And I think most people, not all investors, but the majority of investors are not conservative enough. And I know whenever I say that they shake their head like, “Come on. Why don’t you want to take risk?” And once a decade you learn why, once a decade. Whether it’s COVID, or 9/11, or 2008, once per decade, you’re like, “Oh, okay, I get it now. I didn’t see this coming. It was a calamity and I either ground myself into the floor and I got wiped out, or I had a little bit of extra savings that got me through.” So that’s how I think about how to stay in the game in a long term history where history is a constant chain of surprises. That’s the only way to do it.

  11. Framing: Understanding when volatility or pain is a “fee or a fine”

    The way that I’ve phrased it in the book was “understanding the difference between a fee and a fine,” which seems like they’re really similar but there’s a very important difference which is, a fine means you did something wrong like, “Shame on you, here’s your speeding ticket. Don’t do it ever again, you’re in trouble.” And a fee is just a price of admission that you paid to get something better on the other side. Like you go to Disneyland, you pay the fee, and then you get to enjoy the theme park. You didn’t do anything wrong, it’s just that’s the fee.

    I think if you could situate your life to where you view a lot of the ups and downs, not all of it, but a lot of the volatility in investing, a lot of the volatility in your career, as a fee instead of a fine, then it just becomes a little bit more palatable. And when the market falls 30 percent, it’s not that you enjoy it, you don’t think it’s fun, but you’re like, “Okay, I understand this is the fee that I have to be willing to pay in order to do well over a long period of time.” Most investors don’t do that. When their portfolio falls 30 percent, they say, “I fucked up. I did something wrong. I clearly made a mistake. And how can I make sure this never happens again?” And that’s the wrong way to think about it. And I think if you view it as a fee instead of a fine, it’s just much more enjoyable. It’s much more realistic to deal with.

    Now, I said earlier that there are some areas in life where it’s like that. If you’re talking about a death in the family, a divorce, there’s things that’s like, “No, that’s not — that’s just a straight negative.” Like no silver lining to some of these things in life so I want to be careful at parsing that. But particularly investing, the huge majority of the pain that people go through and put themselves through is just the fee for earning superior returns over time. And if you’re not willing to pay that, then you’re probably not going to get the reward on the other side. And that’s why you can see so many people who at the first experience with being uncomfortable in investing with a loss, they view it as they screwed up and then they want out. They want to move on to something else.

    And of course, they’re not going to get the rewards over time. Nothing in life is going to give you those rewards for free. There’s a cost to everything. And just identifying what the cost is then realizing that the cost is not on a price tag, you’re going to pay for it with stress and anxiety, and dopamine, and cortisol, like that’s how you pay for these things, I think that’s the only way to deal with those big ups and downs.

  12. The optimal amount of bullshit

    You had Stephen Pressfield on your show, and he was talking about a time when he lived in a mental institution. He was not a patient himself, but he lived there and he starts talking to all these people. And he made this comment that a lot of the common denominators of these people who lived in a mental institution was they were not crazy, they just could not handle or put up with the bullshit of life. They just couldn’t deal with it. And that was kind of why they ended up in the mental institution. And he said all these people were the smartest, most creative people who he had ever met, but they couldn’t put up, they had no tolerance for the bullshit of the real world. And that to me, just brought this idea that there’s actually an optimal amount of bullshit to deal with in life. If your tolerance for bullshit is zero, you’re not going to make it at all in life…

    I listened to that [interview] and it was like, “Oh, see, these people could not function in the real world because they had no tolerance for bullshit.” The second step from that is, there is an optimal amount of bullshit to put up within life. And that was where this article, “The Optimal Amount of Hassle,” came from.

    And I remembered I was on a flight many years ago and there was this guy in a pinstripe suit who let everyone know that he was a CEO of some company, and the flight was like two hours delayed, and he completely lost his mind. He was dropping F bombs to the gate agents and just completely making an ass of himself because the flight was delayed. And I remember thinking like, “How could you make it this far in life and have no tolerance for petty annoyance, like a delayed flight?”

    And I just think like there’s a big skill in life in terms of just being able to deal with some level of bullshit, and a lot of people don’t have that. There’s another great quote that I love from FDR, who of course was paralyzed and in a wheelchair. And he said, “When you’re in a wheelchair and you want milk but they bring you orange juice instead, you learn to say, ‘That’s all right.’ and just drink it.” And I think that just having the ability to put up with that kind of stuff is, I think, really important and often lost in this age where we want perfection. We want everything to be perfect, and it never is.

    [Kris: I have a good friend who is insanely smart and well-traveled (top 1% in both categories of everyone I know). He has a  brother who is not conventionally successful and I’ve asked him about what that brother is like. His brother is also very well-traveled in part to choosing a life in the armed forces. But my friend has also described is brother as also extremely smart. But he’s incapable of tolerating the b.s. that defines the ladder-climbing world. The military life is simple in the ways he prefers. It has always stayed with me, that my friend quite explicitly described his brother as being unwilling to suffer bullshit. I really think about this a lot (too much if I’m being honest), since I often feel that “getting ahead” is really just climbing sedimentary layers of compressed bullshit.]

  13. The durability of value investing with a lower case “v”, not the investment category

    Value investing will always work in terms of, if you buy an asset for less than it’s worth, you’ll probably do pretty well over time. But the actual formulas that you use to determine value, those have always evolved and always changed. And formulas that people use, whether it’s price to book value, the P/E ratio. Whatever formula it is that may have worked at one period of time, those always evolve. That’s always been the case. I think it always will be the case that there will be people that will be stubbornly attached to the metrics and the formulas and the valuation techniques that worked perfectly in the previous era that now outdated and outmoded.

  14. Incentives

    If I was selling products by commission, if I was a financial advisor selling by commission, I would probably be much more into active investing and active strategies than I am right now. I think because I’m not a financial advisor, I’m not giving people advice, I can just view it as an outsider and be like, well, this is what makes sense to me so that’s what I’m going to do.

    Whereas I know that if I was in the trenches so to speak and had to make a living doing this, I know I would’ve very different views about what strategies you should pursue. And I know that the strategies that I would lead towards would be higher fee higher commission. I just think that’s the reality of it. Most people who work in finance are good, honest, noble people. Not all of them, but most of them are. But to the extent that is bad advice that gets perpetuated, I really just think it comes down to the incentives that are in the industry. The perfect example of this is that the only firm that’s really been able to make a good business out of selling passive funds is Vanguard and they’ve done it by becoming a nonprofit. That’s the only way that you can do it. You can’t make a good business out of selling the lowest fee funds that are out there. You just can’t do it. So I know that if I had a different compensation structure, I would think differently as an investor.

  15. I couldn’t help mentioning this section. Do what you will with it

    Tim Ferriss: Yeah. I am going to try to find this. There it is. It is a tweet from Jason. So a few years ago, Naval Ravikant and I were having a conversation on the podcast and he talked about the asymmetric costs of offense and defense in a world where drones are weaponized. Meaning if you have a drone or a bunch of tiny drones that are weaponized, and this is being developed all over the world, of course. You have sophisticated attacks where they can be coordinated with software to say all land on a given tank and explode at once. They can be used in more ad hoc, improvised ways.

    But I’ve been tracking this space because a number of my friends are involved. Some of them design and manufacture predator drones, for instance. So a drone that would kill or capture other drones, and they use netting that is shot out like Spider-Man to catch drones and they’re used by different major league sports franchises, because that’s a non-trivial threat to say an arena would be drone attacks. And Jason has a tweet, this is from December 7th, 2021. “Saudi Arabia is running out of the ammunition to defend against drone and missile attacks from rebels in Yemen…” I can’t pronounce, the Houthi it might be, I’m sure I’m pronouncing that incorrectly, ” …rebels in Yemen is appealing to the US and its Gulf and European allies for a re-supply.” This is in The Wall Street Journal and the lead, or at least the teaser sentence that I see presented by Wall Street Journal, is, “Saudi Arabia’s defense against the rebels’ drones pits $1 million missiles against $10,000 ‘flying lawn mowers.’” In quotation marks.

    Morgan Housel: I remember that. Yeah. That’s a great way to phrase the problem that you’re dealing with and who has the edge here? It’s crazy.

    Tim Ferriss: Yeah. The future of warfare is here. Not to beat poor William Gibson’s quote to death, but the future’s already here, it’s just not evenly distributed. But this is something that I’ve been watching very closely because the potential consequences and the implications are so terrifying. So not to end on that, but I only saw that tweet today from Jason and it served as a reminder to me that I think in a year, particularly with the technological development cycles that we’re seeing, how compressed they are, and the innovations that we’re seeing from drone manufacturers. I recently had some interactions with the newer drones and drones with flir technology and infrared tracking capabilities. It is incredibly impressive. Compared to drones from even 18 months ago, they are worlds apart. It is shockingly impressive.

    Morgan Housel: Here’s what’s scary to me about that too, is that when the nuclear bomb came about, there was obviously fear that this is the future of war and knock on wood, fingers crossed, it has not since 1945. Because the consequences of a nuclear war are so catastrophic, that everyone who has them up until this point has said it’s not worth using them because the consequences are so severe. I almost think drone war is the opposite where it’s like there’s no skin in the game, you’re not sacrificing any soldier’s lives. You’re sacrificing civilian lives, of course, on the other side. But there’s so little skin in the game and it’s so easy to just flip these things up in the air and go for it, that it makes starting a war, progressing a war so much easier than it’s ever been. It’s the opposite of what happened with nuclear war over for the last 80 years.

    Tim Ferriss: Yeah. If people want to make an attempt at looking around some corners, also from a technical perspective with respect to AI and cyber warfare, highly recommend listening to my recent podcast with Eric Schmidt, it is mind-boggling. What else? I think that within a year we will have things like GPT-3 at a point where we can generate probably, I would say within a year might be aggressive, but within 18 months, with figures who have enough audio on online that you can really deep fake effectively. You’ll have synthetic interviews with people alive and dead that are convincing enough that they can’t be distinguished from live interview. I could see that being graspable in the next 12 to 18 months.

    Morgan Housel: And that just torpedoes trust even more than it’s ever been. You hear a quote from Tim Ferriss, and you’re like, “That’s probably not even Tim, so I don’t even take it serious anymore.” There’s no trust anywhere.

    Tim Ferriss: Election cycle 2022. It’s going to be exciting.

    Morgan Housel: I got my son in Oculus for Christmas and there’s a thing where you can do a tour of the White House with Barack and Michelle. It was filmed back then. And just sitting at a table in VR, having a conversation with Barack Obama, it was so shockingly realistic. And you know where that’s going, the VR headsets that we have 10 years from now are going to make this look like a complete joke. If you mix that with the ability to deep fake, we’re heading into a world that’s going to be so wild.


    Kris: As I was pulling insights from the transcript this was a timley news event:

Notes from Tom Morgan on Infinite Loops

Link: https://www.infiniteloopspodcast.com/tom-morgan-all-you-need-is-love-ep74/

Tom Morgan, Director of Communications & Content at The KCP Group, joins Jim O’Shaughnessy on Infinite Loops to discuss:

  • The trillion-to-one ratio of attention
  • “Love” as a compass for growth
  • Religions and Traditions
  • Enlightenment vs. Adulthood

On attention and the possibility that there is something beyond us:

Tom: I’m not going to paraphrase the whole thing [Usual Illusion], but the relevant piece that we probably are aware of 60 bits of information at any given moment, but there’s 11 million that are potentially available to us. If I say to you, “Wiggle your big toe,” you’re suddenly aware of your big toe. That information was coming to you all this time.

You are having a conversation with a cocktail party with one person, and you hear someone else across the room say your name and you swivel your attention to that. You were taking that information in some way, it just wasn’t being served to your conscious awareness. It’s a filtering process. That feels like something that’s intuitive and is easy for us to understand. The bit that took me a really long time to understand is the idea that outside of that million to one ratio, there’s a trillion to one ratio of things that we’re never aware of and never can be aware of.

When you think about an earthworm, an earthworm has never seen a sunset and it will never see a sunset because it has not evolved to see a sunset. We will never experience the way a Bloodhound does with 200 million receptors in its nose because it’s not relevant to us. So the reason why that’s important is that if you think about a trillion to one ratio of things outside of us, the things that we’re aware of, the idea that there wouldn’t be a force influencing us that was hidden goes from a possibility to, I think, a probability.

How the powerful were able to shut down threats with might and control of information in mid-sixties to mid-seventies

Jim: Watch the music videos from that time. Again the artists were at the forefront. They were the tip of the spear in this and the spear scared the shit out of the left-brained dominant society and the man, so to speak. Psychedelics were broadly being misused in many cases. But all of the elements required for a phase change to happen successfully were in place in the mid-sixties to the mid-seventies. The man in this case, Richard Nixon, but everyone in control, and I’m speaking pretty specifically about the US here. But it happened in the UK too. And it happened in Germany. It was a global phenomenon. They made drugs, almost all of which are the non-addicting drugs, illegal. Fed max prison for going. They made an example of Timothy Leary. He became the scapegoat for like, having a couple of joints in his pocket? They didn’t even get him with any kind of psychedelic. You got to remember this guy was a tenured professor at Harvard, who was a well-thought-of psychologist. And, so they made an example of him because, now this is getting into kind of my take on this, people are terrified of what the implications are for being free.

The conventional keepers of the social “truths” shut it the fuck down. And they did that because they could. They did that because back then there was no global communication network like we have today.

People, for example, didn’t know that Franklin Roosevelt was in a wheelchair. They did not know that. Can you imagine in our day and age? Even trying to comprehend that is wild. So they were the keepers of the “truth” and it was a narrative that everyone believed.

Bucky Fuller, on death and rebirth being a shocking or scary idea:

There’s nothing about a caterpillar that suggests the butterfly.

The balance of safety and vitality; bridging specific knowledge and control with the abstract

Tom: And at the moment we’ve optimized for safety at the cost of vitality. And if you want vitality, you have to give up certainty. You have to give up the certainty of what you want, and you have to give up all forms of security, but not all forms of security. I don’t want to overstate this. Everything’s a balance, right?  We’ve just gone too far in one direction. And I think that’s sort of the prescription. It doesn’t involve a huge societal meltdown. It just involves more of an awareness of our own vulnerability and our own holistic inclusiveness.

Jim: It’s not like we haven’t been thinking about this as human beings. Forever we have, and we let traditions, and I’m not anti-tradition, but I am opposed to traditions which have osified and are not serving us anymore. And it’s like our school system, it’s like every, this is the kind of the main central heart of the great reshuffle. All of those old systems are broken or breaking. And we need to make new ones. And making new ones is going to be scary, but the only way you do that is to understand vitality.

Tom: I think any kind of reductionist theory is always going to be incomplete. You can get to the Higgs boson, but the Higgs boson isn’t going to tell you how to live your life. Right? You need values for that. I think there are actual universal values. They may be expressed in a Ten Commandment or something like that. But there is some sort of metaphysical truth out there. But the root to that individual creativity. That way you co-create with the environment around yo is intrinsically unique. And that sounds incredibly saccharine. Because it’s like, everyone’s special. Everyone’s got creativity inside them. Again, terrible words, right. When I heard “creativity”, I think of finger painting. And when you talk about reading poetry and listening to songs that just annoys my intellect.

But you have to remember that your intellect is fiercely resistant to all of these ideas because it requires giving up the steering wheel.

[Still] you do need to be is actually practical, because spiritual regressiveness and spiritual bypassing gets us nowhere in the same direction. So you need to be looking for people that are building the bridge from science back to spirituality.

Intuition or wisdom as evidence of a good filter

Tom: I read a resonant quote, two days ago, wisdom is knowing what information is important. Well that’s simple and incredibly profound, right? And to go back to the Usual Illusion example: you can’t take in 11 million bits, you’d be burned out like a light bulb in a nuclear reactor. You can’t take in a trillion bits, you’d be jello.  So all this is about, is all we’re talking about is how do you calibrate your filter to get the full range of human experience, including the shit stuff, which is the problem. If you hide in your intellect, as a lot of people I know have, it’s typically a coping mechanism to prevent yourself from experiencing the full range of human emotion.

And if you do get blown open, a blowing open experience tends to be incapacitating and overwhelming. And that’s the point. You’re not supposed to have a direct experience of that, right? Too many crazy psychedelic experiences make you too open. You believe everything, you need a good filter.

And that’s the definition of wisdom. And I think that George Soros example is brilliant. So like, for those of you that don’t know the George Soros anecdote, it was that he used to give all these really clever, retroactive reasons why he did things and then his son gave an interview I think to the Irish Times where he was like “Oh no, it’s just his back hurts when his portfolio positioned wrong.”

I thought about that for a long time. And my interpretation of it, whether right or wrong is that, we lay down a whole bunch of information from pattern recognition and he laid down a whole bunch of information from seeing an enormous number of different trading scenarios play out. But those recognition patterns run in the background. Because if they’re running in the foreground, you’re not going to get anything done. You’re going to be using your 60-bit consciousness to act in the world. But when something trips that, because it’s not running in your intellect, it’s running in your unconscious, you’re going to feel it as a sensation first.

And that’s the point. You need to be in tune enough and embodied enough that when you feel that, you don’t just feel it and discount it, you feel it and know what it means. So you are serving the correct emotions, you’re serving the correct physical sensations to your consciousness. And then you are able to interpret them and act on them in the correct way. That is a well-calibrated filter. It’s not about feeling everything all the time, because then you’re just going to be mush.

Notes From C.Thi Nguyen Interview About Games and Society

Link: https://www.preposterousuniverse.com/podcast/2021/10/18/169-c-thi-nguyen-on-games-art-values-and-agency/

C. Thi Nguyen received his Ph.D. in philosophy from the University of California, Los Angeles. He is currently associate professor of Philosophy at the University of Utah. He has written public philosophy for venues such as Aeon and The New York Times, and is an editor of the aesthetics blog Aesthetics for Birds. He was the recipient of the 2020 Article Prize from the American Philosophical Association. His recent book is Games: Agency as Art.

I only excerpted topics of particular interest to me so you should listen to the podcast for a fuller understanding. Anything bold is my emphasis.


Intro by host Sean Carroll

One of the good things about the artificiality of games, you know when you’ve won or lost, unlike life. But…that clarity of knowing when you’ve won or lost is very seductive outside the context of a formal game. It’s very seductive in life.

Thi has developed this understanding to study things like echo chambers and cult leaders. A cult is in many ways like an echo chamber. In both cases, it’s not just a filter bubble where you prevent information you don’t want from getting in, but it’s like a strategy for preemptively undermining claims from outsiders that the cult leader or the echo chamber doesn’t want you to believe in, right? You give people ways to discount outside information.

One of the reasons why cults and echo chambers are so seductive is that they bring clarity to values and moral reasoning, maybe a little bit too much clarity: They make it too easy, they make things cut and dried in a way that the world itself is often not so cut and dried. So he has a whole understanding of why we’re so seduced by conspiracy theories, by cult leaders, by echo chambers, and how it relates to this seductiveness of clarity that we get from thinking about games and point. We get points, we get likes on our tweets, we get steps on our Fitbit. This engages our brains for interesting evolutionary reasons, and that feature of human psychology can be gamed, if you like, by the leaders of cults or echo chambers.

Games

What is a game?

The notion of a game is really disputed in philosophy. It’s very storied. In philosophy, it’s a particularly famous concept, because when Wittgenstein was like, “No, you can’t define concepts,” his example of an undefinable concept was a game.

There’s an amazing book from Bernard Suits called The Grasshopper, which is an attempt to define games, which actually takes itself as a response of Wittgenstein and also secretly about the meaning of life and the relationship between games and the meaning of life.

The short version is, “To play a game is to voluntarily take on unnecessary obstacles for the sake of making possible the experience of struggling against them.”

  • Part of the idea of the game is that the goal of the game is partially constituted by obedience to certain restrictions:

    If you’re trying to get to the top of a mountain to get some rare drug that’s only there, you’re not playing a game. You’re just trying to get to the top of the mountain. If you’re trying to climb the mountain as a mountain climber, then certain restrictions are part of what you’re doing. So the medical seeker is not a game player, and the mountain climber is. And one way you can tell is if someone goes by in a helicopter and says, “Hey, you want a ride?” The medical climber will say, “Of course, get me the cancer drug.” And the other person is like, “Of course not. What do you think I’m doing?”

  • Autotelic: It’s worth engaging in the activity for the sake of the engagement and the doing rather than the product.

The charm or allure of games

  • Struggle

    The aesthetic experience of struggle can be accessed in a safe way by making the difficulty manageable.

Some struggles are beautiful, some struggles are satisfying. And what games do is, they let you tweak the activity to maximize that satisfaction…Most of life’s challenges are too big or too boring and little for us. In games, we get to modify the world of the game and the abilities we’re allowed in the game until they fit just right.

Example:

I feel like things like chess are kind of tuned to maximize that moment, you get more and more of those moments. In my normal life moving around the world, I get to feel graceful once a week, but rock climbing tunes you into the part of the activity that has that feeling. It’s built to constantly call out of you that incredible experience of delicate, graceful, perfect motion.

Manageable because of clarification

Games are these circumscribed spaces where the actions in space have been often been leaned down and clarified, so your actions can fit. They’re clarified, not just because the actions you can perform have been clarified, it’s because your values have been clarified.

Bounded and limited beings make things that make them feel temporarily okay, like spaces where we don’t feel too little for this vast world. The real world is this existential hell-scape of too many values, and games are like this temporary balm, where the world makes sense for a little bit.

  • Games as art

    Games are sculpted experiences of practicality. I think what’s interesting in games is, if games are sculpted practicality, then the beauty emerges in the practical action. So in other words, when you play a game, it’s not the game that’s beautiful, it’s you that’s beautiful.

    I think a lot of the literature about games has been going around looking for qualities that are in the game, like, Oh, the graphics are beautiful, the sound is beautiful, the story is beautiful. And they’re not looking at how radically different games are. And I think there are other things like this that are also mostly neglected, but the thing that makes games unique is that they’re sculpted action.

The danger in having your values clarified

  • Gamification

    Game values are hyper crisped-up, and that’s fine if you put away those values at the end. But when you gamify something like education or communication, then you’re forcing a singular clarified value system on a real-world activity. Think of how Fitbits or Twitter engagement can orient your goals towards local maxima. Twitter’s gamification squashes an individuals’ pluralistic values and gets everyone, insofar as they’re motivated, to be motivated in the same direction.

    • Education examples:
      • Sean Carroll: I used to be at the University of Chicago, which obviously has always been academically super-duper strong, but back in the day, it wasn’t the place you applied if you were interested in Harvard or Stanford or Princeton, it was less well known. So suddenly, there was a strategy that they undertook at the University of Chicago because they were being hurt in the US News rankings, and they were being hurt because the only people who applied to the University of Chicago were the ones who really wanted to go there. And you are rewarded in the US News rankings by having a high selectivity, by rejecting most of the people who apply, so they intentionally encouraged people to apply knowing they would reject them, ’cause it increased their selectivity, and they leapt up in the rankings. That’s an example of maybe the goal perverting the original aspiration.
      • Law School culture
        A study about law school culture when the US News and World Report started ranking them charts a bunch of stuff like what you’re talking about, about people gaming the rankings. One of the things they point out is that different law schools used to follow different missions before the rankings, but if their mission is skewed to the ranking at all, then you drop in the rankings, so it’s forced everyone to pursue the same values.

        Before the rankings, prospective law students used to talk about what different law schools valued and talk about their own values and decide what their values were, to pick which school to go to. Now, they, say 99% of the students just assume their goal is to get into the best school, where the best school is set by the ranking. So they don’t go through the process of value self-deliberation. You end up outsourcing your values, you end up letting somebody else perform value deliberations for you, and what goes into those values are often very much based in what’s in the interest of large-scale institutions and the kind of information management systems at large-scale information.

People worry a lot about games creating violence, and there’s actually a lot of data that mostly they don’t. And I think part of that is that the violence in games is fictional, and we have a lot of information that people are mostly capable of screening off fictions. The thing that I’m really worried about is people becoming used to the idea that the goal is some simple, quantified thing that people share, and what we’re supposed to do is do everything in our power to up that simple measure, and one thing on to note, that’s not fictional.

We shouldn’t worry about games creating serial killers, we should worry about them creating Wall Street bankers.

[obligatory reference to James C Scott’s Seeing Like A State: “Look, what you should think is that large-scale institutions generally see the parts of the world that are processable by large-scale bureaucratic machines, which are quantified data, they can’t register the part.” So, think about this, a large-scale school district or an educational bureaucracy can’t register individual student evaluation data, they can only register aggregatable data like GPA. So, says Scott, large-scale institutions have reason to remake the world along lines that are more regular, so that they can be legible to the institution and actable on by the institution.]

  • The satisfying aspect of games common to conspiracy theories

The satisfaction we crave in the clarity and simplification of games is why we are drawn to conspiracy theories. Conspiracy theories are tuned to give you the exact same pleasure [as games]. Someone has changed the nature of the world, apparently, to make it tractable.

How the argument works:

    1. There’s a source of anxiety: The world is complex

      Scientists are hyper-specialized, no-one understands everything, at some point you realize that you have to just trust tons of stuff that you have no ability to grapple with.

    2. Conspiracy theories circumvent our need to trust

      They say “Don’t be sheep. Don’t trust other people. Here is a vision of the world, where you can contain the world in you. You can explain all of it with this one powerful explanation.” It is a game-like pleasure, but exported to a place where it’s dangerous.

      • Refers to a book by Elijah Millgram, called The Great Endarkenment. It talks about how knowledge must not be individual quest given the fact that the world is so hyper-specialized that no one can know more than a tiny amount of it. [This stands in contrast to the] ideal of intellectual autonomy that drove the Great Enlightenment. But it doomed itself, because it created all the science that made it impossible to be intellectually autonomous. If you still hold to the old ideal of intellectual autonomy, where everyone can understand everything, what you get is being driven to anti-vaxxing and various conspiracy theories in which you reject trust in the sciences.]
    3. Conspiracy theories hack our desire for clarity

      It’s not that clarity is always bad. When you have intellectual success, you do have this feeling of clarity. My worry is the feel of clarity actually comes apart from real understanding, and that outside actors can game it.

      For example, in the course of evolution, it made perfect sense for us to pursue sugar and fat because calories are scarce, it’s hard to get enough fat and so on. Then the world changes and industrial forces figure out that they can maximize the feeling of sugar and fat separate from any nutritive qualities. And then if you’re still stuck on that old heuristic and chasing sugar and fat, then you’re screwed. Clarity can be like cognitive sugar. Someone can aim to max out the feeling of clarity, and the way that looks like is a conspiracy theory.

Trust’s role in conspiracy theories

1. Trust is tricky because there’s a lot you cannot trust, yet being able to trust is not optional

If you devote your entire life to it, you can understand one one-millionth of the human landscape of knowledge. [Even worse] not only can you not understand everything else, you don’t even have the capacity in yourself to pick the right experts to trust.

I have a PhD in philosophy, I have a lot of education. If you gave me a good, a real statistician, and a fake one, I don’t have the mathematical skills to tell the difference between a good statistical paper and one that gives a bad result. I don’t have that in myself. So what you get is actually this incredibly iterated and very fractal chain of trust.

[An example of why we have no choice but to trust in many cases:

There was one proof of a really famous theorem that literally only one guy understood, and he’s getting old, so a whole bunch of people had to have a project to re-write the proof in a way that other people could understand it. And that whole process of dealing with the fact that you need to trust some things, while you shouldn’t trust everything, is a tricky thing that is probably under-theorized.]

Politically, conspiracy theories tend to be associated with the right, but the left’s appeal to science fall flat because they are not appreciating the role of trust:

      • The false argument they spout:

        “Oh, these fucking anti-vaxxers, anti-maskers. Think for yourself, look at the science, evaluate the science.”

        When the truth is “I can’t evaluate that science.”

      • The obstacle is not whether people trust Science with a capital “S”, it’s the trust of its messengers

        Look at the people that are legitimated in a certain institutional structure, which involves a background trust in those institutions. And I think there’s this vision where for a lot of us, like when you look at anti-vaxxing, anti-masking, the climate change denialist space, what we want to say something like, “Oh, those people are totally irrational.” But I think what you have to think instead is, they have an entirely different basic framework of trust, for a different set of institutions. The degree of rationality there depends on the degree to which we can justify our trust in our institutions. And that’s a really, really complicated matter, and it’s not like the authoritative institutions are always right. There are plenty of historical cases where they are corrupted, right?

        It’s hard to be against conspiracy theories as a blanket statement ’cause sometimes there are conspiracies. We have plenty of historical examples where all the institutions in a particular country have become corrupted, have taken over the news media, are issuing fall statements. That’s a real thing that happens.

2. Echo chambers are not about ignorance, they’re about trust

An echo chamber is a system in which people have been taught to systematically distrust people on the other side. The book Echo Chamber doesn’t quite say the world around Rush Limbaugh is a cult, but they basically almost say it. This book is an empirical analysis of the world around Rush Limbaugh — Rush Limbaugh’s top people just systematically distrust and dismiss people on the other side.

This is is different from not hearing them at all (which is the filter bubble argument). The problem goes back to trust, not irrationality or disbelief of science.

A large segment of the population has had their trust subverted and undermined and directed toward what we think of as like the wrong institutions.

The way back is not to wave the evidence in people’s faces. I think people want to be like, “Oh, climate change denialists, just look at the evidence, here is the evidence,” but of course they’re not showing you the evidence, they’re showing scientists that they trust who process the evidence, ’cause not even a climate change scientist, a particular climate change scientist, has looked at all of the evidence for climate… It’s all processed.

Someone whose trust has been systematically undermined in that set of institutions will not trust evidence from sources they distrust**. And that is rational.

This is a complicated problem without easy solutions. But the first step is recognizing the story is that the other side doesn’t hear us. It’s that their trust has been undermined.**

A lot of public policy figures are fixated on the filter effect thinking we just need to create these public spaces where people can meet each other and talk to each other. That’s a standard view in a lot of political philosophy and public policy. And I think that’s not going to work if trust has already been systematically undermined. It doesn’t matter if you meet and hear the other side, if you already have a prevailing story that says they’re malicious, manipulative, evil people.

The grand takeaway

The need for clarity as evidenced by our love of both games and conspiracy theories can cause us to overoptimize and seek safety in echo chambers.

What do we do about it?

While there are no answers some hints that can point in helpful directions:

  1. Transition between perspectives

    Playfulness is the quality to transition between different world perspectives, easily, lightly, to hold your perspective lightly and slip between different ones. This can be done via literally traveling and playing games where you are forced to slip in between different value perspectives.

    It’s hard to do, it’s hard to put on different worldviews as like different outfits. This is a resonant argument for reading and earning widely:

    This is going to become the world’s oldest chestnut, but sometimes I think like, this is what the fucking humanities are for. Read some art, read some novels, motherfucker, and if you want the background paranoid view, it’s something like the world has very good reasons to get us to onboard to super simple, clear targets. And when I look at universities cutting humanities programs in favor of business schools and STEM, because those are higher-earning jobs or lead to more clearly measurable productivity, I’m like, of course, reading weird subtle art, experiencing weird subtle art, including games, but also including novels and music and all this other stuff, is this stuff that might have clued you in to different value perspectives other than make a lot of money and get a good job. And of course, they’re going to get cut out in a world dominated by hyper-simplified institutionalized values.

    One of the suspicions I have is that certain domains, especially the domains that science has a lot of success with, are the kinds of domains that admit of extraordinary clarity. And other domains, like the domain of life value and the domains of personal health and fitness and aesthetic joy, are not domains that admit of the same systemic clarity. And when we demand them, we start hitting simplified targets.

    There’s a difference between qualitative and quantitative data. Qualitative data is really rich and nuanced and subtle, but it’s really context-sensitive. It doesn’t aggregate, it doesn’t travel well.

    [insert quote: Not everything valuable can be measured, and not everything we measure is valuable]

  2. Be aware that there are forces that are trying to manipulate us

Like the sugar analogy, is this moral view or worldview too yummy? Is it just too satisfying? Did someone make this just for me and people in my cohort to swallow down?

This is definitely not a blanket. The thing is, you also get clarity and pleasure from really getting at truths. You can’t throw all that stuff away, you just have to realize that the signal has been amenable to perversion and misuse.

Dan McMurtrie with Howard Lindzon

Link: https://howardlindzon.com/dan-mcmurtrie-founder-of-tyro-partners-llc-joins-me-on-panic-with-friends-to-discuss-information-overload-and-behavioral-investing-ep-151/

About Dan: Dan McMurtrie is a 28-year-old founder, portfolio manager, and Twitter phenom more commonly known to his nearly 60,000 followers as @SuperMugatu. He’s an insanely funny, original and inspiring person who knows a lot about social media, maintaining an audience and the behavioral side of investing. Dan’s New York-based hedge fund, Tyro Partners LLC, focuses on trends and supply chains driving technology, healthcare, industrial, and consumer markets.


An insight common to making money and making people laugh

Something everybody knows it to be true but no one’s speaking up about it being true

On people struggling to make sense of the world

It’s a paradigm shift to a networked world…going from one-to-many media to many-to-many media, and having cycle times for communications go down to sub-second, meaning the number of cycles, the number of communications is going to infinity really fast. That’s leading to all these weird neurological effects because your brain is not used to having hundreds or thousands of opinions scattered at it. Your brain is used to thinking that an opinion from somebody means something, which is super wrong. And so I think this knee-jerk reaction to dismiss things that well-trained investors in the past three years have developed is actually the biggest weakness you can have, because everything now is like this kind of meta game of “it looks absurd but it’s actually not. Actually you shouting that it’s absurd, is what’s going to give it the audience that makes it real!”

The output of our quickly networked world is disrupting seasoned investors’ heuristics

It’s scaring the shit out of people. They’re looking at this and they’ve been around the block a few times, and their experience is betraying them because they’re seeing things that are so behaviourally horrifying to them that they don’t realize that they’re then becoming just instinctive and knee jerk, And they’re not running basic numbers [and asking themselves] “Is this a material amount of money?”.

[consider the lazy argument against Dogecoin that it has unlimited supply]

Is it actually unlimited supply? I’m like, “Yes, but is it unlimited supply forever. No. There’s a more nuanced point  that it’s not unlimited supply at any individual point in time, there’s a rate limiter on time with those points, which is why this pump thing is working. 

An example of how brains get hacked in this networked world, orchestrated by the guy that oversaw such hacking at Facebook

There’s a technique that I think Chamath does that I call “the 90% rule”. What you do is you say something that’s technically accurate, but like maybe 10% off of how a professional would say it, or maybe it’s 10% not correct, but it’s in the spirit of correct. For example, Chamath said something on Twitter — that he was up 120 basis points this year, and the market’s up 30 basis points, so he said he’s outperforming by like 300% or 400% or something. [Everyone jumped on Chamath for this], but do you actually think that Chamath doesn’t understand basic math. Do you think the guy who led monetization of mobile advertising for Facebook doesn’t understand the way things are reported. The guy who’s leading several SPACs, who’s talking to bankers every day, who has a sophisticated family office. You could dislike the guy for a million things, but basic numeracy is not one of them. And yet the knee jerk reaction [by people on Twitter] is that he’s wrong. I think the reality is, and here’s the brutal thing about Twitter, most people on Twitter are strivers. The people that are working really hard, they’re trying to make it, and candidly for most people it’s not working out. Especially the finance guys. The guys who went to finance, they’re not getting the money. It’s not working out. They’ve got the CFA, they’ve got the MBA, they worked at Goldman, they went to Wharton and they’re still not making a fraction what they thought they were. They’re not moving up. It’s not working out because of top-down industry dynamics which you’ve talked about ad nauseum, but that makes them really bitter. They’re really bitter because they feel like they’re getting screwed. And so when they see this guy, who’s making billions of dollars, making a beginner mistake, that would have gotten them fired, the amount of unrighteousness or injustice feels so massive. It overrides all logic and reasoning.

Nobody is immune from the brain-hacking that the networked world is doing, but the first step to understanding it is being aware of it.

My big thesis right now is technology is being used to program people, not the other way around. In the frickin documentary on Netflix [referring to “Social Dilemma”] is half of the stuff and [Chamath] is doing it. It’s crazy how effective this stuff is. A great example of this was when I tweeted a stupid joke that “no one actually knows what’s in chalk, they just teach you to accept the premise when you’re so young, and they just go with it.” And you have people, like real people with PhDs responding like I’m a fucking idiot. Everybody knows what chalk is. Don’t you see this as tweeted from my iPhone?! I tweeted this from a supercomputer in my pocket. Even if I didn’t know what chalk is, I could obviously put faith in it. [This is obvious if you think about this] for more than a split second but you have people who have multiple PhDs from places like MIT, who are completely hacked. Their brains are being hacked. And they look like fools, and they think they think that they’re smart because they’re speaking. Not to validate what they’re saying. They’re speaking to validate themselves, and that’s the weakness that all people have. This is the dark arts that you have to study now.

Change is occurring at an accelerating rate

There’s a concept called the Overton window, which, not to be like a dropper of concepts but Overton Window refers to what like types of political policies are acceptable to talk about in public. [A few years ago universal basic income was considered a quack idea], last year Donald Trump initiates universal basic income. Admittedly because of a virus so I’m not saying it was a wrong move, but you need to understand how insane that shift is society that that went from unthinkable to expecting it, and actually the people almost revolted. I mean I was in Richmond, Virginia when the protests were happening there. We were watching the breakdown of society happened, because there was some uncertainty around it that changed in a year.

You can’t put your head in the sand about the role of social media. The genie is out of the bottle. Dan sees evidence that some managers do not understand that reality.

The thing about Twitter within hedge funds or institutional endowments that nobody really wants to admit is, even if the CIO isn’t on Twitter, (and if he isn’t, it’s only because he’s too old) all of their analysts are! So, like there’s this huge issue right now of mass group gaslighting of mimetics and ideas spreading like viruses and if you’re a CIO right now, you probably don’t actually know what your firm’s sourcing mechanism is (unless you’re pushing all your ideas down). The number of times I meet with the senior guy who runs a fund, and he starts rattling off ideas I’m like “Yo, you know your analysts ripped all of that from Twitter right. And they’re like ‘What are you talking about?’ and I’m like, Look, there are these cliques of people on Twitter, I’m not even I’m not saying they’re bad ideas, but they aren’t original ideas. I’m just telling you. I’m not going to doxx your boy, I’m not going to get anybody in trouble, but I’m just telling you that you don’t know how your own investment process works. You don’t realize you’ve already been fully infiltrated by social media.”

Instead of fighting this new reality, adapt to it.

[You’ve been infilitrated by social media] but you actually kind of want that because if you are the only guy who’s not participating in these things [you are missing important context]. For example in January, and the end of December [during the stock squeezes]. I’m not particularly smart, especially relative to other hedge fund guys, but I was seeing where the liquidity was in the market and I was seeing the type of stuff happening on StockTwits and Reddit and all these other places I mean there was just gonna be just some crazy stuff happening. I went to my clients and said “Look, I’m not gonna play this game. I’m gonna take exposure way down. Yes, I believe I should be short half these companies, but I’m short the stock not the company. I’m not messing with this.” I had several people say I lack conviction, long-term investing blah, blah. Then the next three months it was just a hedge fund after hedge fund blow up. This is not going away, it’s not going back because it’s not 2000. This is not instant messaging. Last year was the first year that most waking hours for humans were online, and everybody was on one to five websites. Nobody really understands how significant that is. Everybody’s now networked, all the time 24/7.

The bar for what is considered table stakes is rising. Psychology and the repercussions of being highly networked should receive more of your attention to gain an edge.

People don’t realize how fast these big changes happen and so when I just look at some people who think we’re gonna, we’re gonna be good investors because we do more conservative discounted cash flow analysis than the other guys I’m like, “You’re like a dude with a horse and a saber walking into WWII. You’re about to have a really bad time. Like I can’t even explain to you the ways in which you’re going to get beaten down, and you’re not psychologically prepared to deal with any of this stuff because it’s gonna seem random. It’s just gonna be chaos. There’s gonna be bombs dropping and machine guns and you’re not gonna know what either of those things are. It’s just a really weird time to be an investor and I think you have to move the psychology stuff up in how you’re relating to the world into a really forefront position. Or these systems are just going to eat you.

How Dan’s fund is adapting

We’ve continued to zoom in on this behavioral stuff. Everything else is table stakes. Of course, you need to know how to value something, you need financial analysis, you need to be able to read transcripts, and do value research. But that became commoditized sometime between 1995 and 2010. Look at the number of people who have CFAs or how many people went through banking here or internationally. Companies like thedeal.com. You can go online, hire somebody anywhere in the world in like 10 minutes with a contract and a 1099.

Right now, I think the markets become a pure metagame of the game. Where does it go from there? The thing is humans are still very human, and actually, the rise of passive means the humans are a smaller percentage of the market. When they move at once they have a bigger price impact, because it’s just everybody running out the fire door of a theater. It’s as old as the hills. It’s all the same stuff again but remixed and much faster. It’s still music but it’s going from jazz to dubstep, way more aggressive, way faster, with all these different games being played. So we spent a lot of time trying to understand the fundamentals and what’s going on in these businesses and what’s going on in the supply chain, but also what is the psychological game going on in the market.

You must find a lineup where you’ve got great fundamentals, good business improvement, a really long-term runway, and you have some really distracting psychological thing that’s distorting the price. Or more importantly, maybe in this era, mandate arbitrage. As more and more capital is just driven by somebody’s investment policy statement, or an endowment investment policy statement or the S&P index rebalances. Those legal mandates are really powerful and just getting bigger. So we want to see a clustering of understanding why the opportunity exists. Because of legal mandate, because of agency costs and behavioral things like [where investors] can’t go to LPs and own it because they are going to get upset. If we see that plus it’s a good business [that becomes a potential opportunity].

This bit reminds me of the style of trading I’m more accustomed to where we don’t predict so much as try to “see the present clearly”. I’m more accustomed to measuring what is happening now than predicting tomorrow. (An example from my world would be owning optically expensive volatility because it’s carrying well)

We don’t try to predict. We try to observe. We might have a starter position on but when we see thesis confirmation, we’re going to add. What we do not really like to do, is make a big bet because we think x is going to happen. I don’t think it’s necessary because I don’t think the market adjusts to new information as well.

Dan loves Warren Buffet but scoffs at his cargo-cult imitators

I’m a huge Warren Buffett fanboy. My favorite people in investing are Warren and Charlie and then my least favorite people in investing, generally speaking, are people who tell you that they’re fans of Warren and Berkshire.

A great filter is to ask them “what’s your favorite Berkshire business?” If they say See’s Candy, you know that they know nothing. Nothing about Warren Buffett or Berkshire Hathaway. The reason is Warren Buffett is probably one of the greatest marketers to ever live. He’s built this brand. He’s built this brand that’s hyper-consistent. That allows him to not answer any critical questions, because he doesn’t actually have to defend objectively right or wrong. He just has to defend consistency with his brand.

There are several value investors that really market themselves as like Warren Buffett or Charlie Munger brands. Baby Buffetts. They all have kind of good records of not losing huge amounts of money but none of their records would stand on their own in a vacuum. They live off this same narrative. Recently I’ve had some interesting interactions with a couple these people. You ask them “How do you think about your business?” They’re very candid. “Look, I am looking for somebody, where that’s what they want. They want to feel that they’re investing in a long-term, conservative thing. They’re not going to lose their money. They will compound well and they get to feel like they’re part of the church of Buffett.”

At the end of the day, what are they selling is a psychological safety blanket. They’re not selling an investment product at all…they will only take inbound clients because they don’t want to go out and convert anybody. Look at how these [investors] behave. If you’ve ever studied cults, you see the exact same behavior. I don’t necessarily think it’s malevolent or bad, but I think that in the modern era, with everything that Warren Buffett did now being sped up 100,000 times, and on Twitter everyday with people doing these explainer threads and Substacks. These are all the same psychological manipulation techniques. It doesn’t mean they’re malevolent. If you really understand how Warren built his public persona, why he built it the way he did, and how he changed his business at every scale level of capital [out of necessity] you’d understand that the idea that Warren Buffett The Empire Builder, bears any resemblance to Warren Buffett The Ruler is naivete.

Why 2020 made Dan optimistic

Looking forward, I think the takeaway from last year, has to be a profound optimism for humanity. We just took a global pandemic on the jaw. As pissed off as everybody is we’re calling it the Five Aces Problem. It’s like you being dealt a poker hand with four aces and people are like “It would be good if we had a fifth ace”. There’s no fifth ace in the deck! You can tap something on your phone and have a pizza in 20 minutes! You can have a date in 5 minutes. You can have anything you want delivered to your house within 2 days. Like woe is you that you couldn’t get the specific dumbbells you wanted that week. During quarantine, we were living a better life than people in the 1960s were able to live. People in the 25th income percentile now live better than Rockefeller did. We’re going up a curve that is getting exponential so people are not understanding how insanely awesome the performance last year was of humanity. And sure we have some supply chain chokeholds leftover from last year. Yes, there are obvious knock-on effects. We’ve got some issues around the government explicitly putting all risk onto the dollar and making some big bets on modern monetary policy. Those are generally concerning things, but they are super obvious. I just don’t see how you can’t be optimistic about our ability to solve these problems.

I think one of the things people struggle with, I just wrote about this, is as the world gets better, as you go from being a caveman to being an office worker, your job is moving further and further away from the kind of base Maslow needs. You’re not hunting a saber-toothed tiger, you’re typing in data entry or doing social media posts. That’s why every generation looks at the next generation and thinks they’re soft as hell. You know “they had to walk both ways to school uphill in the snow.”

It always happens like that. That’s what progress is.

Darrin Johnson On Flirting With Models

Independently Shorting Volatility with Darrin Johnson (Podcast)
Corey Hoffstein’s Flirting With Models

Darrin Johnson is an options trader and the first independent trader Corey’s had on the pod. Considering Corey’s show focuses on institutional and cutting edge investment professionals, it says a lot that he had Darrin on the show. I’m not surprised, I’ve been following Darrin on Twitter for years and impressed by his understanding of options trading. I have always believed that option trading is an apprentice activity. I cannot imagine how difficult it would be to learn the game with the guidance of masters. Darrin has managed to cobble together that guidance from a variety of sources including Euan Sinclair’s books, Twitter, hiring grad students to walk him through the academic math, running countless simulations, and detailed reconstructions of financial products.

Here are some of my favorite aspects and insights from the interview (with my commentary):

  • Darrin’s entrepreneurial path before he even found his way to trading is worthy of an interview of its own.
  • The importance of building sims instead of backtesting as a way to get more samples. For those of us who trade for firms, we benefit from the collective osmosis of many traders discussing trades and situations in detail. All those morning huddles and afternoon meetings help us build a mental library of counterfactuals. Darrin did the next best thing…build simulations, knowing that a backtest is a single version of what could happen. This is crucial to get a fingertip feel for how positions behave.
  • The idea of pricing out financial products to the penny. Darrin called it “back-office” kinda stuff that retail traders don’t do. Corey said he does this too. This is exactly what you do at a mm/arb shop. As a clerk I remember building giant spreadsheets to price fair value for ETFs. This is not optional work. You will use those skills to attack new products and understand the frictions to arbitrage.
  • At around the 40:00 minute mark Darrin explains why he concentrates his selling on at-the-money or meaty options not the wings. He makes the correct insight: when you sell tails, you need to capture the entire premium. The hit ratio of selling tails is high but when you lose you lose many multiples of the premium. If you fail to collect the full premium, it will not make up for the losing trades. The difficulty of selling tails is even trickier yet. Darrin explains how betting against longshots leaves you uncertain if you have an edge in the first place. In my words: good luck differentiating between a 50-1 shot vs a 100-1 shot. That’s the difference of 1 probability point but it’s massive in payoff space. I discuss further in Tails Explained.
  • Here’s a more subtle insight from the interview. Darrin tries to find the structure that has the best payoff to his vol forecasts or thesis. Notice the subtext. If there’s a “best” there must be a “worst”. This is the basis of relative value trading — buy the best payoff and sell the worst payoff contingent on the vol forecast coming true. For example, if you thought skew was cheap in the oil complex compared to macro backdrop, you could buy the cheapest puts across the oil and products suite. You could buy some ratio of oil puts and selling RBOB or HO puts depending on how how you think the macro stress plays out. Now you might want to be outright long the vol forecast coming true so you might not want to turn this into a basis trade (the advantage of a basis style trade is you can likely do it bigger). Or you could choose to buy oil puts and say sell puts on an equity index where the stress has been priced in. Because you’d be taking an even larger basis risk than staying within the oil complex, you would size the trade smaller than the oil basis trade, but perhaps larger than an outright long oil vol position. The point is there is a lot of creativity on trade expression that balances edge and basis risk.

Since the interview was so good, it got passed around quite a bit on Twitter. In one of the ensuing discussions, I offered my down-to-the-studs view of what options trading really is:

There’s nothing magical about options trading. Paraphrasing Darrin, the intellectuals who are drawn to it prolly need a more blue collar view. Step back and think about what the market needs. What risks doesn’t it want to hold? Obsess over the who and why, not moments [of a distribution]… For years the “job to be done” in vol was be willing to pay theta The marketplace was bidding for that role and vol folks that filled it did well. The market “bids” for different roles all the time in vol-land and the job of a vol trader is to fill it. Simple not easy.

@TheSpeculator0, who trades for a firm, astutely observes: It’s not easy to catch the regime change that switches up the roles.

My response:

That’s why risk management is key. The nature of market-making, even if you don’t explicitly have that title, is you lose on the regime change. So you adjust and hope the next regime lasts long enough to pay you for the [money-losing] transitions.

If you want a fuller discussion for the raison d’etre of vol trading, you probably won’t do better than Corey’s podcast with QVR’s Benn Eifert who describes the job as “bringing balance to the force”. I took full notes for you…Flirting With Models: Benn Eifert (Link)

Notes from Marc Andreessen on Education

Link: https://a16z.com/2020/09/10/education-myths-monopoly-oligopoly-cartel-costs-past-present-change/


The education system is based on model that pre-dated the printing press. It has had little innovation in light of the technological advancements. Yes there are experiments like Lambda School and its ISA alignments. There are MOOCs which offer micro degrees. But in 2020, distance learning as necessitated by Covid, has accelerated the questions we have about a system whose costs were already outpacing inflation. We are left to wonder who our current system is serving and if it is time to examine more efficient possibilities.

Recently Google dropped the requirement that new hires need college degrees and it’s expected other large employers will follow suit. It begs the question, what were degrees good for?

The CEO of Figma, Dylan Field, interviews Marc Andreessen to hear what the cost/benefit of our college system is and how recent developments will test theories about what college is good for and what alternatives may serve those requirements better or more cheaply.


Purpose of college

Overt purpose: A bundle of actual education/skills acquisition, social/dating service, network building, “attached to a hedge fund” (in the form of an endowment)

Cynical purpose: Outsourced personality and IQ testing (via SAT) as these screens have become either socially undesirable or illegal for employers to perform.

The personality dimension being tested for is known as conscientiousness 1 which has 2 components.

  1. Industriousness: Basically self-starting energy
  2. Orderliness: Attention to detail, time management, organization

The “sheepskin effect”

Somebody who goes to college for seven out of eight semesters does not receive seven eighths of the income of somebody who goes for eight out of eight semesters, they receive half the income of somebody who goes for eight out of eight. So the diploma signals your conscientiousness by evidence of you clearing the 4 year hurdle.

A diploma tells employers you are a smart kid who can get their work done, signaling conscientiousness, rather than being about knowledge acquired.

Testing the purpose of college

  • Covid-19 will tease out how much people are willing to pay for an online education which will hint as to how much of the value proposition derives from the degree, from the social, and from the actual learning (this acting as a constant). International enrollment which is unsubsidized would be an especially useful clue as you would expect the loss of social network effects would impact those students the most.
  • The test of college as an outsourced intelligence test will naturally occur as leading universities shed standardized testing requirements

Understanding the source of the student debt crisis

We need a conversation about value given vs value received of college from an economic lens because it is subsidized by Federal and state government. If the ROI is not there the victims are tax payers and the students who cannot discharge the debt via bankruptcy.

How did we arrive at a mountain of debt that cannot be serviced?

The system is a hostage of a govt sponsored cartel.

  • K-12 education is compulsory and state-run. Captive audience.
  • Hallmark of monopoly: real dollars spent on education have 3x in 40 years and outcomes are unchanged
  • Funding is monopolized
    • Accreditation: Loans are subsidized by the government and are only available to accredited institutions that are certified by the govt. Accreditation or admittance to the cartel is nearly impossible.
    • University research funding comes from the government. Can’t remember the last research university to come into existence
    • Operating a university is taxed as a non-profit
    • Endowments are taxed as non-profit

    Meanwhile between sports programs and endowments these institutions have more in common with for-profit businesses.

The spiraling costs are exactly what you might expect from a monopoly and to be contrasted with perfectly competitive businesses such as manufacturing that have led to goods disinflation.

Basically what the government does to education is just like what they do in health care, it’s just like what they do in housing. A two part strategy for managing these markets. They restrict supply. And then, and then restricting supply causes prices to rise, because there’s more kids that want to go to school than can get in. And then on the other side rising prices create political pressure which they resolve by subsidizing demand.

(This was part of his anti-govt rant. I haven’t fact checked any of this. He also points out that spiraling costs without an improvement in service is also the hallmark of 2 other heavily govt influenced areas: housing and healthcare. The story of the ultra-liberal Cal professor who called for subsidized housing while he votes against development to maintain “historical charm” came to mind.)

The value proposition of university for people in “show your work” fields is changing.

One of the most basic revelations the internet has surfaced is the different nature of professions.

Internet has made the largest difference in “show your work” professions: occupations where it is valid and easy to demonstrate your value online. For example, coding, design, music, art, game dev, animation. Open source projects and writing, democratized, pure examples of “show your work” fields.

From an employer’s point of view conscientiousness is a proxy for being a good employee. But this can be circumvented by just showing your work online. This erases the value of a degree that derives from employer demand.

GitHub has like an internal ranking and rating system for software code, and for programmers. So you can actually build an actual professional reputation as a software developer on GitHub without ever actually being face to face with another human being. People all over the world today who were basically taken advantage of this to be able to basically build these incredible track records as a software developer and make themselves more employable. Employers like my venture firm. We recommend that our employers spend as much time on GitHub looking for good programmers as they do on LinkedIn, or going to college fairs.

YouTube, blogs, Figma for design all play a similar role as GitHub does for software developers. He tells the story of South Park as an early example of a viral video that was able to spread organically through a distributed technology. The show born from Matt Parker and Trey Stone’s irreverent holiday card which made its rounds as a downloadable Quicktime vid!

“If you can go to college, go to college”

  • Even jobs that probably shouldn’t require degrees require them.

I think it’s actually quite dangerous to give somebody, somebody as an individual the advice, don’t go to college, like in the current system that we have that’s basically saying don’t prove that you’re smart don’t prove that you’re industrious, and conscientious and then basically be prepared to settle for fundamentally lower income for the rest of your life.

  • Understand the proposition

Gates and Zuckerberg notwithstanding, if you go to college finish college. Get the piece of paper.

  • The 2×2 matrix of what to study and where to study.

The spread of outcomes for technical degrees is not that wide. If you have a technical degree your choice of school matters less. This is exactly the opposite of what you find with liberal arts degrees. Since the output of a liberal arts degree are more subjective or uneven the school issuing the diploma carries more weight. 

Possible explanation: in absence of concrete skills, the network from a top school is valuable.

Tips for those in college or considering college

Execute on the opportunity — take the hardest course load you can. Get the skills (obviously get good grades but focus more on getting the skills).

If you are at a sub-tier college taking liberal arts, de-risk by acquiring marketable technical skills.

For those considering alt paths

At this point Marc, still recommends college and acquiring technical skills but if you choose an alt path be aware of the trade-offs. For example, if you choose to do open source work recognize it’s better to make major contributions to one project (as opposed to minor contributions to multiple projects) because that really demonstrates what employers are looking for. Put yourself in the mind those who will be evaluating you years down the road.

Consistent work demonstrates conscientiousness and the nature of the work is an embedded intelligence test.

What should a software developer do? Unquestionably the answer is create an open source project or go become a member of an existing open source project and make successful high quality sustained contributions to that project over time. At this point I think that’s clearly a better credential than getting a computer science degree. I’d hire people like that myself and the great thing now is you can do that from all over the world.

So what matters to Andreesen when they hire or fund someone?

The good news:

They do not care about a degree or GPA or test scores and in fact question if too much conscientiousness means you are too much of a rule-follower.

The tough news:

They measure you by what you have actually done. Building companies requires being able to do things so that is the capacity they are looking for. List of things a founder will need to be able to do:

  • Building an actual product that somebody will actually pay for.
  • Figuring out a way to actually sell it to them
  • Actually collect the money
  • Actually service the customer so they actually have a good experience
  • Actually tell their story so that anybody will even know that they exist
  • Run a finance function so that they don’t lose all the money
  • Run a legal function so they don’t get sued all the time
  • Actually get others to work with them.

There are many talented people so the way to stand out is to actually demonstrate the ability to build or create.

Steve Martin best career advice ever: Be so good they can’t ignore you.

Developments to watch

  • New credentials2 to replace bachelor’s degrees (ie Google certification program, coding tests, and math puzzles)

  • Still early innings of “show your work” online as way to qualify yourself



Kathleen Mercury on Board Gaming With Education Podcast

Link: https://www.boardgamingwitheducation.com/games-in-schools-and-libraries/

About Kathleen: Educator with a special focus on teaching gifted students game design (Link)

Transcription: Otter.AI

I incorporated Kathleen’s presentation to these notes for the sake of consolidation.


Overview

Kathleen believes:

“Happiness comes from being able to choose the life you want to live.”

To empower students there are 2 anchor ideas:


Be Producers Not Consumers

…what I want more than anything for my students is for them to be creators, not consumers…The only thing I care about is what ideas they have, and giving them the tools where they feel empowered to take on big complex challenges where they have no idea of what the final product will be, but that they can build in and learn the skills and confidence that they can hopefully get themselves there. That’s what I care about because if I can get them to accept that and do that, then they can pretty much take on whatever challenges come their way for the rest of their lives.

Bias Towards Action

For those familiar with the Silicon Valley ethos of “Move fast and break things” this will be familiar. Despite, her midwest roots and home Kathleen’s thinking has been heavily influenced by the Stanford D-School.

…probably the biggest thing that’s helped me is the Stanford design school’s method of prototype development. I went to a design-thinking boot camp, and the design mindsets that were presented as far as when you’re wanting to design something for someone else, and how you should think about it. Here’s how you should approach it. And it was so different from what I was doing, but it was just one of those things where it’s like, oh my god this is 100%, what I should be doing and it completely pivoted everything that I was doing. For example “bias towards action”. Instead of just thinking about something just start doing it. Rapid iteration making prototypes fast and cheap so you can get them on the table so that you can fail quickly see what works, see what doesn’t work quickly and so you can make more versions of something even faster.

It’s designed to keep them moving quickly so that nothing becomes precious and nothing becomes so sacred that they won’t get rid of it. And I think for me as a teacher, that’s really helped me and also helped me as a game designer in terms of trying something getting it out there, seeing what happens getting feedback on it and making improvements to it as well.

Lessons From Teaching


On using games in learning

  • I think for a lot of gaming experiences in the classroom, having everybody involved at the same time, really, really matters for success.” (Party games are a good tool for this)
  • A good teacher can make a lot of things fun. Sparks a love of learning.
  • Bridging the abstract to concrete
  • Critical Thinking
  • Information more sticky/accessible. Increases connections.
  • Boosts engagement & connections (made me think of how a local teacher used Pokemon cards to bring the boys and girls in 1st grade together)

On kids having different abilities

  • Everyone deserves to learn at their level every single day that’s just one of those tenets that I just hold. If you’re doing something where their disabilities or inabilities become apparent to others. I think you have to be really careful about how you handle that. As far as you know what you’re willing to do to, you know, protect them to take care of them because if they’re stressed out and embarrassed.

  • Approach to gifted kids:

    1. If you don’t give gifted kids problems to solve, they will create their own.
    2. They need to learn how to struggle and work through it.
  • Heterogeneous groupings can protect kids by partnering up.

  • But homogenous groupings have advantages too.

For my gifted kids, a lot of times when that happens, they’re always like the ones that are like spread out amongst the other groups, and then they put all the spread out all the middle kids and then they spread out all this sort of low kids and pardon me for speaking in broad brushstrokes but I am. And so a lot of times they never get chances to work with each other. And one thing that research shows is that when you let kids have similar abilities work with each other. Everyone gains, because the kids on the middle step it up, and the kids on the lower end also step it up, even if it’s like one notch higher, you know, that’s okay for them, you know they’re using their abilities and what they know and trying to push themselves up to be more competitive as well

  • Why the emphasis on points in winning is redundant.

Points are used to ultimately communicate your position in the game to other people. And if we’re playing a game that is just to be, you know, a review or something like that I don’t care about the points at all. And so, what I will often do is even if they get points, or if one team starts to get a blow out. I will, you know, do something like say “this is a 20 point question”, and then somehow I manage to make it so that kids on the other team get those points, or I start awarding ridiculous points my cool you just got a puppy. So drop puppy up there on the scoreboard.  

Why teach game design?

  • Develop analytical, practical, and creative thinking skills

  • Autonomy and collaboration
  • Teaching game design is teaching to orient towards an internal scorecard not an external one

That quantitative checkmark feeds into a lot of the programming that we’ve already done with kids as far as you know letter grades and standardized tests and success is 100% and success is, you know, an A plus is, you know, and I think for a lot of my students especially having to sort of break that mentality. A lot of what I do in teaching game design is here is this problem that cannot be solved, or notions like that. Here is this problem that you will have to you have to define the problem. You have to figure out how you’re going to solve this problem, you’re going to design your tests with these resources in terms of you know how close are you to solving this problem and you’re gonna do this again and again and again, you’re going to make a prototype you’re going to put it in front of other people, they’re going to play it, you’re going to get their feedback, and then you’re going to take those ideas, and that, you know, good, bad, the ugly. Incorporate that into your next design so that when that hits the table hopefully it’s better. Thinking of it as an unfinished unending hopefully upwardly ascending sort of cascade. See that process as a real process reflective of what life will be, I think is really important, because for a lot of my kids, you know they’ve learned what successes is and it’s an A+. I’m trying to show them that if you want to do anything cool, there will never be A+. You will never be finished. You will always just have to try to do your best to put out your best possible effort, listen to other people, and hopefully make that idea better and so that’s why I teach game design.

The reason why I teach game design is a teaches them this process of thinking design, thinking hands-on, trying to create solutions and learning how to see successes incremental progress, not as I finished I’m done.

We do talk about how it can be finished and not perfect and that’s really important for a lot of them. That you can have something that is unfinished. And you can see it as successful because you did try to make it better, even if you don’t think it’s better. And that’s really really hard for them to accept because it goes against everything they’ve always done

  • An antidote to results-based thinking

I honestly try to minimize any type of objective points in any kind of game situation as much as possible, because no one should ever be blamed for losing for their team, and I honestly don’t want anybody to be, you know, the fourth batter to just hit the Grand Slam home run and they get all the credit, not the people who also got on first, second and third.

  • Be thoughtful about when points matter

It does make sense to have kids have scoring that matters, but I think you have to really ask yourself, is this that time.

  • Not having grades at all doesn’t really work

And if I had my choice I wouldn’t do grades at all, but this is the world we live in and I have to actually try tried one year to not give out grades and our gifted class. There’s some unintended consequences there but there you go. We tried it once. As much as we wanted it to work it didn’t really work.

Projects Kathleen and Dustin Are Pushing Forward

  • Game Database To Aid Teachers looking to use games to augment material

    I think that something you touched on and I’ve been kind of thrown around in my head is creating some sort of database where teachers are teaching a unit on something and they can go on there and see what kind of games they can use in their class to either tackle review or tackle preview and concepts of the whatever material they’re learning. It would be really good for teachers to find like a resource where they can just go to, and save time and kind of have this lesson plan that they can use.

  •  Formalizing standards

Look at the curriculum that I have and formalize it a little bit in terms of standards that it’s meeting. That’s something that people ask me about that I haven’t really ever have had to do. And I think it’s something that I’m interested in one because it will make it even easier for people to use these resources in their classroom but it also. I’m really like thinking about the idea of what are the things that people could do to get their kids to think like game designers to use design thinking, using games, what would be appropriate, you know the early elementary level, the later elementary level, the middle school level, the high school level. So that if somebody wants to do something with game design in the classroom, they’ve got a better chance of success. That they’re not over-shooting or under-shooting what their kids are able to do but also in terms of tying this, you know, more specifically to actual curriculum. Then it can be easier for their administrators to use.

Flirting with Models: Wayne Himelsein

Link: https://blog.thinknewfound.com/podcast/s2e7-wayne-himelsein/

About Wayne: CIO of Logica Capital

Transcription: Otter.ai


Overview

Every trade is implicitly long or short volatility or optionality

  • There is variability in every asset and its distribution dictates whether you are long or short.
  • Every trade is either a bet on convergence or divergence. Convergence trades are short volatility

Quant vs Discretionary

“There’s good and bad in all of it. So the best you can do for yourself by going with what you know because you’ll be able to ask better questions and be more comfortable with what’s happening day-to-day.”

  • Myth of quants building a black box then “going to the beach”

“The market is always changing. In fact, it’s funny even the idea of factors and categories, if you think of something like value and growth. These two big facets of the market, even those are evolving. [Consider] that you buy a value stock, and it turns around and starts moving in your favor. Well, now it’s a growth stock. So literally, the categories are changing on us. So if you bought a value book, and you leave it for six months, you’re now a growth book, if you were right on your picks.”

  • Using quant to “mechanize” what works vs mining for patterns

“Finance algorithms that developed from logic and experience that simply seek to mechanize what is already well understood, have a chance at success. Those that begin in data analysis, categorization, quantification, or statistical or numerical gymnastics do not.”

Opportunities in volatility trading

Traders have different “assumptions across the volatility surface, the strikes up and down and across the calendar upwards and outwards, There are different prices for every option. Because of all this modeling and people having demand for different options at different calendars in different strikes, there’s going to be cheaper and more expensive….Take advantage of the weirdness and pricing and model variants across the option surface.”

An inverse relationship between signal strength and opportunity size

  • As your signal strength declines you need to diversify more. “To have more probabilities repeated more often, [so] more positions”
  • Hoffstein: “Information ratio is equal to your information coefficient times square to breadth. If you have to lower your information coefficient, but your breadth goes way up, you can actually end up with higher information ratio”

Re-phrasing a bit: expectancy scales with number of trials but volatility scales with square root of number of trials. If your bankroll is large and your business diversified, it follows that your focus should be on hunting for high expectancy games, not minimizing risk.

Evaluating a strategy

  1. Use daily returns to get more data points. Monthly returns mask too much.
  2. Are you achieving your premise?

    “So you’ve said yourself, I know where I want to neutralize, and I know where I want to get my alpha. And if that’s where you get your alpha, you have to know that number one, you have alpha there. So if you look at your growth tilt and measure that against Fama growth factor, do you beat it? If not, you’ve got no edge.”

    • Map the strategy.
      • Compare the exposures to time series of different exposures to see how it behaves. This requires using mathematical tools that do not rely on linearity (ie regressions).
        • “I don’t ever listen to what [the manager] tells me. I just run it versus we have in here about 180 different exposures that we have time series for factors or exposures [to find out] “what is inside this thing?”
      • How intentional are the exposures?
        • Managers will tell you that they’re doing something but don’t even know what they’re exposed to. “Did you know you have a 30% exposure to momentum? Oh, no, I didn’t. I’m actually a value investor.” (Me: sounds similar to performance attribution frameworks behind “hedge fund replication” strategies)

Risk

Beta is a poor quantity to use to balance your portfolio

  • Beta equals correlation times vol ratio
    • It’s easy to compute which makes it popular
    • …but since its inputs are non-stationary, non-linear and themselves volatile it’s garbage in/garbage out.
    • Important to understand if a beta-hedge portfolio will bleed longer or shorter as correlation increases. (Me: This is why gross exposures are important to constrain)
  • How to balance a portfolio without relying on beta?
    • Geometric approaches that account for non-linearity
      • Clustering distance approaches
      • Stochastic dominance

Market neutrality is a “funny” concept

  • What does it mean to even be neutral?
    • “What do you want to be neutral to? Are you directionally neutral? Are you factor neutral? You can [initiate] a directionally neutral portfolio that has equal long shorts, with a complete growth, tilt, or a value tilt or some other factor tilt like a volatility tilt.

Overcrowding

“If we find a good pair trade, rest assured, many others have found it. And there’s just gobs of computing power, and PhDs and all the rest doing the same thing. And so we’re all going after the same edge. When things start to go wrong, the differences between the different groups is that they manage the risk differently. And one of the best means of managing risk in these markets [is to manage leverage]. The overcrowding risk is that everybody’s in this trade, and it’s a good trade. That’s why everybody’s in it. So you’ve done the right thing. But as some of these bigger shops start to unwind, it becomes everything going the wrong way. Others are needing to exit because they have LPs to answer to or they have risk that they’re managing to, so as long as you’re in it, you’re exposed to that. And it’s difficult to manage because at the get-go, you made the right bet.”

Walking away or sticking with a “broken” strategy?

Difficult question since the pricing may be more favorable as anomaly gets stretched but unclear whether the relationship will revert and on what timeline. There’s career risk is sticking with it vs the weight of the historical evidence for the opportunity.

“The more your measure won’t determine whether something’s out of favor, the more time you might give it to try to fix it”

“Comes down to a personal decision. How much time am I willing to spend tweaking and contorting to try to figure out whether I can fix it. And we all have our limits. It comes down to a business question as well. It’s not just tweaking and contorting and trying to fix it. But how much time can you spend defending it? How sticky is your capital? Even if it does come back still be in business?”

An easy example was the trade that shorted both the triple long and triple short ETFs on the same reference asset. The trade was over once the cost to borrow the shares exceeded the edge in the trade. This was easy to measure and therefore abandon when it became too crowded.

Hedging non-linearity or skew

  • “The only way to get rid of the left tail is to balance it with the right tail. And to have that obviously, you have to have the right offset temporarily. You need the time association to match that when this thing goes down, the other thing goes up. So you need to understand the time relationship between the two.”
    • Stop-losses are “synthetic left tail mitigator”. They are not fully reliable because of:
      1. Gaps
      2. Discipline
    • Tradeoffs between hit rate and cost of the hedge. Need to define what type of exposure you are ok with to target the right option hedge. Just like insurance has cost levers like premiums, coverage amounts, durations, and deductibles options portfolios can be custom tailored.
    • Flight to quality assets like gold, USD, treasuries in a permanent portfolio
    • Managers who engineer defensive market-neutral portfolios

Final words on hedging

  • Depending on the nature of the crisis hedges behave differently. Since we cannot predict the nature nor timing of a crisis it’s best to be diversified across hedges.
    • “Back to the larger insurance analogy, you have your medical and you have your dental and you have your vision. And so I don’t know where I’m going to get hurt. But either way it’s covered.”
  • Tolerating the cost
    • “Optionality being potentially the heaviest cost again, to me, it’s not expensive when you get what you want. But since it is more often a bleed than a payoff, perhaps people should have more treasures and gold and a little bit less optionality. But definitely all concurrently.”

Thought experiment

You can only own 1 asset and never trade it again, what do you pick?

SP500. The only reason people underperform the market is they want to control volatility and liquidity needs. But if we remove these concerns the best thing is to just own the market in perpetuity.