Moontower #115

Friends,

Last week I shared The “R” Word.

The post was about trying to reframe a career in a sustainable way. In a way that aligns with how our idiosyncratic energies work. Aligned with the types of people we want to be around.

The largest payoff to this isn’t immediately obvious. It relieves the pressure to build a nest egg with an overengineered margin of error. Instead of relying on assumptions of things that are out of your control like returns and inflation you choose to rely on your human capital.

The key is that you will still be excited to employ your ability and the returns that come from being a willing perma-learner. You won’t have a strong desire to stop working since you chose a stroll that forgives you for meandering instead of a sprint. A sprint taxes you not just physically, but mentally, by making you think there’s only one way to win. Racing is insidiously expensive because it directs your gaze to a finish line. A bizarre approach to life, since tomorrow is never guaranteed.

The post led to many responses (it’s the most reactions I’ve gotten from a post, especially as a percentage of total views). Many of you are thinking deeply about the same topic. I’ve had a few young people respond. I am impressed at how deliberate they are about their long-term strategy. I was never that mature. Unsurprisingly, most of the responses came from finance/trading folks of similar age as me. Many extremely financially successful or downright rich. Some of them have been sick of their profession for years but in the absence of a roadmap can’t pry themselves away from stacking more chips.

I keep thinking about this. I keep coming back to a half-baked thought but I’ll blurt it out and you can finish it in your own oven. It could be a wasteful or irresponsible thought. Or it can unlock more thoughts and break inertia. I take zero responsibility, blame, or credit for what you do with it.

You will never walk away from money without a reason. But money is not fungible with risk. Actually it’s a risk-absorber. For many, the feeling of a life well-lived requires risk. If you accumulated more money than you need, you have sterilized a lot of risk. And you’ve sterilized the feeling of being alive. There are many types of risky pursuits. Some are fun but not meaningful. Some are meaningful but not fun. And everything in between.

Before making any changes to your life think about:

• The size of risk you need to feel engaged
• The nature of the risk you need (where is it on the fun/meaningful spectrum?)  

With the answers to these questions, you will know whether you just need a new hobby…or if you need “a man to come through the door with a gun”.

Finally, I’ll point you to 2 terrific related posts that have lingered for me.

• The Path (5 min read)
  Chris Wong

  Excerpt with my emphasis:

  For me, The Path started when I began my career in finance in 2002. Actually, I’ve probably been on The Path even longer, since middle school. Get good grades, get on the honors track, do extracurriculars. Get into a good college. Get a good job. Get promoted. Get a better job. Get promoted. Get a better job. Get promoted.By the time I turned thirty, I had begun to question The Path.

  The real reasons were that the money was good and The Path was a siren’s call to a life of comfort. The money to me was security and optionality. But I wasn’t using the optionality to do anything and because I had already stopped spending money on things I didn’t enjoy, I had a degree of financial security. Why be inauthentic to myself in order to pursue goals that didn’t interest me? In finance, the answer to the interview question “Why do you want this job?” is a dirty open secret. You are not allowed to say money. Even though that is everyone’s real answer. You must make up an answer to prove that you are not a masochistic psychopath. I couldn’t lie anymore. The only reason to stay in this job was money, but to me cash was the applause of Performance Art and I would rather put on my own show in an empty theater.

• Speculation: A Game You Can’t Win (More To That)
  Lawrence Yeo

  Risk aversion is the idea that a loss of X hurts more than the joy of winning X. That means the profession of investing has an emotional volatility drain that wears us down. This short post will similarly resonate with traders. If you are not a trader and it resonates, I’d suggest you are misallocating your time.

  Excerpt from Lawrence’s post:

  …financial freedom isn’t about money, it’s about attention. The less you have to think about money, the more free you actually are. Speculation is the antithesis of that statement.

  Read the whole post here.

The Money Angle

I’ve talked about compensation deals in the past.

For example, one of the tweets in this thread:

Anyone that has ever worked in derivs or at a mm knows what a beast comp negotiation can be. There’s a trader on both sides of the table. Both sides are pricing calls and puts, netting risks, and trying to find structures that work for both sides’ risk preferences.

In On #Voltwit Melees I wrote:

If you really want to examine incentives, think about the PMs at the fund. The non-equity owners want maximum vol since their downside is just losing their job, but their upside is a percent of their performance. Their equity-owning counterparts want the assets to stick. Notice how the non-equity-owning PM has the same incentive as the LP, not the GP.

Comp structures, just like fee structures, are about shifting incentives to create alignment. But there’s a lot of haggling under the hood that looks an awful lot like options trading. When you negotiate comp, do you ever wonder who the patsy is? Or do you think you are in the ballpark of fair value AFTER considering all the levers/scenarios?

Recently, a friend reached out for advice about a specific type of situation. I see a concern that is worth sharing more widely. A bit of background first:

The friend is a senior employee. They are not too concerned about the downside of the new opportunity they are looking at (meaning if they just earned their salary and no bonus they could tolerate that outcome…salaries tend to be a small percentage of total comp for senior employees). The friend is really interested in the opportunity for the upside so, in trader parlance, the friend wants maximum call exposure and doesn’t value the put (ie a minimum guaranteed bonus) much. I have found that employers can be flexible on these structures. If you are risk-averse they are willing to give higher minimum bonuses but take your upside. Of course, on the trading or fund management side, employees are usually in it for the big payoff so do not choose this option, especially if they have savings and can survive on their salary alone if needed.

The major points to be aware of:

• This friend wants max upside and is not concerned about the downside of the opportunity they are considering. In fact, the friend would be taking a substantial paycut for the shot to have large exposure to the new gig’s success.
• The nature of the gig is the friend would be launching a fund that had an AUM fee but no performance fee (it’s not a hedge fund) and the fund would be closer to systematic than discretionary.
• The friend is focused on how to ensure they are aligned with the employer in the case that the venture succeeds.

That’s going to be tricky. Can you anticipate my warning?

Here’s what I told my friend:

You are willing to accept a large carrot on the back end to take risk on the front end. The prospective employer agrees in principle to that arrangement. If possible, the gold standard of alignment will be tying your stock awards to a trail of your efforts in the building of the new product.

The correct appearance of the trail is that it should look overly generous to you in the event that it “hits”. Remember, you took a paycut and a risk upfront. The real-time value of that trail cannot simply be weighed against your real-time efforts since the trail is a lagging indicator of your work.

You are being very clear that your situation allows you to take a risk but it’s critical that you get paid off if things work out. There is always a form of “credit risk” when structuring a deal like this in the sense that at many winning positive scenarios, on a forward-looking basis, it will always look like the right play for the employer to cut you. You are addressing this ahead of time, and want the employer to assure against the incentives it will have AFTER you have borne the bulk of the risk.

What safeguards are in place to “remember how this deal was supposed to work”?

At every review, owners can exercise the option to screw you. Insuring against that is pretty difficult. A big difference between startups and fund management is that early startup employees own true equity. This reality is harshest when things go well. I suspect some market-making firms (they are not funds but the analogy holds) could have paid every employee millions of dollars last year and still had record profits. But they didn’t. People were paid well but found out they had zero delta to the upside at some threshold.

I’m sympathetic to their employer as well. If you paid everyone what they “deserved” many would have quit having hit their FU number. And if you don’t, sure some might rage-quit, but there’s not some other employer willing to pay them more based on some outlier year. Most likely, the owners will admit to themselves, that ownership has its privileges and they are the risk-takers. An unhappy employee is free to start their own business. In fact, that’s who entrepreneurs often are…people with chips on their shoulders.

Ownership is the only true call option. Not shadow equity, where you are promised a percentage of the p/l. That’s not a stake that you can cash out to partners.

If you are in the game for upside, be careful about who writes your checks.

(Option traders know the warning well. Bonus season, despite its moniker, rarely feels like bonus-y fun. Reviews are mostly endurance tests in which you restrain yourself from flipping a desk as you read a disappointing number off a page, several times until it finally registers that it’s what was indeed intended, all the while a superior gaslights you about how good a job you did. The canyon between words and actions so wide, you might even look around to see if there’s someone else in the room. But no. They are actually talking to you.

Market-making firms are generally run by ruthless Ayn Rand worshippers. Whether they converge to this mindset as a post-hoc rationalization for their role in doing “god’s work” or start with it likely varies. I suspect it takes a certain type of person to get to the top of that profession. That person will be good at rationalizing and see wealth as evidence of being right. It’s all quite convenient.)

Last Call

From my actual life 

• We stayed at the Yacht Club. It’s considered one of the mid-tier Disney properties but we thought it was plenty nice. We chose it because it has the best pool. It didn’t disappoint. There’s a great water slide that starts in the crow’s nest of a pirate ship and takes you down to a 4′ deep pool. It’s fun for adults and kids probably as young as 3 or 4 (if they can’t swim you can catch them at the bottom). The staff coordinates activities for kids in the pool, there’s water volleyball, a lazy river, a whirpool with a strong current that’s fun to try to swim against, and many pools with sandy bottoms! Toddlers and younger children will especially love the kiddie pool/beach section.
• The Magic Kingdom is still not doing fireworks or outdoor shows which is strange (Yinh was up late one night though and did see a practice fireworks show after midnight). The park is crowded and nobody is masking so I presume operations will go back to normal soon. Except the new idea of mobile ordering. More than half the concession and food options have no lines because mobile ordering is mandatory at those spots. I suspect that trend is staying. Between using the app in the park, mobile ordering, and taking pictures make sure you have enough phone battery. Oh yea, I discovered a frozen dessert called a Dole Whip. For $5 it’s the best deal in the park (although I recommend the vanilla soft-serve that you can find at the same stands. Perfection.).
• The best rides in the Animal Kingdom are the Expedition Everest rollercoaster (the Yeti theme and surprises are awesome) and the Avatar: Flight of Passage ride. I thought that ride was exceptional and in the running for best ride overall. If the line wasn’t so long, I’d have gone again.
• My favorite park of the 3 we visited was Hollywood Studios. The Star Wars section is called Galaxy’s Edge and is an unbelievable re-creation of places from the movies. The attention to detail hurt my brain. Total devotion to quality. The kids especially loved the Millenium Falcon ride called Smuggler’s Run. It’s interactive as everyone plays the role of either pilot, gunner, or engineer. But the show-stealer is the 18-minute experience called Rise of The Resistance. You must reserve one of the limited spots and the ride is very popular. I’ll pass along the tips we learned to ensure we’d get in. Call customer service on the Disney app to link the app accounts for all the adults in your party. This process took about 2 hours the night before (mostly just sitting on hold). Then have everyone in your party ready to snipe the “virtual queue” on the app when they start accepting people (just like trying to snipe concert tickets when they go on sale). 5 of us sniped at the same time, anticipating as the clock turned from 6:59 to 7:00 am.

  Finally, if you want a chance to grab a drink in the Cantina bar make a reservation. They book 2 to 3 months out. We didn’t know about this. Next time.

• I learned that when my kids are scared on rides they keep repeating with utter calm and monotone “I hate everything about this”. Then when it’s over they claim it was their favorite. Psychopaths.

Today, we are in the Dallas area for the next few weeks crashing with close friends. We lived near each other in NYC and amazingly in the Bay Area as well. Now they are making a full-court press to have us move to TX. I don’t know, it’s pretty hot here. They are targeting my vanity and weakness for frivolous beverages. Never a bad strategy to be honest.