Moontower #137

The Best Way To Complain Is To Make Things

Here are 5 minutes of inspiration to inject into your veins.

h/t @jposhaughnessy

If you found that resonant, I’d like to point you to a book by friend and Moontower reader Paul Millerd. It is a must-read if you feel like there is a “pebble in your shoe” on your current path. If you have thought about trying on a different version of yourself. If something feels off about your direction, this book can help you sort your thoughts and take a step towards a new heading.

It’s called Pathless Path (Amazon).

I’ve sent it to several people.

I wrote a document (about as close as I get to making “fan art”) of excerpts re-factored by topic and interspersed with my commentary:

✍️ Notes On Pathless Path (link)

The document is meant to memorialize my takeaways but is not a substitute for reading what is a profoundly personal story. A story that vibrates with personal agony.

Please consider buying a copy.

I’ll even buy you a copy if you promise to tell me what you learned from it 🙂

Here’s my Amazon review:

Money Angle

I’ve used several of 10kdiver’s threads as launching points to dive into a quantitative topic. If you are trying to learn about investing and associated math, his work is a goldmine.

Last month, he hosted a call-in show (he does these every weekend), where he taught about how volatility affects returns. He generously asked me to join because of my option’s background. Jump to specific topics from this thread:

🎤 Understanding Volatility (70 min)

The bulk of my contribution to the show came from 2 topics.

The first was a 2-part question that I’ll paraphrase:

  1. With all the great option content freely available, what do retail options traders still misunderstand about volatility?
  2. What aspect of the institutional experience is still missing for the average retail trader?

I spend 12 minutes answering these questions starting at the 40:25 mark. For the second part, I focused on where retail has the best chance for an advantage.

The second area I was able to help with was in discussing why volatility matters. For regular readers here, this feels self-evident, but 10kdiver’s much larger audience was raised on value-investing and Warren Buffet.

If you narrowly interpret Buffet you will get the impression that he is dismissive of volatility. In Buffet: Volatility Is Not A Risk, we find this quote (emphasis mine):

“Volatility is not a measure of risk. And the problem is that the people who have written and taught about volatility do not know how to measure — or, I mean, taught about risk — do not know how to measure risk. And the nice about beta, which is a measure of volatility, is that it’s nice and mathematical and wrong in terms of measuring risk. It’s a measure of volatility, but past volatility does not determine the risk of investing…in stocks, because the prices jiggle around every minute, and because it lets the people who teach finance use the mathematics they’ve learned, they have — in effect, they would explain this a way a little more technically — but they have, in effect, translated volatility into all kinds of — past volatility — in terms of all kinds of measures of risk.”

Volatility is a measure of risk. Is it incomplete? Of course. Literally, nobody thinks it’s the definition of risk with a capital R. No single measure can encapsulate risk or for that matter the merit of any investment.

I’ve discussed these points in various ways before:

I’ve noticed that 10kdiver threads sometimes get push back like “why are you talking about this volatility math, don’t you know Buffet said it doesn’t matter”.

That attitude reflects misunderstanding so in addition to my prior posts, here are a few additional ways to show why volatility matters:

  • In one of my favorite all-time papers, My Top 10 PeevesCliff Asness places this one as #1: “Volatility” Is for Misguided Geeks; Risk Is Really the Chance of a “Permanent Loss of Capital”.

    His conclusion is less cranky than his characteristic style:

    “I still think this argument is mostly a case of smart people talking in different languages and not disagreeing as much as it sometimes seems.”

    The root of the argument is quants are decomposing risk from return and more deferential to mark-to-market, while Buffet refuses to separate risk from return.

  • Another one comes from a real vs nominal illusion.

    It is also conveniently addressed in Asness’s Peeves. Specifically #10: “Bonds Have Prices Too”.

    You may hear some people say they want to buy an individual bond rather than a bond fund. They worry that bond fund prices move around and have no real expiration, so when interest rates rise your losses are somehow more real. But if you buy a bond and hold it to maturity you can put your head in the sand, and never lose.

    This is nonsense.

    You have lost in a real sense since the money you are being returned is worth less in a world in which rates have risen to compensate for inflation. The bond fund is effectively taking your loss today rather than later.

    If you sell your bond for a loss, you can reinvest at a higher yield going forward. That’s a similar experience to just being in the bond fund.

    Holding to maturity does not mean you have less risk. It’s an illusion.

  • This brings me to mark-to-market.

    Having a preference for private assets that are less volatile simply because their marks are stale is bizarre (although it’s understandable if there is a principal-agent problem at play…hmm, couldn’t possibly be that could it?). They are still volatile. The fundamentals of the private business are correlated with the public market volatility.

    Even if you don’t believe your investment should be marked down, then you should be sad you can’t redeem your private investment at par to rebalance into public stocks after the market drops 20%. Giving up liquidity without a premium because it will behaviorally “save you from yourself” sure feels like you sold the option to rebalance at zero.

    Further reading: How Much Extra Return Should You Demand For Illiquidity? (7 min read)

  • Speaking of options…

    I’ve seen the argument that holding cash means you don’t have to care about volatility. After all, you can dollar-cost-average into drawdowns.

    Um, what?

    To say that holding cash means you don’t have to worry about volatility is to misunderstand the arrow of causation. The reason you have cash is because you are concerned about volatility! Cash is liquidity. It’s the ultimate option (its cost is inflation). What maximizes the value of any option including cash?

    You guessed it. Volatility.

Last Call

You know I’m a big user of Notion. I published the Pathless Path notes in Notion. If you’re interested in checking Notion out, here are a few links for inspiration.

✍️ How I Use Notion (19 min read)
by Robert Andrew Martin

Leave it to an astrophysicist to be this thorough.

And then you have my latest Notion experiment…slightly less intellectual:

🍸 Moontower Cocktails (database)

If you filtered the database for the ingredients you have at home you will see which cocktail recipes you can make. My repertoire is sparse but the use of Notion is more interesting.

I adopted the template from Notion ninja Ben Smith. I’m not using the word “ninja” lightly. Spend a few minutes clicking around over there.

Stay groovy,


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