I meant to put together a summary and discussion of December’s Moontower survey. There are many interesting topics, especially in response to the open-ended questions that you answered so thoughtfully and vulnerably. Alas, I spent a lot of time writing the Money Angle For Masochists section so the survey summary is delayed until next Sunday.
Instead, I’ll point you to an interview that keeps lingering for me.
In 2021, Tim Ferriss interviewed George Mumford. Mumford has been a mindfulness coach to MJ, Kobe, and countless other elite performers. Mumford’s personal story is as inspiring as any. And if your life has been touched by the darkness of addiction it will be extra relatable.
There was a particular excerpt that resonated that I included in the Meaning Section of my Affirmations and North Star page. It reminded me of the proverbial donkey placed equidistant between 2 troughs of food who starves to death.
On the “dizziness of freedom” (all emphasis mine):
Freedom is not free. The dizziness of freedom is because you’re on a road less traveled, you’re on shaky ground. The ground you’re on is moving to the degree that — I’m going back to 1846, Søren Kierkegaard, and he said that one side of the coin is freedom or potential. The other side is anxiety or uncertainty. So he called it the “alarming possibility of being able.” So when you grow, when you change a behavior or a habit, you have to experience anxiety. You have to experience uncertainty. You have to experience discomfort.
You get comfortable with being uncomfortable. Before you have freedom, you don’t have to think. You don’t have to reflect. You don’t have to take a risk. You don’t have to be vulnerable. Now you’ll be in freedom and you’re going through a different door. You’re trying something else. Then the dizziness is you do this thing, you can do that thing.
So you start understanding there’s no meaning in the universe other than what you give it, that when you do one thing you lose something else. If I have five choices and I make one, I lose four. So now I’m in here, now I’m worrying about, did I make the right choice? The uncertainty is a military term they use, VUCA, V-U-C-A. From moment to moment, things are volatile, uncertain, complex, and ambiguous. So you have to embrace uncertainty, ambiguity. That’s part of life. This is what life is about. It’s about saying “yes and”. Yes, it’s frustrating. It’s unpleasant, and it’s okay. This is it. When I grow, this is what comes with it. If I achieve my goals, you look at the positive, but there’s a negative.
The other side is you’re in a rowboat with people. You change, they’ve got to change. They’ve got to move. They don’t want to move. Or they got you in a box and now you’re out of the box. So now they’ve got to see who you are. They’re going to keep you in a box and get mad at you. So for whatever reason, it always comes down to discomfort, being uncomfortable. The nervous system is wired this way. If it’s pleasant, we approach. If it’s unpleasant, we avoid. And if it’s neither, we’re indifferent, we space out, because the nervous system does so.
When you impute meaning onto something, and say, “It’s going to be great. Even though it’s uncomfortable, I know on the other side, this is the only way out.” Once I commit to that and I have the experience of going through it and then coming to another level of grace, of ease, of peace, then I continue to do that. That’s what I talk about — the superpower trust. You need trust, but when you can verify it through insight, through information, through experience, now it goes from confidence to conviction, and then now, you get on a beneficial cycle where things keep getting better— the rich get richer, because you know that if you learn and you achieve, it’s going to generate enthusiasm and you’re going to want to learn more. You’re going to want to commit to it, because you know that — this is what the elite performers do. They see those things as challenges. “Oh, this is great. This is an opportunity for me to express myself.” So that mindset is the growth mindset, but it’s also pursuing excellence.
One bit of feedback I got from the survey was that Money Angle can sometimes fly over readers’ heads. I can own a share of the blame for my writing style. But also some topics are really unnecessary for the average investor or reader and by discussing them in the same section I often discuss basic topics can overwhelm someone who can’t tell what’s relevant to their current or future learning tree and what’s not.
I moved all the brain damage to the new Money Angle For Masochists section.
Today’s regular Money Angle section is a couple of links:
- How Much Growth Can You Expect? (6 min read)
Nick is a master of making investing topics scrutable for the average person. Last year he published his first book Just Keep Buying which I recommend and buy for people. It tackles personal financial questions intelligently without overcomplicating the nature of investing.
In this blog post, he presents realistic numbers for what investing is actually capable of in the long-term (which is much less than the financial media would like you to believe).
If happiness is the gap between reality and expectations the post will help you calibrate to decrease your chance of disappointment. Another of his posts, his first of 2023, is in my opinion, a natural (though unintended) sequel to this calibration:
It’s Time to Work (5 min read)
- Examples Of Comparing Interest Rates With Different Compounding Intervals (2 min read)
I wrote this quick post as scaffolding for the post you’ll find below in Money Angle For Masochists to build up to the idea of continuously compounded interest. If you already understand how to compute yields and various compounding intervals then you can skip this one. If you don’t then be aware of 1 of its real-life uses:
Note in all these cases, $90 is growing to $100. We are just seeing that the implied rate depends on the compounding assumption. In real life, when you see “compounded daily” or “compounded monthly” and so on, you are now equipped with the tools to compare rates on an apples-to-apples basis. If a rate is lower but compounds more frequently than another rate the relative value between both loans is ambiguous.
Before we continue to the masochism, let’s try a math problem:
Suppose you have an 85 average on the first 4 tests of the semester. There’s one test left. All tests have an equal value in your final score. You need a 90 average for an A in the class.
What do you need on the last test to get an A in the class?
What is the maximum score you can get for the semester?
If you are comfortable with this math then you have all the quantitative knowledge to understand the next topic. I suspect the post might still be challenging despite the math being grade school level. If you find it difficult, I’d like to know where you start to get lost. I think it’s a good topic and would like to make it accessible for anyone who was interested.
Money Angle For Masochists
Understanding Implied Forwards (14 min read)
Learn about implied forwards starting with interest rates and then moving into implied volatility. Implied forwards will help you:
- find trading opportunities
- understand arbitrage and its limits
While the post works through the dry mechanics there are wider lessons that can be applied to general pricing and reasoning that should have a larger audience than just option degenerates and the people who read footnotes (this post has many).
A few excerpts in that vein:
- When you study asset pricing, one of the early lessons is to step through the cash flows. This is the basis of arbitrage pricing theory (APT), a way of thinking about asset values according to their arbitrage or boundary conditions. As opposed to other pricing models, ie CAPM, someone using APT says the price of an asset is X because if it weren’t there would be free money in the world. By walking through the cash flows, they would then show you the free money. The fair APT price is the one for which there is no free money.
Forwards vols represent another way to study term structures. Since term structures can shift, slope, and twist you can make bets on the specific movement using outright vega, time spreads, and time butterflies respectively. A tool to measure forward vols is a thermometer in a doctor’s bag. How do we conceptually situate such tools in the greater context of diagnosis and treatment?
The post includes a discussion of my own process.
This discussion of forward vols was like month 1 learning at SIG. It’s foundational. It’s also table stakes. Every pro understands it. I’m not giving away trade secrets. I am not some EMH maxi but I’ll say I’ve been more impressed than not at how often I’ll explore some opportunity and be discouraged to know that the market has already figured it out. The thing that looks mispriced often just has features that are overlooked by my model. This doesn’t become apparent until you dig further, or until you put on a trade only to get bloodied by something you didn’t account for as a particular path unfolds.
This may sound so negative that you are wondering why I even bother writing about this on the internet. Most people are so far out of their depth, is this even useful?
My answer is a confident “yes” if you can learn the right lesson from it:
There is no silver bullet. Successful trading is the sum of doing many small things correctly including reasoning. Understanding arbitrage-pricing principles is a prerequisite for establishing what is baked into any price. Only from that vantage point can one then reason about why something might be priced in a way that doesn’t make sense and whether that’s an opportunity or a trap. By slowly transforming your mind to one that compares any trade idea with its arbitrage-free boundary conditions or replicating portfolio/strategy, you develop an evergreen lens to ever-changing markets.
You may only gain or handle one small insight from these posts. But don’t be discouraged. Understanding is like antivenom. It takes a lot of cost and effort to produce a small amount. If you enjoy this process despite its difficulty then it’s a craft you can pursue for intellectual rewards and profit.
If profit is your only motivation, at least you know what you’re up against.
Interview with Bill Burnett & Dave Evans on Designing Your Life (5 min read)
Bill and Dave are at the Stanford Design School, a place that massively influenced another of my favorite online people — boardgame design teacher and middle school educator — Kathleen Mercury.
These guys apply design principles to life and decision-making (and show when not to!). It’s been almost a decade since they published their book and did the TED circuit but the material is timeless.
Here are my notes from their interview with Peter Bregman:
You are not defined by your earlier choices
- Don’t let “dysfunctional beliefs” or sunk costs trap you (ie I studied X in college so I must practice X)
- Humans are curiosity-driven. Life may have beaten it out of us but it just needs re-awakening.
Behavior change —> Bias to action
You can’t think your way out of a rut. To solve problems you must take action. They call experiments “life design prototypes”.
- The answers you seek are out there in the world not in your head.
- Expand your circle. Those in your bubble often have the same problems or thought patterns — there’s no new data there.
- “Finite is your friend” —> lower the mental burden of novel experiments by saying you will only do the new thing 6 times, or spend 5 minutes a day doing X
Large focus on awareness of the nature of the decision and the power of re-framing. Problem-solving requires applying the frame that best aligns with your need. Before you can do this, it’s critical to understand your current framing of a problem.
- Life-design thinking with experimentation won’t help with certain types of decisions. For example, should you buy disability insurance? You can learn everything there is to know about your risks, the costs of insurance, the suppliers of insurance and so on but it’s a decision that you must make one way or another and accept the inherent ambiguity. Acceptance is the answer.
This leads to the single most common re-frame they use:
There is no single answer to your life. There is no single best “you”. There are many possible great satisfying lives that you can have and you never actually know about the ones you didn’t get a chance to try so we’re all getting partial credit on essay questions, not right wrong on true/false on all the big issues of life. Once you accept that this is the nature of being a human being you can say “how’s it going today?” and the answer is “it’s going reasonably well. And that’s fabulous because this is as good as it gets.”
- Borrowing from decision researchers like Dan Gilbert they mention tactics like “burning bridges” by making certain decisions irrevocable. [Me: This makes a lot of sense to me bc FOMO is an energy suck. I tend to satisfice on everything that doesn’t hold major meaning to me — if I’m like 70% sure that product X will tick my boxes I just buy it and move on. I don’t care enough about my TV to spend a week in analysis/paralysis about how deep the blacks are. But if I were a cinephile I might.]
- “Anchor problems”: These occur when you become inflexibly anchored to a single solution to a problem.For example, you say: ”I’d like to do it I’d like to be a gardener or do something in the garden but I’ve decided the only solution is moving to the Berkshires. Since we can’t move to the Berkshires, I can’t have a garden, therefore I can’t be happy”
What you’ve done is you’ve baked the solution into the problem. The solution has been defined as the problem.
Instead, you might notice there are community gardens in the Upper West Side of Manhattan or you could start by putting a container on the porch. There are a million different ways you can do it but people take a solution, pretend it’s the problem and then say “Oh gosh since I can’t have the thing I want, I can’t solve this problem.” They’ve mistaken a solution for a problem and now they’ve anchored on it and can’t move forward. Once we explain it to them it’s almost laughable. They go, “Oh yea I could reframe this and there are hundreds of ways to be a gardener in Manhattan. Maybe “gardener” is also an anchor problem because the reality is maybe it’s about spending time outdoors in Central Park or maybe it’s about growing something”
- “Gravity problems”: These are unactionable problems. They are still issues but if a problem cannot be acted on it’s not so much a problem as it is a circumstance. Like gravity. As soon as you realize your problem is a gravity problem, that it’s not actionable the way it’s currently framed, you can unfixate from it. You might hate knowing you will never get rich being a poet, but can you live and write poetry? Of course.
A few lines that were dropped in passing that are actually quite poignant.
Here they are with my commentary:
I’d rather get a B on time then an A too late
Dave’s framing for how to think about optimization. Forgive yourself for being human. Any sensible approach to prioritization means you can’t turn every weakness into a strength. Again, the theme of acceptance. Or not letting perfect be the enemy of the good. I tutor 2nd graders that are far behind their grade level. Am I the best person to do this? Is this the best use of my time? Does this scale? No all counts. But it’s something that needs to be done and they still need people. If the only people who tutor are the “optimal” people to do so then what do you think is going to happen if we are already short tutors?
Some people obsess over peak performance and optimizing and so on. That’s fine. It’s a big world. In most things, I’m more concerned with the area under the curve than its peak.
Meaning comes from engagement, what you spend your time on.
I believe that there is no Meaning with a capital “M”. We create our own meaning and since I put more stock in actions than words, I think what you spend your time on is the best reflection of where you draw your meaning. This is often oblique. Maybe you spend all your time making money on something you don’t necessarily care about. This strikes me as a difficult way to live but it may reflect your value of providing for your family. There’s always a question of balance…the time spent providing is a cost to you and them as well and deciding where the diminishing returns to being at work vs being present are personal and downstream from not just our values and desires but insecurities and ego.
Figuring it out is kind of helpful but actually behaving differently is hugely helpful
Dave dropped that line in the context of therapy (he was explaining that this work is not therapy and ofc there are problems for which you should seek therapy). It reminded me of a story Slatestarcodex told about a psychiatric patient his clinic was helping. The patient was crippled by OCD. Every time she left the house she needed to go home because she thought she left the hair dryer on. The doctors racked their brains trying to get to the origin of the problem until someone suggested a highly effective but, seemingly unsatisfying solution — she could just bring the blow dryer with her:
Approximately half the psychiatrists at my hospital thought this was absolutely scandalous, and This Is Not How One Treats Obsessive Compulsive Disorder, and what if it got out to the broader psychiatric community that instead of giving all of these high-tech medications and sophisticated therapies we were just telling people to put their hair dryers on the front seat of their car? But I think the guy deserved a medal. Here’s someone who was totally untreatable by the normal methods, with a debilitating condition, and a drop-dead simple intervention that nobody else had thought of gave her her life back. If one day I open up my own psychiatric practice, I am half-seriously considering using a picture of a hair dryer as the logo, just to let everyone know where I stand on this issue.
That’s enough for this week. Go Big Blue…it’s been 7 years since they made the NFL playoffs.