Moontower #220

Friends,

I’ve noticed the same thing as Visa — the gaps in people’s lives when the metaphorical camera’s not rolling.

[This week, while watching the amazing creation of the blue LED I noticed it again in Nakamura’s life. You can brush the technicalities aside and just appreciate an extraordinary human story in that video.

The nondescript gaps in a narrative can be hard to notice because our minds rely on memorable signposts to chronicle stories. But I hope after today’s musing you will also start noticing and celebrating those gaps — because they are the seeds, light, and water of the achievements that make into our stories. By normalizing your recognition of them, you will have another weapon to fight your biggest battle — the battle against fear.

[Related aside: The writer

argues that our largest failures are often “failures” of nerve. I profoundly agree. I often think about nerve as having something to do with time. Like, if you are in a major rush you are more likely to have nerve. Urgency manufactures nerve in the same way you’d ignore the speed limit if your aunt was in labor in the passenger seat of your car (this happened to me 1 week after I got my driver’s license en route to my goddaughter’s birth).

But recently, I’ve been thinking Chris Rock’s observation that “life is long, especially if you make the wrong decisions” is an argument for having nerve. Having a long time horizon increases the ROI on explorative gaps. Nerve can come from fight-or-flight but also from taking the long-view. Like many things, it’s the “medium” perspective or horizon that is self-defeating — in this case by assassinating nerve. To use poker-speak, if you find yourself calling a lot you’re making a mistake — before you call ask yourself if you should really be folding or raising.]

A personal perspective on gaps

I hit a reset button in 2021 leaving a great job once I was sure I didn’t want to keep doing it for another decade. It turns out that having a good career but feeling antsy about it mid-life is very common. You should see how many people reach out wanting to chat about transitions (btw @khemaridh & @p_millerd have really done great work on decision-making and framing in these transitions)

Speaking from experience, transitions are hard especially if you don’t know the object level “job” you are transitioning to. All the expected difficulties (what’s your identity, sucks to be making little $) apply. But as someone still in the thick of it I’m confident that it will work out so long as I feel both “flow” and validation that I’m adding value. Sustainability (ie monetization) is a challenging technical problem (but that is even true for companies like twitter or any number of early stage startups looking for product-market fit.)

Even if a transition feels right you still need to be careful because “unsustainable forever” is definitely wrong but “unsustainable as an investment in finding the right match of me to work” is necessary. When you get off W2 autopilot, you are threading a different needle than the one you have when your 9-to-5 is a drag and you’re side-hustling your exit strategy. (Make no mistake — you are threading a needle in either situation unless you work for someone and are genuinely stoked about it).

There’s always “voice” that tempts to take away the uncertainty — “you can go back to having a job” but I know it would be swapping one pain for another. Incubating any risky endeavor requires some amount of mental shelter from that “voice”.

That shelter is exactly what Visa points out and how I see it personally — when you read a biography or hear a person’s story there’s gaps. This person did X and 5 years later they did Y. In biography form we don’t bat an eye. But that person lived through those 5 years. It wasn’t a blink for them. They tangled with everything and just because the tangling wasn’t legible in a tidy chapter doesn’t mean this years were insignificant. Hell, they might be the prereqs.

I’m an immigrants’ kid. I’m not free of the scripts at all. But I reframe them lest the self-doubt keeps me from hunting down my match. The grand upside is coming out of this with true self-determination. If you are going to gamble, do it for a big prize.

The game, the practical challenge is to get where I want to be while being who I want to be. I could have gotten financially to where I’d like to be with the job but I wasn’t enjoying the path anymore. It felt low stakes as far as what it meant to my identity. Likewise, I could be more of a whore in my current path but that would also betray my taste (also, to channel the slow productivity lessons it’s bad strategy).

My last few years of p/l at the job were my best and yet I felt nothing. That told me a lot. It confirmed feelings that started years earlier that I pushed down to the cellar.

Let me be clear. None of this advice. It could be cope for all I know. But it’s most definitely a bet. These years that don’t leave receipts will very much be ones that I remember. Self-doubt and all. I’m not comparing myself to Arnold or anyone but it’s hard to deny that our internal representation of our lives is like a personal movie. It would be tempting to get up and go to the bathroom at this part. But there’s a lot of detail in the dialogue, not everything has to be explosions.

[And if your a touch older you know life off the immediate achievement carousel goes down a lot easier when you have a elementary age kids that still wanna play with you].

Refer a friend

Money Angle

A fun question that came up in

conversation with Tyler Cowen:

Tyler Cowen (00:55:08):

But I would stress the point that high rates of growth decades on end, the numbers cease to have meaning because the numbers make the most sense when the economy is broadly similar. Like oh, everyone eats apples and each year there’s 10% more apples at a roughly constant price.

As the basket changes, the numbers become meaningless. It’s not to deny there’s a lot of growth, but you can think about it better by discarding the number and presumably AI will change the composition of various bundles quite a bit over time.

Dwarkesh Patel (00:55:40):

When you hear these estimates about what the GDP per capita was in the Roman Empire, do you just disregard that and think in terms of qualitative changes from that time?

Tyler Cowen (00:55:47):

It depends what they’re being compared to. There’s pieces in economic history that are looking at say, 17th, 18th century Europe, comparing it to the Roman Empire. Most of GDP’s agriculture, which is pretty comparable, right?

Especially in Europe, it’s not wheat versus corn. It’s wheat and wheat. And I’ve seen estimates that, oh, say by 1730, some parts of Western Europe are clearly better off than the Roman Empire at its peak but within range. Those are the best estimates I know and I trust those. They’re not perfect, but I don’t think there’s an index number problem so much.

Dwarkesh Patel (00:56:24):

And so when people say we’re 50% richer than an average Roman at the peak of the Empire, this kind of thinking doesn’t make sense to you or does it?

Tyler Cowen (00:56:33):

It doesn’t make sense to me.

And a simple way to show that, let’s say you could buy from a Sears Roebuck catalog of today or from 1905 and you have $50,000 to spend, which catalog would you rather buy from? You have to think about it. Right?

Now, if you just look at changes in the CPI, it should be obvious you’d prefer the catalog from 1905. Everything’s so much cheaper. That white shirt costs almost nothing. At the same time you don’t want that stuff. It’s not mostly part of the modern bundle. So even if you ended up preferring the earlier catalog, the fact that you have to think about it reflects the ambiguities.

This reminds me of a personal peeve. The vacuous expression “beating the market”.

Reducing investing success to “beating an market-cap weighted basket” is incoherent without a concept of goals but as far as I know nobody has tabulated a relevance-centered benchmark that tracks corporate share of global GDP weighted per capita divided by the amount of ATP it takes a human to satisfactorily get through a day in the year 2024.

Money Angle For Masochists

I added an outstanding post to the top of the Moontowerquant Career section.

Version with my emphasis:

🔗Buy-Side Quant Job Advice

I read it a few times. It’s both amusing and practical.

Landscape

• Every firm is a bit like Orwell’s “Animal Farm”: all employees are created equal, but some employees are more equal than others. In PEs and VCs, quants are not at the core of the business, and in a good portion of asset managers, pension funds, and family offices, quants are not working on the most exciting problems. You probably want to begin your career in a place where quants are first-class citizens and are using their brains. I will focus only on hedge funds and prop trading firms.
• the top 20 hedge funds have generated 19% of the total profits (out of maybe 50,000 HFs). In the past three years, the top three hedge funds (Citadel, Millennium, DE Shaw) have generated 38% of the total PnL.

Recommended Reading

• Subscribe to Matt Levine’s “Money Stuff” newsletter; read his past articles too. They are informative, funny, and have aged well. They are free. They are just too long.
• Read a few entertaining books for fun and profit: “My Life As A Quant”, “Against the Gods”, “Red Blooded Finance”, “The Education of a Speculator”, “The Man Who Solved the Market”, “A Man for All Markets”, maybe a Taleb book (but don’t take it too seriously).
• People ask brain teasers, and I can think for a couple of reasons. First, to probe basic modeling and math skills. Second, because it is a focal point: everyone knows they are a likely topic. So I am not testing your intrinsic ability to solve a puzzle, but your ability to learn about puzzles. And there is a pattern to puzzles, which can be learned. Work through all of Peter Winkler’s books. And various firms, including Jane, IBM, etc. have puzzle sites.
• Applied probabilistic modeling and statistics are very important skills to have. Physics is still a good major to hire from, because it is a model-based discipline, as opposed to a technique-based one, and you will be exposed to many models. Take classes at the MS level. Read at least the following books:
  • “All of Statistics” (both volumes) by L.Wasserman
  • “Applied Probability Models” by S. Ross
  • “Convex Optimization” by S. Boyd and L. Vandenberghe
  • “Numerical Linear Algebra” by Trefethen and Bau
  • “Linear Algebra and Learning From Data” by G. Strang
  • “How to Solve It” by G. Polya Note

    I don’t recommend any finance book. You’ll learn on the job.

Read the following three essays. They are short and full of useful advice.

1. You and your research by R. Hamming This is the most practical of my recommended readings. Please read this over and over again. My favorite sentence is: “I started asking, ‘What are the important problems in your field?’ And after a week or so, ‘What important problems are you working on?’ And after some more time, I came in one day and said, ‘If what you are doing is not important, and if you don’t think it is going to lead to something important, why are you at Bell Labs working on it?'” If you have time, read “The Art of Doing Science and Engineering: Learning to Learn” by the same author
2. Real-life mathematics by B. Beauzamy. By a mathematician actually doing applied mathematics. Favorite sentence: “Real-life mathematics does not require distinguished mathematicians. On the contrary, it requires barbarians: people willing to fight, to conquer, to build, to understand, with no predetermined idea about which tool should be used.”
3. Ten lessons I wish I had been taught by G.C. Rota. Although this is a bit more academic, it is extremely useful. For example, the first item is on “lecturing”, but it’s really about communicating ideas effectively. Favorite lesson (from Feynman, actually): “You have to keep a dozen of your favorite problems constantly present in your mind, although by and large they will lay in a dormant state. Every time you hear or read a new trick or a new result, test it against each of your twelve problems to see whether it helps.”
   

Non-obvious points in the essay

• non-alpha related jobs can be extremely intellectually satisfying. Thinking about data, execution cost measurement, optimization, risk–these are all very deep subjects and you can have a great and long career in any of those. The road to hell is paved with mediocre alpha researchers who did not achieve their goals and burned out by the early 30s. Maybe a life of purpose is not the first thing that comes to mind when working in finance but, as much as it is in your power, pursue it.
• As a pet project, over the years I have asked many (many= 50-100) successful traders, algo developers and portfolio managers what makes a great analyst for their team. The answers have been remarkably consistent.

1. Curiosity. People who read articles and scientific papers on their own, maybe during weekends, for the sheer pleasure of finding things out.

2. Creativity. Like obscenity, hard to define but easy to tell it when you see it. I guess, something like this: looking at the same thing everybody can look at, but noticing something different, and proposing an original course of action. Most ideas do not survive scrutiny, but a few are brilliant.

3. Humility. When something does not work, admit it early and openly, examine the reasons why, and move on. In practice, humility (as described to me) is both willingness to take responsibility and openness to experience.

4. Integrity. Following the letter and the spirit of the rules– the team’s, the firm’s, the regulators’.

A few personal comments on this list. First, these qualities are highly correlated; their definitions even overlap. There’s a single trait that perhaps explains 85% of their occurrence. I can’t determine whether this trait is innate or cultural, but I’m fairly confident that by the time you join a firm as a researcher, you either have it or you don’t. Interestingly, not a single person highlighted “capability”, “mental throughput”, or “puzzle-solving” as a quality; yet, we partly select based on the ability to solve puzzles—go figure. In fact, many people I interviewed said that everyone can proficiently perform [task x] or work hard to execute instructions. Also, no one mentioned soft skills like empathy, communication skills, etc. Indeed, some of the very best investors I know, while being very good people at heart, have the social skills of a thermonuclear reactor. Finally, every manager I interviewed sees their employees as researchers, not soldiers or doers.

• Scout Mindset

  Maybe this is a good time to recommend a book on this subject: “The Scout Mindset” by Julia Galef, which explores the differences between explorers and soldiers.[Kris: See A Few Blurbs From Slatestarcodex’s Review of Scout Mindset]

• You can be successful (especially as an alpha researcher) in one of two ways.
  1. First one: You identify a completely new opportunity. Example: Gerry Bamberger at Morgan Stanley in the 80s developed statistical arbitrage. Also in the 80s: the early index rebalancing strategies, and convertible arbitrage.
  2. The second one: You apprentice in a team that has a successful strategy, learn the trade, and improve it marginally. Unsurprisingly, the overwhelming majority of successful traders belong to the second class. The lesson: try to join a team and a firm that has a habit of being successful. Don’t think you can make a huge difference, and don’t fall for the poetry of the underdog.
     
• Don’t be paranoid. No one is going to steal your idea. The real risk is that they will not even listen to you.
  

He ends with a statement that I feel goes from insightful to cliche back to insightful for each decade you’re in the business until your 50. At which point only the sociopaths, alimony payers, and overly fertile still remain. (Calm down, I’m mostly kidding)

A final and non-strictly professional piece of advice: you will spend more time working with your colleagues than with your partner or spouse or family. If you have to suffer at work, try to suffer successfully by sharing a strong common purpose with your colleagues, then by pursuing it in the best possible manner. The accumulated wealth from having worked at several firms will not come from your W-2s, but from the relationships and friendships you will have developed along the way.

☮️

Stay Groovy