Friends,
Last Sunday morning’s letter talked about reading. The night before at my cousin’s wedding, he quoted CS Lewis in his speech. Later that Sunday, he was hosting a post-wedding fiesta at his house and the topic turned to book suggestions.
He recommended Lewis’ Screwtape Letters. I have the book but haven’t read it.
[Actually we have 2 copies now because my wife ordered it on my cousin’s rec not knowing I had it, but it works out since I can’t find mine since the move.]
My mother was visiting this week for the festivities so she opened it up and read the first page. She couldn’t understand it. I took a peek. I could read it just fine and in fact I quite like the style but it’s certainly harder than reading popular novels. My mother is a voracious reader, both fiction and self-help, but it’s all Dan Brown level.
I looked up its Lexile Score*.
*According to the Gemini blurb at the top of your Google search that steals views from someone else’s site, a lexile score is a measure of how difficult a text is based on attributes like sentence length and vocabulary
1170.
I looked up Lexile scores for Harry Potter or Dan Brown stuff. It’s all in the 850-920 range.
For context, I highlighted those mid to upper 800s here:
A top decile 3rd grader reads the same as a bottom decile 9th grader. Popular writing is about 4th-grade level. I asked my 7th grader to read a page from Screwtape and he liked it! He started it this past Thursday, after wrapping the Unwanted series he was addicted to. I looked them up. Only about 800 Lexile. Confirming my frustration that while he reads a ton, it all seems below grade level.
But I guess that’s true for almost everyone.
If interested, years ago, I compiled this table of books for kids based on reader recs or personal experience. It includes Lexile scores:
https://notion.moontowermeta.com/book-ideas-for-kids
Job Posting
Financial Sourcer/Researcher – Part-Time, Remote (Greythorne Associates)
We’re looking for a skilled researcher who can find talented quant traders, PMs, and strategists—the people who don’t respond to generic recruiter messages.
Greythorne is Stacey Crognale’s recruiting firm. Stacey was the director of HR at SIG when I was hired back in 2000. She started Greythorne in 2007 and specializes in quant finance with an especially strong pipeline in prop trading. This role is not an external mandate, but to work with her directly.
—> Apply here
A chat with John Reeder
John is the man behind the Risk of Ruin podcast. He interviews advantage gamblers and the occasional investor. The format is one of my favorite. It’s more like an audio essay than an interview. He does a lot of writing for them, weaving together his knowledge and lessons from experience and discussions, and then treats the guests answers the way you quote in an essay.
I’ve always been impressed by how well they are put together not to mention how much work they clearly require. As a long-time fan, I was totally honored to be invited on. John’s questions are always thoughtful and unique.
🎙️The episode is available on Spotify
We don’t get into the nitty gritty of options because that’s not the audience here, but for those interested in options, I do explain why vol trading is easier than directional trading (and why this is not the refuge it sounds like).
Money Angle
So You Want to Abolish Property Taxes ( Lars Doucet)
I remember being on some freeway, I mean highway, in the DFW area and seeing a billboard for some candidate promising to 86 property taxes. As a CA resident drawn to Georgist economic principles, in no small part due to Lars’ persuasive education, I’m just shaking my head as I whizz past the smarmy ad. Like what’s wrong with you? Your state’s economy is a positive role model — no state income tax, high property taxes, and allows builders to build. And you come up with this?
If your plea of “Don’t California My Texas” amounts to symbolic own-the-libs gestures like banning rainbow crosswalks and cannabis while inviting, hell, speedrunning Prop 13 distortions, then you are about as serious as a pixie stick.
Lars breaks it down so well, just check it out. If nothing else, read the section Answers to Various Objections.
Money Angle For Masochists
Option trader and author Euan Sinclair published a labor-of-love project that will become a cult classic for trading nerds.
The Theta Pig Letters
It is a remarkable pastiche of none other than — The Screwtape Letters.
The Screwtape Letters are an escalating correspondence between the devil and his demon protege Wormwood. The devil is teaching his dear nephew how to sabotage the lives of humans.
The Theta Pig Letters are an exchange between a master manipulator and his understudy whose trying to undermine traders attempts to succeed.
It’s not only brilliant, it’s fun to read. The condescending tone towards the incompetent nephew is relentlessly hilarious.
You can download it here:
A selection of excerpts:
- The mistakes described here are not rare. They are routine. They do not announce themselves as errors. They arrive dressed as insight.
- My dear Backtest: Congratulations on your first assignment. There is nothing quite so exhilarating as the early days of a Patient’s trading career, when vanity and vulnerability sit so invitingly close together. Trading, you must tell him, is uniquely stressful. Unbearably so. More grueling than any other occupation. (Do not, under any circumstances, allow him to reflect that bartenders suffer drunks, that teachers manage thirty howling infants, or that soldiers are expected to remain calm while being shot at.)Encourage him to think of himself as a kind of artist-warrior—misunderstood by ordinary mortals, ennobled by his suffering. His partner’s raised eyebrow becomes an attack on genius. Any well-meaning question is interpreted as doubt. He will learn to ignore those who do not mirror his self-image and surround himself only with those who validate it.And better still, he will eventually seek out “kindred spirits”—online forums, trading chatrooms, or overpriced mentorships—where the mythology is reinforced. He will not look for conflicting views or rigorous critique. He will look for comrades in suffering, not comrades in truth. A good trader seeks out disagreement; your Patient will seek only confirmation. the more he believes that trading is uniquely punishing, the less responsibility he will take for improving his own skills. The idea that competence, not courage, is the antidote to stress must never cross his mind. If he begins to study properly, to practice restraint, to track his errors with cold detachment—well, then you will have lost him. He will, without realizing it, become sturdy.
- Let him convince himself that the law of large numbers is his ally, not his executioner.
- Let them drown in a sea of partial differential equations and symbolic regressions.
- Let them believe that beauty implies truth. Encourage him to chase symmetry where there is only noise, to assume continuity where there are jumps, and to impose causality where there is merely coincidence. Most importantly, let him believe that the clarity of a model matters more than its performance. That the elegance of his thinking is a substitute for testing. Make him allergic to heuristics. To approximations. To ugly truths. Let him scoff at simplicity and worship coherence. If you succeed, he will spend months—perhaps even years—building intellectual castles in the sand. He will conflate sophistication with strength. And when the tide inevitably washes those castles away, he will rebuild them: higher, more intricate, but equally unstable.Let him mistake thought for progress. That has always been our favorite kind of failure. And, Satan knows, you should be familiar with failure.
- Let him believe that by reading financial statements, scanning headlines, and pondering macroeconomic conditions, he can infer what the market has missed. Encourage him to imagine that he is not reacting to price, but interpreting value. He will feel sophisticated. He will say things like “market overreaction” and “long-term thesis.” He will call himself a contrarian and imagine that patience is a strategy. Do not let him suspect that he is merely doing what everyone else is doing: consuming public information and projecting his own beliefs onto it. He must never consider the possibility that the balance sheet he’s analyzing, the CEO he’s quoting, the trend he’s spotting—are already priced in. Let him imagine that the edge lies in how he reads the data, not in whether that data is actionable.This is especially potent for Patients who fancy themselves worldly. They will cite books, articles, and podcasts. They will draw connections between oil prices and grain futures, between central bank policy and auto sales. Let them draw. Let them weave vast, fragile webs of inference and call it research.Most important of all, convince him that the more connections he sees, the smarter he is. He will not realize that each new variable adds noise, not clarity. You must never let him notice that it is merely confusion with a vocabulary.And let him pride himself on general knowledge. He has read The Economist, after all. He remembers something about China’s shadow banking system. He once mansplained negative interest rates to a bored babysitter. He will come to believe that markets reward this sort of cleverness. That his perspective is not just informed—it is rare.Do not let him test this belief. Do not let him look at the returns of those who trade on earnings reports or macro forecasts. Do not let him study the failure rates of discretionary portfolio managers. Above all, do not let him ask how many successful traders he knows who rely on reading. (Kris: profound…success is being repetitive, in some ways dull. A hammer. Types that fancy themselves intellectual is not the archetype anymore than you expect a professional poker player sitting in a chair 16 hours a day in poorly ventilated, unglamorous room with smelly dreamers to have a James Bond passport and home library.
- Now we come to one of the most elegant diversions in our entire arsenal: the myth that risk management is the edge….If he were astute, he might see the absurdity of it all: that if risk management alone were the edge, then he could play the lottery with good position sizing and come out ahead. That perfect risk control, taken to its logical conclusion, simply means taking no risk at all. And there’s no edge in abstention.But he won’t see it—not if we play our part. Keep his thoughts on risk superficial. Let him use “asymmetric payoff” as a shield against deeper inquiry. Let him feel clever for “limiting downside while keeping upside open.” Just make sure he never notices that he doesn’t know where the upside is coming from.He will think himself disciplined. He will think himself wise. And best of all, he will think that not losing money is the same as making it.Let him worship at that altar, Backtest. It is a quiet church, and its congregation rarely asks for proof
- Letter XI: But if he asks, “Why is VVIX diverging from VIX?” or “Why is NASDAQ volatility rising while the Dow’s is falling?”—that’s dangerous. Because relationships are where inefficiencies hide.How does skew behave as realized volatility rises? How long does it normally take for implied volatility to relax after a spike? Do the VIX options and SPX options account for the weekend in the same way? These are the sorts of wrinkles that arise not because the market is dumb, but because it is constrained. Because participants face capital charges, mandates, and rebalancing needs. The inefficiency is often the residue of friction.But if your Patient starts thinking in this way, we’re in trouble. He’ll begin to measure rather than guess. To observe rather than judge. To know the structure well enough to notice when it flexes. And that is edge.Stop this immediately.Distract him with headlines. Give him a guru who trades Tesla based on vibes and political bias. Feed him chart patterns shaped like ducks. Whatever it takes to keep him watching the show instead of reading the script.Snuff the curiosity. Leave him the confidence.
- My regrettable aide,It seems I’ve overestimated you—again. You need help.You are enthusiastic, certainly. Eager. Occasionally—not often—effective. But in matters of craft, you remain a blunt instrument—loud where subtlety is required, impatient where patience would rot more deeply. And now, as the Patient begins to experiment with backtests, you must understand: this is a specialist domain that demands precision, not noise.Which is why I’m assigning you an expert.You will be working with Overfit. Do not speak unless spoken to. He does not tolerate enthusiasm. Or questions. Or you, if I’m honest— He will teach the Patient that systems must be tweaked, improved, optimized—until they hum with apparent perfection. He will praise him for reducing drawdowns, for raising Sharpe, for improving win rate by 0.03. And just when the Patient believes he has built something invincible… Overfit will let it collapse.Not immediately. That would be merciful. No, he will let it erode slowly, unpredictably, across market regimes that were never covered in-sample. And the Patient will blame volatility, not the process. He will tweak, not question. He will descend into an eternal loop of minor improvements. Like an old general planning for a war he fought many years previously.Overfit works in silence. In metrics. In elegance. He leaves no fingerprints—only code.Learn from him.He may even let you observe one of his routines: the 17-parameter breakout strategy that has a 1.47 Sharpe from 2008–2018, then disintegrates into noise. The Patient won’t discard it. He’ll “tune it for the new regime.” Again. And again. And again.Welcome to the second layer of hell, Backtest. You’ve played with belief. Now you’ll learn how to destroy through data
- Letter XIII (Overfit’s first letter): Poison the foundation. We ruin the story in two ways: through data, and through method. The Patient must never suspect that his dataset is already betraying him. Some of the most reliable sabotages are achieved before the first line of code is written…
- The point, Backtest, is not to mislead him directly. It is to cultivate his belief in rigor. To have him confuse exhaustiveness with validity, iteration with insight, and polish with truth.He must never think: “Does this idea make sense?”He must only think: “Can I make this idea work?”In this way, we will bury him in process. And the most beautiful part? When the strategy fails—as it must—he will blame himself. He will believe the system almost worked.That’s the mark of true failure: not that the backtest was flawed, but that it was nearly right.Almost correct. Endlessly refinable. Infinitely seductive.
- Let Him Worship the Process. That is your final goal. Make him revere the ritual of validation more than the reality of outcomes. Let him define his identity as a “data scientist” rather than as a trader. Let him think that discipline replaces insight.He will become a guardian of statistical purity. A monk of withheld data. And he will lose money correctly. There is no cleaner form of failure than that.
- Options. It is wonderful that the Patient has been allowed to discover options. Although I suspect you were just lucky in stumbling across this idea, it opens up many promising avenues for our project.You’ve done well to confuse him with the usual smoke: theta decay graphs, multi-leg jargon, and variations on iron condors named after insects. Now comes the ripest fruit: convincing him that an option strategy itself is an edge.Not the underlying market behavior. Not the statistical tendency of volatility to mean-revert, or of skew to overprice puts. No, no. The structure. The shape. The aesthetics of the trade. “My edge is in strike selection,” he said the other day. Selection! We are nearly there.Your task now is to seal the confusion between frequent and favorable. This is easier than it sounds. A wide short strangle, for example, wins often. Most days, nothing happens. The underlying chops around or drifts, the wings decay, and the trade is profitable. It is, in the short term, comfortingly correct. And like all good traps, it flatters his need to be proven right—again and again—until it suddenly doesn’t.What matters, of course, is the average outcome. Not the common one. But he has spent his whole life being rewarded for consistency, for pattern recognition, for turning in neat homework. The idea that a trade can win ninety times out of a hundred and still be a disaster is alien to him. Keep it that way
- Your next task is to convince him that knowing the Greeks is the same as having an edge. We must not let him realize that the Greeks are merely descriptors—thermometers, not thermostats. They measure exposures, but say nothing of whether those exposures are favorable.
- Make him identify as “a long vol trader” or “a short vol trader”. Make him pick a side before estimating which side is likely to win.
- Whisper to him that true mastery lies in perfect delta hedging. That one day, with enough precision, he will out-calculate uncertainty itself
- Your next task is to help him improve the strategy. Do not misunderstand me: we are not trying to make the strategy more profitable. We are trying to make it more elaborate.This is the art of post-discovery sabotage. The Patient has found something simple that works—some recurring pattern, some repeatable structure—and now feels the itch to “refine” it. Scratch that itch with gusto (it is no coincidence that mosquitos are on our side).Encourage him to add filters. Conditions. Weightings. Perhaps a volatility overlay. A moving average confirmation. A custom indicator. Or two. Or six. Suggest he look at volume, sentiment, cross-asset flows, macro overlays, news feeds. It doesn’t matter what. Just keep adding. Convince him that if he stops refining, he’s being lazy. That the real professionals are out there stress-testing their systems across twenty-seven regimes and fifty-three metrics and nine asset classes. Let him think elegance is amateurism. Most importantly, get him to optimize. Not once. Not simply. But obsessively. Every parameter must have a range. Every range must be backtested. Every backtest must have cross-validation. Let him run grid searches until his processor whines as much as you do. Let him discover the perfect lookback period, the ideal stop-loss, the optimal entry condition for a phenomenon that doesn’t. Over time, the original idea—the edge—will be so buried beneath rules and tweaks that even he won’t remember what made it work in the first place. If the strategy fails, he will have no idea why. He will re-optimize. Re-fit. Re-torture the data. Let the logic drown in complexity. Let the confidence die by a thousand knobs.
- Automation: I am delighted that you have prompted the Patient to automate. This is the first real initiative you have shown and somewhat assuages my concerns about your ability and potential. Splendid. He will tell himself this is about efficiency. “The logic is sound,” he’ll say. “Why not let the machine handle it?” He will cite objectivity, discipline, and scalability. He will feel proud—professional, even. What he will not notice is that he is about to spend weeks automating a task that takes two minutes a day to do manually. This is the first victory: the gift of misallocated time. Every hour he spends writing code, debugging data feeds, and integrating APIs is an hour not spent thinking about the trade itself. He will be productive but only be producing something pointless.And the best part? Even if he gets it all working, it will still fail. Possibly not immediately, and probably not dramatically. But slowly, subtly, and in ways he won’t trace back to us.There will be bugs, of course. A mislabeled column, an off-by-one error, a missing data point that seeps through the system like a weeping pustule. He’ll fix these issues eventually. But each error will chip away at his trust. Not in the system—he’ll double down on that—but in his ability to implement it. He will begin to suspect he is the bottleneck. That more automation is the answer. Now comes the second level failure. Once automated, the trading process no longer asks anything of him. It runs. Quietly. Invisibly. His only feedback will be a daily P&L, eventually unnoticed, like the death of a woman who lives alone with the cats that will eat her. There will be no touch, no feel, no reason to monitor execution or slippage or spread. No sense of flow, timing, or friction. And because he no longer must think about the trade, he eventually won’t.The edge might remain, technically—but it will be unexamined, unmonitored, and unprotected. Execution costs will creep in. Fills will worsen. The strategy will degrade, not from a fundamental change in the market, but from neglect. And he will not notice.You must understand, Backtest: automation does not always kill by malfunction. It kills by abstraction. By replacing attention with convenience. By allowing the Patient to feel like he is trading when he is, in fact, only observing a spreadsheet. If you allow the patient to automate something out of necessity you will have committed a great error (and will be punished appropriately), but if he automates out of convenience then you have had quite a success. Please don’t ruin such a promising start.
Stay groovy
☮️
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