In this issue:
Friends,
The money sections are full of education today, so I’ll be short up here again.
Permission to Chase Work You Love | 12 min read
In prior years, I’ve shared Bill Gurley’s excellent talk Runnin’ Down A Dream. It was so popular with audiences that he spent years turning it into a book with additional research. It came out this week so he’s been promoting it everywhere. Check out David’s interview with him. It’s a book I’ll be picking up for son and sharing with the kids I have in the class I discuss below.
Child’s Play: Tech’s New Generation and the End of Thinking | 34 min read
There’s no blurb suitable for this article. It hurts my head. Like, I think I’m sad. Or I’m crazy. Or the world is ruled by crazies and I’ve stayed the same. I can’t tell anymore. It was definitely entertaining.
As I’ve shared here before, I spun up an investing class for middle and high school kids locally. I am teaching my 12-year-old as it is, so I figured if I formalize it a touch so others could learn as well.
The materials for all the classes live here:
https://notion.moontowermeta.com/investment-beginnings-course
There are a few weeks between each session since there’s a fair amount of prep even with AI helping with:
The class we did this week was a lot of fun. There’s even a video to prove it below (I masked any faces. There were 16 kids in attendance). Most importantly, the kids learned a ton. Parents were texting me with their feedback and it felt good to hear their kids’ gears were turning.
For what it’s worth, I think there was a lot of material in here that parents don’t know either but I’ll leave you to guess what some of that might be.
Investment Beginnings — Class 2: The Math of Investing
Class 1 was about building a business.
Class 2 flips the perspective — you’re the investor now.
Someone is asking you for money. What should you pay for shares? What’s the lowest rate you’d lend at? How do you know if it’s a good deal?
This session covers the foundational math that underpins every investment decision you’ll ever make.
What we covered:
✅ The power of compounding (FV = PV × (1 + r)^n)
✅ The lily pad riddle: why most of the action happens at the end
✅ Early Bird vs Late Starter: why starting 10 years earlier beats investing 3x more money
✅ Warren Buffett: 99% of his wealth came after age 50
✅ Total Return vs CAGR: why doubling your money in 10 years is ~7%/yr, not 10%
✅ The Rule of 72: quick trick to estimate how long to double your money
✅ P/E ratio (multiple) and earnings yield (the reciprocal)
✅ The two levers of stock returns: earnings growth vs multiple expansion/contraction
✅ Zoom case study: great earnings, terrible return — how you can pay too much
✅ The asymmetry of losses: why losing 50% requires a 100% gain to recover
Hands-on:
🕹️ Live bidding exercise: students not only bid on shares of Lamorinda Sneaker Co knowing only that it earns $10/share, but quoted the lowest rates they’d lend at.
🕹️ P/E guessing game: guess the real-world multiples for Tesla, Chipotle, Shake Shack, Lululemon, Nike, and more
Homework:
🔨 Inflation Scavenger Hunt — look up prices from the year you were born vs today🔨 Fee Impact Calculator — compare 0.03% vs 1% fees over 40 years
🔨 P/E Return Decomposition — Pick 5 stocks. For each, look up the price and EPS 5 years ago vs today. 1) How much of the total return came from P/E multiple change vs EPS growth? 2) Then compute the current earnings yield (E/P). Compare it to the trailing 5-year CAGR. 3) Using the Rule of 72: if the 5-yr CAGR continued, how long to double your money? If you earned the earnings yield instead, how long to double?
🔨 Compounding Frequency — calculate FV compounded annually vs semi-annually
Resources:
📊 Slides
📈 Spreadsheet (File → Make a copy to get your own editable version; scripts may trigger a security warning — just advance through it)
Full video:
Junior Masochists
Let’s review 2 examples from the class that demonstrate how markets are hard because prices are already forward-looking.
The kids learned how to decompose returns into change in earnings vs change in multiple. Or “what happened” vs “the future” or what I sometimes referred to as “sentiment”.
When I asked the class what stock would have been all the rage during Covid (when many of these kids were only 6 years old 🥹), one boy immediately and correctly responded, “ZOOM!”
I pulled up ZM’s price chart:
I asked…”what do you think happened?”
Kids suggested that less people used Zoom as people went back to offices. I explained that ZM’s earnings actually did skyrocket for the past few years so that’s not the culprit behind the horrible return.
Look at the revenues from this Twitter post:
It’s not just the revenues that are up (although you can see how revenue growth has slowed). EPS has also skyrocketed.
The multiple just got hammered. Great business, but investors just paid too much for it.
Earnings were up >35x, but the multiple is down 99%.
A handy decomposition:
Price return = (1+ percent change in EPS) * (1 + percent change in multiple) – 1
The point of the formula is that your return depends on changes in fundamentals (actual earnings) AND change in sentiment around future growth prospects.
A quick caveat. This is not complete. Imagine a situation where a company is $5/share and EPS of $1 for a P/E of 5. Over the next year, the company’s earnings don’t grow and the stock price doesn’t change. The price return is zero. But the company did earn $1. It’s assets have grown by 20%. You are economically richer by 20% but if they don’t distribute it by other paying a dividend or buying back shares (which would raise EPS) then the formula above did not account for a more holistic total return.
You could estimate:
Total return = (1+ percent change in EPS) * (1 + percent change in multiple) + earnings yield – 1
That would capture the idea that you are economically better off even if it’s not paid out, although management’s allocation decisions are a matter of concern.
As a class, we stumbled into a situation on the opposite side of the spectrum. A boy mentioned he bought Delta Airlines 5 years ago for ~$35. I pulled up the chart and noticed the stock doubled.
First of all, great teaching moment as we covered rule of 72 minutes earlier so I immediately asked the class, what the annual return must be? Proud dad moment as Zak is the first one to say 14.4% which I know he figured by thinking “72 divided by 10, times 2” which is better than I would have done as I would reach for 70/5.
Mental math aside, I asked our young investor, “Why did Delta do well, did the earnings increase or the multiple?” With zero hesitation, he responds that the earnings haven’t grown. So a perfect anti-Zoom example for the class. Delta Airlines coming out of Covid years had sour vibes but even if the earnings didn’t grow, you could make a nice return on the sentiment and therefore multiple improving.
I did go back after the class to see DAL earnings and stock history and I think it makes more sense that the kid bought the stock just 2 years ago, since that is the point in time where the earnings were about the same to now and the stock was about $35.
A crap business that investors sold too cheap.
For our regular Masochists
Since we are talking fundamentals, a mutual on X pointed out that HRB (H&R Block) has recently gotten trashed and that its shareholder yield is ~15%.
Shareholder yield is dividends + net share repurchase + debt reduction as a percent of market value.
News flash, HRB is not a growth business. It doesn’t re-invest much of its earnings versus just distributing the cash. I do find it amusing that the stock could be trashed along with other AI disruption stories when it has already survived the transition from brick & mortar to the internet, the popularity of TurboTax, and the growth of the standard deduction, relieving a wider proportion of the population from filing. With a P/E of 7 and a management that pays out the earnings you make ~15% if its already crap business stays the same.
Shedding 1/3 of its market cap since the start of the year, the implied vol is unsurprisingly jacked. I’m a little nuts and decided this was enough to launch some puts with the “I’ll take the shares if I’m wrong”. I normally don’t like this mentality, but part of the vol selling attitude is that the stock probably doesn’t have a lot of upside which reduces the regret possibility from “I was right on this stock and all I collected was some put premium”. In other words, if the upside is abridged, that’s a statement about the vol of the stock being lower.
Selling puts for yield is pretty aligned with what I’m trading the stock for in the first place — yield. I’m just taking it in the form of options intead of buying the stock because the option market is giving me that, but if the price falls a lot further well, I’ll have to go for that yield in the form of assigned shares.
Never financial advice, I’m just sharing my thinking aloud. As options go I’m currently short covered calls in silver and short cash-secured puts in HRB and long options on TSLA and IBIT. Overall, vols are on the higher end of their range across the market (outside of bond vols), but there’s always relatively cheap and relatively expensive in any market cross-section.
[Dons marketing tie]
I sent this to our moontower.ai list this week:
If you run a trading or investment book that uses options but don’t have or need the weapons-grade (and weapons-cost) infrastructure that options market-makers have, then you are in our position. We built moontower.ai for us, which means it’s for you.
The various dimensions of options across expiries, strikes, and symbols are impossible to make sense of without the right lens.
Moontower is a bridge.
Everything we build is designed to be “opinionated” — pulling things together the way a vol PM sees them. Not a sea of contract premiums. A coherent picture of what’s typical and, critically, what’s not. What we call “analytics with a point of view”.
“Hey, this looks expensive compared to its own history, but cheap relative to prevailing volatility surfaces across the market.”
If you understand that options are about volatility, then that is the type of statement you can make with this lens.
Take It With Your Coffee
We launched the Today’s Markets page in the past few weeks to be the first stop when opening your option view.
Your watchlist loads and the metrics snap to that universe.
Sector Performance can flag when vol moves against expectations.
Today, the Sector Performance surfaced an unusual dynamic. Crypto implied vols are up on the rally, while SLV vols are down on an up day. Opposite of what you’d expect for both!
The numbers on the bar show the price change in standard deviations;at the number on the end of the bar shows the change in implied strike vol for 1-month options.
Most option users are not dyed-in-the-wool vol traders first. If you are a professional manager refining your option expressions, reach out to hello@moontower.ai or visit us online.
Just some content stuff. We finished Mad Men. It’s immediately canon for me. One of my favorite shows ever. The writing, the character, the arcs, the costumes, and the period piece-ness of it. Straight into my veins.
Joining the rest of you in this decade we watched both the Anaconda reboot and Nuremberg this weekend.
Anaconda has 2 scenes that had the 4 of us howling. There’s nothing better than watching your kids cry from laughter. It’s a preposterous movie that turned out to be all upside.
I enjoyed Nuremberg on the whole, even if I found Kelly’s character forced and frankly silly (bruh, it took the film evidence to finally wake you up?). Russell Crowe and Michael Shannon carried. Although with Mad Men still in our RAM, I couldn’t take John Slattery’s character in the movie seriously. He is Roger Sterling forever.
Stay groovy
☮️
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