Moontower #334

In this issue:

• hacking hope

• if it feels good you’re too late

• the geometry of volatility scaling

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Friends,

Jared Dillian has this great essay, The Reason We Do Everything, from earlier in the year that opens:

Norm MacDonald, one of the funniest people to ever walk the planet, was also a degenerate gambler, busting out a number of times and going to zero. His therapist told him that he gambled in order to escape reality. Norm said, “That’s why everyone does everything.”

You should read the essay, but today I just want to zoom in on something Norm said. I watched the recent documentary Judd Apatow did on him (Netflix). Apparently, Norm was a heavy and eventually reformed gambler. Judd pulls the following quote from Norm’s 2016 memoir Based on a True Story:

Most people would think it’s the wins that keep the gambler going, but any gambler knows this is not true… When the red dice hit the green felt… and you’re declared the winner… you feel relief. Relief is all, and relief is fine, but hardly what a man would give the whole rest of his life to gain. It has to be something else… It is a particular moment, a magic moment that occurs after the placing of a bet and before the result of that bet. It is after the red dice are thrown but before they lie still on the green felt… As long as the red dice are in the air, the gambler has hope. And hope is a wonderful thing to be addicted to.

At the seat of any good comedian’s observational power is a rare balance of sensitivity with cold logic. Norm is able to feel and diagnose simultaneously (his struggle to quit is a notch for philosopher David Hume’s idea that we are slaves to passion).

As you gaze at the horizon in 2026, dotted with inescapable metaphorical gambling billboards, I urge you to remember that their pitches are hacking an otherwise adaptive impulse just like Frosted Flakes hacks our predisposition to the muted sweetness of pre-industrial fruit. The impulse that’s being hacked is our urge to grow.

Celebrating short-term wins when you don’t have an advantage is like falling in love with the good cop during an interrogation. You are being manipulated. In the gambling sense, by chance herself. She’s an abusive partner who gives up the milkshake just enough for you to stay.

We need growth so nature wraps it in hope. Take the motion to gamble as a sign that you crave risk. Risk is good because it precedes growth. Risk involves failure. Failure leads to learning. Learning changes behavior.

Don’t waste the urge towards risk on a loop where the lessons of failure fail to compound towards durable knowledge that you can actually build upon.

Gambling addiction has always seemed to me like the “insanity of doing the same thing over and over again and expecting different results”. Norm humanizes why we are susceptible to it without taking the stupid low road that it has to do with innumeracy or anything like that. But as it increasingly gets hawked as something more noble (ahem, prediction), they are trying to bring it even closer to what constitutes growth and learning. I’m not against gambling any more than I’m not against freedom to indulge in most conventional “vices”. But big tobacco doesn’t even try to put Vitamin C in their cigarettes.

[Ha, ha I’m lying. They actually did.]

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Money Angle

I was chatting with a friend this week who I’m so happy for it makes me almost teary-eyed. He turned down an unbelievable job to take a chance on building an HFT startup a few years ago. It’s going VERY well. And it’s fun. And they’re hiring and all the things. I couldn’t help but say, “Man, you’re just in one of those sweet parts of the curve now”. The work fits like a glove and to quote Eddie Murphy “the ends are meeting like a muthfckr”.

It’s HFT with Sharpe so high you don’t bother with numbers, I just call it Charizard. I have to waste my breath because this is as cheap as an option gets, but “are you raising money?”

Of course not.

They raised once at the start and that’s it. Self-financing from here. Interestingly, they raised from VCs, not allocators. This unusual arrangement combined with the mathematical visibility of their edge, which doesn’t exist in long-term stock-picking, just had me thinking again about the nature of investing.

From The Paradox Of Provable Alpha, we know that the only place to mine for alpha among managers is among those with longer-term horizons. The regular investment firms are not as capacity constrained, are an underdog to have any edge at all, and happy to work for a small take on other people’s money. The managers that look like traders, with high turnover and sample sizes, who consistently crush, don’t want your money.

An advantage in long-run investing on the basis of pure analysis is very hard and even if you’re good you there’s no stats that will ever affirm you to be as good as you think. Active managers either think they charge too little, but since they can’t flaunt HFT stats, settle for what the market will bear, or the managers know they are way overpaid. Nobody thinks the fee is exactly right because the industry is some mix of a economic “lemon” problem and a circus exhibition that has little to do with serious investing and more with spectacle. (Pick your favorite negative alpha manager that finds a way to stay relevant and maintain assets).

Alpha in long-term investing is scarce for even more fundamental reasons. The nature of advantage in a zero-sum game (the warm drift of beta is a public good, but alpha is fixed…no winners without losers).

You have probably seen some version of the right/wrong vs consensus/contrarian 2×2 before. If you haven’t, you should sit under a tree with it for a while. It’s liberating in its proscriptiveness.

A looming annunciation of this problem comes from an interview VC Josh Wolfe had nearly a decade ago on Invest Like the Best.

He noticed that every one of his fund’s investments that became a giant winner was highly contentious at the start. Typically, the stake had just one passionate champion for it on the investment committee.

[Do not confuse this with all highly contentious ideas will be winners. It’s a statement conditional on the investment paying off huge already.]

In light of the 2×2, this is not surprising. If the investment makes obvious sense, it will be consensus and even overbid.

I’ve seen an analogous phenomenon in trading, but even in mock trading. I’ve talked about it a lot before, but when I watch a room of people mock trade, I can quickly tell quite a bit about the person from their action or lack of action (in the case of lack of action, I have to probe a bit, but the lack of action comes from a fairly small number of common reasons which are as telling as taking action).

[If I ever host an event like that again, maybe I’ll consider report cards, where I inform the individual what I learned about them and they can tell me if it matched their horoscope.]

But, one consistent trait that I think is good out of the box is the ability to act before all the info is obvious.

If you need to wait until the evidence is convincing, you’re too late. In fact, at that time you may want to be doing the opposite.

This is a ruthless aspect of markets because it defies the requirements of regular decision-making. In your daily life, you’re not in a race to buy the best phone or lunch before it’s gone. You can usually hold out for a bit more info, improve decision quality, and not have your patience used against you.

The ability to act before you have all the info is useful in other zero-sum games as well. There’s an unsavory connotation to say someone has great political instincts because the object is usually someone who seems impure. The left-coded VC who moved right sharply after Covid. Perhaps they were honestly disillusioned with their team. Perhaps it was just good for business. Either way, the begrudging respect one might hold for a winning political trade echoes the lauded financial agnosticism of great traders. Stan has no problem flipping a yard from long to short at a speed that obviously outpaces any kind of formal research process.

VC to me is an interesting solution to long-term investing because its very structure acknowledges the futility of analysis on forecasting what is going to pay-off. Instead, create a marketing machine that both stabilizes assets and makes founders, the lifeblood of your upside, want to come to you. Then diversify the lotto tickets. As long as you’re drawing from a sample that truly has no mean, then surviving practically ensures thriving.

Yes, the surviving is hard, but has surprisingly little to do with returns.

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Related

The Efficient Venture Markets Hypothesis (9 min read)

Abraham Thomas doesn’t publish too often but I am always sure to read them. This one opens:

Venture capital is deeply weird these days. Consider these phenomena…

Thomas’ description of VC circa 2026 strikes me as a triumph of venture creating demand for its services by becoming a part of the “market portfolio” (in the CAPM sense of the word). It is now as much beta as SPX members, which elevates it above the bucket of crabs that is zero-sum competition for outperformance. VC funds are essential allocations to those trapped in the asset-managment-industrial complex should seem paradoxical if their scale ensures beta-level returns. But this article makes it make sense.

Money Angle For Masochists

Trigonometry and Vol

I had Claude make me a custom chalkboard app for making math and investing tutorials Khan Academy-style. For fun, I asked Claude to use it to teach me something. Claude knows me better than my mother, so naturally it chose to talk about volatility.

It created this geometric intuition for volatility. Watch the video and then if you feel like visiting trigonometry, below you can read a full treatment of what cosines have to do with correlation and volatility estimates! → Using Geometry to See Why Volatility Scales With √t

I’ve mentioned before that I’m playtesting a game called Market-Maker that I started making just over a year ago. The current form of it didn’t come together until a) I attended the Arbor Bootcamp last November and got inspiration for one of the core mechanics and b) vibe-coding got so good that it could build a fully digital version of the game that can be played on the internet.

I’m still iterating on it (slowly, this is a hobby project), but when I was playing with a trader friend he understood immediately how to price a straddle that expired in round 5 (it’s the lesson of the video).

Although sometimes that sqrt(round) trick isn’t quite right. The reason, to put it in the context of the geometry article, is that there are card interactions that would make the “angle something other than 90 degrees” and for sigma itself to change. Your cards are private information. Looking forward to getting to play this with you. I think it will be quite the mix of fun and educational (but the goal for this is really fun).

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So succinct it’s genius

Corey’s comment is outstanding framing.

From My Actual Life

Self-care = Metallica at the Sphere

Stay groovy

☮️

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Moontower Weekly Recap

• So you’re interested in trading…

• are the options market’s odds any good?