Moontower #35


  • 5 years ago the Patriots’ Malcolm Butler intercepted a Russel Wilson pass on the goal line to cement another Super Bowl trophy. The NFL Network called it the 5th greatest play of all time, and Seahawk’s coach Pete Carroll’s decision to pass and not hand the ball off to Marshawn Lynch aka The Beast is one of the most widely criticized calls of all time. Was it a bad call?
  • If you were coaching a Stanley Cup playoff game and were down by 2 goals, when would you pull your goalie? With 2 minutes left? 90 seconds? When do you see coaches typically decide the benefit of having an extra skater outweighs an unminded net?

Straight from the writing-a-hook-101 playbook, surprise! You guessed right — the answers are counterintuitive. In the first case, coach Carroll actually made the right call despite what many observers think. How about the hockey coaches? According to famous Wall Street quants, Cliff Asness and Aaron Brown, coaches should yank the goalies with more than half the time remaining in the 3rd period. Their argument and model has been one of the most popular papers on SSRN since it was published last year.

Going for it on 4th and long near midfield. Letting your opponent score a TD when they are in close range for a go-ahead FG late in the 4th. These are some examples of the unconventional but correct calls that have been normalized in the NFL. Upon first glance, these stories seem to be about sports becoming more woke about math. I disagree. The math was not the bottleneck. Bill James and sabermetrics have been around for forty years.

The deeper lesson is about acting independently. Pete Carroll made the right call. It happened to not work out. When you have a 55% edge on a coin flip you still lose almost half the time. What makes this call memorable is how courageous it was. He knew that observers would ridicule him if he called a pass and lost. A lesser coach may have chosen wrongly to run the ball knowing that nobody would second-guess the call if it didn’t work. Even if a magical flying Seahawk materialized on most coach’s shoulders with divine knowledge that running was only 45% to work, you can easily imagine the coaches rationalizing that it was still worth trying. Such is the power of motivated reasoning when the fear of a mob shakes your conviction.

(The story of the defensive play that was called on the field for that interception is fascinating. If you want to understand the depth of Belichik’s strategy it’s worth a listen. Mike Lombardi, Pats assistant that year, breaks it down starting at 38:40)

Somewhat anti-social

For Carroll to pass the ball in that goal line situation took faith that the team owner wouldn’t fire him based on the outcome. He had to trust that that the process which brought him to this moment and dictated the decisions on smaller stages deserved more weight than the emotions which might emerge in the spotlight. To explore why some people seem to be more capable at this and how we can all be aware of the forces which inhibit us from good decisions check out Malcolm Gladwell’s interview with Cliff Asness and Aaron Brown.

For those of you who have taken the Big Five Personality test (also known as the Five-Factor or OCEAN model), you will see the role of ‘disagreeability’ and in which ways it is an adaptive quality. The trait of being less interested in others’ approval has significant pros and cons. It’s advisable to match your temperament in this category to the work you do. More than many other traits, I feel like a mismatch here leads to very avoidable frustration. After the interview (and a moment to ponder how Brown’s voice sounds just like Jeff Bridge), you will find yourself in the following thought exercise:

You discover an armed intruder in your house when you are home alone with your child. What’s your strategy?

Gladwell, riffing on the plot of No Good Deedwalks you through the right strategy versus the one you are going to choose. He then explains why you should be forgiven for choosing poorly.

The Courage to Be Disliked

This is a book by Fumiake Koga and Ichiro Kishimi which follows a conversation between student and philosopher to demonstrate the principles of Adlerian psychology. It was the latest book covered in the Rad Read’s Slack book club. Borrowing from Blas Moros’ notes:

No matter what moments you are living, or if there are people who dislike you, as long as you do not lose sight of the guiding star of “I contribute to others,” you will not lose your way, and you can do whatever you like. Whether you’re disliked or not, you pay it no mind and live free.

Armed with observations from Alfred Adler, you can orient towards your needs more effectively than the often misguided promise of other’s approval. I highlighted Moros’ notes here if it helps you decide whether you want to pick it up the book.

The Money Angle

Having a disagreeable streak is an advantage in the investing world. If backed by stakeholders that are not beholden to conventional thinking (rare), you at least have a chance to stand apart from the herd. Some observations I’ve collected on contrarianism and investing.

  • Josh Wolfe on the Invest Like the Best Podcast: Not all contentious ideas turn out great, but all great ideas were contentious. The contentiousness it what allowed them to be underpriced. If everyone loves an idea from the outset than it’s probably overpriced or it’s obvious which increases the chance someone else has tried it and failed for a reason you have yet to discover.

  • Since 1968 [until recent history], Altria has generated average annual returns of more than 20%. No other stock has come close to matching that long-term performance, according to renowned stock market expert and Wharton professor Jeremy Siegel. Jared Dillian would not be surprised. His pet theory of ‘constraints investing’ advocates for owning names that others can’t be seen holding. This is not limited to sin stocks. Mall REITs, brick & mortar retail, and perhaps even the next round of unicorn IPOs are all businesses a constrained investor might not look since the downside is losing money AND ridicule.

  • Unsexy businesses and careers and careers can be quietly lucrative. My impulse is that people who own funeral homes and sanitation companies are doing pretty well. Small-cap private equity investor Brent Beshore is making a living out of this idea. His company Adventures’ website is a wealth of real business knowledge and he’s one of my favorite follows on fintwit.

  • An very simple math example to demonstrate the importance of divergence when filling out an NCAA bracket: Suppose 4 people are filling out a bracket and the favorite has a 72% chance of winning the tourney. If 3 people choose the favorite and I choose the second best team which has a 28% of winning the tourney (the numbers are silly but it won’t change the conclusion), then I have the most equity. How? If the favorite wins only 1 of the 3 people will claim the prize based upon the rest of their bracket, reducing their initial equity to 72/3 or 24% vs my 28%. Assuming the scoring system is designed to give massive weight to the final game (most brackets do) then the conclusion is apparent: if many people overbet the favorite you want to pick the likeliest teams to win who are relatively ignored! (h/t Steve for help with the example)

  • Many investors create risk management rules that say “if I lose X dollars, I will close the position”. This type of rule fails to acknowledge that the best opportunities often occur when an asset’s path has inflicted max pain. The merit of an investment on a going-forward basis has nothing to do with your p/l up until that point. Instead, consider a risk management framework that recognizes the benefits of contrarianism. Such a system would have its users establish max pain tolerance as an input into sizing the position in the first place. This may sound like a subtle difference but in practice it is not. Work it out yourself to see why.

  • The Allocators’s Dilemma

  • Activist investors are great examples of ‘disagreeable’ personalities. Being funny is a byproduct of their style. Market folk will recall the venom in Dan Loeb’s pen as well.

  • Short sellers are like the investigative journalists of corporate America, sniffing out frauds and accounting anomalies. One of my favorite interviews is with famous short-seller Marc Cohodes. His irreverent, iconoclast reputation is on full display. Being a short-seller requires an extremely ‘disagreeable’ personality streak since they are often battling against charming executives who are masterful story-tellers and fundraisers. Short selling is often condemned by its targets as opportunistic when in fact it serves an imperative truth-seeking function in the markets. For technical reasons I’ve described here, it is one of the most challenging strategies. When short-sellers are sounding off we should actually pay extra attention since the truth they uncover is a byproduct of one of the most masochistic paths to profit.

  • Examples of businesses featured on Guy Raz’s How I Built This born from contrarian thinking.

  • I have concerns about climate change but have reservations about the discourse around it. Let me explain. Dissenting with the scientific orthodoxy immediately gets you associated with the unwoke, the climate deniers, or Trump. In other words, you get camped with uncritical ideologues that are often associated with being stupid. This is a binary view of the world. One of Moontower’s recurring themes is the world is messy and grey. When something becomes that polarized, the ensuing lack of nuance raises an antenna. There’s no short-seller function in discussions like this. Truth-seeking is completely suppressed by signaling tribe allegiance. Honesty is compromised by incentives. Dissension risks academic grants, public ridicule, and maybe even friendships.

Lyall Taylor is an independent investor I read. He answers to nobody. He’s disagreeable. This gives him an edge in finding situations where the baby has been thrown out with the bathwater. His recent post on climate change discourse and ESG discourse is a great way to step through nuanced thinking. Agree or disagree with him, but don’t miss the lesson. Behind every conversation exists an intellectual meta backdrop. The odds of any conclusions need to be discounted by the incentives embedded in the evidence.

Here’s the post with my highlights.

A concept I call “Career TANSTAAFL”

There is a psychic premium to jobs that are sexy like chefs or jobs that are rewarding like teaching. So those types of careers will either be very competitive or pay poorly. If a job was lucrative and rewarding everyone would want to do it. Musicians are cool. No way they get to be well paid too. Same for actors, artists, models, athletes. Unless you think being the best basketball player in your state (that’s roughly how good you need to be to have a shot at the NBA) is a legit career plan, recognize that working on cool things means you will need to give up financial comfort.

A tangential, possibly cynical, musing: You can be paid in money. In prestige. In honor. In gratitude. How you weigh these things is personal. And the weights reveal your insecurities.

Climb Higher

We have been exploring how acting independently or contrarian can be challenging. The consensus of crowds and markets is often correct but divergent strategies aren’t optional in a quest to outperform.

Farnum Street says it best:

If you do what everyone else does, you’re going to get the same results that everyone else gets. This means that, taking out luck (good or bad), if you act average, you’re going to be average. If you want to move away from average, you must diverge. You must be different. And if you want to outperform others, you must be different and correct. As Munger would say, “How could it be otherwise?”

Takeaways from Watch Out for “Good” Ideas by Scott Young
1) Feeling Safe Promotes Dangerous Actions

Just as helmets encourage football players to be more reckless, following conventional paths insulates you from criticism. Be careful not to mistake the common wisdom as the only option. Young reminds us:

A little fear helps you focus. Too much causes you to break down. The ideal amount of danger is one that encourages preparation but doesn’t discourage action.

An example I notice: much of our public discourse tries to make us feel safe. Authoritarian instincts are rampant on the left and the right but target different insecurities. My guess is you can easily spot those impulses in those you disagree with. Can you spot them on your team, or are they colorlessly in the air you breathe? You should care since safety and freedom are competing ideals.

2) Young’s version of invisible scripts.

Adopting common wisdom in the cases where it does not apply leads to very expensive and painful outcomes. Why? Because it is so fully priced, that you get crushed when you are wrong. This risk is clearly embodied in buy/rent wisdom as we discussed last week and how to think about college.No question fits this pattern more than going to university. I personally think university is a great idea for many people. Even the people who can self-educate, university offers accreditation and signaling that you can’t get on your own. For many people it’s a great investment. Except when its not…

3) Using others’ approval/disapproval to shift the burden of research

Whenever I undertake projects that elicit mixed reactions, I research the heck out of it…Contrast this with “sounds good” projects. Because you get mild encouragement from everyone, you don’t question the fundamental assumptions. Discouragement and outright haters serve a useful purpose here. They force hard-nosed introspection you’re unlikely to get from sycophantic conformists.

Last Call

  1. SNL skit: DuoLingo for kids (h/t Steve)
  2. Avi pointed me to Gary Gulman, a master of linguisitc humor. Stick around to hear about the ‘sky comma’. Link.
  3. If an inmate dies and comes back to life have they served a life sentence. Link.
  4. A Scott Galloway quote from this week: The services industry is prostitution, minus the dignity. If you spend a lot of time at dinners with people who aren’t your family, it means you’re selling something that is mediocre. 

From my actual life 

This issue of Moontower was a bit long. It was a tribute to disagreeability and independent thought. I owe a lot to those qualities. You simply can’t survive in options trading for 20 years without them. But I want to share something positive and surprising.

I am not naturally someone who rocks the boat. I score fairly average on the agreeable scale. But in my career, I have been surrounded by very bright, disagreeable thinkers. I’ve put work into being nuanced. Questioning assumptions and incentives. I wasn’t born doing that. In fact, I get anxiety when I remember how much I sought approval as a youth. I wouldn’t even let my mom pack pita bread sandwiches because it didn’t fit in with the ‘American’ kids. I’m proof that one can learn to think more independently.

It helps to have a role model.

This weekend, I was privileged to celebrate my business partner and close friend Steve’s 40th birthday. It was extra fun to be part of a surprise party for him since being the center of attention makes him uncomfortable. I like to joke that he loves people but hates gatherings (an inversion of Randall in the movie Clerks). I’ve been working side by side with him for nearly 15 of the past 20 years. We disagree all the time about trades, parental styles, public policy, and Nirvana. Work wife doesn’t begin to cover it. We debate every day.

But he has been that role model. He has been able to do things nobody thinks he ‘should’ be able to do. He’s successfully incubated and delivered businesses that have endured nothing but skepticism from the first seed he shared of the ideas. His thinking is quantitative and measured. He doesn’t bother opining on things he knows little about. Humble about the limits of his knowledge, decisive when the facts warrant it. I don’t know if you’ve noticed, but this is the opposite of how are public leaders seem to operate. I’m heartened to see the best amongst us are not taking their cues from people in power.

I’m obviously proud to be his friend. But most importantly I have been able to partner on a concept that I hope can scale in society. The concept that people can disagree productively. That when we disagree, we remain rooted to a common purpose — mutual well-being and truth.

Happy birthday brother. Welcome to having LSOB. Gross.

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