Moontower #40


First, a quick mention that Moontower is taking the next 2 weeks off and returning on January 5th. We can all use a bit less stimulation at the end of the year. Play some boardgames, go to sleep late, binge some shows, gain a few pounds. Laugh so hard bourbon eggnog comes out your nose. Shower your loved ones with attention. You’re not missing anything, including Moontower 🙂
Facing A New Decade

With a new decade looming you are being bombarded with listicles, resolutions, and all manners of reflection. We can’t help but pause when faced with a year ending in a zero. Ascribing significance to base 10 years seems a bit arbitrary, but I’ll play along for a moment.

Taking Inventory

At the start of this decade, I was living in Long Island City. I had my own trading business by then, banked more money than I could have imagined possible just a decade earlier (trust me this says more about my 21-year-old imagination than my 31-year-old paychecks), and very recently married. Facebook was still new to me. We were mailing DVDs with Netflix. If I go back and look at my Google photo album from 10 years ago, it’s sparse. I looked back at my Google calendar from 2010. Crickets.

A lot changes in a decade. I don’t even have a DVD player now. I have been in the Bay Area for 8 years. My Nextdoor profile rhetorically wonders “How long do you need to live in CA before you’re no longer a New Yorker?”. After recently celebrating my 10 year wedding anniversary and 17th year overall with Yinh, I have now spent an equal amount of time with my partner as my nuclear family pre-college. In 2010, our circle of friends had very few babies. Today my 3-year-old is one of the runts of our friends’ combined litter. Today my life is rich with kids, so many nieces and nephews by both blood and bond.

But the passage of time carries everyone forward. My parents, wife’s parents, aunts and uncles, and yes even one of each of Yinh and my grandmothers are 10 years older.

We are children of a generation who gave birth young. We will be much older grandparents than our parents are today. We spent some extra time in our 20s hustling maybe. Or just having selfish fun. Tradeoffs I suppose but no sense in regrets. It’s natural to consider what I might be writing 10 years from now. When I’m 51. My oldest son will be taking the SAT. I’m already older than my mom was when I took the SAT! I’ll be shuttling Max to and from his freshman year of high school in between my doctor-recommended prostate exams and colonoscopies.

Another Year, Another Whisker

Projecting your life forward is never sentimental. Mawkishness only works in reverse. When you are young, looking forward is about ambition and hope. More money. More freedom. A house of your own. But when you cross your actuarial midpoint, the exercise drifts towards melancholy. We’ve seen enough to realize that joy balances on the head of a pin. The unannounced wind will invariably come. If you haven’t heard it whip yet, you’ve heard the tales of its force.

If this sounds sad, it’s because you compared this outlook with the illusions of youth. When you were young, you were naively impervious. I suspect this is a design feature. A timed release of feigned wisdom which you had not yet earned. Of physical beauty which belied your insecurity. When a 24-year-old bro advertises his fitness as a mate, we know nature’s mimicry transcends snakes and butterflies. When you are older, you can spot the fake.

If your beliefs from ten years ago embarrass you, congratulations. You’ve grown. Growth is paradoxical. It comes with both assuredness and humility. It must be humbling. You just learned how wrong your past self could be. But it’s also a hint. You don’t need to pretend anymore. It’s ok to be wrong. More than ok actually. Do you ever wonder what beliefs you carry today that will make future-you cringe? Squirm if you must, but let yourself grow.

A Gift Lies Ahead

Herein lies the beauty of looking ahead — grace.

You may get to be someone’s shelter from the wind. An honor to which even a precocious youth can find no shortcut. It’s as if life’s greatest privilege is reserved for the aged. For those who see their chance to serve as a reward for the mistakes they’ve made. When getting older makes you realize everything is ephemeral, then you can finally enjoy it. When you think you have forever, the present never feels urgent. If you could live forever, nothing would matter. Scarcity, far from a constraint, is actually liberation.

So rather than lament what you will inevitably lose, do what you can today to enhance the memories which are yours forever.

I say all of this knowing that in 10 years I will look back and think about how stupid I was about some things I think today. But that’s just another thing to look forward to.

The Money Angle

The equity risk premium, or ERP, is defined as the excess return you get for investing in stocks over the risk-free rate. Simply, it’s the premium return you earn in exchange for dealing with path. The fact that you might experience a 20% drawdown every few years (with U.S. equity markets currently sitting on all-time highs it’s hard to believe that just 1 year ago the SP500 had a 20% drawdown). I admit this “no pain, no gain” explanation sounds a bit weird.

Student: Hey prof, why do I get paid extra for buying stocks instead of t-bills?

Master: Because if you weren’t offered a discounted price to buy stocks you wouldn’t. Duh.

Proof by induction can be unsatisfying. To be fair, my use of the word proof is straining its English definition. Instead, it’s typical to hear ERP referred to in the context of a puzzle since some economists with calculators decided that this roughly 6% historical premium has been excessive compared to what they would expect even risk-averse investors to demand.

Enter the Witch

But what if I told you that there is actually no ERP and therefore no puzzle. Well, you’d accuse me of heresy since I’m directly contradicting widely accepted financial orthodoxy. After all, I’m ignoring the fact that equities have in fact outperformed t-bills by a wide margin.

Let’s look at that assertion again — equities have outperformed t-bills by a wide margin.

Well, what do we mean by equities? Single stocks or indexes? This is where I let the witch take over. The heretic, BreakingTheMarket who states:

The Equity Premium Puzzle has lasted for 37 years without anyone recognizing the market index doesn’t represent stocks.

Mistaken Equivalency

Turns out the existence of an ERP depends on your definition of equities and an index of equities is just not just equities. It’s a strategy. An index is a rule-based weighting that rebalances intermittently. The difference cannot be overstated. Why?

“Stocks” and the “Stock Market Index” are not the same thing and never have been. One is an asset class, the other is a trading strategy of that asset class. They don’t behave the same and don’t have the same properties, return, or standard deviation. You can’t use one to replace the other.

The math makes it clear.

When you compare the geometric return of stocks not a stock index you do not find an ERP!

The key here is that the historical volatility or standard deviation of single stocks is .33 which is about twice what it has been for U.S. stock indices. He makes the case that a .55% premium is much more in line with what economists would predict or just dismiss it as noise.

Enjoy the full post Solving the Equity Premium Puzzle, and Uncovering a Huge Flaw in Investment Theory. (Link)

How This Ties Together With What We Have Learned In The Past

As you digest this, there should hopefully be a comforting reinforcement of past ideas, namely:

  • When we deal with multiplicative processes, like returns that compound wealth, we care about geometric or logreturns not arithmetic returns because of the “volatility drain”. (Link)
  • Portfolio components are not perfectly correlated so when we rebalance, we capture a premium geometric return. (Link)
  • The imperfectly correlated aspect of a portfolio contributes to what Fernholz called the excess growth component that diversification earns when you are in logreturn space. (Link).

If we presume stock index volatility is only 17% (as opposed to the 33% for single stocks), we can use napkin math to make additional observations.

  • Index ERP is closer to 6% – .5 * (.17^2) = 4.56%…the extra 4% represents Fernholz’s “excess growth rate”. This is why some pros refer to diversification as the only “free lunch” in investing.
  • The average cross-correlation of stocks in an index can be approximated by the ratio of index variance to average weighted stock variance. Using our estimates (.17^2) / (.33^2) = .27 which is in the ballpark of where long term average SP500 index correlations have realized (although option folks know how spikey that number can be, especially on short measures).

Summing Up

ERP doesn’t exist if you look at stock; only stock indexes!

  • Researchers commonly mistake equivalency between a single asset and a portfolio:
    • Treasury bills (and bonds) are a single investment item. An equity market index (SP500 for the original study and many others) is a portfolio of many investments, who’s composition changes all the time. They are not the same thing and shouldn’t be compared as if they are!

A Final Note

I chat with BreakingtheMarket on Twitter and follow his discussions with quants. So much of the merit of Twitter, and the internet in general, is the beauty of being able to learn and engage in conversations with talented, curious people whom you may not have found otherwise. Breaking the Market is not in finance. He’s an engineer with a strong math background who approached markets with a “beginner’s mind”. I don’t think it’s an accident that two of my favorite finance writers on the internet are from scientifically minded people from a different field. I think the best finance blog is which is penned by another finance outsider, the pseudonymous Jesse Livermore. Jesse did his first interview this year and it’s worth checking out, along with his widely influential writing. (Link to interview with my notes)

Climb Higher

As the year closes, I thought to indulge some observations about writing these weekly Moontower emails.

On Process

  • Started in March. 40 weeks in a row
  • Between the weekly email and my website I’ve written 100k words or the equivalent of a 400-page book (there’s an iceberg of notes under that)
  • The email takes about 7 to 8 hours per week 2 of them have taken upwards of 12.
  • About 1/3rd of that time would have been spent doing it anyway as I have been taking lots of notes over the years. The extra step of making it public, while intensive was still incremental, which is why I thought it would be a fun idea in the first place.
  • I started with about 20 weeks worth of ideas in the queue. After writing 40 of these, I now have about 50 in the queue. There’s a lesson about feedback loops in there somewhere. I often don’t consult the queue and just tackle something that I noticed that week.  Usually, the topic occurs to me in a way that unifies some subset of my notes.
  • The time to do this has come away from watching TV and movies, some Friday night activities, some workouts and strolls, and some sleep. Everything has a cost.

On Benefits

  • The coolest benefit has been what one friend emailed me to say he’s enjoyed the “friendship renaissance”. We have many phases in life. A number of people from my days in NYC who I have fell out of touch with now regularly email with me. Sometimes sparked by a Moontower topic. But there’s another effect that I can relate to since I get a lot of letters myself. Reading somebody every week breeds familiarity as well as an implied (or in Moontower’s case, an explicit) invitation to chat. We all know great, thoughtful people who we just fall out of touch with. The letter was a beacon to invite them back into my life even if I didn’t realize that fully when I started this.
  • I have gotten to meet many people both digitally and IRL. There’s a lot of cross-pollination with Twitter conversations so it’s hard to directly attribute, but this year has to, on average, I’ve met 1 in-person per week. And there are more connections online that I have regular chats with. I think the thought of that idea would have exhausted me in the past. Not that I’m shy, just not a social butterfly. But the meetings have been invigorating since they are rooted in a spirit of mutual open-mindedness and helpfulness. I suspect this might not even seem like something remarkable to many of you but for the few to which that may resonate, it’s worth mentioning.
  • It has been a forcing function to get me to write. Something that I have been wanting to do for a long time but required a form of accountability to get started. Your attention is so so appreciated. I’d be privileged if I could help one of you as much you’ve collectively helped me.

On Growth

  • I sent a welcome email to about 110 friends and family when I started in March. 40 people signed up for the first letter. Today, 375 people receive the email. This is an objectively tiny number but it punches so far above its weight. You are a smart, curious group of readers.
  • The growth is partially from word of mouth but mostly from something I’ve written that gets boosted by a highly-followed person. The most popular letters have been the ones in which I explain something technical from my own non-academic point of view.
  • On average, 2 people sign up per day even though it’s super spikey (about a month ago the readership grew by over 30% in a week).

On the Future

  • You can expect more of the same. I see myself as a curator and gatherer who basically takes you with me on my own learning journey. If Moontower had a theme it’s that the world is messy and by sharpening our thinking we can not only get better but be more empathetic. I’d say my pet peeve is the rampant discourse which acts otherwise. Discourse that at its best is flat and stupid, but more often, willfully manipulative.
  • You probably noticed I added the Money Angle section. This was natural since investment topics overlap with my professional domain and I thought it was useful to separate it a) for the benefit of those who find this via #fintwit and b) to spare those of you who might find those topics “too much”.
  • I’ll continue to look to you for input as how I can be helpful or more lucid. I don’t have any proper training or qualification. And while my very first letter addressed pushing past “imposter syndrome”, my opinions about how I present material is pretty loosely held. So don’t feel like you can offend me with criticism.

On Twitter

You have seen my take on the benefits of Twitter before.

Bill Gurley puts it succinctly

“Twitter is the most amazing networking and learning network ever built.

For someone whose pursuing their dream job, or chasing a group of mentors or peers, it’s remarkable. In any given field, 50-80% of the top experts in that field are on Twitter and they’re sharing ideas, and you can connect to them or follow them in your personal feed.

If you get lucky enough and say something they find interesting, they might follow you, and the reason this becomes super interesting is that unlocks direct message, and now all of a sudden you can communicate directly or electronically with that individual. Very, very powerful.

If you’re not using Twitter, you’re missing out.”

The Ultimate Guide to Twitter

This week, Fadeke Adegbuyi, published the ultimate guide in a well-organized and well-written document. If Twitter is something you want to level up in the New Year the timing couldn’t be better.

Here’s the guide (Link)

Here’s a great example of a Twitter hack from the guide that people use to facilitate in-person connections:

If you attend a few conferences or events each year, you’ll meet interesting people that you can follow online. Often there will be a conference Slack group where everyone attending can chat. A link and instructions to join this group are typically provided in an email after event registration, generally weeks before an event is slated to start. Join it. Add folks to Twitter that you’re looking forward to meeting or you’ve had interesting conversations with. If you’re at a larger event, temporarily add it directly to your name on Twitter.

For example, if your Twitter name is normally “Alfred Lin,” change it to “Alfred Lin at Cool Eng Event Dec 6-10” so people know you’re going. You might also temporarily pin a tweet to your profile about being there.


Here’s a finance professor’s easter egg tweet reinforcing how #fintwit is a great learning tool.

Last Call

Tom Whitwell’s annual post of 52 things he learned this year is always fun. Citations included.(Link).

Some of my favorites:

  • Harbinger customers are customers who buy products that tend to fail. They group together, forming harbinger zip codes. If households in those zip codes buy a product, it is likely to fail. If they back a political candidate, they are likely to lose the election. 
  • At least three private companies have fallen victim to ‘deep fake’ audio fraud. In each case, a computerised voice clone of the company CEO “called a senior financial officer to request an urgent money transfer.” 
  • The Korean Police force includes five labradors who are clones of ‘Quinn’, a bomb-sniffing dog who found fame after finding a missing girl’s body in a 2007 kidnapping. 
  • CD sales still make up 78% of music revenue in Japan (compared with less than 30% in the UK). Japanese pop fans have been encouraged to buy multiple copies of their favourite releases to win rewards (buy 2,000 copies, win a night at a hot spring with your favourite star). One 32-year-old fan was charged with illegally dumping 585 copies of a CD on the side of a mountain. 
  • And because I used to do phone surveys as a PT job in H.S. this was interesting: “Polling by phone has become very expensive, as the number of Americans willing to respond to unexpected or unknown callers has dropped. In the mid-to-late-20th century response rates were as high as 70%… [falling to] a mere 6% of the people it tried to survey in 2018.” 

Fun Music Appreciation

My favorite YouTube channels are about music appreciation

1. Ryan and George are Lost in Vegas. (Link)

These 2 guys are R&B and hip-hop enthusiasts who have discovered rock and metal. Their followers submit songs for them to do reaction videos and they have amassed a million followers who tune in to see their commentary. It’s like a play-by-play for songs you know. Despite not being musicians themselves, you only need to see a few videos to realize they have innate musicality and perceptive ears. But the best part of these videos is how enthusiastic and endearing they are. It’s easy to see why they have become popular enough to quit their day jobs. I’ve been watching them for a couple of years and it’s cool to watch their palette widen and see what songs they will give their highest honor…”playlist!”

While I dig so many of their videos, including their breakdowns of Rush, Rage Against the Machine, Van Halen, and Metallica songs their’s nothing like watching them lose their minds over a song that you also love. They do plenty of hip-hop and even country songs.

Here are some of my favorites:

  • Alice in Chains: Rooster (Link)
  • Chris Stapleton: Tennessee Whiskey (Link)
  • Black Sabbath: War Pigs (Link)

And here’s a more recent one with their higher production backdrop…and is a great way to wade into the brilliance of Tool’s recent album which I’ve raved about before.:

  • Tool: Pneuma (Link)

2. Rick Beato’s Everything Music channel (Link)

Rick is a producer and multi-instrumentalist who represents the opposite end of Ryan and George’s amateur appreciation. Rick will dive into music theory and teach you what makes certain songs great. Everything from ear training to detailed top 20 lists. If you are a big music fan, music nerd, or musician this channel could keep you busy enough to displace Netflix. His home studio is ridiculous and he can sidestep getting blocked by music labels since he can easily just demonstrate the music being discussed on his own.

A great place to start:  “What Makes This Song Great?” series (Link)

Here’s a look at his other playlists. His son Dylan has perfect pitch and gets his own playlist full of his own party tricks.

From my actual life 

‘Tis the season that Jim Carrey’s Grinch (my favorite Xmas movie in a tie with Elf) and the Polar Express (our kids’ favorite xmas movie) plays on loop. Holiday movies seem to be polarizing (pun highly intended). You either love Hallmark movies or hate them. Nostalgia is like the beer-goggles of good taste. No judgment. As Naomi likes to say “don’t yuck my yum”. That said I’m always surprised what riles people up. The whole Peloton holiday commercial thing kind of eluded me. Sure I read the gist of the circus it caused. It felt like the commercial was pretty earnest and benign to me. I see how people can find it tone-deaf or distasteful but it definitely didn’t seem as cringey as those Lexus “December to Remember” commercials where these rich, high cheek-boned couples leave bow-wrapped luxe cars on their uncracked driveways in front of their modern, glass-plated houses.

If you have managed to avoid the back-and-forth on these commercials, you win the too-busy-with-important-shit-to-notice-manufactured-distractions award.

But if you didn’t here’s some more to feed your appetite.

  • A hilarious rant against those Lexus commercials…I went back far into my archive of links, as those commercials have made me want to gag for at least 10 years.
  • The viral “Love putting my Peloton bike in the most striking area of my ultra-modern $3 million house” twitter thread (Link)

A request

While you are mixing it up with your loved ones with this season see if there is one person who you think would enjoy or benefit from Moontower. As you can guess, I’m always referring people to content that I think might resonate with them and I appreciate when people refer me to good stuff. If you are enjoying Moontower you are giving both them and me a small gift by spreading the word.

Just say, “you should check out this letter named after that scene in Dazed and Confused where some stoners contemplated how many people in Austin were having sex at this very moment. I”ll text you the link”

Then send them this:

To wrap the decade, I’ll offer one of my favorite nuggets which is probably a mutt quote of a bunch of similar maxims:

“We overestimate what we can do in 1 year and underestimate what we can do in 10.”

Best wishes for a cheerful, safe holiday season. See you in 2020!

Me, Yinh, Zakary (6), Maxen (3)

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