Moontower #52

Friends,

By last weekend the urgency around Covid-19 hit critical mass. It had been building for weeks. I wrote:

The virtual hivemind was buzzing with concern while mainstream meatspace seemed complacent and oblivious in contrast. Luckily the virtual crossed over to reality.

I promised more to say about that. Specifically on how we consume information.

We are decades beyond the pastoral era of Tom Brokaw mediating world events through a single pipe into your living room. What remains of that gatekeeper model feels like a pot-stirring imperative not to inform but to confirm. To confirm its self-selected audience’s biases. Preachers have always found reliable income by selling affirming nods to the choir. With the major news networks so politicized, I’m reminded of a joke I used to hear on the Nymex floor.  “Do you know how I can tell your lying? Your lips are moving”.

In his post, The Media Who Cried Wolf, Dave Perell describes the collapse of trust in not just the media but institutions in general. He explains how the high-peak, staccato news cycle backs us into “adopting a posture of learned helplessness”.

Fortunately, there are alternatives. In fact, the alternatives likely drove big media to a “we-must-fan-partisan-dumpster-fires strategy” out of commercial necessity. The alternatives are the unfiltered sources of information bursting from permissionless platforms. WordPress, Twitter, Reddit, Substack, Medium, etc.

Ben Thompson, borrowing a computer networking term, writes in Zero Trust Information:
“…once we get through this crisis, it will be worth keeping in mind the story of Twitter and the heroic Seattle Flu Study team: what stopped them from doing critical research was too much centralization of authority and bureaucratic decision-making; what ultimately made their research materially accelerate the response of individuals and companies all over the country was first their bravery and sense of duty, and secondly the fact that on the Internet anyone can publish anything.

To that end, instead of trying to fight the Internet — to try and build a castle and moat around information, with all of the impossible tradeoffs that result — how much more value might there be in embracing the deluge? All available evidence is that young people, in particular, are figuring out the importance of individual verification; for example, this study from the Reuters Institute at Oxford:

We didn’t find, in our interviews, quite the crisis of trust in the media that we often hear about among young people. There is a general disbelief at some of the politicised opinion thrown around, but there is also a lot of appreciation of the quality of some of the individuals’ favoured brands. Fake news itself is seen as more of a nuisance than a democratic meltdown, especially given that the perceived scale of the problem is relatively small compared with the public attention it seems to receive. Users therefore feel capable of taking these issues into their own hands.

A previous study by Reuters Institute also found that social media exposed more viewpoints relative to offline news consumption, and another study suggested that political polarization was greatest amongst older people who used the Internet the least.”

Embracing the Deluge

Both traditional sources and the decentralized free-for-all will coexist. While the unpermissioned voices are not without risk (looking right at you Jenny McCarthy), it is no longer possible nor desirable to put the genie back in the bottle. But to learn from those who will not be bothered by the indignity of a sitting for a test, you need a new strategy. You must funnel wide and narrow quickly. For every rare gem trapped in a non-conformist’s amber, you will sift through elaborate forgeries and well-rehearsed charlatans.

This is not easy. You cannot be an expert in everything. Modernity is too specialized and complex. Punters don’t even kick field goals. This reality underscores the necessity of tuning a good filter. This filter cannot be so strict it ignores the fringe. This filter must consider whether something is “because of” or “in spite of”. It must weigh incentives. Then know when to overrule the weights. You’ll find yourself rummaging through a mish-mash of minds with bias and brilliance. With strange values and foreign logic. And this filter needs to triage these sources as they wait to be verified. Make no mistake, this is a 21tst century skill. So how do you do this?

Build a Cabinet

The solution is to recruit help.

Build your very own cabinet of trusted advisors. Whose thinking resonates with you? Who can be verified by proof-of work? Curate what gets your attention. The sources you read, the blogs you RSS, the people you exchange ideas with, and the accounts you follow.

In the lyrics of the late Neil Peart:

“If you choose not to decide, you still have made a choice”

This exercise is not optional. If you don’t actively choose who you let in your mind, you will find squatters with bad agendas living in your head.

The risk

When you build a cabinet you are also creating an echo-chamber. The outrage that bounces back and forth in the mainstream is a convenient reminder that there are many people who disagree with you. It can be easy to lose sight of that when we swim in personalized feeds. This can be distorting when considering how we typically onboard beliefs. It’s common to believe that people examine facts then draw conclusions. Wrong. People form an impression first. An impression that by virtue of being first must be overtaken. It’s like a mental cortical reaction. How a fertilized egg blocks late-arriving sperm from fusing with it. Your brain is monogamous with the first gut reaction it meets.

To resist that, you need to date around. Curate from different beliefs. Let the ideas compete on their merit and see if you can be like an MMA fighter taking the best from each martial art. Yes, this can be risky too. You may find yourself DM’ing with truthers or scheduling dopamine-fasts. But if you never make that error you are probably too conservative. If you never fail you don’t take enough risk. (Some prefer the if-you-never-missed-a-flight-you-wasted-too-much-time-in-airports-being-early argument)

So find a unifying thread between all your follows that transcends belief compatibility. Instead, search for sincerity or decency or curiosity or being logical. These are traits of honest debaters. An honest debate is a performance even a truth-seeking detractor will appreciate. You don’t need to agree with all your follows. If you do, beware, you are dangerously cozy.

How to build a cabinet
Twitter is a great way to observe the battle of ideas. You unknowingly start to assign believability scores. Some folks sound smart, almost too slick, but you can’t tell because they are out of your field. You struggle to judge them. So you watch them. At some point, they might tangle with an argument you have a solid grasp on. Now you have more information. You mentally build a profile. You wade through personalities looking for truth. The people you let in will become trusted sources of info. Unpaid curators.  Friendly adversaries who can improve your thinking. And in the best cases, friends.

Almost everything I read these days has been a recommendation from someone who has good taste in the topic at hand. By curating your people filters well, you curate your content funnel downstream. This is the way to efficiently navigate the deluge of ungated information. In this new world, the average content is worse, but the best is unparalleled and more abundant than a gated system would produce. Just try to find me a better TV character than Antoine Dodson.

Examples of sources in action
Coronaviruses and infection behavior were fairly foreign topics until recently. Twitter helped me get to the heart of the matter much faster than reading Wikipedia or news articles. The nerd analysis was strongly underway by late January around the time the market made its initial swoon. Pandemics are low probability events. Reasoning about low probability events and strategies for dealing with exponential phenomena are not intuitive. But watching discussions amongst people who are strong in these areas makes more sense than watching the news or listening to the average journalist.

First came the nerdy exponential math and flattening the curve arguments. Then the game theory arguments. For example, understanding that if you need to be certain before you act then you will never win against a fast-moving adversary. One of my cabinet members is follow (and friend) Meddling Mage. He has elite-level game instincts (the guy literally has a Magic the Gathering Card made in his honor) so you pay attention when he re-tweets something like this.

Another example is Nassim Taleb. He has made a living thinking about black swan events and risk mitigation. When I care about those types of topics I’m going to seek his view. His wisdom: if you are going to panic, it is better to panic early. If you are right the people who thought you overreacted won’t be around. Not to mention the fact that the act of overreacting makes it more likely that you will end up looking like you overreacted. That’s some pretty diabolical reflexivity. This is also true of terrorism by the way. The measures you take against terrorism make it less likely to occur which make you look foolish for worrying about it when it doesn’t happen. The better it works the more unnecessary it appears.

Rationalists will recognize the Bayesian process. Use trusted sources and your own instincts to form priors. Update and iterate. In the post-mortem, score your trusted sources and recalibrate going forward. Getting meta about info intake is worth some effort.

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The Loudness Wars

A loud environment for information is also a compressed environment for information.

This is an outstanding article by Rusty Guinn about the loudness war in our media. Rusty is at Epsilon Theory where his team does neural net voodoo to analyze how narratives propagate throughout society. He uses the “loudness wars” metaphor from recorded music to discuss the media landscape. The first time I remember reading about loudness on music albums was when fans complained that Metallica’s 2008 Death Magnetic album sounded terrible because of the mix (I suspect many people think it sounded terrible for artistic reasons too). Turns out the loudness wars had already been going on for over a decade. The post is worth a read for that history alone.

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Besides my Twitter lists, my cabinet includes many online writers which you can find here. (Link)

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The Money Angle

Should you invest in stocks now?

With the market down 30% from the peak, I’ve seen many variations of this question in recent weeks. Mostly people who dollar-cost average by adding money from every paycheck wondering if they should increase the amounts they put in since the market is “on sale”. It’s an understandable question — I load up on Lucky Charms when they go on sale.

Ok, number one, nobody is qualified to answer this question for you, so let’s get that out of the way. While I hope the following will help you come to your own answer, the learning opportunity here is to get a better understanding of how markets work.

We need to address the mistaken presumption in the question. There’s a bit of a myth that the market is cheaper today. Well, this is true if you compare current prices to past earnings. But markets look forward. Lower nominal prices do not mean bargain. If fundamental deterioration was steeper than the price decline the market is actually more expensive. What a buyer is really interested in is whether the prices are a better value. If Trader Joes sells bruised bananas for half price, the cheapness is for a reason. Right now corporate America’s prospects are brown and soft. Is 30% the right discount? It’s a coin toss.

The market from a bystander perspective is nothing more than the fair point spread. In other words, whenever you put money in you are basically investing at the fair price. I’ll preempt some pushback to that by saying this perspective is a bit scope dependent. There are people who make money in narrow niches of the market that can be mispriced. Dislocations and liquidity frictions can mean opportunities for those experts. Just like if you were an expert in your local real estate market (have great contractor and banker relationships, got the look from the broker you grew up with, some other form of private info), market turmoil could lead to some easy layups. But zoom the scope out until you are a tourist and you are back to tossing fair coins.

This is always the case when you put money in the market. The price balances the buyers’ and sellers’ consensus of the future. Right now all buyers and sellers are meeting at prices that assume earnings in the future will be worse than they expected back in January. If you bet on Bucs to win the Super Bowl this year and Tom Brady gets hurt, the price to bet on the Bucs will get cheaper. The lower price to buy them is probably an equivalent value to the higher non-injured Brady price. It just reflects bleaker fundamentals.

Let’s belabor the point from another angle. The silliness of statements like “I’m a buyer of the market if it goes down to 200” when it’s currently trading for 3000. The unsaid assumption baked into that statement is “all else equal”. Well duh, all else equal, when the market is trading for 3000 there’s a stack of bids from 2000 to 3000. The only way your 2000 bid becomes in play is if the world is different. A bid is an inherently conditional statement. I wish I could have bought my house for $200k. But if my neighbor’s house ever goes on sale for $200k, it’s more likely we’re about pestilence deep into Egypt’s 10 plagues than I’m getting the deal of a lifetime.

Evergreen Advice

It’s widely understood that the average stock picker is no better than chance at figuring out what a value is. A full-time endeavor whose output is no better than chance. The conclusion is obvious. Trying to time or beat the market is a low-yielding object of attention. You cannot do this reliably or repeatedly. Not worth the brain damage to trying to decipher if the market is a value. You aren’t counting cards to overbet a stacked blackjack deck here.

Focus your energy on understanding your liquidity needs. Give that exercise its full due. Only you have visibility into your family’s income in a slowing economy. Make sure you have the cash you need to live. Nothing has changed about the fact that the market tempts you with a reward in exchange for volatility. If the risk is suitable, stick to your regular plan.

(Mandatory disclaimer…I’m not giving investment advice. I’m not qualified and have zero credentials.)

A word on market consensus right now

The debate rages on whether the market is oversold or has a lot further to fall. The market price collapses the expected value into a single number. There’s plenty of smart-sounding people with models and forecasts and opinions and degrees on both sides of that price. All of these ideas are swamped by the other market-based consensus: the volatility. The options market is pricing the 1-year standard deviation of the SP500 at 40%. This is about 2x the market’s typical confidence interval. Volatility is a more actionable input into your investment process because it directly feeds into the thing you should be thinking most about — your cash requirements for upcoming expenses. If that kind of volatility is intolerable given your upcoming liabilities (retirement, college, buying a house, and so on), then you are overexposed. Stock returns have always been an award with strings attached. Volatility is not just small print. It’s a double-edged feature. If it didn’t exist markets would not offer a reward.

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Climb Higher