Friends,
Older generations like to act like they knew their place. They put their head down, worked hard, and were thankful for what they got. Younger generations were told they were special. They were told they could become anything. Presidents, astronauts, inventors. Instead of staying in their lane, they were told to spread their wings.
You could backfit a superficially appealing defense for the helicoptered approach without much effort. We have fewer kids these days and they are more expensive to raise. If you have fewer kids, seatbelts and bike helmets start looking less like amenities and more like insurance policies. Shrug. Who knows? Intergenerational arguments are fun which should make you skeptical of their sway.
In the coming years, my parenting role will gradually evolve from simply ensuring survival to preparing my kids for the complications of adolescence and eventually adulthood. That means more prospective conversations. Discussion about paths in life and the nature of reality. By nature of reality, I mean its temperature. Is it cold and brutal or is it warm and fuzzy? What should I tell my children to expect? Which generation will I tilt towards?
The Dangerous Expectations of Snowflakism
Nobody really wants to put a lid on their children’s ambitions. We puff them up. We know self-confidence is self-fulfilling. And when they do well, they get positive feedback, and [especially in sports] get more attention which speeds their progression. A virtuous loop. Confidence mimics the recycled exhaust in a turbocharged engine.
This is not without risk. If the sky’s the limit, everything short is a failure. Is it possible our best intentions are actually a trap that will spring on our children once they are on their own? Did our cheerleading actually shield them?
Or us?
The Parable of the Talents
It’s an essay I wish I read when I was much younger. At this point, it just articulates what I already believe better than I could ever write. And as I learned from the personal stories in it, there’s good reasons I could never write that well. And there’s better reasons for why I’m ok with that. (Link) (Link with my highlights)
Some ideas:
1) When it comes to obesity, mental illness, and wealth:
the compassionate/sympathetic/progressive side of the debate is that depression is something like biological, and cannot easily be overcome with willpower and hard work. That success is due to accidents of birth, and the less compassionate side is that success depends on hard work and perseverance and grit and willpower.
But…
And the weird thing, the thing I’ve never understood, is that intellectual achievement is the one domain that breaks this pattern. Here it’s would-be hard-headed conservatives arguing that intellectual greatness comes from genetics and the accidents of birth and demanding we “accept” this “unpleasant truth”.
2) How trying to be egalitarian about ability is counterproductive.
And it’s would-be compassionate progressives who are insisting that no, it depends on who works harder, claiming anybody can be brilliant if they really try, warning us not to “stigmatize” the less intelligent as “genetically inferior”.
3) Genius is a gift.
It should be weighted accordingly in the moral calculus.
When we discuss being born on third base we focus so much on wealth. Yet, luck in athleticism, artistic ability, height, looks, brains and temperament are under-attributed. We only seem to give them their due when they’re freakish. That’s ignoring a lot of causation that has little to do with merit.
4) Should we get medals for things we find easy?
We are graded on peer curves. But the ideal is to grade on a curve to yourself. One of my closest friend’s father didn’t motivate him with rewards or punishments. By simply conveying disappointment, “you’re better than this”, my friend understood. The real benchmark is not external.
It’s not just honest to grade our children on their own curves, it’s compassionate. Compassionate doesn’t mean soft. It penalizes sandbagging. It rewards grit. And it calibrates expectations. If happiness is the gap between reality and expectations then mercy demands we narrow it.
5) Humility and self-forgiveness
The deal I came up with was that I wasn’t going to beat myself up over the areas I was bad at, but I also didn’t get to become too cocky about the areas I was good at. It was all genetic luck of the draw either way. In the meantime, I would try to press as hard as I could to exploit my strengths and cover up my deficiencies.
6) Dignity
The moral seems to be that if you take what God gives you and use it wisely, you’re fine. The modern word “talent” comes from this parable. It implies “a thing God has given you which you can invest and give back”. So if I were a ditch-digger, I think I would dig ditches, donate a portion of the small amount I made, and trust that I had done what I could with the talents I was given…
If everyone is legitimately a different person with a different brain and different talents and abilities, then all God gets to ask me is whether or not I was Scott Alexander.
This seems like a gratifyingly low bar.
To think everyone has similar ability is not just wrong, it’s evil.
Echoing much of the same lessons, here’s what Jordan Peterson told Tyler Cowen:
I don’t think that people want to understand the rule of raw general cognitive ability because it’s such a determining factor, and it’s hard for people on the right and the left to accept it. People on the right think there’s a job for everyone if they just get off their lazy ass and do it, and people on the left think anybody can be trained to do anything.
Both of those things are seriously wrong. One example that I often use is that the American military decided a couple of decades ago that it was illegal to induct anybody into the armed forces who had an IQ of less than 83. That’s an unbelievably important thing to know because that’s about 10 percent of the population.
You’ve got to understand what this means. It means that a very large organization that’s desperately hungry for manpower, especially under circumstances of extreme crisis, is unwilling to accept 10 percent of the population because they have determined — after 100 years of doing absolutely everything they possibly could to the contrary — that there isn’t a single thing that they can train someone like that to do that’s not counterproductive.
It’s perfectly reasonable to think every person is created equal without thinking they have equal economic value. Admitting this is compassionate. Admitting this concedes the limits of capitalistic idealogy. It’s ironic that the progressive viewpoint misses that. I wonder if they will notice the own-goal.
The Money Angle
Negative Prices
Oil prices for the prompt future traded negative this week. Matt Levine covered it well all week, I won’t re-hash. I just wanted to explain negative prices a bit more since it sounds crazy. It’s not. Trader lingo is oil was “trading for a credit”. In other words, you get paid to own it. You get paid to own it because the inconvenience of owning it exceeds its value of using it. If I brought some radioactive uranium to your house you might pay me to take it away. Even if it has lots of value in the right hands.
What are other examples?
- Asbestos. If you google “price of asbestos” you only find prices to “remove asbestos”. This was not always true.
- Old beater cars. My Highlander costs $500 to register every year (thanks California). At some point, the cost to carry a car can be greater than its value. If you couldn’t give it away you are happy to pay someone to take it.
The Wider Lesson of Questioning Assumptions
And if you have failed to examine assumptions in these crazy times you are wasting an opportunity to think outside the box about risk. Interactive Brokers failed to realize futures could trade negative (this oversight cost them $88mm). Well in your model of what a rental property is worth have you considered what happens if a law circumvented limited liability? What if a law changed that made insurers raise prices dramatically or even withdraw from markets? What would that do to affected properties? Modernity if nothing else appears to be hyper-optimization on the stability of assumptions which may turn out to have an expiration. Assumptions that outlive their convenience.
The Curious Case of USO
When it comes to abstractions built on faulty assumptions take a look at the U.S. oil fund more recognizable by its ticker, USO.
Until this week, it held near-dated futures but when those traded as low as $7 a barrel, USO was a few circuit-breakers away from liquidation. Since oil futures we learned can trade below zero, you could argue that USO had about a 25% chance of going bankrupt if you looked at the delta of the 0 strike put.
USO decided to halt trading to announce it would roll into longer-dated futures that were trading near $20. In other words, they changed their mandate (which was legally within their right according to the prospectus) to give themselves more distance from zero. An act of self-preservation that more than halved their chance of going bankrupt.
So the fund managers extended USO’s life. They have a management fee to clip so their motivation is clear. But should USO exist?
USO is a public fund that cannot trade below zero but holds an asset that can. It seems like a mismatch of legal structures. USO posts margin for the oil futures it holds with a portion of the proceeds from what investors have paid for the fund. At negative futures prices, USO has no way to collateralize the futures losses since it cannot go into shareholders’ pockets for more money.
(Side note: Assuming it doesn’t gap down, my guess is the CME or their clearing broker forces them to delist for cash first. After all, who is on the hook for the future’s losses if the prices go negative if not the shareholders).
Hockey Stick Diagrams
At risk of giving CFA and Series 7 vets PTSD let me use USO to demonstrate optionality. Oil futures can trade negative. USO cannot. If you buy shares of USO and oil futures go negative nobody can ask you for more money. Your shares just go to zero.
So USO can only go to zero but futures can go negative. For the visual, let’s look at the payoff diagrams.
- In the first pair we look at the payoff of buying oil for $5/barrel using futures OR USO.
- In the second pair we look at the payoff of shorting oil at $5/barrel in both cases.
- In the 3rd chart, we take advantage of the fact that USO can only go to zero. Read ahead to see what happens.
A savvy reader will see that the last diagram is the payoff diagram of a put option struck at the zero strike price. And you’ll note that it’s a free option. There’s no oil price at which you lose money.
Well, markets aren’t stupid. USO has been trading at a premium to NAV. Options have premiums.
Questions for advanced readers
1. USO’s premium to NAV has varied greatly this week from 10% to almost 40%. What do you think it’s worth? What drives the fair value of the premium?
2. USO is a basket of futures plus a premium. What does that mean for the volatility of USO? (Hint: there’s some Inception type stuff going on here)
3. The poker question. Can you form a view on USO volatility based on the incentives of the fund? How about the incentives of the risk holders?
Have fun thinking about it. You can share your answers with me but full disclosure, I will not confirm or disconfirm. Your only upside in telling me is I might be impressed.
On Trading and Aptitude
I know there are many younger readers of this letter. I’m not a quant. I took Calculus BC in HS and one stats class in college (although I do want to take more math online — I’m not advocating ignorance). Many of you are very strong in math. There’s a perception that options are about graduate degree stochastic calculus and differential equations. There are research-oriented jobs for which this is true. These jobs require raw mental horsepower and lots of training to tackle technical problems.
On the trading side, don’t get discouraged by academic notation in option papers. Here reasoning and numeracy are the pen and hammer. The tools of the trade. I should add for college students looking to get into trading coding is now table stakes. You need to have something to give in exchange for learning. The business is harder than ever, fetching lunch is not enough. (I know what you are thinking. Every generation in trading always thinks “if I was just born 10 years earlier it would have been so much easier to rake in the bucks”. It’s as stupid as a 300 lb lineman who wishes he could have come up in a time when linemen only weighed 250. He’s committing a time travel fallacy where he gets to go to the past with knowledge of recent innovations in diet, drugs, and exercise). Continuing on. The ability to code is also self-reliance. My own ability is very limited and I’m sure a junior will look at me the way I used to look at older traders who struggled with Excel. Circle of life.
Perhaps more so than the pure quant roles, in trading there’s a lot of room for grit. The analogy is as simple as the fact that most poker players are not quants, but there’s no doubting their discipline, endurance, ability to focus, number-sense, and logic skills. Your liberal arts (and no economics and business degrees are not science) degree is not a life sentence in ops.
(To be clear, this is not an affront to ops…my wife went that way. In fact, there is a whole conversation to be had about why a career in ops can be the more lucrative route. But it’s a parallel route and if a person wants to trade and take risk, anything else will feel like they failed even if objective standards might say otherwise).
On the other hand, tying this all back to the Parable of the Talents essay above — trading is not for everyone. It’s not even for many. You can do anything, except for what you can’t do.
Last Call
An essay we all need from time to time
More To That on self-doubt (Link)
Highlights:
1. Self-doubt can cripple but also acts as a barometer for what you really care about.
2. It’s a product of comparison with others. Not from the self
- This is why the line between inspiration and doubt can be thin – the very people that inspired us to pursue a calling can also make us doubt ourselves when we don’t think we’re reaching what they have attained. Ultimately, Self-Doubt is more about how you view your relationship with others, and less about a battle with yourself. Once we’re able to understand how our view of others affects our sense of progress, then we are better equipped to handle the fear that Self-Doubt throws at us…We are constantly comparing the completed works of others to the jagged and messy routes of ours
3. Why do we overestimate others’ abilities, and underestimate our own
- The viewer can only see the finished product – the polished result that is being presented to the general public. The viewer doesn’t see all the failed prior versions, the countless hours of practice, the trashed drafts, or the sleepless nights that went into building what’s on display.
4. Self-doubt accumulates because it can inject itself in many places of the creative process
5. This ability for Self-Doubt to sound like the rational voice of reason is its grand finale
The greatest tactic it uses time and time again to prevent people from doing work they love and from reaching their potential. But like all the other nonsense it spews, it’s just one big devious trick.
The thing about Self-Doubt is that it lives solely in the now; it knows nothing more than what can be seen and experienced at this precise moment. It can’t envision any sort of future where results grow over time, where your confidence builds with each thing you make, and where your insecurities soften as you progress onward.
Instead, it takes all the frustrations you’re experiencing today and makes it feel like things will always be this way. It sees that you spent ten hours making a blog post that only five people saw, and will convince you that every single post you create afterward will have the same result. It tells you that today’s results will be tomorrow’s inevitabilities, and that these results will extend out to all the months and years to come.
But of course, the truth is far from that. All meaningful endeavors and careers take time to shape and develop, and this type of long-term thinking is something that we all have the power to understand.
Quick Hits
1) Parents be nodding. (Link)
2) Kids feel the same. A letter one of our friend’s kids wrote this week. (Link)
2) I subscribe to lots of newsletters. From the letters I’ve found in 2020 so far these are my favorite:
- Kneeling Bus by Drew Austin (Link)
- I’m Late To This by Myles Udland (Link)
- Thoughts In Between by Matt Clifford (Link)
- Tiny Newsletter by Gary Basin (Link)
From my actual life
Gratitude
A gratitude hack we use around here: Instead of saying “I have to do X”, remember “you get to do X”.
Honesty
An honesty hack we use around here: If you say “you don’t have enough time for X”, you will get attacked. You choose not to prioritize X. We all have the same number of hours.
Yes, there are some serious fires that sometimes need to be put out. Yes, sometimes the thing you have to do is really not a choice. Those times don’t require excuses. These hacks are for the other 99% of the time.