I can be vulnerable to reading pop-science books and articles. This is against my better judgment. The cynic in me pretty much imagines a good writer or mediocre social scientist latching on to some tidy conclusion and building a career as quickly as they can on it. Authors know there is a first-mover advantage in ideas. Lodge grit, growth mindset, or ten thousand hours into people minds and they’ll:
a) ignore the deluge of counterevidence that follows it.
b) pattern-match this satisfying knowledge to everything they see.
It’s a race to get on as many podcasts as possible before Alexey Guzey stamps your work with the “doesn’t replicate” disclaimer. It’s not that these things are definitely disproven so much as they are believed in unjustifiable proportion to their evidence thanks to a persuasive advocate. I tend to be more sanguine about the grifting. After all, the authors are as susceptible to confirmation bias as the audience and I prefer to be charitable in my perceptions unless proven otherwise. I can hear some of you murmuring that a real scientist should be actively trying to minimize their confirmation bias. Look, I’m just rationalizing my infotainment, cut me some slack.
Alright, so we all agree airport nonfiction is Chinese food. Eat a salty meal, wash it down with a fortune cookie insight. Well, I came across a convincing post that gave me a free pass to indulge self-help without the indigestion.
From TJCX comes How To Read Self-Help (Link)
I urge you to read it, it’s pretty entertaining and calls out books you have definitely read. My own takeaways and thoughts below.
Self-help as wisdom
From Paul Graham’s definition of wisdom : “But this is a hallmark of wisdom: it’s trivial to read but nearly impossible to put into practice”.
Good self-help is actually wisdom. Wisdom is general. The author writes:
We’re embarrassed by self-help because (at its best) it’s full of banal platitudes—but these are platitudes because they’re so general. Specific rules like “if your boss likes golf and you want a raise, ask for it while taking her golfing” are too specific to be wisdom.
The reason business books often sound like self-help is that the conceptual demands of business often require us to recruit wisdom not specific knowledge.
…“business” has so much conceptual real estate that solving “business” problems requires tools that are closer to wisdom than to knowledge—no business book can predict what sorts of situations (businesses, market conditions, etc.) the reader will encounter, so instead it offers general, obvious-sounding rules.
Rules for reading self-help
- Read self-help that makes sense
A good rule of thumb is that arcane wisdom is rarely right. A good corollary here is that old self-help tends to be better, because:
1. Pseudoknowledge is eventually exposed
2. Wisdom tends to be stable over time
This reveals an important point secondary point. It means real wisdom is actually commoditized and value is in the communicator. This is why I’m a fan of people writing even about well-trodden material. It’s not such an exaggeration to believe the best self-help is ancient Greek philosophers reformatted to make maximal impact on a glossy page. Not everybody wants to read Plato. I write about options and finance crap that is covered everywhere. But if you get 1% of your quilt of understanding from 100% of my effort it still makes a difference.
Your work is content + voice and if we are certain about anything it’s that how you say is often more important than what you say.
- Specific advice is probably overfit
Anecdotes and examples make the lessons stick. But they should not be confused for proofs of the lesson. A friend once recommended me a self-help book in spite of the anecdotes which he found to undermine the strength of the case. You could say he’s so inoculated against charlatans’ techniques that his skeptical white blood cells reject any anecdote-shaped intruder.
- Don’t be embarrassed
We (the cognoscenti) are terrified of sounding trite, of repeating obvious truths, of saying things that have been said for millennia—so we laugh nervously at phrases like “accept yourself,” or we utter them with a certain ironic distance—but the reason these sayings sound trite is that understanding them s trivial, it is easy and available to anyone, regardless of social circle or education. But practicing these things is incredibly hard.
- Be patient
Self-help is hard…Reading wisdom is the easiest part of becoming wise…we read a lot of self-help because we need to. As I’ve already mentioned, we need lots of examples to drive this wisdom home. We should be more forgiving of self-help (the genre) and more forgiving of ourselves.
The Money Angle
Sunblock stock (SUN) makes 10% in a sunny year. Loses 2% in a rainy year.
Umbrella stock (RAIN) loses 2% in a sunny year. Makes 2% in a rainy year.
- The year is 50% to be sunny.
- The risk-free rate is 0%
A few things to think about
- SUN has a higher expected return and Sharpe than RAIN
- We can see the stocks have -1 correlation
- There is an arbitrage. You can put 50% into each stock and earn 4% in sunny years and 0% in rainy years for an EV of +2% on the portfolio
What can we expect?
The market prices of these stocks will adjust.
Let’s keep it simple and presume:
- SUN’s price stays constant. Its returns characteristics are unchanged.
- RAIN’s price is to be bid up so it returns only 1% in a rainy year and loses 3% in a sunny year. Note that RAIN’s expected value is now -1% per year instead of zero.
Why would the market bid that much?
This is the subject of my latest post, You Don’t See The Whole Picture. (Link)
Expect to find:
- A simple math example to show how the diversification benefits of an asset can benefit a portfolio EVEN if the asset has a negative expected return
- Examples from the market-making and option trading worlds which describe the “supply chain of edge”. When you see prices that don’t make sense it’s possible you don’t see the info embedded in a higher link in the chain. Whether that’s due to analytical or structural limitations, incentives, or something else is a question you need to consider.
Some Musings I Left Out
If I felt comfortable larping as an actual businessperson I might have included a few more thoughts in the post:
ComplementsFB can pay up for WhatsApp because they are the most efficient buyer. So the price to a bystander, who can’t see Zuckerburg’s dashboard, looks insane. And in fact, in isolation, the price might be insane. But to the party where its value is highest, it can be a bargain.
Disney paid $4b to buy Star Wars rights. It was a win/win for Lucas and Mickey. The synergies lower the effective price.
Sometimes tech giants scoop up small firms as acqui-hires or to leap-frog R&D time/cost. But I imagine sometimes it’s just defense. Kill Simba before he grows up to inherit the Sahara. Once again, the price looks high in isolation but this “strategic buying” is informed by a wider context.
A Lower Bound
The stand-alone value of a business is the intrinsic value of a call option. But, there is a non-zero chance that some combination makes the asset worth even more. An excessive price is a mix of intrinsic and extrinsic. Going further, is it possible the extrinsic premium increases in proportion to connectivity?
Louis Pasteur wasn’t doing R&D at chocolate chip cookie company, but he would have been paid more at a Nabisco than at his local French universities. But they need to find each other.
In a connected world, awash in capital, the DCF of any business in isolation might be just where the bidding starts.
The most practical implication of these ideas is that you are not paid for diversifiable risks, so you incinerate theoretical money when you don’t diversify. This is true regardless of your actual investment performance.
The Diversification Imperative is a reminder of the only free lunch in investing. (Link)
- Twitter got hacked this week. Verified accounts like Obama blasted a scam requesting BTC in exchange for a promise to send even more back. The Nigerian email for a new generation I guess. Anyway, Byrne Hobart’s post is an amazing breakdown of the scam, why it was stupid, how it could less stupid, and why the fact that it’s hard to make it less stupid should actually comfort us all. The parallels to his logic could be extended to debunk conspiracy theories generally in case you find yourself swept up in them as a habit. (Link)
I like to think I played a hand in getting Byrne to un-paywall that post. I sub to his daily letter. It’s free on Fridays if you need a sample. If you read Moontower you already know he’s one of my favorite finance writers.
- Here’s a fun post about storytelling from Taylor‘s outstanding weekly email. Taylor’s blurb verbatim:
Storytelling comes naturally to humans, but since we live in an unnatural world, we sometimes need a little help doing what we’d naturally do. Dan Harmon is the creator of the TV shows Rick and Morty and Community (two of my favorite shows of all time…) and he lays out how he thinks about story structure and writes his episodes. (Link)
That link is to the first page in a multi-part series and it’s worth going through it. I should add that I tried watching a random episode of R&M and felt too stupid to understand it.
- Investor Chris Schindler draws a very intuitive link between assets that are very volatile and poor future returns. That probably sounds counterintuitive to people who equate risk with reward. The nature of auctions plays a role in that process. There’s a cool cardgame that isolates that idea. It has an art collector theme and some tricky dynamics. A quick thread. (Link)