Moontower #75


A good friend shared this in one of our Whatsapp chats.

Tsk, tsk.

Classic #chartcrime. I don’t want to be too hard on my friend, after all, Bay Area real estate has certainly co-moved with the stock market. But this chart is intentionally heavy-handed. The axes don’t start at zero which should immediately cause you to wonder “what’s that smell?”

Look a little closer and you see the dual vertical axes are out of proportion. The blue axis goes from $400 to $1,100 while the red makes a much larger percent jump from $7,000 to $29,000.

Getting fooled by a chart is a forgivable offense. The friend who shared that chart has a grad degree in physics and extensive business and tech experience. It’s tiring and impractical to slow down at every chart we see. Fortunately, spotting chart crimes is just a matter of practice.

For financial #chartcrimes I recommend this thread by my buddy Jake who ruthlessly collects them.

Every chart you see was created by someone who was framing a story. Every chart has intent. Design choices are never accidental. This doesn’t mean every chart crime is nefarious. Often they just reveal how people have fooled themselves.

Here are 2 common failure modes:

  • Spurious Correlations

    These are best explained by simply looking at ridiculous examples. Call it lazy pattern-matching or uncritical data-mining. Correlation/causation errors are in our DNA. I’m convinced there’s no solution to this. And even when we think we isolate causation we are prone to being exactly wrong. A recurring theme in Moontower is we often say “because of” when we mean “in spite of”.

  • Invalid Comparisons

    What can cause 2 quantities to be non-comparable? One series might be “stationary” and the other “non-stationary”. These are technical words so I feel like an imposter even writing them. The ELI5 gist of a non-stationary series is one that does not have a stable mean. For example a stock price index or your age. These are quantities that trend (we can debate the stock one, but if you believe in inflation at the very least the price is subject to the trend of the denomination. All prices are relative to a denomination. I can compute the price of oil in USD but I could also compute in terms of eggs per barrel, diplomas per barrel, or Pokemon per barrel).

    Examples of stationary or stable quantities would be how many hours you sleep, how many times you go to the bathroom, or returns. So it would not make sense to compare the price level of the SP500 which has a mean which changes over time with the level of the VIX which is mean-reverting.

    So when making comparisons it’s important to consider what drives the measurables. If the drivers do not come from the same distribution or behavioral class you might be fooling yourself.

Just before I was set to blast out the newsletter I learned this is the “most liked” tweet of all-time. That’s informative but it does make you wonder what the most liked tweets of all time are normalized by number of active Twitter accounts. And even then you’d like to further account for Russian bot accounts. A common way to normalize a non-stationary series to a more stationary one is to normalize it with a ratio. GDP vs GDP per capita. Inventories vs Inventory/use.

The Money Angle

One of my favorite follows on #voltwit is @SqueezeMetrics. The account more colloquially known as “the Lemon” has a personal crusade against using implied vol to refer to option prices. Recall, volatility is just the asset’s standard deviation of returns. It’s usually an annualized number. So if the SPX has a 15% volatility that just means you expect the SPX to return +/- 15% about 68% of the time.

“Lemon” prefers using the average expected move, more commonly known as the straddle.

Thus tweeted the Lemon:

I think the convention of turning the straddle price into an annualized standard deviation is obfuscatory. Straddle gives you the average move that’s priced in. Why complicate that?

I can see how the distinction between average move (aka the “straddle”) and standard deviation (aka the “vol”) is “obfuscatory”.

So let’s clear it up.

Expect to learn:

  • The math relationship between the straddle and the volatility
  • How the distinction relates to win rates and expectancy
  • Why the spread between the straddle and volatility can vary in turn altering win rates
  • My own humble opinion on the matter

Continue to my latest post Straddles, Volatility, and Win Rates (Link)

Last Call

2 outstanding productivity links this week

  • Anne-Laure’s How To Pick The Right Note-Taking App

    We all organize and retrieve information differently. There is an absolute zoo of tools to choose from. This post is great because it helps you narrow down your choices according to your style. Are you an “architect”, “gardener”, or “librarian”? Personally I use Notion. George Costanza would approve. (Link)

  • Nat Eliason’s automations to grab and organize podcast notes is brilliant.

    People who “take notes on podcasts” is a pretty specific niche but I suspect overrepresented in the readership of this letter. I haven’t been able to try Nat’s tech stack because Airr is still Apple only. But you should at least check out this workflow. I think this is just the beginning of “audio highlighting”. (Link)

2 amazing minutes of Bill Burr’s play-by-play of a drummer who showed up at the wrong gig. Assist to Avi for the find. (Link)

From my actual life 

We all know a story of some actor whose real life personality is nothing like the role they play on TV. We are 2 degrees separated from the actress who plays “Darlene” on Ozarks. We hear she’s the sweetest lady ever in real life. On the show, she’d shoot your balls off. I remember once reading about the actress who plays “Suzy” on Curb Your Enthusiasm. She lives in Brooklyn and apparently whenever she gets recognized in public, fans just ask her to curse. Just say “Larry, you four-eyed f_ck!”. In reality, she couldn’t be any further from Jeff Garlin’s caustic wife on the show.

Well this weekend, we were pretty bummed about Chadwick Boseman’s passing. Covid season has meant a lot of Marvel movies on loop. Max was in a phase for awhile where he’d declare “Wakanda forever” before leaving the room. I’m not familiar with Boseman’s body of work other than Black Panther but his portrayal of T’Challa stands so tall. He’s magnetic, charming and inspiring. You cannot help but feel that Boseman’s real life character is bleeding through. You wouldn’t want to discover the negative version of the “Darlene” or “Suzy” surprises.

Fortunately, the man, Chadwick Boseman, would make T’Challa proud. Some of my favorite discoveries:

  • The “Black” Jeopardy SNL skit (Link)
  • Boseman talking about his relationship to kids with terminal cancer. He was quietly battling Stage 4 colon cancer during this interview. I’m not crying, you’re crying. (Link)
  • A 90 second clip from a commencement speech he gave. I’m sure you don’t need to be religious to hear the message. Last 30 seconds were especially resonant. (Link)

Public discourse, by its nature, promotes glory and underappreciates silent heroism. It’s why the Humans of New York project you see on social media is so special. It’s about the unheralded. Appreciating the day-to-day struggle that people privately deal with makes the world feel more relatable. It connects us in ways that we need more of. I’ve mentioned this in various ways in Antidote to Abstraction and my eyerolly take Avoid Boring People?.

Boseman was a celeb who provided a rare example of silent leadership.

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