Moontower #85

Friends,

Rewind nearly 3 months to August 20.

It was handy that I had a KN95 mask lying around since it was 2020. I needed it that day and for the next several weeks. We were trapped inside due to smoke and the AQI in my garage office would make your eyes tear.

This was the 3rd year in row that you needed to set your browser home page to purpleair.com if you live in CA. And it wasn’t even the heart of fire season yet, when we could look forward to planned PGE blackouts. Grrr. We already live on a faultline, I didn’t need more Old Testament-style risks on my land.

Sprinkle in the talk of yet higher CA taxes (the state pension situation is not improving despite being the epicenter of a 10 year bull market), word that some major insurance  companies wouldn’t underwrite home policies in the Bay Area, and the fact that WFH meant we could live anywhere and I felt a bit of an emotional tidal wave…

Why do I live here?!

Before I take one step forward let me caveat this. I love living in CA. I won’t list the reasons but I often liken it to a hot girl — you wouldn’t tolerate her behavior if she was less than a 10.

(The less crass version is a paradox of plenty — companies in super profitable industries can afford to be poorly run. Oil-rich nations use resources as crutch to mask imbalances. Byrne Hobart likes to say “never lend money to a country with good cuisine”, No matter how bad CA treats you, San Diego is always 72 degrees and sunny.)

So if I’m not in some smoky, reactionary mood I get why we live here. If it was any less awesome, we’d be long gone. Everyone I know who lives here is aware of the downsides. Every Californian has a wandering eye. Gee, that Incline Village sure has a sexy zero state tax.

But the wandering mood lingered longer that morning. That my entire team just high-tailed it to Denver didn’t help. At dinner that evening, I raised my concerns to Yinh. Her family is here, her mother lives with us. Her perspective always talks me off the ledge.

Not this time. She not only agreed, but having a hair-trigger bias towards action, Yinh texted a realtor friend to come by the next day.

A month later our house was on the market. It sold in a weekend (the city exodus meant a feeding frenzy in the burbs where prices ripped 10-15% in 3 months. A pandemic-spread-via-proximity broke the home price to GDP correlation).

So last week I didn’t write because we were busy moving to a rental in the same town. We don’t know where we will end up. Between distance learning, WFH, and the chaos of 2020 we decided we wanted max flexibility and optionality. The inertia of our script was stirred this year. We didn’t want to waste the chance to embrace the chaos. The chance to reconsider and test our values.

Owning a home requires mindshare and can anchor decision-making. I won’t say that’s true for everyone, but it did for us. We spent a lot of money and effort improving our home over the past 5 years. And yet, I couldn’t manufacture a shred of emotion when we sold it. No nostalgia. Staring at the home my second son was born in, I expected to feel something. Looking at the yard where we threw big summer birthday pool parties or watched Zak learned to ride a bike, I expected more. But alas there was nothing. When I canceled the home policy and signed up for renter’s insurance they asked me how much coverage I wanted. And it occurred to me, I don’t care. There’s almost nothing I own that I actually care about or couldn’t just replace. Everything that matters is either made of carbon or megabytes.

We moved from a cool, modern ranch house to a Boogie Nights-esque 60s style home that has not been updated.  Mirrored walls, black toilet, shag carpeted bathrooms, no closet space and a setup that required us to have the kids share the master while Yinh and I use a small-sinked, hallway bathroom that reminds us of the modest homes we grew up in. We haven’t seen a shower curtain in 15 years. On paper, a major downgrade.

But the ranch has a cabin feel bookended by fireplaces, bordered by old beautiful redwoods and Japanese Maples. It’s so California you want to take a psychedelic dip in the hot tub while White Rabbit plays in the background. I actually love it. And I really do love CA.

I guess I just have commitment issues.

The Money Angle

In my short post Is Volatility A Risk?, I urged that any definition of risk:

should be evaluated by its usefulness. Any single definition is incomplete and insufficient for making an investment decision.

Here’s a specific case.

• How The Sharpe Ratio Broke Investors’ Brains (Link)
  Institutional Investor

  This is a good overview the shortcomings of Sharpe ratio, most of which should be well-understood by anyone who has computed a standard deviation.

  I’ll expand on some of the less obvious points:

  • If you annualize Sharpes from monthlies you risk overstating it if the strategy returns are serially correlated.

    Why? Because you are understating the vol which you can no longer assume scales at the square root of time. This is a complicated issue because auto-correlation, while easy to compute, is itself subject to variation.

  • Pardon my yawn, but apparently option sellers game the Sharpe ratio fetish by selling nickels in front of a steam roller. If the image of straw allocators investing on the basis of a single measure keeps you up at night then, sure, sound the alarm. Skewness can hide within vol.

    A quick demo:

    a) Bet $1 on a fair coin
    b) Bet $.33 on heads on a coin that costs 9-1 if tails but has 90% of coming up heads (still a fair coin).

    These bets have the same vol ($.33 creates risk or vol parity weighting) but the payoff shape is materially different.

  • There are popular alt ratios like Sortino, Calmar, and Omega which try to correct for skewness by penalizing drawdowns and giving hall passes to upside volatility. These are not panaceas since they correlate strongly to Sharpes. This reinforces the idea that you can’t compress the nature of any strategy into a single number. (I feel the tendency to pretend that anybody evaluates investments so naively is a straw man drubbing of allocators signaling no deeper handle of the problem than an influencer who read Taleb on a cross-country flight. Like do you even know an allocator?)
  • A point the article didn’t mention: you can have high Sharpe strategies that cannot generate high returns. Like investing in T-bills. If the cost of levering the strategies is prohibitive then Sharpe would yet again not be the only number you can look at.

Ok, I’m done suspending my disbelief that anyone uses a a single metric in isolation to decide anything of importance. The post is worthy reading for new investors who just discovered Sharpe before they run out and impale themselves on it. I hope my additions made it a touch more interesting for the initiated.

Last Call

• The Job Of A Milkshake (YouTube)
  Clayton Christensen (h/t Khe)

  The late HBS prof reveals some surprising facts about the habits of people who buy McD’s milkshakes.

Then…

This post shows why you don’t need a manufactured solution. You don’t need a “milkshake”:

• Decomplication (Link)
  Nat Eliason

  We all know the concept of simple but not easy. It’s the truth to everything worth having. Good relationships, good health, good output. You can’t fool yourself and there’s no shortcuts to these things.

  It’s easy to forget that because we want to forget that. It’s inconvenient. So we tie ourselves in confusing webs of apps, CBD and expensive mattresses to figure out how to do something babies just do: sleep. And that’s just one example.

  We succumb to:

  The Law of Artificial Complexity: As the number of people experiencing a problem increases, so will the artificial complexity of the solution.

  We need to remember: 

  The Law of Decomplication: The more people that are experiencing a problem, the simpler the solution should be.

  So strip the problems back down to their essence.

  • Losing weight: People without access to food get very skinny. If I eat less, I will lose weight.
  • Networking: Famous people tend to hang out with other famous people, or people as accomplished in tangential fields. If I want to get to know someone I respect, then I should do something that puts me on a level where I could be friends with them.
  • Productivity: The goal of productivity is to get more done, and the biggest reason you don’t get things done is that you’re doing other things. If I remove the ability to do other things, I’ll do the thing I’m trying to be productive on.
  • Sleep: Removed from modern society, sleep is not a problem. If I can create a sleep environment as if I wasn’t in modernity, I should sleep fine.

From my actual life