YIMBY Paradoxes

All sensible policies must contend with trade-offs between equality and efficiency. There’s a tension between between optimal resource allocation and, well, basic fairness. Textbooks call it positive vs normative economics. Progressive taxation, honors classes, pre-existing conditions. These topics are neck deep in these trade-offs.

Housing Policy Cage Matches

Housing policy debates are a pure form of this polarity between economic and social fairness. Unfortunately, these debates become charged cartoons pitting Nextdoor superposters who pay $500/yr in property taxes on their 5 bdrm peninsula homes against tech-worshipping YIMBY Nudgers.

It’s understandable that housing discussion dispenses with nuance. There’s no room for hedged statements when you have a book to talk. And everyone has a book to talk. Especially near expensive cities where the stakes are high because shelter is either your largest expense or biggest “investment”.

Even if I pretend that incentives don’t dominate your stance, housing is still going to be a charged issue. Humans value proximity to one another. And shelter is known as an “excludable good”. You physically cannot stand on the GPS coordinates that my body occupies. We should always expect the means of allocating proximity to a nucleus of human activity, ie cities, to be a rilesome topic.

More Of A Puzzle

I’ve recently become a renter again, but I’ve bounced back and forth between owning and renting for the past 15 years. The only thing I have allegiance to is telling people they should not organize their life around trying to own because “it’s something an adult is supposed to do” or “rent is throwing away money” (see my post The Homeownership Fetish).

Still, when you live in the Bay Area, you cannot avoid the NIMBY/YIMBY discourse that surrounds you. I’ve always struggled to form a coherent opinion on it as any extreme stance capsizes the efficiency/equality ship while a sensible middle stance is a paradox in practice (and in practice is what matters).

I recently discovered a post that articulated the pudding of contradictions that is housing debate better than I understood them. The bummer is its conclusion is basically a shrug. Something I’ve come to accept about shrugs is they usually mean range of policies that reasonable people can agree to is fairly wide. The good news is we can feel more confident dismissing strong views. The sanguine news is that the local maxima is not a single point but a line of unsatisfying compromises.

On to the post (thanks to Taylor for sending it)…

Home Is Where The Cartel Is (Interfluidity)
Steve Randy Waldman

On the contradiction…

  • There is a fundamental contradiction at the heart of housing capitalism. We encourage people to take on highly leveraged, undiversified exposure in homes with promises that they are good “investments”, meaning they will increase or at least retain their values over time. We also claim that housing is a consumption good that should be efficiently provided, a good for which competitive markets should expand supply to drive prices down to a technologically declining marginal cost of production. Housing cannot be both of those things at once. Much of the work we have to do if we wish to increase housing supply is to deemphasize the housing-as-investment narrative in favor of housing-as-consumption-good.
  • If you buy a home in San Francisco today, the last thing you want to happen is for the housing affordability problem to be solved next year. Residential property is expensive in power cities because it includes the capitalized value of the large incomes streams one can earn from accepting tenants.

On homeowners ironic position as anti-capitalists…

  • Existing homeowners bought into particular neighborhoods in large part because of their “character”, which includes nice-sounding things like walkability or “charm”, as well as not-so-nice-sounding things like access to exclusionary education. “Zoning reform” is an anodyne way to describe an expropriation of those customary rights. It amounts to diminishing residents’ ability to preserve or control the evolution of their neighborhoods, in order to challenge the exclusivity on which the value of existing neighborhood amenities may be based.

On the YIMBY case…

  • Housing supply constraints are to blame for high rents in powerhouse cities, and may constitute an important drag on productivity growth and a cause of macroeconomic stagnation.

On the YIMBY pro-market framing…

  • “Market urbanists” present themselves as capitalist deregulators but I think they can be described with equal accuracy as radical redistributionists.

On the futility of this framing…

  • Homeowners understand their actions not as monopolizing the housing market but as protecting their homes and neighborhoods from the market. Telling people to think of their homes as a commodity upon which market forces should be brought to bear in order to ensure production of housing services at competitive prices is obtuse. People purchase property, rather than renting, largely to gain security and control, to escape the vicissitudes of the market. The worst place to emphasize “deregulation”.
  • People experience individual not aggregate outcomes, and individual outcomes are usually riskier than aggregate incomes. it is rationally hard to persuade individuals to consent to policy changes that, in aggregate terms, would meet a return-to-risk hurdle but at an individual level might not. When market urbanists point to how much more productive and awesome the city as a whole might become, they are missing this point.

How misunderstanding rent-control exacerbates the already poor framing…

  • If you frame your solution as being about “freeing markets”, you are likely to oppose rent control on naive and misleading Econ 101 grounds. Price controls, you have been taught, create scarcity, by eliminating the incentive to produce up to the market-clearing quantity…In the prosperous cities where we perceive housing crisis, market-rate housing is already priced at levels that would attract further development, if only the polity could be persuaded to allow it. New construction is market-rate housing: It is almost never subject to rent controls. The existence of rent controls on older buildings does suggest a danger that housing built today might someday be placed under rent controls too, sure. But that risk is already priced into market-rate development. If market-rate apartments sell for substantially more than their physical cost of replacement, then the market deems the risk of future value-impairing rent regulation to be sufficiently small, or sufficiently distant, or the present demand for housing to be sufficiently acute, as to cover that risk. The Econ 101 case against rent controls only holds if the threat of controls prevents the market value of newly produced rentable properties from substantially exceeding the cost of development after regulatory hurdles have been overcome. This is not what we observe in real life. Impaired prices are simply not the binding constraint on new development.
  • Market urbanists unnecessarily make enemies of a critical constituency, tenants in rent-stabilized apartments who have extraordinarily much to lose.

Ending with a shrug…

  • I don’t advocate trying to impose price ceilings on existing market-rate housing. That would be an expropriation at least as unfair and politically challenging as eliminating zoning restrictions. Plus, maximizing the quantity of housing supplied cannot be our sole, overriding objective. There is much to be said for encouraging “neighborhood capital” production, incentivized in part by the prospect of rising home values, as a means of increasing quality of life and sheer aesthetic joy, despite the “NIMBY-ism” it rationally provokes. There are trade-offs.
  • Urban housing is a really hard problem. We’ll need lots of inspiration. That economics textbook might help a little, but don’t try to use it as a cookbook.

Notes on Trading Volatility: Correlation, Term Structure, and Skew

Trading Volatility: Correlation, Term Structure, and Skew
Colin Bennett


The book is a broad reference on basic option theory, dispersion, and exotic options. It includes practical insight into managing a hedged book with a focus on correlation, term structure, and skew.

In addition its appendix includes the following topics and more:

  • a taxonomy of historical vol computations including and how they rank on “bias” and “efficiency”
  • shadow greeks
  • cap structure arbitrage theory

It’s an outstanding reference so I took notes. For public sharing I re-factored them by topic and tied some back to my own investment writing.

You can find these edited notes in my public Notion page. (Link)

Vol Premium [Partial] Justification

I’m about halfway through Colin Bennet’s terrific book Trading Volatility, Correlation, Term Structure and Skew (pdf).

Bennet is (or was) the Head of Quantitative Derivatives Strategy at Santandar. The book sits in a very sweet spot. It has lots of practical insights into managing vol portfolios and the mechanics of both vanilla and exotic options, var, and vol swaps. I’ll likely do a full post summarizing the takeaways I appreciated most, but in the meantime I thought to share this blurb about the oft-referred VRP (vol risk premium).

Just because implied vols trade over realized does not mean they are mispriced:

[To be fair the author asserts they still are. More importantly, you should read ch. 3 of the book to see how he decomposes the premium to systematic risk and pure vol demand premia.]

I wrote something similar a few weeks back:

Index options should be “overpriced”.

The question is how much premium do they deserve. If stocks warrant a risk premium over the RFR it’s because their systematic risk cannot be hedged. Index options must conceptually inherit this premium otherwise there would an arb in portfolio allocation.

An index option, held delta neutral, gets paid as correlations in the marketplace increase. It literally makes money when systematic risk embodies.

A standard for deciding if puts are expensive: Its price should have enough premium in it that by buying a put, if delta hedged, that you would actually have basis risk. In other words, it’s premium should make it uncertain that you would actually make money in a sell-off. If your argument is that it’s expensive in a vacuum (perhaps as a comparison to realized vol) then what if it was only 1% premium to realized? That sounds like a bargain for something that hedges the risk that, like, the whole world has. This isn’t news to most investors or anyone who understands portfolio construction and the beauty of neg correlations. It’s just another instance of my sun/rain example.

Let Chess Help Kids

Two years ago my wife Yinh started her podcast Growth From Failure. Her second guest was Berkeley Chess School founder Elizabeth Shaughnessy. It is one of my favorite interviews ever. We have referenced wisdom from it on many occasions since. Yinh texts with her from time to time and always comes away so invigorated. This past week I was stoked to meet the 83-years-young chess whiz. My expectations were high.

It turns out I still underestimated how special she is.

We went to lunch at Cafenated Coffee in Berkeley and 5 minutes into the conversation I immediately regretted not having a notebook. Elizabeth is bursting with passion for her mission and practical insights for teaching, life, and of course chess.

I did a full write-up that I’d love for you to check out: Lunch With The Amazing Founder Of Berkeley Chess: Elizabeth Shaughnessy (Link)

Here I’ll give a brief version of why it’s so special but the full article gets into ideas you can literally apply today in your life.

The Mission of Berkeley Chess School

BCS is a true Robinhood organization. As a non-profit, they are funded by donations and fees they receive for after-school programs around the Bay Area and private lessons (our son and his friends do group private lessons with BCS instructors). This supports their mission to provide free or low-cost chess instruction to students at poorly sourced Title 1 schools. In the past 40 years, BCS has taught over 250,000 kids.

But when you sit with Elizabeth you realize this is about far more than a game. Today, with Covid decimating enrollment, the school has re-purposed its building to teach disadvantaged kids. These are kids from low-income sections of Oakland, Richmond and Berkeley who are struggling with distance learning. These kids have no internet or computers at home. Without intervention, these kids, already struggling academically before the pandemic hit, may suffer an irreparable learning loss that could affect their health and financial well-being far into their adult lives.

From her experience, Elizabeth is convinced there is hope.

How Does Chess Help?

As a fan of games and games in learning, I like to believe that the skills acquired in play “transfer” to other domains. This is something I’ve wondered aloud about on Twitter. It is rooted in causality. I specifically asked Elizabeth if she thought a joy of chess was simply a symptom of a more general aptitude or if chess was imparting a more generalized skill that could be applied to other fields.

Elizabeth is a big believer that there is transference.

  • Chess asks kids to slow down and be methodical.

    Count how many pieces are threatening your pieces. Do this for every piece, on every turn, to find the strengths and weaknesses on the board.  Then look at all the checks you can deliver, then the captures, then the attacks. When all this is done, then make your move.

  • Consequences matter and compound.

    Chess teaches you that consequences matter. Make a rash move and you get penalized by your opponent.  Mistakes are expensive in chess and life. What scenarios can unfold if you always skip math class? How will this serve your long term objective of being a Wall Street wizard if you’re unable to calculate risk or odds?

  • Chess sharpens your focus.

    She has repeatedly seen firsthand the power of chess to harness kids’ attention. It’s an effective tool to settle kids so they can get into a better headspace for learning. Kids who start out resistant often do not want to go home after school.

Chess can show kids they are smart. It teaches them to believe in their own abilities. Many of the kids BCS teaches face long odds in life but chess can offer lessons in foresight, creativity, problem solving, and self-control.

Helping BCS

Children heatseek that which provides immediate benefit or stimulation. BCS has figured out how to stimulate children that have been written off. Any witness to that transformation will see one thing — the longest lever we have as a society to improve a child’s well-being today and into adulthood. When I listen to Elizabeth, I can feel what she has seen.

If you are looking for high impact ways to give back I encourage you to check out my full post or if you prefer you can simply head over to BCS site to learn more. (Berkeley Chess School)

Tips and Insights

Elizabeth cannot help but spill insights all over the place when talking. Check out the full post to get:

  • practical tips for learning chess today
  • how to play chess with children and why
  • insights into teaching girls specifically
  • the role of genius
  • the pros and cons of being a good loser

And if you are wondering her view on Netflix’s Queen’s Gambit — she thought it was too long but the beginning and end were fantastic. Ultimately, she thought it deserved high marks for making chess so compelling.

Wrapping Up

My 7-yr-old has been taking lessons with BCS intermittently since he was 5. Even our copycat 4-yr-old is into it. It took him all week of multiple games per night to learn how the knight (he’ll correct you if you call it a “horse”) moves. I better start learning more, they are hot on my heels. I’m MoontowerMeta on Lichess.org if you want to add me. I’m a beginner. I’m still beating the 7-yr-old but it’s getting tougher.

This is one of Elizabeth’s sons teaching chess at our pod a few weeks ago.

Lunch With The Amazing Founder Of Berkeley Chess: Elizabeth Shaughnessy

I’m going to tell you about Elizabeth Shaughnessy. Exactly 2 years ago, Yinh contacted to Elizabeth to be one of the first guests on her podcast Growth From Failure. Elizabeth has been an inspiration to our family since that first conversation.  I have been telling anyone interested in chess, children, education, or simply hope to listen to that interview.

This past weekend I was privileged to meet Elizabeth for lunch in Berkeley.

About Elizabeth

Nearly 40 years ago, Elizabeth, 83-years-young, volunteered to teach an after-school chess enrichment class at her children’s school. She expected a handful of people to take interest. Instead a diverse group of 72 children showed up. She was stunned. In the eighties, chess was the underground world of nerds. And if you think back to 80s movies, nerds were people jocks stuffed in lockers. (It probably didn’t help that we were in the Cold War — think about it — if Drago was a Grandmaster and Stallone a genius orphan from Brooklyn, Rocky IV would have swept the Oscars).

How times have changed. Today, Elizabeth oversees a chess school that teaches nearly 7,000 kids per year. She estimates the school has provided instruction and community for nearly 250,000 people in the past 40 years!

Her illustrious history can be found here.

The Berkeley Chess School

The chess school is a true Robinhood organization. As a non-profit, they are funded by donations and fees they receive for after-school programs around the Bay Area and private lessons (our son and his friends do group private lessons with BCS instructors). This supports their mission to provide free or low-cost chess instruction to students at poorly sourced Title 1 schools. While they are in over 120 local schools, Covid-19 has been devastating to enrollment as in-person instruction has cratered.

Always the optimist, Elizabeth has pivoted resources. With generous support from philanthropists and organizations working through the Berkeley Public Schools Fund, the Chess School now administers a program to help our most vulnerable neighbors. Her son, Stephen Shaughnessy, a former California State Scholastic Chess Champion and a teacher with more than twenty years of experience, guides cohorts of students struggling with remote learning in a safe setting in the School’s spacious tournament hall. Steven’s gifts and calling has always been to teach children, but this year this mission has been extra special. And challenging.

Coming from low-income neighborhoods in Berkeley, Oakland, and Richmond, his 5th graders are from extremely disadvantaged backgrounds. Not one to mince words, Elizabeth says that without intervention, these kids, already struggling academically before the pandemic hit, may suffer an irreparable learning loss that could affect their health and financial well-being far into their adult lives. They are at a critical age, steps from a dark a road without an offramp.

From her experience, Elizabeth is convinced there is hope. BCS is determined to help kids believe in themselves and their own ability to be smart. Many of the kids BCS teaches face long odds in life but chess can offer lessons in foresight, creativity, problem solving, and self-control. It can give these youngsters a chance for better futures far from the disadvantages of their childhoods. The hope is they would have kids of their own one day for whom the sky is the limit. If the realism is off-putting, then you can imagine just how important the work is.

Lessons From A Lifetime Of Teaching Chess

While this lunch was supposed to be nothing more than friends catching up, I found her passion and enthusiasm for her work the only thread I wanted to pull on. She just oozes hard-won insights into children and learning. I immediately regretted not having a notebook. Here is what I can remember from the 90 easiest minutes I ever had of keeping my mouth shut as I tried to absorb the steady stream of wisdom.

Benefits of Chess

As a fan of games and games in learning, I like to believe that the skills acquired in play “transfer” to other domains. This is something I’ve wondered aloud about on Twitter. It is rooted in causality. I specifically asked Elizabeth if she thought a joy of chess was simply a symptom of a more general aptitude or if chess was imparting a more generalized skill that could be applied to other fields.

Elizabeth is a big believer that there is transference.

  • Chess asks kids to slow down and be methodical.

    Count how many pieces are threatening your pieces. Do this for every piece, on every turn, to find the strengths and weaknesses on the board.  Then look at all the checks you can deliver, then the captures, then the attacks. When all this is done, then make your move.

  • Consequences matter and compound

    Chess teaches you that consequences matter. Make a rash move and you get penalized by your opponent.  Mistakes are expensive in chess and life. What scenarios can unfold if you always skip math class? How will this serve your long term objective of being a Wall Street wizard if you’re unable to calculate risk or odds?

  • Chess sharpens your focus.

    She has repeatedly seen firsthand the power of chess to harness kids’ attention. It’s an effective tool to settle kids so they can get into a better headspace for learning. Kids who start out resistant often do not want to go home after school.

Tips For Learning Chess

Yinh and I are starting to learn chess alongside our 7-year-old who has been getting intermittent instruction since he was 5. Our 4-year-old recently learned how to set up the board and how the peices move (ok, he doesn’t really understand how the “horse” jumps). Learning chess can be a bit overwhelming for good reasons. There are tons of amazing resources out there from software, to YouTube, books, and communities. If you are like me, sometimes you just want to be told “Do this” and be handed a basic recipe from which you branch as you learn.

Here’s the simple recipe.

  • At first, focus on tactics.

    You can think of tactics as a series of maneuvers to gain an advantage over your opponent. They have cool names like “forks” and “pins”. They are the “fun” part of chess. Most major software and websites provide ample puzzles to teach and reinforce tactics.

  • There’s plenty of time to worry about openings later

    Don’t worry about studying openings until you have at least a 1200 rating. More has been written about openings than any other aspect of chess and it is a rabbit hole from which the beginning and intermediate chess player might never emerge.

In the meantime, take solace in the idea that beginners’ focus on tactics is not just the best use of time, but conveniently, fun. Strategy including openings and end games come much later (Elizabeth mentioned that endgame chess is especially fascinating to the mathematically inclined). Although I have just started, I find the puzzles extremely engaging. While it’s humbling, the feeling of “seeing” the move is addictingly rewarding.

Chess and Children

  • High standards

    With a good teacher, many kindergartners can visually play without looking at a board. It is not the realm of genius. In fact, one of the most inspiring feelings you get from spending time with Elizabeth is how bullish she is on children’s abilities. She believes we do not give them enough credit. They are capable of so much. We easily forget how we stunt a plant’s growth when it’s in a small pot.

  • Playing chess with children

    Do not let them undo bad moves. Remember, consequences matter. If they make a weak or ill-advised move (a blunder in chess parlance), turn the board around and play the weaker position. You can continue to do this and by the end there is a sense that nobody has truly lost which can be useful to keep kids encouraged.

  • Genius

    They exist. She has seen her share. There are children out there who can recite every move of the last games they have played. You cannot teach geniuses. They are smarter than the teachers. But you can guide them and help them explore the exponential facets of the game. BCS has had the privilege of coaching three Grandmasters, including Olympiad Gold Medalist and 2018 US Chess Champion GM Sam Shankland. BCS offers Master Classes so the best players can learn from and help one another even as they compete.

  • Not pushing too hard

    Other than World Champion Magnus Carlsen, the life of a grandmaster is hard. There are few things in the world in which you can be so close to the top and have so little to show for it. Most grandmasters are scraping by, writing books, and being paid to play in tourneys. She does not push the geniuses in that direction. The application of genius to real world problems results in easier, productive, and more prosperous lives.

Chess and Gender

  • Girls

    On average, girls in chess are more discouraged by losing than boys and this can lead them to giving up. They were not born like that. But if one child is encouraged towards cooperative play, while another child is encouraged to compete, losing will be a more emotionally significant event to the child who is unfamiliar with it. She has found that girls who play sports do not give up easily, reinforcing the idea that this is learned behavior.

    Losing is an important subject. There is a tension in being comfortable with losing. It’s necessary to be able to lose because it’s part of learning. However, Elizabeth has never seen a great player that was not deeply bothered by losing. So we must examine our own values and how they relate to losing. When daughters come off the floor after a chess tournament what does Elizabeth see? Fathers who ask their daughters “Did you have fun?”. To the boys they ask, “Did you win?”.

    Elizabeth has lots of views on women in society based on what she has seen at formative ages and observing thousands of families. She believes there is bias and while we were too short on time to get into the vast subject one thing was obvious. We carry tremendous responsibility for the scripts children grow up believing about themselves. It is the single most empowering lesson I grokked from taking in her wisdom.

    And by the way, BCS teaches girls to play chess aggressively. They are trying to balance out society’s conditioning.

    There are 65 active Grandmasters in the United States. One is female.

  • Women

    When women compete at tournaments they are extremely competitive with one another but away from the table they can become friends. Elizabeth told a story of a tournament she hosted with women coming from all over the world. After the fierce competition ended, the women organized a guided tour of SF Bay and got along like sisters. She noted this was a very different dynamic from the men. There is a balancing energy missing in our world if that story is any indication.

Why we care

Chess has exploded in popularity as nerdiness has become cool and the internet has spread access to high quality chess tools, matches, and education. Elizabeth’s life mission has coincided with a more secular phenomenon. The chess school boasts 3 of the United States’ 65 Grandmasters with the most recent one being just 17 years old (masters are getting younger thanks to online play).

If Elizabeth’s mission were simply to promote the empowering aspects of a beautiful game then she has the right to be satisfied. That baton is securely passed on to wider zeitgeist than she ever imagined. But as the recent pivot to share the school’s resources with our most neglected has shown, the Berkeley Chess School is not just a Kumon For Chess. It is a sustainable model for meaningful impact. It is a model for fostering local community. And through it’s alumni, a model for global community.

It is a place we feel lucky to have discovered and organization we are honored to give to. With enrollment down and the ongoing renovation of the School to improve ADA access, there is a lot of wood to chop. If you are interested in helping, they have several programs that you may make targeted donation to.

You can find the list here.

I’ll conclude by saying, when I met Elizabeth I had high expectations. Yinh talks about her a lot and her interview is one of my absolute favorite all-time pods, not just Yinh’s. When I met her, I was blown away. She is sharp as hell. She cares so much you can feel it. As I listened to her stories, it was clear I was in the the presence of a special individual who has spliced her DNA into the heart of an institution (this is not so figurative…her son Steven manages the day to day operations now).

We are excited for the future of the Berkeley Chess School!

(And if you want to learn she recommends starting with the tutorials on licchess.org. Hope to see you there!)

The ‘Volatility Is A Risk’ Strawman

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.

California Love [Hate?]

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.

Working for Free

This is the first year in nearly 20 that I haven’t played fantasy football. I blame Covid but it’s actually a blessing. [If you work in asset management I suggest you look away and skip to the next paragraph]. The bots level the playing field so any extra alpha would be work that pays like $2 an hour.

Despite FF being dead to me, I ended up reading every post by FantasyLabs co-founder Jonathan Bales. There’s no point in describing him. His writing style is addictingly personal. It’s smart stuff that goes down like a pint of of Salt & Straw.

I’ll get you started with one I have thought about from similar angles. [Special thanks to Adam who put Bales on my radar.]

Should You Work for Free? (link)
Sometimes, working for free is the most valuable thing you can do. Here’s how to figure out when it’s smart.

Why did I pick this essay in particular?

I tend to think “free” is misunderstood because free refers to price. Price is a narrow concept which gets all the attention. It’s the most legible. It’s easy to label. Really big companies love price. If they can get you to focus myopically on that single number they can ruthlessly optimize for delivering you a solution that they are best suited to supply. Big food wins when they commoditize. If you accept subconsciously all beef is the same regardless of where it came from then price is the only thing left to compete on.

So “free” is an idea that focuses you on a single aspect of a transaction. It’s short-term oriented. Free is not free if we imagine the repetition of that transaction. It has downstream effects that you are aggressively discounting in the present. (This stands in very sharp relief to what is happening in asset markets today — cash flows ever further out in the future are being inhaled into present prices).

Consider an obvious example: health. The cumulative effect of low quality food is an invisible debt that accumulates. Subsequent chronic illness is the equivalent of a debt service that crowds out future growth. Acute illness is a bankruptcy re-structuring (if you don’t test the limits of financial metaphors, are you even trying?).

A personal example is this newsletter. I do this for less than free. It takes about 7 hours a week to deliver these Pulitzer masterpieces every Sunday. That the rewards are invisible doesn’t make them any less real.

In business, I always enjoy the Costco example. Charlie Munger has written:

“When other companies find ways to save money, they turn it into profit. [Costco] passes it on to customers. It’s almost a religious duty. [They] sacrifice short-term profits for long-term success”.

It’s not as hokey as it sounds. Think of it this way. They are hiding profits in the customer’s own pockets. They will be return customers. That profit is hidden from competitors’ wandering eyes and the IRS. The strategy commits Costco to keeping the customers happy because the profit is realized over the long-term. It’s simple but requires rare discipline.

Bales on time horizon:

  • Reading, sleeping well, and working out. All stupid uses of time if your goal is to optimize your day…but if the question is “How can I create the most value for myself (happiness, money, however you want to define ‘value’) in, say, 2024, then you should probably create a long-term foundation for success, with reading, working out, and getting rest being among the most +EV things you could possibly do.

    Which cuts to the heart of the matter for working for a low or zero price.

    We’re all trying to strike a balance between maximizing money/value/happiness right now versus creating a sustainable foundation for long-term value generation. At one end, working for free makes no sense. At the other end, you should work for free all the time because it provides value to the maximum number of people.

Another aspect to delivering more than you get back to today is how goodwill accrues to you. It’s equity that cannot be taken away from you. Just because it doesn’t show up on the balance sheet doesn’t mean it’s not there. (Fans of gangster movies will note the more nefarious version — an asset you might call “favor receivables”).

Bales on entrepreneur’s mindset:

  • Do you know who works for free all the time? Entrepreneurs. Do you know who never works for free and gets paid for every hour they put in? Employees.

    Being an employee can be great. You can typically work only during set hours, get weekends off, don’t need to worry about problems that arise outside your expertise, etc.

    But, when you work for someone else, you (mathematically, at least in an efficient market) must take less money than you’re worth. And usually, you don’t get to participate in the upside if you (and your company) do an awesome job.

    To be clear, I’m talking about the typical mindset (and pay) of your average employee/entrepreneur; you can be an employee with an entrepreneur’s mindset, or vice versa. Some business owners are total shmucks and would be better off working for someone else. Most, probably. But many people are sharp enough to absolutely crush it on their own and just aren’t going out and doing it. Today, and tomorrow, more than ever, it’s easy to go get it for yourself.

If you actually believe in yourself you should imprint this point on your mind:

When you start to think about the value you can generate for yourself—again it can be happiness, freedom, money, whatever you want—you realize that getting paid for your time is -EV if you have awesome skills and can better people’s lives.

Bales is a realist. You should not let yourself be exploited.

  • You must be able to sort out those who are just looking for interns they never plan to hire from those from whom, at a minimum, you can really learn. And, to be clear, you should not be working for free for most people.

    And this next point is a brilliant tactic for reducing the adverse selection that would come from being chosen to work for free.

    It all comes back to providing value to the right people, meaning you’re the person who identifies them, and not vice versa. If someone asks you to do work for free, that might not be the best opportunity; your job is to spot the situation that’s going to improve your upside the most long-term—likely with someone who isn’t even necessarily looking for help—and then convince them you can improve their life…by actually doing it.

In sum, the article says:

  • Doing things that are positive EV in the long-run requires indexing your options by more criteria than just price.
  • Although working for free can be a hugely positive risk/reward, it’s still risky. Be discerning who you work for. (I’d lean heavily to those who have a lot to teach me, especially if the lessons are scarce in the wild).

I think you will enjoy the whole piece and think many of you will move right into his other posts. (Link)


40% Of Your Assets In…OTM Options?

The treasury issues EE Bonds that yield 3.5% guaranteed if held for 20 years. In the interim, they are totally illiquid.

Meanwhile 20-year US treasuries yield 1.5% if held to maturity. However these are liquid, so you can sell them anytime.

Is it worth giving up 2% per year for the liquidity?

In How Much Extra Return Should You Demand For Illiquidity I explore this question and what it depends on. There are other examples of how other investments are priced based on their liquidity. I provide 2 frameworks to consider as you try to price liquidity.
Applying the logic to the current environment
Putting your money in a lockbox for 20 years to earn 3.5% per year might sound attractive if you decide liquidity isn’t worth much to you. Especially when the equivalent liquid treasury only yields 1.5%.

But as @econompic shows, there is no period in the last 75 years that if you looked back 20 years at stocks did you only earn 3.5% per year.

It’s reasonable to point out that stocks are not bonds so the comparison is made of straw. But the counter to the counter is that if you are putting the money in a box and throwing away the key for 20 years, then the comparison is not crazy. A significant benefit of bonds comes from the ability to rebalance. But with a 3.5% bond trapped in a box you lose the option to rebalance.

So we are stuck with that 1.5% bond. It’s nearly cash. Let’s not sugarcoat this. Bonds at current pricing are just an option on deflation. And the premium is all extrinsic value since they have negative real returns. Since they are now an option that you pay for in real terms, they are no longer an investment but an insurance policy. Once you see it like that, you have to wonder if their appropriate allocation size should be more commensurate with that line of thinking. Would you put 40% of your portfolio in option hedges? I didn’t think so.

Is anyone still putting 40% of their portfolio in bonds? Asking for an industry.

Snowflakes vs Lemmings

My professional training and experience give me tremendous respect for the “wisdom of crowds”. In a prior post, Dinosaur Markets, I defend using the “outside view” as a surrogate for your own.

Obviously you don’t want to follow this logic right off a pixelated cliff. The tension is in knowing when the consensus is wrong.

You can fail in 2 ways.

Snowflake Error: contrarian when you shouldn’t be
Lemming Error: consensus when you shouldn’t be

If the consensus is correct most of the time, you’ll make Snowflake errors more often than Lemming errors. This is counterbalanced by the fact that Lemming errors are more costly.

When I hear “first principles” thinking my mind sees snowfall. Lots of snowflakes. Since I’m a default efficient market mindset, my first instinct is Chesterton’s Fence:

Don’t ever take a fence down until you know the reason why it was put up.

If you think something that exists is wrong, you need to be able to explain why the conditions for its existence are no longer valid. This idea is often invoked when people describe the difference between rigid conservatives and eager reformers. Well, ok. I suppose there will always be some people who put ketchup on steak.

The idea is more powerful than that. It’s more broadly about epistemic humility. When someone thinks they are “thinking from first principles”, my instinct is to ask “are you the first person to think from first principles on this problem?” It’s firsts all the way down. Chesterton’s fence is more generally about who has the burden of proof. A current example: Does the urbanist need to prove that cities will continue to be humans’ preferred means to self-organize or is it the dissenter’s duty to show otherwise?

In sum, nobody’s life rule is “copy what other people do”. But the opposite binary, “always think from first principles”, which is somehow more acceptable to say, is just as ridiculous. It’s almost like the phrase “reinvent the wheel” hired a PR firm.

The subject of when you should actually think from first principles vs listen to markets is obviously complicated. If you are interested in when to diverge from consensus, then check out the free book Inadequate Equilibria: Where and How Civilizations Get Stuck by Eliezer Yudkowsky. I have plugged it before and plan to re-read it soon enough. (Link)