The 4d chess strategy behind Yang’s circumcision comment

Why does Andrew Yang seem to care so much about circumcision?

One possibility is it is just a weird obsession of his. I’m not a medical doctor but neither is Yang.  I thought circumcision was just a standard medical procedure. WTF is an Intactivist? How will this save us from the robot apocalypse?

Another possibility is the comment was 4d chess jiujitsu, and Yang is seeing several moves ahead in the 2020 meme wars.

It is easy to make fun of him, or criticize him for making an offhand comment about circumcision.  But think of how he can spin it if his opponents fall into this trap. Do they really want to be the one to saying parents shouldn’t have more freedom on this issue?   During the Democratic primaries Yang can bait an opponent into seeming like a power mad uber regulator coming to snip your baby’s genitals.


Yang Circumcision

Only Yang can save us from an army of dick chopping bureaucrats.

And in the general election vs Trump… with those small hands ?   Obviously he just wants to cut everyone else’s junk down to size, or at least that’s what an army of Twitter bots will say.

Think of the memes Yang can use to crush his opponents if they fall into the trap of criticizing his position on circumcision.   Only Yang can protect your Wang.

Is the weird circumcision comment part of a genius master strategy?  Probably not. But you heard it here first.

Links that made me think (March 16, 2019)

Cognitive Enhancers: Mechanisms and Tradeoffs
A classic from the Slate Star Codex archive. As the author notes, the medical component of the article is speculative. However its useful from a mental model perspective. It discusses how people adjust their model of reality, and how “smart drugs” alter this process.

In the predictive coding model, perception (maybe also everything else?) is a balance between top-down processes that determine what you should be expecting to see, and bottom-up processes that determine what you’re actually seeing. This is faster than just determining what you’re actually seeing without reference to top-down processes, because sensation is noisy and if you don’t have some boxes to categorize things in then it takes forever to figure out what’s actually going on. In this model, acetylcholine is a neuromodulator that indicates increased sensory precision – ie a bias towards expecting sensation to be signal rather than noise – ie a bias towards trusting bottom-up evidence rather than top-down expectations.

Learning rate” is a technical term often used in machine learning, and I got a friend who is studying the field to explain it to me (all mistakes here are mine, not hers). Suppose that you have a neural net trying to classify cats vs. dogs. It’s already pretty well-trained, but it still makes some mistakes. Maybe it’s never seen a Chihuahua before and doesn’t know dogs can get that small, so it thinks “cat”. A good neural network will learn from that mistake, but the amount it learns will depend on a parameter called learning rate:

If learning rate is 0, it will learn nothing. The weights won’t change, and the next time it sees a Chihuahua it will make the exact same mistake.

If learning rate is very high, it will overfit. It will change everything to maximize the likelihood of getting that one picture of a Chihuahua right the next time, even if this requires erasing everything it has learned before, or dropping all “common sense” notions of dog and cat. It is now a “that one picture of a Chihuahua vs. everything else” classifier.

If learning rate is a little on the low side, the model will be very slow to learn, though it will eventually converge on a good understanding of its topic.

If learning rate is a little on the high side, the model will learn very quickly, but “jump around” between different understandings heavily weighted toward what best fits the last case it has worked on.

On many problems, it’s a good idea to start with a high learning rate in order to get a basic idea what’s going on first, then gradually lower it so you can make smaller jumps through the area near the right answer without overshooting.

Parallelisms for the future
I’m always fascinated with Chinese Communist Party propaganda:

Parallelism,” or paibi (排比), is a rhetorical method that when used with appropriate measure can strengthen an article, but when used carelessly can have exactly the opposite effect.

What the hell is going on?
A mini book length blog post that explains how the change in media has altered society.

The striking parallels between commerce, education, and politics isn’t a coincidence. In fact, it’s inevitable. In the past decade, the information environment has inverted from information scarcity to information abundance, and the effects are evident in every corner of society….

….
The rise and upcoming fall of commerce and universities frame the context for two big shifts, which account for the weirdness of contemporary society: (1) how information scarcity creates authority, and (2) the transition from one-way communication to two-way communication.

The Unwinding of Globalization: Fallen Angels & Behavioral Alpha
Excellent investment letter focusing on the movement towards regionalism, and the breakdown of historical correlations between asset classes.

Confusion creates anxiety but importantly offers opportunities for those able to control their emotions.

How much due diligence is enough?

“They can’t touch me. I do my homework”
-John Boyd

How much investment due diligence is enough? How much is too much?

The amount of research an investor should do before making an investment depends on three factors: 1) Size of Position 2) Illiquidity of position, and 3) Contrary nature of position.

The Kelly Criterion is a good heuristic, although in real life we never know exact probabilities. Most investments will succeed or fail on one or two factors. The key is to identify those and understand them better then the person selling to us. Anything beyond that is just for fun. Indeed a lot of investors really like to dig. But the 80/20 rule applies. Think jiujitsu not powerlifting.

Position Size


Position sizing is part math and part psychology. The bigger a position, the more a person has to check and double check. This isn’t just a number in a spreadsheet. Conduct a premortem. What is the maximum pain you can take? The only way to survive a large position going against you is to have the confidence in your research.

Its critical not to get causation wrong here. If “concentration” is part of one’s identity as an investor, there is a major risk confirmation bias will takeover and more research will just make them more sure of a false idea. Remember smarter people are actually at greater risk of confirmation bias.

If the facts lineup, it might make sense to “go for the jugular”.

Illiquidity


For most individual investors, illiquidity is a secondary concern. Nonetheless an investor must consider it. An investor can easily sell a widely traded stock or ETF. But for illiquid positions, an investor needs to learn that information ahead of time.

Decisions that are easy to reverse can be made quickly. Decisions that are difficult or impossible to reverse require more analysis up front.

Contrarian nature


Markets are usually right. The more out of consensus a view is, the more data and analysis an investor must have to back it up. “Who is on the other side?” is probably the most important question in investing. I’m only comfortable if I understand the contrary position better than people who hold it.

Active investing requires active thinking.


With investment research an hour of active critical thinking is worth more than a week of passive reading

Techniques of due diligence depend on what’s available, and also on an individual personality. Some people are good at plowing through footnotes or analyzing sentiment data, others are highly skilled at interviewing industry experts. Since computers read 10-Ks the minute they come out, its essential to get creative with due diligence, but this does not mean digging for the sake of digging.

Example:

I was researching, a venture capital focused business development company (BDC) liquidation. Its investments holdings consisted of preferred stock in 11 venture stage companies, with most of the value concentrated in the top five holdings.

Although there was limited publicly available information on the financial condition or valuation of each individual holding, the filings disclosed the aggregate range and average of the metrics and assumptions used by the company in the valuation process to arrive at fair value of Level 3 Assets on the financial statements. My interest was piqued when I noticed that other public BDCs that owned some of the same asset were marking them at much higher prices. Nonetheless, I needed to verify the viability, and growth potential of the main underlying businesses.

I approached this issue from multiple angles:

One of the company’s largest assets was preferred stock in a company that operated a dating site. With permission from my wife, I set up a fake profile to see how the interface of the website and app worked, and to verify that there were indeed a large number real people using it in my area, and a few other cities I checked. This helped me corroborate information from user reviews I had read.

The company owned stock in a highly specialized medical testing startup. I reviewed the background of top employees on LinkedIn, university websites, and various scientific journals. Additionally I discussed the business idea with friends in academia. They verified that the idea had a reasonable chance of working, and would require an advanced degree to replicate.

Accounting rules gave management ample discretion on how to report the holdings on the balance sheet. I carefully reviewed everything they had disclosed about their valuation process, and tracked changes in language between different filings over time.

I also contacted the management of the BDC, and was able to reach the people in charge of the valuation process on the whole portfolio. They helped me understand the facts they were using to justify the valuations supplementing my careful reading of the public disclosure. The conversation verified that the BDC was indeed serious about liquidating its portfolio. Further they candidly reminded me how valuing the portfolio conservatively made the tax consequences of converting to a liquidating trust more favorable for investors(the management group was also a large shareholder).

I did a lot of unconventional work, but didn’t mindlessly dig for more info. It wasn’t a huge position but since its going to be locked up in a non transferable liquidiating trust, and it was an idea most people thought too ugly, a bit of extra work was justified.

The company already paid back most of my initial investment after selling one investment and the portfolio still has a lot of value. The true test will be in the final IRR when its all said and done.

See also: The hard thing about finding easy things

Links that made me think (March 9, 2019)

Will sports betting change how games are played and even watched?

This is an interesting meta view of how betting will change sports.

The games we watch are already enhanced by data collected through technological advances. Announcers tell us how hard baseballs are hit and how far they travel, or how many miles a particularly active soccer player has run. Because such derivatives create new opportunities for betting, we’re sure to see many more of them. (The N.B.A. has been advertising for a gambling data analyst on the employment website Glassdoor.) Hockey hasn’t traditionally generated much in the way of metrics, but in order to learn who is skating the fastest or shooting the hardest, the N.H.L. is preparing to record the movements of every player during every game and even put a chip inside the puck. “Leagues are building a fire hose of data around their product,” says Chris Grove, an analyst who consults for gaming companies and investors. “And the logical recipient of that data is the betting industry.”

….
But gambling’s greatest impact, at least proportionally, could come in the new professional leagues it spawns and the moribund ones it helps to resurrect. The Arena Football League once included 19 teams spread across the continent; last year there were four. Leonsis owns the Washington and Baltimore franchises, which makes him not only the most powerful owner in the league but the only person preventing its demise. He has positioned it as an ideal entertainment vehicle for the next generation. That includes gambling, of course. Arena Football averages a touchdown every six plays, Leonsis notes, as well as 98 points a game. “Lots of data generated,” he says — and a multitude of possible bets.

Personally I would love to see arena football go mainstream.

Death in the time of bitcoin

Purchasing uncertain cryptocurrency claims at a discount is an interesting investment strategy. I know some opportunistic investors were buying Mt. Gox claims , but that situation is arguably less complex than Quadriga.

… this tale of “boy meets girl; boy marries girl; boy stores all client cryptocurrency data on cold wallets with no backup; boy dies; more than 115,000 people get screwed out of their precious crypto” could have a happy ending for a progressive asset allocator.

The cold wallets were subsequently found empty so the search continues I wonder how the hunt for the missing crytpo will be financed?

Theranos: How a broken patent system sustained its decade long deceptionh

I’m not convinced by the assertion that the patent office gives out patents much too easily on a consistent basis. But this article points out that many of Theranos’ patents arguably don’t pass basic tests of patent law.

What does this mean long term now that Theranos has been seized by its lenders?

Accused of having lied to investors and endangered patients, the company leaves us with a parting gift: a portfolio of landmines for any company that actually solves the problems Theranos failed to solve.

So basically the shell of Theranos will become a patent troll? Also, apparently Mark Cuban has endowed a research organization to fight “stupid patents”

When Britain chose Europe

The Brexit debate in a historical context going back to Cobden and the fight against the corn laws. Points out a startling implication of Brexit that the media barely covers:

There is, in fact, simply no way thata hard Brexit, much less a no-deal Brexit, can be accomplished without an intra-national upheaval that will result, sooner or later, in a disunited kingdom”


The fallen superpower: US foreign policy from triumph to hubris

Review of a new book, the Back Channel A Memoir of American Diplomacy and the Case for Its Renewal , written by William Burns, the ultimate foreign policy insider who has served 5 presidents and 10 secretaries of state

…diplomatic profession has lost its near monopoly on presence, access, insight and influence. In the age of WikiLeaks and transnational actors, secrecy is porous, information ubiquitous. Those like Burns who have practised statecraft risk being drowned out. Lost in the Twittersphere are the age-old virtues of diplomacy: the ability to convene, communicate and manoeuvre for future gain, especially through alliances.

The End of Economics?

That economics has since slipped from that pedestal is simply a testament to the fact that the world is messy. The social sciences differ from the hard sciences because “the subjects of our study think,” said Herbert Simon, one of the few scholars who excelled in both. As we try to understand the world of the next three decades, we will desperately need economics but also political science, sociology, psychology, and perhaps even literature and philosophy. Students of each should retain some element of humility. As Immanuel Kant said, “Out of the crooked timber of humanity, no straight thing was ever made.”

Rediscovering literacy

Literacy meant using mastery over language — both form and content — to sustain a relentless and increasingly sophisticated pursuit of greater meaning. It was about an appreciative, rather than instrumental use of language. Language as a means of seeing rather than as a means of doing.

….

Gutenberg certainly created a huge positive change. It made the raw materials of literary culture widely accessible. It did not, however, make the basic skills of literacy, exposition and condensation, more ubiquitous.

Instead, a secondary vocational craft from the world of oral cultures (one among many) was turned into the foundation of all education, both high-culture liberal education and the vocational education that anchors popular culture.

Renaissance Technologies Buying Microcaps

Those of us that invest in microcaps are accustomed to high volatility on low trading volume. Sometimes the company will report major news, and nothing happens to the price until a year later. Other days there are 20% swings when somebody places a 100 share market order.

When there is a surge in volume lasting more than a couple days and a definitive trend in price, it’s not uncommon to see Renaissance Technologies file a 13G, indicating a 5%(or higher) position.

What would such a large systematic trading firm be doing in this part of the market? Aren’t microcaps usually owned by fundamental focused investors? Funny thing is sometimes there is sufficient volume and a definitive trend, causing systematic traders to get interested. The market switches from value dominated to momentum activated, even in microcaps.

This is part of a broader phenomenon explained well in Market force, ecology and evolution:

If a substantial mispricing develops by chance, value investors become active. Their trading shrinks the mispricing, with a corresponding change in price. This causes trend followers to become active; first the short term trend followers enter, and then successively longer term trend followers enter, sustaining the trend and causing the mispricing to cross through zero. This continues until the mispricing becomes large, but with the opposite sign, and the process repeats itself. As a result the oscillations in the mispricing are faster than they would be without the trend followers.

In real life, prices are almost never at their equilibrium.

Articles that made me think (March 2, 2019)

Markets are Eating the World

Many internet pioneers in the 90’s believed that the internet would start to break up corporations by letting people communicate and organize over a vast, open network. This reality has sort-of played out: the “gig economy” and rise in freelancing are persistent, if not explosive, trends. With the re-emergence of blockchain technology, talk of “the death of the firm” has returned. Is there reason to think this time will be different?

Transaction costs can be subdivided into trust costs, transfer costs and triangulation costs. Technology drives down transaction costs. In general this increases the prevalence of gig work and incentivizes renting instead of buying.

Technology increases coordination scalability which is key in understanding how this all changed from the Neolithic to the Blockchain eras. Mechanical clocks and cryptocurrencies are both useful examples to understand the impact of technology on the economy.

Would be interesting to develop a framework for shocks caused by a sudden increase in transaction costs. Revolutions and natural disasters can cause a break down in trust in society. This of course does create an opening for crypto that can be overlooked by people’s whose experience consists of stable monetary regimes. Crypto has played a larger role in Argentina and Venezuela recently.

Ultimately, what we call society is a series of overlapping and interacting ledgers. In order for ledgers to function, they must be organized according to rules. Historically, rules have required rulers to enforce them. Because of network effects, these rulers tend to become the most powerful people in society. In medieval Europe, the Pope enforced the rules of Christianity and so he was among the most powerful.

Should I hire someone or outsource this role? Should a business vertically integrate? Why are CPG brands being upended by upstart product designers? Transaction costs is the datapoint that can answer all these questions.

Going for broker: Remittances to North Korea
Speaking of high transaction costs and low trust economies, its risky and expensive for North Korean refugees to send money home to relatives.

If a refugee in south South Korea wants to make a transfer, she may contact a broker in the North who owes a smuggler in China. The refugee may offer to pay some portion of the broker’s debt; in return, the intermediary gives an equivalent amount the the refugee’s family in the North, usually in dollars or Chinese yuan. The system is based on trust — and extravagant fes. The broker who facilitates the transaction takes a cut of around 30%.

Actually I’m kind of fascinated by how robust this market actually is all things considered.

Bond Illiquidity And LIBOR

Financial markets’ failure to solve the LIBOR replacement problem is the result of a misunderstanding of the reasons for the LIBOR problem. Understanding of LIBOR suffers from journalistic misdirection, on one hand, and a misunderstanding of the root problem that the LIBOR brouhaha exemplifies, on the other.

….In short, any satisfactory LIBOR replacement must be a form of debt that doesn’t exist now. We could throw up our hands and use the hazardous SOFR, but this seems to be a negative way of looking at the situation.

This is an obvious opportunity to seize an enormous chunk of the financial markets in one fell swoop by addressing bond market illiquidity more generally. Moreover, it is an opportunity that anybody with the courage and the capital could pursue. The problem is one of creating a new debt market with a different structure. Such a new market would have no incumbent oligopolies and no reactionary regulators. Capital, a few hotshot IT professionals, and some people with skills of persuasion would be enough ammunition to get the job done. Island overwhelmed the incumbent stock exchanges with less.

Enrique Abeyta has four pieces of advice for Jorge Paulo Lemann

The story of 3G’s value creation — buying a big brand and cutting costs to generate high equity returns — worked for ten years, “but they sailed in the direction of a storm they did not forsee. They overleveraged the ship in search of returns and lost their flexibility.” …


Rule thinkers in, not out

Imagine a black box which, when you pressed a button, would generate a scientific hypothesis. 50% of its hypotheses are false; 50% are true hypotheses as game-changing and elegant as relativity. Even despite the error rate, it’s easy to see this box would quickly surpass space capsules, da Vinci paintings, and printer ink cartridges to become the most valuable object in the world. Scientific progress on demand, and all you have to do is test some stuff to see if it’s true? I don’t want to devalue experimentalists. They do great work. But it’s appropriate that Einstein is more famous than Eddington. If you took away Eddington, someone else would have tested relativity; the bottleneck is in Einsteins. Einstein-in-a-box at the cost of requiring two Eddingtons per insight is a heck of a deal.

Basically its the framework of high upside convexity applied to ideas and people.

The fall of America’s “Money Answers Man”
This guy was simply promising 6% risk free. But it was too good to be true. Early Ponzi schemes usually promised outlandish returns with no risk. Perhaps after many years of millenium low interest rates, the bar for return promises on ponzi’s has been lowered.

America is obsessed with Theranos and Fyre Festival
The insatiable appetite for all things Holmes is part of an overarching obsession in America right now: We can’t get enough of scams and scammers.

Why hipsters all end up looking the same
Mimetic desire is a powerful force- even(or especially) for those who claim they don’t care.

In a vast range of scenarios, the hipster population always undergoes a kind of phase transition in which members become synchronized with each other in opposing the mainstream. In other words, the hipster effect is the inevitable outcome of the behavior of large numbers of people

For some reason this also reminded me of the movie SLC Punk.

RIP culture war thread
Slate Star Codex creator was subjected some of the crazier human tendencies that come to surface in the cultur war. Painful to read. Which is why it is essential reading.

In praise of work

The reason for the emergence of workism was that the jobs of banking and consulting were fundamentally about signaling intelligence, competence, credentials, hard work and availability. They were not about what sliver of work was being done, or how much meaning anyone invested in it. The job was – and is – almost wholly abstracted from that work. That is the soul of workism: that the job is, in every meaningful respect, to look like you are doing the job.

The Paradox of Alternative Data

“My God, they’re purple and green. Do fish really take these lures?” And he said, “Mister, I don’t sell to fish.

Informational edge can drive fantastic alpha while it lasts. This explains the increasing investment industry focus on non-traditional data sources, aka alternative data. If you are the first to acquire a new alternative data set, you might be able to develop insights no one has.

Yet once a lot of people are using it, it is less likely to drive alpha. It might be table stakes to not get screwed, or it might be already be instantaneously reflected in the price of assets.

Furthermore, most opportunities really hinge on a couple factors- more info isn’t always useful. That won’t stop the alternative data industry from doubling to $400 million by 2021, as a widely cited Tabb Group report predicts This is worth considering while one is caught up in an alternative data arms race.

Yet some data sets genuinely will provide an edge.

Perhaps a data set that no one else is looking at provides the edge you need. If a data set isn’t established as useful, the provider of that data will probably offer it cheaper in the early days of their business. There are so many alternative data providers out there, that marketing strategy is important for startups.

Ironically, the provider can charge higher price once word about its value gets out among investors.. So later adopters might pay more for an edge that is already gone.

Of course eventually someone will put all the data online for free and meta data of how investors use that alternative data can also be useful.

Now can I interest you in an alternative data feed that will make all your dreams come true?

See also: https://ockhamsnotebook.com/2016/09/18/the-hard-thing-about-finding-easy-things/

The ecological consequences of hedge fund extinction

Investing goes through fads.  Investing strategies and fund structures(1) go in and out of style.  Nowadays long/short hedge funds are out and infrastructure funds are in.   Within the public equity markets, value is out, growth/momentum is in. Each time this happens, people forget how the cycle repeats.  

In fact, one CIO contended that if he brought a hedge fund that paid him to invest to his board, the board would dismiss it without consideration — simply because it’s called a hedge fund, and hedge funds are bad.  

Institutional Investor

Hedge funds may have to do a name change if they want to raise capital.

Remember last time?

And yet people forget:

Allocators woke up craving the next rising hedge fund star and couldn’t invest enough at high and increasing management fees after the widespread success of long-short funds in the weak equity markets of 2000-2002. Board rooms back then castigated CIOs for not having long-short equity hedge funds in their portfolios.

This isn’t the first time:

People forget that 40 years ago, officials such as Paul Volcker of the Federal reserve wanted an active hedge fund industry to absorb the risk that was not well managed by state-insured banks.

Financial Times

Each investment strategy picks up a certain type of risk(and potentially earns a profit in doing so)- if a strategy disappears that particular risk can become a systemic issue.  Fortunately, around this time it also becomes more lucrative to bear the risk others are unwilling to bear. Eventually the risk reward tradeoff starts to make sense again.

Different, different, yet same

In the 1960’s Warren Buffett put up ridiculous returns, and Alfred Winslow Jones proteges profitably exploited anomalies in markets.  By the mid 1970’s of there were many articles about hedge funds shutting down though. Industry AUM declined ~70% peak to trough. Nifty fifty boom and bust followed by the long nasty bear market.  But as the institutional architecture of international trade and currency shifted we entered glory years of global macro/commodities traders. Then the 80’s were great for Graham deep value and Icahn style activist investing after the 70’s bear market left a huge portion of the market selling below liquidation value.

Likewise late 90’s again saw the death of hedge funds as day traders in pajamas earned easy returns from the latest dot-com- until the crash. Yet out of the rubble of the tech bubble rose a new generation of great hedge fund managers. There was rich pickings for surviving value hunters- and those with the guts and skills to execute became household names a few years later.   Many value managers that nearly went out of business during the tech bubble put up ridiculous numbers 2000-2002 and through the next financial crisis. (See: The arb remains the same)

The greatly exaggerated death of a style gives rise to an environment where there is a plethora of opportunities for something similar to that style to work.   Each time the narrative in the greater investment community favors some type of uniform strategy, and LPs give less capital to other strategies- causing them to nearly die off.  But then the lack of people pursuing the out of fashion strategy makes its return potential more lucrative. Eventually someone finds a new method to pick up those dollar bills on the ground that shouldn’t exist.

Economics emphasizes rational actors and equilibrium.   Yet the messy reality is far more complicated. Ecology is a far more useful  mental model.

A giant self over-correcting ecosystem

There is in ecological function to speculative capital and over time there should be some excess returns to those willing to take mark-to-market losses

Financial Times

Like biological species, financial strategies can have competitive, symbiotic, or predator-prey relationships. The tendency of a market to become more efficient can be understood in terms of an evolutionary progression toward a richer and more complex set of financial strategies.

Market force, ecology and evolution

Ecology emphasizes interrrelationships between different individuals and groups within a changing environment, and indentifies second order impacts.  

Thinking like a biologist

One can develop a useful framework by replacing species with strategy, population with capital, etc

Flows and valuation interact, self correct, and overshoot.  

….capital varies as profits are reinvested, strategies change in popularity,and new strategies are discovered. Adjustments in capital alter the financial ecology and change its dynamics, causing the market to evolve. At any point in time there is a finite set of strategies that have positive capital; innovation occurs when new strategies acquire positive capital and enter this set. Market evolution is driven by capital allocation.

Market evolution occurs on a longer timescale than day-to-day price changes. There is feedback between the two timescales: The day-to-day dynamics determine profits, which affect capital allocations, which in turn alter the day-to-day dynamics. As the market evolves under static conditions it becomes more efficient. Strategies exploit profit-making opportunities and accumulate capital, which increases market impact and diminishes returns. The market learns to be more efficient.

Evolution

When an ecoystem is overpopulated with a certain species, it eventually overshoots and results in mass starvation. Populations fluctuate wildly across decades, and sometimes species go extinct or evolve into something that seems new.  

New conditions give rise to new dominant species.

See also:

George Soros on disequilibrium analysis
The arb remains the same

Book:
Investing: The Last Liberal Art
Hedgehogging
More Money than God


(1) Although I am frequently pedantic about the differences between structure, strategy, and sector, many in the media seem to use these interchangeably when discussing reversion to mean situations.  Fortunately they all exhibit the same boom/bust phenomenon, so I am using them interchangeably here.

The arb remains the same

Imagine if Warren Buffett of 1960 puts down the deadtree 10-K he got in the mail and time travels forward to 2019. Then he looks over the shoulder of an analyst at present day O’Shaughnessy Asset Management. He would find the scene unrecognizable.

Or, if the original Jesse Livermore time traveled from the 1920s stock exchange to the present day trading floor of DE Shaw or Renaissance. Again, completely unrecognizable.

Back in the day people went to the SEC office in the Washington DC to access annual reports faster. That was how one got a fundamental edge.  Now people scrape filings the minute they come out. Or use satellites and credit card data to get an edge on information before it hits regulatory filings. People used to gauge momentum by looking at the facial expressions of other traders, now they use complex computer models. People mine market and fundamental data around the globe looking for a bit of an edge.  New techniques, same thing.

Over time there is the change in the physical activities, and words we use to describe the process of identifying and exploiting market inefficiencies.  Nonetheless the ecological function is the same. Investors are just looking for mispriced risk, and exploiting it till its no longer mispriced.

Around the world there are unfair coins waiting for someone to flip them. Arbitrageurs will need to use weirder and weirder methods to find and exploit them. Methods change, but the arb remains the same.

See also:

The hard thing about finding easy things
Riches among the ruins

Books I kind of liked in 2018

Non-Fiction

Fiction

Non-Fiction

Technological Revolutions and Financial Capital did more to advance my understanding of the modern economy than any other book I read in 2018.  Traditional economics treats sudden changes of technology as a separate exogenous factor.  This mode of thinking is pretty much useless for anyone forced to allocate capital under uncertain conditions.   In reality there is strong empirical evidence that financial markets and technology interact in repeated cycles .  Carlota Perez shows the pattern in these cycles by breaking them down into Installation and Deployment Phases. She identifies four main parts of each technological cycle: Irruption, Frenzy, Synergy and Maturity.  The book illustrates these patterns in the most important disruptions in economic history, including: the industrial revolution , steam engines/railways, steel/electricity/heavy engineering, automobiles/mass production, and information/telecom. Marc Andreesen hailed Technological Revolutions and Financial Capital as the single best book for understanding the software industry.  Since software is eating the world, its probably also the best book for understanding any industry.

Capital Returns is about how competitive advantages change over time, and how changes in capital availability can alter industry dynamics.  It covers a fund manager’s thoughts and activities from 2002- 2015, including periods of disruption and volatility in a variety of industries.    Ultimately the book is about how mean reversion occurs and and impacts investors.

Modern Monopolies deserves most of the hype that it has received.  Many business decision makers were schooled in “linear” business models, but the most valuable and disruptive businesses are platforms, business model that facilitate the exchange of value between two or more user groups, a consumer and a producer.  This book covers how technology has enabled more platform business models, and what the implications are for investors and entrepreneurs.

How the Music Got Free tells the story of how streaming music and piracy upended the music industry.  It also covers the story of how the MP3 format struggled to gain acceptance for many years before becoming ubiquitous.  The contrasting attitudes and actions of the winners and losers in the story are an entertaining juxtaposition , and a useful case study.     As a teenager I had been one of the early pirates, but was less aware of what was going on inside the old line music companies, and had not zoomed out to consider the broader industry implications.  

Laws of Human Nature is an essential guide for understanding how people act and how society functions. It teases out key lessons from psychology along with successes and failures throughout history.  Reading one Robert Greene book provides a reader with the benefits of reading dozens of business biographies and history books. It provides ideas for avoiding certain problematic tendencies in oneself and exploiting traits in others.   Laws of Human Nature looks at the dark reality of patterns in thought and behavior that don’t conform to an idealistic rational expectation:

As long as there are humans, the irrational will find its voices and means of spreading. Rationality is something to be acquired by individuals, not by mass movements or technological progress. Feeling superior and beyond it is a sure sign that the irrational is at work.

 Debt’s Dominion: A History of Bankruptcy Law in America, is a bit wonkish, but well worth the slog for the insight into the American bankruptcy system.   Its easier to understand the subtle nuances of the bankruptcy process and navigate opportunities in the distressed debt market when I think about how the system evolved. Indirectly the book is also about the slow process of institutional change.  

Thinking in Bets   is basically a long essay on behavioral economics, with one valuable message.  Under a plethora of entertaining anecdotes about professional poker it provides an immediately applicable  framework for functionning in an uncertain world. Basically its a slightly less nerdy and less nuanced companion to Fortune’s Formula. It also fits in well with some of the more important behavioral finance books, such as…. Misbehaving, and Hour Between Dog and Wolf, Kluge, etc. (more notes here)

Fiction

The Coffee Trader is historical fiction taking place in 17th century Amsterdam, when coffee was first brought to Europe and the modern concept of stock and derivative markets were just beginning to form.  It tells the story from the vantage point of Miguel Lienzo, a small time speculator who must navigate complex social structures, and deal with shady counter parties and aggressive creditors and competitors while trying to get rich in a nascent market.  He is also a Jewish refugee who fled the Portuguese inquisition but then struggles with overly conservative Jewish leaders in Amsterdam, who constantly threaten to shun him. Complicating matters further, he has a conflict with his brother, who is at the beginning a far more successful and respected member of  the community.

The first person narration includes gems like this one:

There was no shortage of my kind in Amsterdam. We were as specialized as taverns, each of us serving one particular group or another: this lender serves artisans; that one, merchants; yet another, shopkeepers. I resolved never to lend to fellow Jews, for I did not want to travel down that path. I would not want to have to enforce my will on my countrymen and then have them speak of me as one who had turned against them. Instead, I lent to Dutchmen, and not just any Dutchmen. I found myself again and again lending to Dutchmen of the most unsavory variety: thieves and bandits, outlaws and renegades. I would not have chosen so vile a bunch, but a man has to earn his bread, and I had been thrust into this situation against my will.

Three Body Trilogy is a deep character study of humanity itself in the form of an epic science fiction story spanning multiple centuries. It ultimately focuses on the way people act in situations of duress and conflict, both within and between different countries and groups. The Three Body Problem starts slowly, opening during the Chinese Cultural revolution, and tells of the initial contact with alien civilizations. The Dark Forest explores the paradoxical alignment of incentives in high stakes inter galactic diplomacy. The ultimate conclusion for the future of civilization in Death’s End is pessimistic, but getting there is thrilling.

Pattern Recognition is a thriller set in the early 2000s that feels like a science fiction take on modern media. The protagonist is a branding consultant/corporate spook who gets sent on a mission to uncover the anonymous creator behind a series of video clips that have spawned an obsessive subculture of fans. She tracks people and clues down in London, Tokyo and Moscow meeting many bizarre and unseemly characters along the way.

As with all Gibson novels, the dialogue and descriptions are fantastic.

“Of course,” he says, “we have no idea, now, of who or what the inhabitants of our future might be. In that sense, we have no future. Not in the sense that our grandparents had a future, or thought they did. Fully imagined cultural futures were the luxury of another day, one in which ‘now’ was of some greater duration. For us, of course, things can change so abruptly, so violently, so profoundly, that futures like our grandparents’ have insufficient ‘now’ to stand on. We have no future because our present is too volatile.” He smiles, a version of Tom Cruise with too many teeth, and longer, but still very white. “We have only risk management. The spinning of the given moment’s scenarios. Pattern recognition.