"Alexa, quiz me on photosynthesis"

Moontower #250

Nov 17, 2024

Friends,

A bunch of quick observations and recs today especially around investing.

I went on Resolve Riffs with Adam Butler and Rodrigo. It was a totally free-form no prep episode. We mostly talked education and parenting stuff. There’s investing repartee on the back end.

A cool thing Rodrigo taught me was how he told Alexa “Enable ChatGPT”.

Then at breakfast you can prompt it with “Hey ChatGPT you are tutoring my 6th grader in Spanish (or her photosynthesis or whatever), quiz her”.

The kids are going back-and-forth over breakfast vocally with ChatGPT and their grades show it!

I started doing this with boys the next day. Zak’s Egypt test in social studies was Friday. We used the ChatGPT app to converse with the bot using the phone mic and speaker. We uploaded screenshots of the materials and it quizzed him. We even had to tell it to keep the questions focused on what was in the materials because it tried to quiz him on more Egypt facts than the test covers.

We got a bonus benefit too. It was a rainy day and Zak wanted to practice hoops in the garage so he asked ChatGPT to give him a dribbling and calisthenic workout to follow. I didn’t even know until he came back inside and I asked where he was. Good initiative bruh.

If interested, I talk about Math Academy in the interview as well. I also gave a talk to my local social club about it Wednesday night. The boys (and I) are still going strong with it and I don’t even tell them to do it. At least once a week they are logging XP before I wake up. If you’re looking for math enrichment for you, a kid, grandkid, student give it a peek.

Money Angle

I tweaked the Cockpit to highlight the change in markets since the close of Friday before the election. A lot of the gains were clipped a a bit this week.

A few things that popped out:

Equity indices are up .5 to .9 standard deviations. In pure percent terms, IWM is the biggest winner (4.2%) and QQQ the laggard (1.9%)
International stocks are down about .8 standard deviations…which ties into the next point…
USD is up, yields are up slightly and gold is down 2 standard deviations or 6.5%
Meanwhile BTC is the mirror image…up about 2.5 standard deviations or nearly 28%!
There’s dispersion under the hood of equity indices with winning and losing sectors:
- XLE (energy), XLF (financials), XLY (consumer discretionary), XLI (industrials) are all up between 1 and 2 standard deviations
- Biotech and healthcare are down over 1 standard deviation (XBI is down almost 8%)
Finally just looking at a few mega stocks:
- TSLA is up 2.7 standard deviations or 25%!
- NVDA is up .65 st dev or 4.7% while TSM is down .55 st devs or 3.7%
Finally VIX is down from about 22 to 16 (and that includes a greater than 1 point rally on Friday)

💡A note on standard deviation:

I’m dividing the move sizes annualized, by the implied vol of a 2 week option on Friday November 1st.

This cockpit view is coming to moontower.ai this month. Our devs showed me the prototype this week.

I don’t know anything about the future so I follow a permanent portfolio/all-weather/cockroach type investing strategy. The focus is on diversification which is subscribing to a strategy that means always having to say you’re sorry.

Fyi YTD returns for a few major assets:

SPY and gold ~+23%

BTC ~ +115%

TLT (long term treasuries) ~ -4%

US dollar index ~ +5%

Eurostoxx ~ +8%

The InvestResolve team did a great podcast series teaching risk-parity which is another term for diversified portfolio (it’s just that the term “risk-parity” implies the weightings depend on the volatility and cross-correlations of the portfolio components).

I published a summary a few years ago:

InvestResolve Masterclass On Risk Parity (Moontower guide)

If you are short on time focus on the first 3 parts:

Rodrigo and Corey Hoffstein lead the Return-Stacked ETF push which is a way to maximize the benefit of diversification, namely maximizing return per unit of risk, via capital efficient leverage.

I think one of the coolest aspects of these products and the education around them is what it says about the waterline of investing knowledge — it’s constantly rising. What the institutional world understands about portfolio construction trickles down to retail on a lag but it does trickle down.

The lag depends on a mix of:

regulation (ie portfolio margining)
complexity (advisors are the messengers of new financial innovation to most of the public although there’s plenty of asset manager blogs or even blogs like this one that reach DIY investors)
cost (fintech can scale the some of the analytical, data, execution, and funding over large user bases)

The Return Stacked funds bring the same techniques for structuring efficient portfolios that professional fund mangers have understood for decades to retail investors.

Corey does an amazing job explaining the principles in this video interview in a simple way:

🎙️Building a 100% Stock Portfolio Using Return Stacking (Millennial Investing)

My notes:

Rethinking How Your Portfolio is Constructed

Modern Portfolio Theory tells us to find the most diversified portfolio and lever it up. AQR’s Cliff Asness showed that if you take a portfolio that looks very close to a 60-40 and lever it up 1.5 times, historically, you would’ve had a higher return and about the exact same risk as equities. They call diversification “the only free lunch in markets”. It largely is. There’s no benefit really to foregoing diversification, but often you have to use leverage to really unlock those benefits.

Most people in 100% equities know that when you go to a 60-40, you’re de-risking your portfolio — you’re selling stocks to buy bonds that are less risky. The only way a 60-40 can compete, even though it’s more diversified, over the long run is by levering it back up to the same amount of risk.

Notes on tax efficiency
- Equity future inefficient: because it rolls (short-term cap gain)
- Bond future is short-term cap gain but at 60/40 vs regular t-bonds (which are state tax-exempt but normal income at fed level — really depends on investor unique situation: https://www.simplify.us/blog/can-futures-based-bond-funds-improve-tax-efficiency)
- Remedy: ETFs and Tax advantaged accounts OR trade-off for alpha
Leverage
- optimal math number vs behaviorally prudent number (difference bt risk capacity and risk tolerance)
- Leverage has bad reputation but if only if you pair it with concentration. All disasters have leverage at the scene of the crime but usually to increase a concentrated position.
- leverage + true diversification is an unlock and really the big thing that institutional investors understand that the average investor doesn’t. That’s the key innovation here — capital-efficient exposure to leverage while diversification keeps the risk unchanged
Fees are lower than they appear because need to normalize them to amount of risk

Finally in the spirit of retail investing strategies getting smarter, the post I wrote on Thursday is on the topic you are going to hear a lot more about using your existing portfolio to collateralize a long/short overlay enabling the possibility of generating additional alpha as well a bank of short-term tax losses which can be applied in the future to match the timing of selling your large winners.

Tax Loss Harvesting on Levered Long/Short

Money Angle For Masochists

🎙️Strong Source Interviews Ed Turner (70 minutes)

In this episode, we welcome Ed Turner, an experienced commodity trader with over a decade in the energy markets. Ed discusses his journey from trading base metals at Mitsubishi UFJ to leading Mandara’s trading desk.

Now a Senior Trader at Gunvor and an entrepreneur with Shogun Sakes Ltd., he shares insights on navigating oil trading dynamics, the transition from large firms to smaller, high-intensity environments, and the importance of risk management. Ed also explores the psychological aspects of trading and his shift from market-making to a more strategic, balanced approach.

Ed ran Mandara’s trading desk. They are not commodity traders trading around physical assets. Like my own past oil trading life they trade “paper barrels.”. Ed alludes to the same idea I’ve harped on before when interviewing candidates from banks who are used to trading around client flow— when you come to the buyside all you have is capital. You get a computer and a phone. Make money come out of it. The interview articulates what that problem looks like better than I’ve been able to. It’s a poker game. And it’s a grind. From listening to Ed it also strikes me that Mandara is a prop trading firm that resembles a market maker — philosophically and in practice. Ed wrote the firm’s risk manual and was heavily involved in education in addition to running the desk. Strong recommend.

Stay Groovy

☮️

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