The Investing Version Of "Nothing Good Happens After Midnight"
This was a brutal week in the investing world. The fraud at FTX was one of the largest overnight destructions of wealth in financial history. It impacts holders of crypto assets, the employees building projects in decentralized finance, equities, and traditional VC firms (Sequoia allegedly wrote down a $200mm investment to zero).
And with FTX and SBF, it’s worse than other times in crypto. It’s so much worse. They posed themselves as these people that were trying to make the world better. There’s a difference between crypto going down because no one believes in it and crypto going down because it’s systematically being rugged…Many innocent people got wrapped into this because they saw Tom Brady or they saw Sam’s face on a telephone pole - and it was supposed to be safe.
In a calibrating industry, it’s easy to find holes to exploit, which is what FTX did perfectly. They saw opportunity, the VCs saw that they saw an opportunity, and people that wanted to be in crypto believed all of them. And of course, it’s like - well why *wouldn’t* you believe them. And that’s the hardest part.
While I agree with everything she says in the post, I want to address what’s unsaid.
There's way too much obsession with investments as a way to get rich in the first place. It’s misallocated attention. It’s misplaced energy. I feel like the collective benefit of saying this is so diffuse that nobody has the incentive to tell you the truth. Just like Big Food or Big Ag will never commission a study on “intermittent fasting”. No single entity profits from the absence of eating 3 American-sized meals a day.
Same with investing. Who gains from telling people that much of the brain cycles we spend on investing are a waste of time? Maybe advisors with white-glove fees and Vanguard. Vanguard is a quasi-mutual company (investors are owners of the asset manager in a sense). Bogle undercut an industry to tell you what others wouldn’t. There are worse people to be aligned with.
We need a bit of real talk. I’m sorry if you feel like I should have told you sooner (although, I did). At first glance, this talk might sound discouraging. But take a second glance. This should liberate you. This will give you back countless hours of your time that you can use to row towards your goal with strength. Without distraction. And with less reliance on fate.
[This is an edited version of an off-the-cuff thread I wrote when I was too lazy to get out of bed yesterday]
Unless you are already rich, the proposition of earning 6% per year (insert your favorite ERP) with a 20% standard deviation and a fat left tail is not going to lead to the durable wealth you want. At least not on the timeline you want. This is discouraging and fairly obvious if you look at the proposition for what it is (some people might think you earn 10% per year in equities or harbor some other delusions about the proposition. It’s 2022, you’re entitled to “use Your own illusions” — sorry it’s the 30-year anniversary).
But we’re Americans. We are all entitled to do better than average, right? 🤨
So we snuggle up to crypto, privates, self-storage, or whatever makes you feel special. Unfortunately, investing done well, shouldn’t feel comfortable. Truly fat risk premiums feel like caffeine before bed. They make you anxious and insomniac. You should be afraid of feeling warm and righteous. This is the fundamental nature of beating point spreads.
Don't you think that adjusted for risk (even simply by a street-smart “this sounds too good to be true” instincts) that the propositions of these shiny investments are similar to what you are presented in public markets? That’s actually your best-case scenario, where you avoid stepping on landmines.
Think about it.
There are super rich, savvy people staffing professionals in their family offices with tentacles everywhere bidding on everything. It's very unlikely to find something special unless it's your literal full-time job. And even when you do find something compelling in your part-time research, there should be a lower bound to your skepticism that inhibits you from sizing the exposure in a way that would make you rich quickly anyway.
If you put on your ‘equilibrium thinking’ cap you realize that it's contradictory to think you can get rich quickly, in a prudent way, investing as a part-timer. Someone needs to hold underperformance bags. Unless this is your craft, you should expect to be a baggie if you push. The very conceit that you can find and pull out a meaningful number of diamonds from a coal pile picked over 24/7 by well-capitalized professionals is illogical.
Said simply: If you do not devote your life to the competitive task of investing, you cannot get rich quickly. You might by accident but hope is not a strategy. (Anyone know the money-weighted returns of ARKK or crypto investors? I suspect, despite positive track records in return space, their total dollar p/l is very negative. Sometimes the simplest benchmark is useful — what are your net dollar profits? There are fund managers that have probably made more from fees than their investors have made in p/l.)
And devoting your life to investing is not a guarantee either. It’s a low signal-to-noise endeavor. The best you can often hope for is a “chip and a chair”.
Nothing Good Happens After Midnight
You know exactly what that expression means.
The markets version of this is:
Don’t obsess about investing beyond the point of diminishing returns.
Yes, you should absolutely learn about:
implementing or getting help to construct a portfolio with simple rules
Now stop and go home. It’s that last double-shot Irish-car bomb at last call that causes the morning headache (or coyote morning 😬)
If you want to get rich without being reckless, Naval Ravikant has a valid formula:
accountability (own your risks)
[I would actually edit this. My version:
do work nobody wants to do because it’s hard or otherwise unattractive
I’d like to say “accountability” but looking at the new American dream of private gains/socialized losses and all types of bureaucratic capture I need to annoyingly quote Taleb:
Courage cannot be faked; the warrior bore the risk of his deserved glory in the service of his countryman. The 'primacy of the risk-taker' has been a feature of nearly all human civilization. When we reward leaders who did not bear commensurate risks we undermine virtue. Society frays as the truly virtuous/courageous bristles as they watch.]
A thought for the time
For the innocents and believers who made careers in crypto and made it their specific knowledge, I'm sad and sorry. I have a closet of FTX swag because I have a friend there and felt terrible watching this week.
I do believe it was a good bet to go into that world (although not to denominate your whole net worth in it... specific knowledge and the numeraire you take its yield in are different) and would have considered it myself. A career in crypto was a reasonable bet because the human capital is fungible with other careers, thus lowering its opportunity cost.
In addition, crypto as a small investment allocation was reasonable. But as an investment, like all investments, sizing is everything.
If you want to go big or go home, it's best to do so on your skills or personal edge. Not on arms-length allocations to something that is big, accessible by mouse, and widely known about. The risk/reward once it had achieved mass awareness couldn’t be too out of line with other investable assets despite what all the promotors tell you.
And, critically, before you can allow yourself to get excited, remember that any sensible sizing rules neuter the returns to effort. That means you’ll always be disappointed in how much you won when you were right. In chapter 2 of Laws Of Trading Agustin Lebron explains — good trades make you wish you traded bigger, bad trades make you wish you traded less or none.
The very act of trading subscribes you to remorse. In hindsight, you always regret your sizing.
A parting message
Focus on your human capital to get rich. Your human capital > financial capital, it just doesn’t show up on a spreadsheet. In my own life, I don’t even say “investing”. I think of growing assets as “savings plus”. I’m just trying to maximize the chance of meeting my future liabilities.
I’ll rely on myself to get rich (not that anything that vague would motivate me, but you know me by now).
More on these themes from the Moontower Money Wiki:
Today’s letter is brought to you by the team at Mutiny Fund:
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The Cockroach strategy gives investors exposure to asset classes designed to perform in each of those environments including stocks, bonds, commodity trend strategies, long volatility strategies, and gold.
Disclaimer: Investing is risky, and you are reminded that futures, commodity trading, forex, volatility, options, derivatives, and other alternative investments are complex and carry a risk of substantial losses; and that there is no guarantee the strategy will perform as intended.
My buddyhas a great newsletter that tackles a different evergreen market concept each week and contextualizes it with data. He recently created a useful series where he interviews other investment writers about their own frameworks for thinking about investing.
I was honored to be asked. It was also a great excuse to consolidate my own thinking about what people should emphasize. It turned out to be a fair amount of work to put together because the questions were thoughtful. The questions were sent in a document giving me the space to take my time so I could reciprocate with thoughtful answers and links.
Interview: Decision-making for investors with Kris Abdelmessih (Part 1)
Interview: Decision-making for investors with Kris Abdelmessih (Part 2)
This week I edited the index of all my writing so specific categories could be linked to separately.
Finally, there was an interesting discussion on Twitter about SBF’s sizing:
If you want to learn more about Kelly Criterion, I compiled an index in the Moontower Volatility Wiki:
Last week I wrote about the social club idea I launched with local friends:
The spirit of this project is to unlock serendipity and growth from the informal yet material bonds that glue a community together.
It’s an instance of a more abstract idea — not all of our values can be measured and of course not all of the things we measure have value.
Check this out:
Fairness is overrated and bragging is underrated (6 min read)
This post resonates not so much because I was interested in co-living (although with my in-laws moving in next door we are in the process of cutting a hole in the fence so the kids can go back and forth!) but I like experiments in motivation. Experiments in appealing to the multitudes within us and the needs that get neglected because they are more squishy than conventional legible desires.
Suppose you live in a house with strangers. It's typical to designate responsibility with a chore wheel. But what if we re-framed the responsibility as a "brag sheet"? This article provides some experimental models for motivating any group that shares common goals. While it admits that these experiments do not make sense at scale it wonders how many examples abound that lazily accept the large-scale solution.
How big can a network become before its governance needs to change?
At small scale do we borrow too much from large-scale architecture forgetting that the trade-offs that exist at a large scale may not apply at the smaller one?
Choosing a "brag sheet" over a chore wheel may be an example of low-hanging fruit that applies to everything from co-living to motivating our children.
At some scale, overbearing rules might be necessary to impose order. But it would be nice if we could adhere to a simple maxim: leave it better than you found it.
That’s my attitude to the internet. Thanks for helping me.
I was invited to be a part of the Substack Meetings beta. You can book a time to chat. I’m more expensive than a 900 number from 1988 and have a less sexy voice.
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"I feel like the collective benefit of saying this is so diffuse that nobody has the incentive to tell you the truth. Just like Big Food or Big Ag will never commission a study on “intermittent fasting”. No single entity profits from the absence of eating 3 American-sized meals a day."
Interesting thought. Daniel Schmactenberger said something similar in "The war on sensemaking" (https://youtu.be/7LqaotiGWjQ?t=860) that even if information is true and truthful, the context can be shaped by omitting facts because there is no financial incentive to communicating them.
Great piece, loved it. Was great interviewing you!