Every Shot Must Have a Purpose

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I rather enjoy playing golf. But there’s no denying golf is infested with raccoons trying to sell you stuff. Swing trainers. Special clubs. Systems “guaranteed” to lower your handicap.

This ranges from the oversold…

…to the utterly ridiculous.

Not to mention a fair bit of coattail riding on anyone with an aerospace engineering background.

Golf’s a lot like investing that way. And a lot like life, for that matter. Once I realized this, I began to enjoy the game much more, as an exercise in both mental and physical discipline.

Any progress I’ve made on that front, I credit first and foremost to the book Every Shot Must Have a Purpose, by Pia Nilsson, Lynn Marriott and Ron Sirak. It’s rather critical of current methods of golf instruction and training—particularly of what the authors see as an overemphasis on technical mechanics at the expense of player psychology. Early on, they write:

This is where honesty comes into play. The first step toward expanding our perception of the game in general and reaching a better understanding of our own game in particular is to face reality. If that bad swing was caused because you tensed up under pressure, hitting a million practice balls won’t fix the problem.

Rather than the minutiae of swing mechanics, or gimmicky shortcuts, you’re better off focusing on:

  • Course strategy and risk management
  • Shot commitment
  • Focus and tempo

We see this in investing, too. Particularly when we’re investing other people’s money. The most grievous portfolio construction issues I see inevitably seem to center on basic issues of strategy and commitment. Particularly around whether a portfolio should be built to seek alpha or simply harvest beta(s). 

You don’t have to shape your shots every which way and put crazy backspin on the ball to break 90 in golf. Likewise, not every portfolio needs to, or even should, strive for alpha generation.

There are few things more destructive (or ridiculous) you can witness on a golf course than a 20 handicap trying to play like a 5 handicap. And it’s the same with portfolios. For example, burying a highly concentrated, high conviction manager in a 25 manager portfolio at a 4% weight. Or adding a low volatility, market neutral strategy to an otherwise high volatility equity allocation at a 2% weight. (See: Chili P is My Signature

I’ll go out on a limb and suggest very few financial advisors and allocators build portfolios capable of generating meaningful amounts of alpha. The hallmarks of portfolios purpose-built for alpha generation are concentration and/or leverage.

The hallmark of a portfolio lacking strategic direction and commitment, on the other hand, is optical diversification that rolls up into broad market returns (more pointedly: broad market returns less expenses).

I’m absolutely not arguing every portfolio should be highly concentrated. Or that every portfolio should use leverage. I’m merely arguing that portfolios should be purpose-built, with portfolio construction and manager selection flowing logically from that purpose. 

How is it we end up with portfolios that are not purpose-built?

We don’t commit to the shot.

Nilsson, Mariott and Sirak describe a textbook golf example:

Patty Sheehan, the LPGA Hall of Fame player, was playing the final hole of a tournament when she needed to hit a fairway wood second shot to a green protected by water on a par-5 hole. A birdie was essential to play in contention, and the possibility of an eagle was a chance she had to take. What resulted, however, was her worst swing of the day–in fact, probably one of the worst swings she ever made in competition—and she cold topped the shot. As the ball bounded down the fairway and into the creek short of the green, she watched her chances of winning disappear with it. […]

[T]he TV commentators missed the point. If they wanted to run a meaningful replay they should have shown the tape of the indecision BEFORE Sheehan hit the shot. First she had her hand on a fairway wood, then she stepped away from the ball and her caddie handed her an iron. Then she went back to the fairway wood. The indecision in the shot selection led to a lack of commitment during the shot. The poor swing resulted from poor thinking.

For an investment committee, the rough equivalent is the four-hour meeting that results in a 50 bps change (from 4.50% to 5.0%) to the emerging markets weight in the Growth model portfolio.

At best you are rearranging deck chairs with these kinds of moves.

Granted, when it comes to investing some of us will have a more difficult time managing shot commitment than others. For the self-directed individual, this is simply a matter of managing your own behavior. Advisors and institutions, on the other hand, must manage other people’s behavior, often in group settings.

There’s no easy solution to this issue. It can be fiendishly difficult to manage. But there’s at least one essential precondition for shot commitment in investing and that’s a shared investment philosophy. A code.

I’m not talking about the obligatory investment philosophy slide of everyone’s investor deck that’s included to pay lip service to a “process orientation.” I’m talking about genuine philosophical alignment. The kind of philosophical alignment that runs deep into the marrow of the decision makers’ bones and therefore permeates every aspect of portfolio design and management.

What does this look like in practice?

More time spent on philosophical discussions around persistent sources of returns and, more importantly, whether the investor(s) can credibly access them.

Significantly less time spent on chasing shiny objects, debating the merits of individual investment manager performance and statistical rankings of investment manager performance. (In fact, it’s okay to spend basically no time on this at all)

Significantly more time spent on managing the alignment of expectations across investment professionals, clients and other stakeholders in an accessible, plain-language manner. 

This is fairly straightforward in principle, but extremely challenging to execute.

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ET Pack Gathering #1 – Northeast US

Image result for smoke rising

At the urging of some pack members – and because we thought it was a great idea – we will be hosting the first official Pack Gathering in our headquarters town of Fairfield, Connecticut. The idea is, well, ideas. Genuine connection. But if you’re part of the Pack already, we think you probably already know what you’d want to get out of a time like this.

We want an intimate affair, so we are keeping the event to thirty pack-members, solo and sans family for this first event. Because of the limited number of spots, please only sign up if you’re sure you can and will attend.

Spots will be held open for ET Professional subscribers through Friday, July 12th, after which we will open up remaining spots to ET Premium subs. To sign up, simply email Harper at harper.hunt@epsilontheory.com.


Date and Time: 5PM on Saturday, August 31, 2019
Location: Fairfield, CT. Address to be provided to those signing up.
Format: It’s a BBQ. Think beef, chicken and a pig roast. We will have a couple vegetarian options, but I’ll be honest – they’re going to be lame. Dress like you would for a backyard BBQ.
Cost: None. Bring a wine, beer or spirit you’d like to share with the group. If you don’t drink, then feel free to bring something else you think people would enjoy.

Narrative Means Never Having to Say You’re Sorry

Being a full-time missionary – someone who leans on the power of memes and narrative to nudge others into some particular way of looking at the world – often requires a certain amount of sociopathy. Not always, of course. We’ve written several times about when and how we think narrative can be marshaled to serve worthier causes than the interests of a nudging oligarchy. To wit:

Still, it is no coincidence that when we run down our list of professions we collectively associate with corrupt, dishonest people, nearly every one is intrinsically dependent on selling you a story. And every one that isn’t is perceived as being corrupt because they are either seen as the source of that corruption in others (e.g. Lobbyists) or as the agent of structures seemingly designed to fail to live up to promised service standards (e.g. HMO Managers, Nursing Home Operators).

Source: Composite of 2016-2018 responses to Gallup’s Americans’ Ratings of the Honesty and Ethical Standards of Professions Survey

Not all storytellers are missionaries, of course. When we refer to missionaries, we are referring to a game theoretic concept. We mean the people who seek to steer and influence common knowledge – the things that we all know that everyone knows. That, or they’re people who are in a position where they can’t help but influence common knowledge, because their pronouncements are the kind that everyone knows that everyone else has heard. Presidents. Congressmen and women. CEOs. Celebrities. Tech visionaries. Major media personalities and outlets. Within just the investment community, there are similarly prominent voices. Fed Chairs. Activists. Celebrity PMs.

The sort of elective sociopathy that it takes to succeed as a self-interested missionary almost always rests on two malignant abilities: the willingness to stretch the truth, and the fortitude to stick with a story no matter how it goes wrong (or who it hurts). We’ve written a lot about the former.

We have written less about the latter, although it is a crucially important human tendency to monitor in ourselves and others all the same. The unwillingness to admit error is part of an equilibrium-maintaining strategy in a narrative-driven competitive game, and our susceptibility to it is a testament to the human animal as a living embodiment of Gell-Mann Amnesia. In short, we are built to empower unrepentant liars. More disconcertingly, in a widening gyre, those who cultivate the skill are more likely to rise to power of all varieties (yes, even more than normal).

When a missionary permits common knowledge about himself or his ideas to break – the veils of abstraction around their identity or the narrative they’ve promoted nearly always break, too. All of the once-removed models for how we saw and thought about the person and what they meant, the justifications we conjured for their behavior or actions, the cultural significance of believing the reports about them – all disappear almost immediately. Even when the same evidence or factual knowledge exists, absent an admission of error, we still find it brutally difficult to shed the abstractions which color our interpretations of whatever they are purported to be guilty of, especially if we have powerfully positive or negative opinions about the person.

Don’t believe me?

Here’s a fascinating little study on this topic from Richard Hanania at Columbia University’s Arnold A. Saltzman Institute of War and Peace Studies (h/t to Rob Henderson). The gist is this: if your standard is the public perception and credibility of the offender, apologies don’t work. They hurt.

Admission of error is the enemy of narrative.

Yes, there are consultants and others who counsel these people to admit error, but that isn’t because the apology will aid their public perception or any narrative that they are promoting. It is almost always because our taboos require the act of penance to permit others to do business / interact with that person again in an economic sense, which – since we’re talking about influential and famous people here – will almost always happen.

If we want to see more clearly through narrative abstractions, well, we can’t eliminate our sensitivity to those stubborn memes, but there are more lessons here for us as citizens and investors. There are things I think we CAN do:

  • We can seek to be wise enough to be more skeptical in general of those not given to admitting error.
  • We can seek to be wise enough to be more merciful in general to those who do.

It isn’t easy. It will make us vulnerable. We will get burned. But it IS one of those rare places where the often-conflicting philosophies of Clear Eyes and Full Hearts align.

A Modern Vocational Curriculum

When I wrote Starry Eyes and Starry Skies a few weeks back, I made the argument that adequate vocational training for just about every financial services job I could think of would take several months (at most). A few readers asked me why I didn’t think that a longer, more in-depth liberal arts education had value. They clearly didn’t read the piece.

Still, it’s worthy of an answer: I do think it has value. But its value is caught up in the conflicted mess of the three products being sold by American universities: mind-expanding liberal education, vocational training and credibility signaling. We do no service to those whose jobs will ultimately never require them to use even the most modest insights or critical thinking gained from detailed study of Dostoevsky by forcing them to do so for four or more years. We likewise do no service to those who would learn for learning’s sake and yet subject them to four years of watered down classes that have to justify their value in some vocational or competitive signaling sense against other departments or institutions.

When you try to solve for multiple problems, you are almost always solving for only one.

A few other readers who actually read the piece asked me what I thought that truncated vocational training would look like. More recently, the CEO of Presto, a hospitality technology company, posted a similar, if more general question. Specifically, he asked:

If you could redesign college education for smart people who don’t know what they want to be, what would it look like?

His answer was quite good. I just have a different take. So here’s my answer: an intensive set of three separate quarterly sessions over a period of nine months, structured not to identity what is most important but to target the fundamental modern skills that are not necessarily more easily acquired in a work-place setting, and which provide the easiest ramp for additional hard- and soft-skill development in other areas once in that professional environment. It is an important distinction, because in almost every case, the most important determinants of success will have little to do with curriculum and knowledge, and far more to do with temperament, values and natural abilities in a range of different areas.

The topics excluded in the curriculum are left out for very different reasons. You don’t include econometrics because it’s useless unless you plan to become a graduate-level economist. You don’t include a productivity software class because two weeks of Excel without a mouse in your first job will do a better job of it. You don’t include an ethics course because if you are prone to unethical behavior, it sure as hell ain’t gonna be a class that changes that.

I’m sure you’ll let me know in the comments how much you hate it.

Quarter 1

Quarter 1, Module 1: Professional Writing

Good writing is the rarest skill among young professionals I have hired. It is also the trait shared among those who progressed quickly in accomplishment and responsibility.

  • Short-form writing:
    • Extracting and synthesizing key information
    • Bulletized / short-form writing
    • Note-taking
    • Email / slack-style
  • Long-form writing:
    • Technical
    • Analytical

Quarter 1, Module 2: Calculus

I’ll get the most argument on this one. But y’all, there really are a lot of jobs that benefit from understanding the calculation and implications of rates of change. You need more math than high school gives you.

  • Limits, integrals and derivatives
  • Differential equations
  • Optimization and graph construction

Quarter 1, Module 3: Fundamental Managerial and Financial Accounting

Every graduate who might work in some kind of business or non-profit (which is, as it happens, just about all of them) should be able to read and largely understand its financial statements, and should have some sense of how to build a similar financial statement for a household or small enterprise.

  • Ledgers, accounts, line items, debits and credits
  • Accruals and cash
  • Assets, liabilities, equity, income and expenses
  • Standardized structure (IS/BS/CF)

Quarter 1, Module 4: Interviewing, Public Speaking and Debate

Most university graduates are terrible extemporaneous, prepared, ad hoc and informal verbal communicators.

  • Basic formal logic
  • Research, preparation and performance techniques
  • Interview question formulation, conducting
  • Email, phone, conference call, video call, and meeting-size variable etiquette
  • Practical settings

Quarter 2

Quarter 2, Module 1: Capital Markets

You could call this corp fin, too, but importantly. the right course design here needs to emphasize far more about fund-raising, sources of capital and project/investment return evaluation, and far less about valuation techniques and grinding out WACC calculations. In short, a young professional should know what ROI means, the kinds of decisions that improve it, and the kinds of manipulation that others will practice to make it look improved. They should also know what secondary financial markets are and how they work at a high level.

  • Forms, sources and costs of capital
  • Returns and project evaluation
  • Capital structure optimization, credit and risk
  • Secondary markets

Quarter 2, Module 2: Statistics and Probability

  • Conditional probabilities
  • Measuring relationships, regression, optimization
  • Measuring central tendency and distribution characteristics
  • Interpretations, esp. applicability of generalized measures

Quarter 2, Module 3: Programming in Python

This will change at some point in the future. For now, any graduate of any post-secondary program purporting to have vocational influence should be at least proficient in the structure, syntax and methods of Python programming.

  • Structure and syntax, objects and classes
  • Libraries, API and packages
  • Functional programming
  • Data integration
  • Intro to ML, NLP, Tensorflow, etc.

Quarter 2, Module 4: Modern Sectors, Industries and Trade

Macroeconomics curricula are only slightly less useless for most students than microeconomics versions. The gap left for most students by removing them, however, is a simple, if detailed survey of what kinds of companies are out there, what their business models are, how they integrate, who their vendors and customers are, how they make money and how they fund themselves.

Quarter 3

Quarter 3, Module 1: Project / Experiment Management

The skill at organizing projects and resources is a technical one useful to almost any entry-level professional role. It is also a philosophical one that is critical to growth in managerial or leadership positions.

  • Workflows and dependencies
  • Timing, resource allocation
  • Organizational design
  • Conventions for group communication, meetings, logistical planning
  • Marketing experiment design and execution

Quarter 3, Module 2: Databases and Data Analysis

Most skill with data analysis tools and techniques will be best developed in a working environment on live projects. But fundamental knowledge here is important to building those skills.

  • Data classification, ordering and storage
  • Data retrieval, metadata and queries
  • Common data analysis techniques and packages
  • Applied statistical techniques

Quarter 3, Module 3: Business Law

The first job a graduate has should not be the first time they’ve read a contract, encountered its peculiar terms of art, navigated between defined terms and a contract body, or seen disclaimers, indemnities or closing conditions.

  • Torts and contracts
  • Regulation, regulators and SROs
  • Universal principles, esp. fraud

Quarter 3, Module 4: Hospitality

No fourth module this quarter. Instead, everyone works a food service job.

No, I’m not kidding.

Classes on sales are nonsensical gobbledygook, but the idea is right. It’s just something that can only be captured in a practical setting. If most graduates lack anything as much as they do writing and general communication skills, it is an understanding of how to respond with grace under pressure. It is the realization that one is always, always selling in every direction in any professional setting. It is a mentality that emphasizes hospitality, a much better and more comprehensive concept than client service or customer service models.

All told, with decent instructors, I’d be happy to put up a graduate of this program of equal natural abilities against a graduate of any undergraduate program in the country.

It’s unrealistic, I suppose, to consider that we will be able to break the stranglehold that signaling-based institutions have on structuring an expensive four years that functionally serves only a portion of students at all, and almost nobody well. Still, it is worthwhile for us to go through thought experiments like this, if only to perform self-evaluations, give thought to how we structure our professional education programs within our businesses, and how our own children’s educations are going.

It is also important for us to consider how we can make it feasible for a true, liberally minded, horizons-expanding education to exist without the frequently oppositional aims of signal-maximizing and vocational preparation. You won’t be surprised to hear that I think it starts younger, with less reliance on the system or with more reliance on the Pack.

Yeah, we’ve got a lot more to say about this.

The Crossover Point

The New York Times published a powerful story this weekend.

It was the kind of story that has become entirely too common – the story of a young woman, a child from a suburban Dallas megachurch who was abused by a church leader. Not only that, but a leader of the church’s children’s ministry. Utterly heartbreaking, and the kind of thing that our growing familiarity has made too easy to ignore, or to allow not to affect us. 

And yet the story was different from those that would be familiar to us, at least in some small ways. Unlike the prior scandals in the Catholic Church, for example, it wasn’t that the authorities weren’t immediately notified. They were. It wasn’t that the abuse wasn’t taken seriously by church leaders. By all accounts and by all evidence, it was. It wasn’t even that the church didn’t take swift action to prevent anything like this from happening again. It appears that they did. It was that within the church and without, the leaders acted in ways that demonstrated their great concern for how the full revelation of what transpired might impact their ministry, even if it meant ignoring the need of the victim and her family to be seen. To be heard. Regarding the church’s discussion of the termination of the minister, the Christian Post reported:

If we can suspend our disgust long enough to consider what could possibly have gone through their heads to miss the mark by so much, it is not difficult to find at least some empathy. I think these are people who earnestly believe that their ministry is doing important work. They are people who believe – perhaps with justification – that they would never get a fair shake from people on the outside to tell a fair, true story about what happened. They are running through scenarios of the harm that might be done if that happened, if they didn’t control as much of the message as they might. They are trying to find a balance somewhere between the things they know are right and the things they believe are important and worthy of defense.

But this is a lie we tell ourselves. There is no balance to be found between what is right and what we believe is important.

This conundrum isn’t a problem only within this church, or The Church, for that matter. It is a natural feature of scale. 

There is a scale of all activity at which we function and are (more or less) treated and perceive ourselves as humans, and there is a scale of activity at which we function and are treated and perceive ourselves in context of some group to which we belong. I am not talking about tribalism, necessarily, but a change that takes place whenever what we need others to believe to be true about a thing we do becomes more important than what we know to be true about that thing. 

It happens with churches when The Church! becomes a thing, something seemingly more important than the unique and several relationships of accountability and discipleship that justify the thing in the first place.  It happens with businesses, when the single-minded pursuit of an idea gives way to The Business!, a thing of job creation and reputations and expectations. It happens with investment strategies, when our philosophies, principles and maybe even our edge are subsumed into The Fund!, this thing of track records and sustainable management fees and the long-term franchise value of the business we are running.

I’m not talking about a technical problem.

I don’t mean the technical way that any edge we have disappears when our assets become too large because of some liquidity-induced impairment to our flexibility and ability to take on certain positions. I mean the way that our thinking changes when our business or our fund reaches the point at which our management fees are enough, when they allow us to employ people, to start thinking about the capitalized value of our business instead of the returns we generate. 

I don’t mean the technical way that a business or church or any other affiliation of humans changes when it gets bigger and we can’t always have lunch with or talk to everyone every day. I mean the way that our thinking changes when the Important Mission of that place becomes important to us beyond the sum total of the things we do together as part of it. 

To be sure, the line where this happens isn’t a line between good and bad, although the Village Church example shows just how easy it is to turn this illusory conflict into brutally poor decisions. Many of our critically important institutions – national identity, culture, community, enterprises built around grand ideas – demand that we cross it boldly. Invariably, however, it is the line where we will be forced, sometimes quite often, to decide between what is right and what we believe is important (a false choice, even so). It is the point at which our thinking ceases to be about the right way to treat an individual, and where we begin to consider the consequences on some other thing of value.

It is the Crossover Point. 

As investors and citizens and friends, I think part of Finding Your Pack means developing relationships of meaning, mutual trust and accountability in which the relationship itself IS the thing. It also means knowing where your Crossover Points lie, and being conscious and intentional about crossing them. For professional investors and citizens alike, I think it’s a worthwhile dimension for self-inventory and consideration. 

truth and Truth

Smiley-faced authoritarianism is rarely announced with dire, thundering rhetoric.

Instead, it is delivered with smiles and hashtags. It is celebrated as an achievement. It is tweeted with the perfect celebratory photo, tinted with just the right filter, Twitter handle watermark in just the right place. If the composition of the photo can frame the idea of ‘speaking truth to power’, all the better. If it can superimpose self-praise in bold text, we are in the smiley-faced sweet spot. If that self-praise can incorporate an Orwellian euphemism like, say, “legitimize a growing industry,” it is hard to see how we can do better.


There are powerful memes here: ‘legitimizing’ an industry isn’t just a creepy paternalistic turn of phrase – in this case it is also a meme of equality! Safety! Protection! But the memes attached to the bill itself were even worse. Around the same time that Rep. Gilchrest proposed CT HB 5754 earlier this year, another bill was proposed and referred to committee – HB 6742. That second bill was introduced with the following description: AN ACT CONCERNING THE ERADICATION OF HUMAN TRAFFICKING AND FORCED AND EXPLOITED LABOR IN STATE CONTRACTS. What came out of committee? Narrative, of course, in the form of the new frankenbill: AN ACT CONCERNING HUMAN TRAFFICKING AND STATE CONTRACTS AND THE LICENSING OF ESTHETICIANS, NAIL TECHNICIANS AND EYELASH TECHNICIANS.

Yes, you read that correctly.

The original bill had all of the usual trappings of occupational licensing legislation: high school diploma requirements for professions with no conceivable justification. Big recurring fees paid to the state. Huge fines (i.e. $25,000) for violations. Absurd training requirements. In this case, the state of Connecticut felt it was necessary to impose all of these requirements on people who wanted to become hairdressers, makeup specialists and nail salon workers.

Occupational licensing laws are almost universally terrible. They ought to be one of those rare Widening Gyre-crossing miracles that unite both market liberals and full-on socialists. They disproportionately harm the poor. They disproportionately harm women. They disproportionately harm minorities. They promote anti-competitive behavior that reduces the rewards for well-run businesses and entrepreneurs and protects poorly run enterprises. They protect petty cartels. They make no one safer. They produce almost no advantages for anyone other than (1) poorly run incumbents looking to raise barriers to entry, (2) rent-seekers looking to profit from new educational requirements and (3) the politicians who receive funding from them. For all of those reasons, there is a strong movement to pull back these cartelization rituals in most states, and in most jurisdictions a bill like this would undergo far more challenge.

But what is truly terrible, and what permitted the bill to advance at all, was the cynical adaptation of the human trafficking angle, a gift from the narrative gods. By grafting it to the early language of the bill, it permitted supporters to present opposition to it as support for a vile thing. It abstracted the nuts and bolts of a purely bureaucratic proposal into unassailable concepts. And the bill sailed through committees and amendments.

There is Truth-with-a-capital-T in the horror of human trafficking. It happens. It is detestable and ought to be resisted with all the force we can muster. And it has been facilitated in the past through nail salons in particular. And yet the truth-with-a-lower-case-t, the facts, are that there is no evidence that the paltry ‘notice-posting’ requirements of the draft bill or any of the licensing would do anything more than provide lip-service to the very real problem that was used to adorn the legislation for narrative purposes. There is also a growing body of evidence that politicians, prosecutors and police are increasingly adorning other charges with public assertions of human trafficking on the front-end of processes to quickly convert public opinion, after which (because the truth belied the Truth) those claims have often fallen apart (e.g. Bob Kraft investigation).

The final bill is, thankfully, more limited, and requests feedback from the incumbents in the affected industry prior to drafting the scope and specifics of licensing requirements that will be promoted in whatever final legislation emerges. Still disappointing that it passed, but that’s a political opinion of mine, and not an observation on the cynical manipulation of narrative, which has largely been removed.

The lesson, however, remains: beware those who shout Truth and ignore truth.

In the Widening Gyre, I suppose this will be an informally recurring series.

Fellow Contrarians Unite!

I remember the first time I saw one of those dialect maps of the United States.

The best one is a still-active quiz on TheUpshot blog on the New York Times website. (Yes, unfortunately, it does now require you to create a free account to use it.) The questionnaire poses 25 multiple-choice questions about the word you use for certain things and how you pronounce it.

It then plots you on a map to guess where you’re from. Like my accent, my dialect similarity map is a bit of a mess. I was born in Arkansas, but lived there less than a year before moving to an exurb of Chicago for 13 years. The rest of my youth was spent in rural southeast Texas. I guess the logic of the quiz split the difference and decided to call my dialect Generic Flyover State.

But Lord, what a joy it was to say ‘pop’ when I did make that move to rural Texas. It was always jarring to people – even though it was an extremely common term on TV and in movies. It always got a reaction, and being in high school, we always parsed through the relative logic of our terms. I argued that calling everything a “coke” just created ambiguity as to whether you were expressing a brand preference or general request for soda, and they teased me by asking if I made the same distinction on Kleenex. I loved it because it made me different.

I was a contrarian, you see.

When I started working in New York, I wore my mildest of Texas twang and my country-ass name like a badge of honor. I mean, how many people get to say they were named after their dad’s hunting dog? The couple times I talked to my father on the phone at work, a small crowd would huddle around the door. It takes about 5 minutes talking to him for my fast-talking mild twang to transform into something much more like his deep, slow West Texas drawl. I loved it because it made me different.

I was a contrarian, you see.

I had always thought of myself in those terms as an investor, too. If you don’t have and express a different view, and if you don’t have an edge on that different view, you can’t outperform. This isn’t rocket science. In my years of meeting with fund managers of every variety, I don’t think I’ve met a single professional investor who didn’t think of themselves that way. Obviously it doesn’t always manifest in the same manner, but anyone who is in the business of trying to get paid for taking compensated active risk takes that risk on positions where they disagree with what they think the market is discounting.

There is just one problem: With very few exceptions (e.g. risk arb, some rates trades), it is nearly impossible to confidently assert what consensus IS. Sure, the market gives us a ‘consensus price’ of a sort, but that’s not really what we’re talking about here. We’re talking about the fundamental and macro consensuses that guide our forward-looking expectations, which can vary wildly even if they arrive at the same present market price. The result, at least in my experience of meeting with and evaluating investors, is that contrarianism usually boils down to one of these two definitions:

My views are different from those of the (relatively) tiny universe of investors I talk to.

My views are different from the straw man of “consensus” I built.

This is an awful lot of hand-waving given the basic importance of the question.

We investors go to conferences full of pension, endowment and foundation peers and come back with notes on what risks and opportunities everyone is focused on. We read partial surveys of what some subset of investors says they’re most concerned about. We peruse our social media feeds, dominated by a non-representative sample of small-AUM players who ultimately have little influence on asset prices. We talk to other private equity people, or other hedge fund people, and we start to build this idea in our head that we’ve got our finger on the pulse of consensus. We dutifully read and incorporate into our understanding of possible views the Big Daily Note from our macro fund, even though we’ve got ten years of returns telling us it has jack squat to do with the way they’re positioned. Maybe we make the pilgrimage to Omaha, not to build a model of consensus but to share in the group delusion that the real contrarians are just the people in that room.

We are an excited kid from Illinois who thinks he’s spotted a contrarian opportunity because he’s now surrounded by Texan kids who say ‘coke’.

Maybe we allow ourselves to believe that EPS estimates and macro predictions from the sell side somehow form a consensus that we can invest against. Maybe we start thinking of pure relative multiples as an expression of whether something is out-of-favor, or build an intuitive mental model for identifying ‘unloved’, ‘boring’ industries and sectors. Maybe it’s fund flows in and out of the sector, or sentiment from some Twitter-scraping NLP model, or just price momentum. We have a million ways of defining what it means to be contrarian, almost all of which conflict with one another in some way, almost all of which have some value in themselves, and none of which is actually the thing itself.

In other words, contrarianism is almost always a cartoon we build to make the ideas we kind of like fit with the philosophy we’d like to use as a label for them.

It is an idea we build on the shaky foundation of our unavoidably incomplete understanding of other investors, their preferences, their risk tolerances and how they would respond to different events. Wall Street isn’t dumb, either. Our trading desks, our research guys, our fund managers, our advisers – they’ve learned to sell us things not just by telling us why their process and product are the best, but by helping us complete the straw man of what everyone else is getting wrong.

And we can’t avoid it. Cartoon or not, investing without some set of beliefs about what other participants care about and will care about is just guessing. On Tilt.

What we can do is this:

  • We can spend as much time challenging the provenance of our own contrarian cartoons as we do on building the other side of our thesis;
  • We can start building the same kinds of challenges to our theories about ‘what the market believes’ as we do to ‘what is true about this company/government/issuer’;
  • We can always ask ‘Why am I reading this now?’ when someone characterizes a view as consensus;
  • We can do the same when someone says their view is ‘outside’ of consensus; and
  • We can be mindful of missionaries and what they seek to present as common knowledge.

In the meantime, I’ll be up here in Connecticut, being a contrarian.

Just like everyone else.

A Holy Day

Image result for milton lee olive

I am not much given to outward displays of patriotism these days. Part of the reason, I suppose, is how easy it is to become cynical about the many times those who would influence us rely on our willingness to raise our ‘Yay, Military’ signs to serve some other motive. In my book, anyone who uses our most powerful and uniting symbols to marshal us into division or needless conflict has earned that cynicism in full.

And yet, both the 4th of July and Memorial Day are Holy Days. The 4th of July is our Clear Eyes holiday, a day we remember the lengths to which we must sometimes go to demand our God-given rights from those who seek to deny them. Memorial Day is our Full Hearts holiday, when we remember that the greatest gift we can give to another person is to lay down those rights – at times, even our very right to live – on their behalf.

It is a question worthy of thought and consideration on this holy day: How do we shape our minds to permit no one to take from us what we must also learn in our hearts to give freely?

I’ve told the story of Milton Lee Olive – Skipper, they called him – before. The Chicago Tribune also told the story powerfully back in 2002. You can read it in full here. But Olive’s life and sacrifice are worth the telling and retelling, not least because they give us a glimpse into a life lived with Clear Eyes and Full Hearts.

The reason this kid from Chicago and Mississippi joined the army in the first place is a good first clue: His dad thought he’d be safer there than what he was doing before. What he was doing before was working with the civil rights movement to register rural black voters near his grandfather’s farm in Lexington, Mississippi. You can understand the concern. Some of the rural communities he worked with were less than an hour from another Mississippi Delta town, a town where a young man from Chicago named Emmett Till had been lynched for the terrible crime of talking to a white woman in a grocery store only a decade prior. Olive didn’t much care. He saw what needed doing and did it.

Clear Eyes.

Still, he did join the army, although as it happened, the relative safety didn’t last long. The US formally joined the growing conflagration in Vietnam in 1965. Olive’s unit – the 3rd Platoon of Company B in the 173rd Airborne Brigade – was among the first on the ground. They were paratroopers and had made several drops in five months of fighting. It was five months that turned Olive from Milton Olive III, Chicago’s Only 12-Year Old Professional Photographer – a description that adorned a business card he kept in his Bible – into Milt from the Bravo Bulls.

It took less than five seconds for Olive to become a hero – to my family and to America. In a jungle near a place called Phú Cường, very different from the thriving, suburban place it is now, Olive was on patrol with three other men from Company B. One of them was my uncle Jimmy, a lifetime soldier who worked himself from enlisted man to second lieutenant, a man who grew up in a racist town and was raised by a racist family.

Pinned by heavy fire behind a tree stump for several minutes, the squad saw a grenade roll into their midst. Without a moment’s hesitation, Olive shouted, “Look out, Lieutenant, grenade!” He took the grenade in his hand and smothered it with his own chest away from the other men. Some of his squadmates took a little shrapnel, but nothing more. The enemy soldiers were gone. So was Milton Olive.

Full Hearts.

Olive’s sacrifice changed the world for a few that have become many. I’m among them. Thankfully, few of us will be called to make that kind of sacrifice. Yet we will all have moments, I think, where we can choose to do lay down our rights and our privileges, what we think we’ve ‘earned’ and what we ‘deserve’, to make someone else happier, healthier or more free. Even people who wouldn’t do the same for us. Especially them.

If you’re in Chicago this Memorial Day and happen by the Navy Pier or the Ohio Street beach, do me a favor and stop by Olive’s memorial on the back-side of the park. Give Skipper a thought on my behalf – and yours. Only 18, but a man of Clear Eyes and Full Hearts.

A man in full.

A Clear Eyes / Full Hearts Story

I like to think that we do a good job responding to our readers’ questions.

If we have a weak spot, however, I know where it is. It is the unerring target of the question we receive most often: “What books would you recommend?”

It is a completely fair question to ask. Our work references a great many books that could (and probably should) come highly recommended. And yes, Ben and I are both passionate, greedy readers of just about anything in our areas of interest. You would think we would recommend books all the time.

But we don’t. Yes, Ben published this list…in 2014.

And yes, we fairly enthusiastically recommended Cixin Liu’s The Three-Body Problem.

But in general, it’s a question we answer a lot less often than we receive it.

I can’t answer for Ben, but for me, the reason is simple: I hate book recommendations. When I used to recommend books, it became obvious to me that people rarely took my advice. If they did, they bought the book and never cracked the cover – which is still something, I suppose, at least from the author’s perspective. I’m not being critical. I did – I do – the same thing. I’d ask for book recommendations from people I considered thoughtful almost reflexively, as if reading what they considered most important would give me insights into how they developed their much more comprehensive worldview. Or maybe I’d just buy the book and leave it unread. Or better yet, maybe I already owned it, and it made me feel like we were on the same team in some way. So I made it a rule to stop recommending books. Mostly.

I am going to violate my rule. I’m going to violate it for three reasons:

  • The book is really, really good;
  • The book expresses a sentiment that I think you will find a useful case study in Clear Eyes and Full Hearts; and
  • The book is short, which means we might all actually read the thing.

Give Michael Brendan Dougherty’s My Father Left Me Ireland a read. It will be the work of an evening.

“Telling a story at all changes your relationship to the events you are describing.”

My Father Left Me Ireland, by Michael Brendan Dougherty

Dougherty’s book explores the power of storytelling on both the teller and the listener. In a deeply personal and arresting fashion, he examines his relationship with a distant sometimes-father, his present-but-complicated-mother, and a shared heritage that acted as a sort of abstraction layer to better navigate the nature of and connections between each of those relationships. For Dougherty, that was Irish culture and identity.

Like so many of us, for Dougherty that abstraction layer – the narratives of identity, who we are, where we belong – first drifted with his mother’s influence toward Irish nationalistic kitsch. We have written a lot recently about kitsch and Deadly Theatre, most of which you can find by searching the Epsilon Theory archives for the word, “Yay.” Among its most powerful traits is its ability to act as a substitute for genuine connection. That’s an attractive enough trait to make it pretty damned common.

Over time, and with greater exposure to a more cynical world, it is similarly common to become acutely aware of the cheapness of that kind of revisionism. So it is that after early exposure to caricatured versions of what it means to be something, we often revert into a deconstructed, nihilistic revisionism of a different kind. We disbelieve and reject that there might be any fundamental value in these seemingly ‘arbitrary’ associations, ideas or institutions. Nationalism, religion, so-called culture, homeland. All hokey constructs, to be seen for what they really are.

And yet.

“Aloofness misleads us. This ironic distance is insufficient when we are really tested.”

– My Father Left Me Ireland, by Michael Brendan Dougherty

So often, this atomized view of the world, as Dougherty calls it, leads us to and is further reinforced by the process of curation, a kind of picking and choosing of ideas and associations and commitments as matters of ephemeral preference. This process supports a worldview that rejects any kind of natural, primordial connection between us and others, or between us and the ideas that ought to be clung to even when they seem to not be working in some present way. It is deeply cynical, something Dougherty recognizes in the letters his younger self wrote to that distant father.

But was I worth knowing? I doubt it. Not only was I painfully insecure, I was shallow. Someone who approaches life like a curator will exchange his faith for merely believing in belief. He’ll substitute taste where conviction belongs. I was content to slide down the surface of things.”

– My Father Left Me Ireland, by Michael Brendan Dougherty

The cynical philosophy is also a broken one – one it takes the birth of Michael’s own child to begin to repair. And there, I think, is the power of Dougherty’s argument: the family is the thing. Not the family per se (although I think both he and I would argue that has a sort of truth as well), but what we understand so intuitively when we marry, or look at our son or daughter for the first time. We know without the need for kitsch or artificial bombast the unbreakable nature of those connections, and the permanent, unquestioned, unconditional commitment they demand from us. We know without anyone telling us how important it is to help our kids know where they came from – the people who sacrificed, the lives they led, the mistakes they made and the values they kept – and to provide the roots that will permit them to make their own I AM.

And if we can know with no great feat of imagination this living contract between those who came before us and those who come after, how much further can we expand our walled gardens? Can we accept that these kinds of connections can be good or healthy with our neighborhoods? Our towns? Intellectual communities separated by miles but connected by electrons? Cultural institutions like charities, churches, artist communities? Nations? Is there room for the stories we tell to be stories about all of us?

It is something to be intransigent about, as one would be in the defense of a home.

– My Father Left Me Ireland, by Michael Brendan Dougherty

Michael’s is a story of Clear Eyes, a parable of the the narrative abstractions and constructions which can create a cheapened form of meaning. Yay, Ireland!

It is also story of Full Hearts, the recognition that there is still identity and reciprocity to be found in stubborn attachment to what kitsch pretends at – the cultural values, connection and uncynical, unfailing belief in the ideas or faiths we believe to be important.

But more than anything, it’s a story about finding a home. Finding your pack.

I think it’ll be worth your time.

The Life Aquatic

In his note, This Is Water, Ben described the fourth pillar of the current zeitgeist. That pillar is financialization.

Financialization is squeezing more earnings from a dollar of sales without squeezing at all, but through tax arbitrage or balance sheet arbitrage.

Financialization is the zero-sum game aspect of capitalism, where profit margin growth is both pulled forward from future real growth and pulled away from current economic risk-taking.

Financialization is the smiley-face perversion of Smith’s invisible hand and Schumpeter’s creative destruction. It is a profoundly repressive political equilibrium that masks itself in the common knowledge of “Yay, capitalism!”.

This is a note about living and investing in the waters of the current zeitgeist: the life aquatic.

The Life Aquatic also happens to be the title of a 2004 Wes Anderson movie, where a vaguely Jacques Cousteau-like character, Steve Zissou (Bill Murray), attempts to exact revenge on the shark that ate his friend.

Financialization is a kind of jaguar shark. Financialization is all about using financial engineering techniques, either securitization or borrowing, to transfer risk. More specifically, financialization is about the systematic engineering of Heads I Win, Tails You Lose (HIWTYL) payoff structures.

One of my new favorite writers, Ribbonfarm’s Venkatesh Rao, wrote at length about HIWTYL in his series, The Gervais Principle.

This is a simple and child-like example of the operation of a basic human instinct: the heads-I-win-tails-you-lose or HIWTYL (let’s pronounce that “hightail”) instinct. It is the tendency to grab more than your fair share of the rewards of success, and less than your fair share of the blame for failure.

In business, and especially in finance, we see this playing out everywhere.

Debt-financed share buybacks? HIWTYL.

Highly-leveraged, dropdown yieldcos? HIWTYL.

Options strategies that systematically sell tail risk for (shudder) “income”? HIWTYL.

(aside: corporate borrowing can be viewed as management selling put options on a company’s assets. I’ll leave it to you to consider what that might imply about government borrowing)

Management fee plus carry fee structures? HIWTYL.

Literally every legal doc ever written for a fund? HIWTYL.

There are two ways to effectively handle a counterparty that has engineered a HIWTYL game: 1) refuse to play the game at all, 2) play the game only if you have some ability to retaliate if your counterpaty screws you. Legal action doesn’t count. The docs and disclosures are written to be HIWTYL, remember?

You need to be in a position to hurt your counterparty for real.

You need to be in a position to hurt your counterparty economically.

Steve Zissou: Now if you’ll excuse me, I’m going to go on an overnight drunk, and in 10 days I’m going to set out to find the shark that ate my friend and destroy it. Anyone who wants to tag along is more than welcome. […] I’m going to find it and I’m going to destroy it. I don’t know how yet. Possibly with dynamite.

[a woman asks a question about the shark Zissou is hunting]

Festival Director: [translating] That’s an endangered species at most. What would be the scientific purpose of killing it?

Steve Zissou: Revenge.

-The Life Aquatic (2004)

I’ll assume by now we’re all pretty familiar with the prisoner’s dilemma—the simple game where the payoff structure incentivizes “defection.” There’s also the iterated prisoner’s dilemma, where the game is played more than once. What’s interesting is that in this version, the “always defect” strategy that dominates the single-play version performs poorly.

Robert Axelrod analyzed the topic in depth in his 1984 book, The Evolution of Cooperation, in the context of a tournament where various strategies for the iterated prisoner’s dilemma competed for a high score. The winner ended up being the simplest of the strategies, “tit for tat”. Here’s how “tit for tat” worked.

On Turn 1, cooperate.

Thereafter, mirror your opponent’s decision.

It’s fine to swim in the waters of the zeitgeist, admiring the aquatic fauna. But should a jaguar shark suddenly emerge from the depths and devour your best friend, you’d best chase it down with dynamite and destroy it. Traders understand this principle deeply and intuitively. Particularly if they trade in an illiquid or opaque area of the markets.

In our highly-financialized world riddled with HIWTYL payoff structures, we’re most likely to get screwed when we engage in one-off transactions with counterparties we can’t effectively retaliate against.

Unfortunately, a lot of financial transactions fit this profile. Particularly for small investors.

The best we can reasonably hope to do is mitigate the risk of getting totally and irrevocably screwed. There are a couple ways to do this. One is to stay liquid. Don’t get involved in fund structures or transactions where you have no liquidity, or where someone is doing potentially illiquid things in an optically liquid structure where they can in fact lock you in at their discretion (*ahem* every hedge fund ever). Or, where someone else will likely be in a position to squeeze you, if and when you want to sell (*ahem* credit). You can still get screwed but you can also get out.

Frankly, however, that’s not ideal. Or even realistic.

A more flexible approach is to adopt a minimax regret mindset when making investment and position sizing decisions. “Assuming this all goes bad, how screwed am I going to be?” If you’ll be intolerably screwed under any but the most draconian scenarios, adjust your risk posture. Or hedge.

There’s an important distinction to be made here between risk mitigation and risk management.

Risk mitigation is about proactively reducing risk.

Risk management is about accepting risk, within certain parameters.

We confuse the two at our peril.

We tend to have more options when it comes to HIWTYL and tit for tat in every day life. Particularly at the office. Watch carefully how governance works. Watch how senior management makes and communicates decisions. Watch how rewards are distributed and blame is assigned throughout the organization. This is the thrust of the Ribbonfarm piece mentioned above.

[C]onsider the Golden Ticket example. It was a random idea that initially seemed good, then seemed to prove out bad, and then unexpectedly ended up as a win. Such are the uncertainties of life.

How would you attempt to bank such a success in predictable ways?

First you would cut a deal for a performance-linked bonus for a successful marketing campaign (but no penalty for failure of course).

Next, you would set up a committee and charter it to collect, vet and recommend ideas, perhaps with a promise of some nominal rewards, such as gift certificates, for successful ideas.

You would then drop hints and suggestions to create ideas, like the Golden Ticket scheme, that you personally favor.

And finally you would create the appropriate level of urgency in the work of the committee to achieve the risk-levels you want in the ideas produced.

If it works, you praise everybody generously, hand out a few gift certificates, keep your bonus to yourself, and move on. If it fails, you blame the people in charge of the work for failing to consider an “obvious” (with 20/20 hindsight) issue.

As usual, once you start looking for this stuff you will see it everywhere. So your homework is to take all this and apply it to politics. In the meantime, I’ll close with a final exchange from The Life Aquatic, between Steve Zissou and his financier, Oseary Drakoulias.

Oseary Drakoulias: The wire transfer came straight through from Kentucky, and the bank has agreed to gap-finance the rest. But there are a few hooks on it, so take a pew for a spell. Number One, the bank wants a drug screen for everybody on the boat, before they’ll forward the money.

Steve Zissou: A piss test?

Oseary Drakoulias: Yes, a piss test. Two, a stooge from the bond company will be riding along during the whole shoot, to keep you on budget.

Steve Zissou: Who’s the stooge?

Oseary Drakoulias: A chap by the name of Bill Ubell, and there’s not a damn thing you can do about that, Steve. Three, you must swear – legally swear – that you will not kill that shark, or whatever it is, if it actually exists.

Steve Zissou: I’m going to fight it, but I’ll let it live. What about my dynamite?

What Country Friends Is This?

From the RSC’s 2012 Roundhouse production

The shipwreck play is a Shakespearean staple[i]. A foundational narrative form.

Sometimes the shipwreck is the story’s MacGuffin. Tempest – you may be unsurprised to learn if you did not already know – opens cold to the audience, with peals of thunder on a ship at sea. The first scene in The Comedy of Errors sets up its own absurd plot with a long-winded description of a shipwreck in the distant past – a shipwreck that sundered a man’s two sets of identical twins. Others among his plays use shipwrecks as simple devices to move the plot forward. The rumored loss of Antonio’s trading vessels is a critical device in The Merchant of Venice. A fierce storm wrecks Pericles’s ship on Pentapolis, just in time for King Simonedes’s tournament for the hand of his daughter Thaisa. After the tournament, another storm arrives just in time to complicate Thaisa’s pregnancy so much that Pericles throws his only-mostly-dead spouse overboard to appease both the gods and his crew.

Still Slightly-Alive Thaisa: O dear Dianna, Where am I? Where’s my Lord? What world is this?

Pericles, Prince of Tyre, Act 3, Scene 2, by William Shakespeare

The shipwreck device is convenient – and powerful! – because it rather unusually satisfies both of John Gardner’s[ii] two plots that more or less account for the stories told in all fiction and literature: “A stranger rides into town and a man goes on a journey.” The shipwreck play is at once the story of a stranger in a strange land AND of a land whose balance has been upset by his arrival (or her arrival, and sometimes both his and her arrival. Remember, there’s a lot of boys dressing up as girls dressing up as boys in these plays). In the first case, the plot advances as a family, town or community deals with the changes and uncertainty brought about by a stranger’s arrival, and as they stitch their new reality back together. In the second case, the plot moves forward as the man on a journey adapts to, conquers or succumbs to the challenges presented by the new world unfolding before him.

These archetypes are powerful and interesting because they tell the story of a fundamental change in the water in which the characters swim – an immediate shift in the Zeitgeist to which everyone is accustomed.

Sound familiar?

Just as there are plot archetypes, so too are there archetypes of the manner in which the characters respond to the change in the water. There are far more sprinkled throughout the Western Canon, but Shakespeare’s shipwreck plays give us four of the most important:

Prospero (Tempest) comes to terms with the new Zeitgeist through cleverness. He seeks to turn the changing Zeitgeist to his advantage by manipulating others caught in the net of the storm.

The pairs of separated twins in Comedy of Errors come to terms with the new Zeitgeist through apathy and blind luck. They try nothing, fumble around in confusion at their new world and hope for the best.

Pericles comes to terms with the new Zeitgeist through loyalty and faith. The gods, in turn, provide resolution through two of the most literal examples of deus ex machina in the canon: the resurrection of Thaisa and the miraculous reunion with daughter Marina.

When we write on Epsilon Theory about the elements and manifestations of our Zeitgeist – the widening gyre of polarized politics, the black hole of markets, about financialization and the myth of college, the cartoonification of economic data and tools of abstraction everywhere – we get emails. Most of those emails are variations on this: “Now that I am aware of these abstractions, memes and narrative, I see them everywhere. I am actually finding it a bit paralyzing. I feel like I need to DO something. What can I DO?”

It’s the same response often encountered by those who discuss, write about and reveal the behavioral biases of investors. We hear and understand that they are a problem for us and how we engage with both political and financial markets, but how do we conquer them? How do we exploit them? How do we change ourselves so that we aren’t subject to their influence?

It’s a fair question. It’s one I ask myself, too. A lot.

Our justifiable instinct is to demand an Answer. It’s a demand that steers us to become Prospero, to believe that we ought to navigate the change in the waters – and nudge the others swimming with us – through cleverness and tactical genius. Or to become Pericles, where we might navigate those waters by renewing our faith in and loyalty to the ideas that have always worked for us in the past. When neither of these strategies works, we figure that maybe we’d be happier if we just ignored the presence of narrative and abstraction (or, say, behavioral biases) altogether and hoped for the best.

But there’s another answer – the fourth one. It comes from the best of the shipwreck plays.

Viola: What country, friends, is this?

Captain: This is Illyria, lady.

Viola: And what should I do in Illyria?

Twelfth Night, Act 1, Scene 2, by William Shakespeare

When shipwrecked Viola lands alone on the shores of Illyria, her approach is not to nudge, to conquer or manipulate. She also recognizes that this is a different world, that she cannot simply live life in the old way and expect to thrive. She isn’t ready to give in to apathy. She knows two things: she must survive, and she must be humble enough not lose her identity in whatever games she must play to do so.

Clear Eyes. Survival.

Full Hearts. Identity.

Part of the reason that the awareness of narrative (and biases) can be so paralyzing, even when we incorporate it as part of a process instead of an answer, is that we tend to find Clear Eyes much easier than Full Hearts. Once you know how to identify Fiat News, you will see it everywhere. Once you learn to spot cartoonification, you will see if everywhere. Once you learn to spot missionary behavior, you will see it everywhere. Once you learn to ask, “Why am I reading this NOW?” you will ask it constantly.

Identity and reciprocity, though? Those are hard.

How do we own our own cartoons without becoming manipulators in our own right? How do we spot the myth of college and the unassailable value of the credential while still promoting and celebrating the I Am of our children? How do we observe and respect the narratives surrounding companies, industries and asset classes without buying into them? You see, there’s no safety net on identity or reciprocity. Acting on them is an act of PURE risk-taking.

If you’ve got an hour to carve out this weekend, grab a glass of wine and read about Viola, who adapted to a change in the water by navigating the balance between Survival and Identity.

You’ll find no better example in literature of the Clear Eyes and Full Hearts we so often write about.

[i] Hey, you signed up to read about narrative, so if you’re not prepared to get some Shakespeare thrown at you from time to time, you’re probably in the wrong place.

[ii] Or Tolstoy, or Dostoevsky, or the many others to whom this has been attributed. Gardner’s claim is the best.

The Funnel

Lately I’ve been thinking about the mechanics of fiat news. By now we know what fiat news is: the presentation of opinion as fact. We know what fiat news looks like (pop on over to Vox and skim a few stories). But lately I’m more and more interested in how fiat news works.

The metaphor I like best is the medieval wolf trap.

Ben described the wolf trap in his note, Hot Rocks.

[W]olves expect to hunt and track their prey. By establishing a longer trail that must be navigated successfully the wolf becomes more committed to the trap the farther he goes. Third and most importantly, the design prevents the wolves from seeing each other until they get to the end of the blood trail, at which point it’s too late to escape what they now know is a trap.

Here’s the modern version of the medieval wolf trap. You probably recognize it. It’s a sales funnel.

This is how we hunt clients. Or readers. Or attention. Here’s some advice on creating a sales funnel from Forbes contributor Ashley Stahl (I can never resist a good meta joke). The part that really resonates with me?

Bottom Of The Funnel

By now, your customers trust you (as they should!). They’ve received all the benefits from the top of the funnel (the freebie they registered for on your website), and the middle of the funnel (be it emails with great content from you or otherwise), and they have some sense of who you are as a person. This is where you ask for the sale (hello, bottom of your funnel!). You want to continue to engage, of course, but you also want to offer something of even more value to your customers.

You’re a wolf. You’re doing product research or “shopping around” or consuming “some great content.” You’re in complete control.

Except you’re not. Your experience has been engineered to produce a particular outcome (a sale).

There’s nothing wrong with sales funnels. They’re not inherently evil. All sales processes more or less boil down to funnels. But the more sophisticated the funnel becomes, the less obvious it is the experience has been engineered. The more you’re led to believe you’re in control. Sophisticated funnels “nudge” your behavior while allowing you to believe the behavior was your own idea. The most sophisticated funnels replace your thoughts with fiat thought without you ever realizing it.

And this is where these funnel processes become problematic.

Fiat news is a kind of funnel process. It, too, is engineered. There are at least three stages to the fiat news funnel.

Perception: Fiat news filters the signals we receive. What is filtered out is every bit as important as what is allowed through.

Interpretation: Fiat news attaches subjective meaning to the signals it allows through the filter. This can be explicit or implicit. It’s more effective when it’s implicit, in the same way puppet theatre is more evocative when you can’t see the puppet strings.

Action/Reaction: Fiat news triggers a (relatively) predictable response to the assigned meaning.

Say I want to pump a sexy growth stock for clicks or subscriptions.

Perception: Emphasize huge TAM and “obvious” product/market fit. Downplay or omit mention of competition and low barriers to entry (if applicable). Keep the story as simple as possible. As Peter Lynch suggests, a small child should be able to understand the story in just a couple minutes.

Interpretation: The Future is coming. The Future is inevitable. People “in the know” about The Future are going to make a lot of money. Don’t be a Luddite. Luddites never make any money. Luddites are losers.

Action/Reaction: FOMO and FOMO-induced buying.

You can use this template as you go about your life, bombarded by various signals. Once you start, you”ll see it everywhere.

Rule #1 for fiat news funnel building is that you don’t allow contradictory signals through the filter. Contradictory signals induce confusion. Confusion leads to anxiety and indecision. This is the precise opposite of what the funnel is trying to achieve.

The fiat news funnel simplifies life. It adds meaning by subtracting cognitive dissonance. It remakes reality such that reality is legible and identity-compliant.

Back before I was contributing to Epsilon Theory, I wrote a short blog post about the link between sales and identity

If your job is to sell people stuff, the path of least resistance goes something like this:

1) Sell cheeseburgers to fat people

2) Sell advice on giving up cheeseburgers to fat people

The point here isn’t to poke fun at fat people. The point is that “fat person” is an identity with a lot connotations attached to it. One might go so far as to call those connotations “baggage.”

Other identities with a lot of connotations attached to them include: “retiree,” “former executive,” “doctor,” and “little old lady who wants a good rate on her CDs.”

We’ve all got identities. We’ve all got baggage. We’ve all got cravings.

One of the most obvious fiat news “tells” therefore is that fiat news will never draw attention to ambiguity, contradiction, or paradox.

The Power of And is anathema to the creators and purveyors of fiat news.

But reality does not resolve to a clean narrative. It is messy. It is frequently ugly and unsettling. It is full of seemingly intractable problems and irreconcilable contradictions.


“Pan, who and what art thou?” he cried huskily.

“I’m youth, I’m joy,” Peter answered at a venture, “I’m a little bird that has broken out of the egg.”

This, of course, was nonsense; but it was proof to the unhappy Hook that Peter did not know in the least who or what he was, which is the very pinnacle of good form.

Peter Pan; or, the Boy Who Wouldn’t Grow Up, by J.M. Barrie (1911)

I have good stories from work. My wife’s stories are better.

The asset allocator’s seat gives you access to brilliant, interesting and occasionally unseemly characters. Being a cast member at Disney World, on the other hand, gives you access to creepy Disney Dads. In case you have ever wondered, no, you would not be the first dad to ask Alice that while taking a picture with your 8-year old daughter. Yes, that polite giggle is her way of telling you you’re a moron and that you should rethink your life choices.

The best stories, however, are less scandalous. They are also usually stories about what it is like to be – as they say there – a friend of Wendy, the precocious young woman at the center of the Peter Pan stories. Why? Because most cast member roles at Disney World are exactly what you would expect. Scheduled meal appearances. Character meetings and photo ops. Peter and Wendy do all that, too, sure. But most of what they do at Disney is whatever the hell they want. Try to catch their shadows in the brutally long lines for Peter Pan’s Flight. Jump the line for the Mad Tea Party, hop in a teacup with strangers and spin it until they turn green. Play pranks on other cast members.

Peter Pan and Wendy run free at Disney because no one would believe in them if they did anything else.

Disney has been doing some running free of its own – the stock had a big week last week when the company announced the launch details of Disney+, its dedicated streaming service. It popped by a little over 10% after the announcement – more than $20 billion in equity value – and hasn’t looked back since.


It certainly wasn’t because people didn’t know about Disney’s streaming plans. Disney has been extremely transparent about almost all the details throughout its development. We have known the service was in planning for years. We knew its name in November.  We knew about the massive investment in proprietary platform content, the new VP heading up the group, and the details of some of the individual programming planned in January. In LexisNexis Newsdesk’s database, between March 31, 2018 and March 31, 2019, there were more than 48,400 news articles, major blogs, press releases mentioning Disney and streaming.

Below is the full network of that last year of articles, dominated by comparisons of the services, speculation about the impact of Disney’s streaming service on other vendors and discussions of content.

Source: Quid, Epsilon Theory

What are the most interconnected articles, which share the most language across topics about Disney and streaming?

Big tech stocks were crushed in December. Now they’re back [CNN, March 2019]

How Disney’s Investment in Streaming Will Affect Its Bottom Line [Motley Fool, Sep 2018]

Disney is set to dominate Netflix in the battle to be ‘the world’s leading content company’ [Business Insider, March 2018]

Audience demand for Netflix originals will soon pass demand for licensed TV shows and movies, and that’s great news for the streaming giant as competition heats up [Business Insider, December 2018]

Disney to Forgo $150 Million in Fiscal 2019 as it Prepares to Launch Disney Plus [Variety, February 2019]

In short, investors have been talking about Disney and streaming for a long time. They have been evaluating, comparing and thinking about the impact. They’ve been modeling the relative loss of high-margin licensing revenue against incremental costs of running a dedicated service. They’ve been speculating about all sorts of things, because there was a lot of detail out there to permit that speculation.

Except for one detail: the price. The only bombshell in the April announcement from Disney was that the service will launch at $6.99, right in the face of price hikes from its biggest competitor.

Now, I don’t think I (or anyone else) have a perfect sense of the price elasticity of demand on a Disney streaming service. But I will tell you what I think. I don’t think $6.99 is an earnings-maximizing price. I don’t think Disney thinks $6.99 is an earnings-maximizing price. I don’t even think $6.99 is an NPV-maximizing price, not even if we use the Amazing Amazon Algorithm to daydream about price hikes someday that will make it all worth it.

And I don’t think anyone else does, either. You don’t buy Disney on the announcement of a bargain basement streaming price because you plugged the number into your model and came out with a gorgeous new price target. If you did, you probably need to check your math. No, you do it because Disney is creating a powerful narrative that it will take market share. Because Disney is creating Common Knowledge that it will dominate streaming. Because Disney wants you to know that everyone else knows that it is now a Growth Stock – not in the constituent-of-the-Russell-1000-Growth-Index sense, but in the put-us-in-your-basket-with Netflix, Nvidia and Amazon sense. In the sense of the growth! meme.

And the growth! meme is Neverland, where all you need is a little faith, trust and pixie dust.

It is the land of Uber and the other unicorns, where the act of actually making money means that you have lost sight of the real goal: to utterly dominate an emerging market. I use the term emerging market intentionally, because that is exactly what ridesharing, streaming services, brute force protein folding and coin mining hardware, and buying-literally-everything-online-with-one-day-shipping are. Mature as some of them now are, they ARE still the new emerging markets, not only literally, but in the same way that we once allocated to “Emerging Markets”, not as a value or mean-reversion play, but as our speculative instrument. As our way to bet on the explosive potential of ideas and innovation and capital finding both, rather than tweaking some variable in a financial model. And with any such speculative instrument, they only work when we do not know in the least who or what they are (which is the very pinnacle of good form).

In other words, by saying ‘we don’t care about how much money we make on this right now’, Disney is reframing the discussion about the potential of this business to be limitless. To be whatever we can possibly imagine, because it could end up being anything, really. This is obviously just a variant of the don’t-change-the-growth-narrative-and-monetize-too-early game, of course, which obviously isn’t new. Companies have been at this for a long time.

What IS new and interesting to me is that a grown up, blue chip brand company with investors who care about about return on capital looks like they’re trying to find their way back to Neverland. I’m no prophet. I don’t know a damn thing about the streaming or media businesses that you don’t. I don’t have an edge here. But IF they manage it, I DO know this: Disney will be far from the last company looking to pull out a bit of pixie dust, to journey from the boring land of economic fundamentals to the land of growth! memes.

Strange Bedfellows and Proxy Wars

Having been focused on our investment narrative research program, we have been a bit less constant in our published examinations of Fiat News. It has been a while, however, since we have seen a story in which perspectives do not fall along the dominant axis – the political left and political right, in the US – of the present widening gyre. The Julian Assange arrest is exactly that kind of story.

Truth be told, I’m not even sure what *I* think, so I’m not sure if I could tell you how to think about this issue even if I wanted to. But I will do my best to tell you how news outlets have been doing exactly that since the arrest of Julian Assange. Our analysis considers English-language articles published on 4/11 and 4/12. We first present the Quid network of this coverage, which relates the similarity of all of the articles by the language they use:

Source: Quid, Epsilon Theory

What do I see?

Unusually High Fiat News Coverage: Articles which use language from our list of “tells of Fiat News”, or news which may be factual but includes language that seeks to influence how the reader thinks about an issue, account for nearly half of all article output, well above the 30% level we see as a baseline from major wire services. US media coverage exceeds 50%. The articles from the network we’ve flagged as potential Fiat News can be seen visually below.

Source: Quid, Epsilon Theory

Heavy Explainer Activity in US Media: Part of the reason for the high Fiat News level is that a massive proportion of the US media output on Assange’s arrest has taken the form of “explainer” pieces that include “here’s why” and “what you need to know” language that is bluntly indicative of Fiat News. To some extent that is to be expected – these are the early days of an update to a story that has been dormant for some time. Still, the judicious reader will recognize that this presents a powerful opportunity for less principled journalists to frame their opinions in pieces that claim to be ‘news.’ The graphic below represents our identification of the articles that are performing “explainer” functions.

Source: Quid, Epsilon Theory

A Generally Assange-Supportive Media in the US: Despite the more hawkish tone adopted by most US politicians, the language used by US media in most articles with opinion-expressive language has, in fact, been most similar to Snowden’s own “dark moment” language, which referred to the implications of Assange’s arrest on the freedom of journalism. Here are three of the Top 10 most influential and similar articles to the overall network.

A Generally Government Statement-Focused Media in the UK: The southwest quadrant of the graphic above is dominated by UK-based media reports which expend very little ink on the charges, detention, arrest procedures, asylum withdrawal or WikiLeaks’ past activities. They are dominated and made similar to one another by thorough inclusion of remarks from the Home Secretary (“Rightly Facing Justice”), Metropolitan Police and President of Ecuador (“Aggressive and discourteous behavior”), most of which are absent or limited outside of UK media.

Opportunistic Related-Issue Coverage: Right now, most coverage of the Assange issue, however, is being used as a proxy war for other matters. The bottom clusters on the map are coverage of the internal Ecuadorian politics of the withdrawal of Assange’s asylum. One of the largest and most highly connected clusters is the blueish gray cluster in the upper-right, which are articles referring almost exclusively to President Trump and his prior statements on WikiLeaks. A surprisingly large subset of coverage in the UK that did not simply print statements from the Home Secretary instead covered the views of Jeremy Corbyn and Diane Abbott (upper left).

Strange Bedfellows and Hypocrisy Narratives: But for WikiLeaks’s Clinton email involvement, coverage of the issue in the US would probably be much simpler. Instead, many usual law-and-order and national security hawks in office or in pundit seats have more favorable views of Assange, and many erstwhile free speech and press freedom advocates have soured. As the narratives here evolve, I expect the issue to fade somewhat from the news, but when it is resurrected, I suspect that it will probably be in the service of ‘gotcha’ games that align more closely with the usual battle lines of the widening gyre.

In short, my strong counsel to anyone who wants to learn more about the Assange case is to be very cautious about what they read. More than ever, the most powerful question we can ask – regardless of our perspective on an issue like this – is Why Am I Reading This Now?


In the spirit of our excitement about the first imaging of a black hole, I wanted to submit a brief today about the wonders of gravity. Except it wasn’t the gravity of a supermassive black hole with the mass of two-and-a-half billion suns that caught my eye. Instead, it was the gravity that fuels the poles of the widening gyre in our politics and culture, and an interesting new framing of its psychological and behavioral causes.

That novel framing comes from a new article in the journal published by the Association for Psychological Science (h/t @SteveStuWill). It is a survey piece, so it doesn’t publish any new findings. It does, however, organize recent research that posits the sources of similarity between extreme political opposites and differentness between those extreme groups and political moderates. Helpfully, it does so in a way that will be familiar to frequent readers of Epsilon Theory. In short, van Prooijen and Krouwel from the Vrije Universiteit Amsterdam describe these distinguishing traits as follows:

  1. Psychological Distress
  2. Cognitive Simplicity
  3. Overconfidence
  4. Intolerance (of other groups and opinions)

A separate four horsemen, if you will, which unite our political poles and separate them from the hollowed-out shell we used to call a political center.

The final three – Cognitive Simplicity, Overconfidence and Intolerance – strike me as being more descriptive than predictive, NTTAWWT. The underlying papers generally don’t make strong causal inferences (except, perhaps, among and between these traits), but simply observe the traits shared by members of polar political positions and differentiate them from those still seeking to engage in cooperative game-playing. I think the framework implies a set of simple, useful tells to identify those who are contributing to the ever-expanding tendency toward competitive game-playing in our politics and culture:

  1. Cognitive Simplicity: Does the speaker/writer consistently assert that problems on which there is significant disagreement are simple, black-and-white, and would be easy to solve if others weren’t so stupid/immoral/self-interested/corrupt?
  2. Overconfidence: Does the speaker/writer express unreasonable confidence in their knowledge about events, about how policies would function? Do they demonstrate any epistemic humility, or are they prone to declare debates “over?”
  3. Intolerance: Does the speaker/writer rely on expressions of fear of some group of people? Do they actively seek to constrain “acceptable” language and discourse?

It is actually the first trait, however, that interests me most (although I willingly admit, as you will see shortly, that I probably suffer from confirmation bias on this point). I think it is the one which most readily explains not only how the widening gyre manifests in our behavior, but also how it forms and expands. Psychological distress – as defined here – is ‘a sense of meaninglessness that stems from anxious uncertainty.’

Sound familiar? It should.

Here’s an exploration of how this anxious uncertainty, this sense of meaninglessness amplifies our sensitivity to being drawn into the widening gyre.

Here’s our discussion of how the creation of existential threats inevitably emerges as the universal narrative tool to exploit this anxiety, and the full hearts response:

Here’s our examination of the specific existential narratives of this widening gyre, which are the primary engines creating political extremes from psychological distress.

The Love/Hate Cartoon

In case you were wondering, you and I play the role of Elmer in this cartoon.

I saw this chart below from a financial journalist – quite a good one, at that – last week.

The basic idea is to show how the underweights and overweights of mutual funds performed. It is not dissimilar from many research products promoted by the sell side covering this or that universe of active investors. Equity and quant research teams at practically every sell side house regularly publish similar research about how the biggest long and short positions of different active manager classifications have done.

These recurring pieces and the news articles which inevitably follow them are…insanely popular. The are a golden goose of nearly infinite financial news features, a regular source of eyeballs and clicks. So naturally, they usually escape the fine scrutiny of financial media. As for the rest of us, they feed our schadenfreude about the plight of fancy, high-priced hedge funds and how they’re often just as dumb as the rest of us, or when their ‘positions’ work, our suspicions that they are the result of the tools of the super-rich who don’t have to play by the same rules as the rest of us. They feed our condescending ‘retail money’ opinions about actively managed mutual funds, and how they’re just as dumb as we thought they were. The result is that they largely go unchallenged by nearly everyone. Mostly harmless, of course, but there are people – lots of people – who really look at these things.

I regret to inform you that just about every one of these pieces is a cartoon.

Abstractions of abstractions.

The most bizarre part of the whole affair, of course, is that it is the most ardent passive-or-die army – the people who should really know better – that seems so chuffed by the almost always negative conclusions of these pieces. Well, that just goes to show you why active management doesn’t work! No, it doesn’t. The problem with active management isn’t that active managers are especially dumb and prone to bad decisions. The problem with active management is that it asks us to pay fees to bet on a zero-sum game, which as Charlie Ellis reminds us, is definitionally a loser’s game.

Let’s cut through the cartoon to the question that will tell us what’s actually going on here: if active management is a zero-sum game, if all active positions net out to zero, why do all of these analyses manage to show large, residual biases in representations of a large bloc of the aggregate market?

There are three reasonable explanations for just about all of the deviations between these analyses:

  1. DataDriven: The researcher uses the data accessible to them, which often has embedded availability biases. Periodicity is almost always imperfect and its potentially inaccuracies assumed away. Available data frequently excludes derivatives / non-securities, which can be meaningful for certain strategy and vehicle types[1][2]. The universe of managers with good and representative information, especially among alternative vehicles, is incomplete, and total asset information even more so. They call their drawing “the stocks active investors love and hate right now”, but what you actually get is an artifact of the incomplete and biased data set available to the party performing the analysis.
  2. Methodological: Each such analysis reflects the scheme by which the tracked love/hate metrics are designed and weighted. Is it truly asset-weighted, or maybe they look at top 10 lists of holdings from funds of hugely variable size and simply count up how many filings referenced different names? How does it treat cash positions? How does it treat the implied positioning from option positions, if at all? They call their drawing “the stocks active investors love and hate right now”, but what you actually get is a drawing of a methodology with a non-representative and biased weighting scheme.
  3. Sub-Category Biases Categories like long-only active managers have persistent structural biases relating to the practices of active management that are necessary to produce active risk. The universe of US large cap funds, for example, will almost always be overweight mid- and small-cap stocks because meaningful overweights to mega-cap positions are either psychologically challenging or difficult to achieve without a significant reduction in position count or loss of ‘active-ness.’ There are similar such biases across other categories. Some of those biases may be the result less of tautology (i.e. to be active you must be…active) than of behavioral tendencies which vary among different classes of investors. But in any case, if we’re saying a class is consistently underweight, we have to know that somewhere out there, someone has got to be overweight. They call their drawing “the stocks active investors love and hate right now”, but what you actually get is a drawing of the things they always love and hate for structural reasons.

If you raise these points, you will very likely get a response that “all models have flaws” or maybe that “data is never perfect”! Ignore it. You don’t have to argue with someone explaining why it’s OK that their model predicts that 70% of outcomes are worse than the median. If you believe at all in the principles that underlie a belief in passive management, the zero-sum game is your rock. If someone can’t adequately explain why they are telling you a massive cross-section of financial markets is non-zero-sum, or if they can but can’t explain why the dimensions of that cross-section aren’t just a feature of persistent structural tendencies related to the definition of that cross-section, they simply don’t have information that is of any interest to you. And if they can? Then by all means, listen. There’s no reason why this kind of analysis can’t be useful.

But in almost every extant form, it is just sales and marketing.

These artfully constructed reflections of available data, sets of subjective methodologies and persistent structural biases in the composition of various investor universes are sold to you and me as reflections of how certain investors are playing this market, so maybe you’d like to call our desk and bet with them? Or maybe against them?

You see, the cartoon IS the point. Creating more internal natural variation, a more robust sense of winners and losers that you can bet on or against, IS the point. Telling you the truth about zero-sum games defeats the purpose.

[1] My favorite example is the periodic breathless piece about the ETFs disclosed as part of one Bridgewater’s portfolios, something that can tell you how they’re investing! Y’all. C’mon.

[2] It’s true as well that shorts and some derivatives can create distortions in the nexus between a zero-sum framework and portfolio results, but as is noted here, the accurate availability of those positions is brutally bad, which is the problem.

First World Problems in Fund Management

Tadas Viskanta from Abnormal Returns posed an interesting question on social media this morning. “How”, he asked, “has a company as big as Fidelity managed to stay private for as long as it has?”

A number of decent and partial answers popped up, but surprisingly (to me, anyway), none of them got to the core of the matter.

It’s the Johnsons. Period.

As others pointed out, a traditional asset management business of any meaningful scale is a simple operation. You take in management fees, and in most cases you or a third party deduct fees directly from whatever vehicle or client account is being charged, so there is rarely even a meaningful consideration of receivables. Fidelity’s business has other fee sources, of course, but take this as a general observation. Most industry expense structures are convention-driven and reasonably well-established. You will pay 25-40% of top-line to portfolio management teams, all considered. Sales people and executives will pretend that sales costs and commissions are variable, but by and large they are not. Not really. Depending a little bit on account aging, and a little bit on institutional/retail mix, sales teams will usually take 10-25% of top-line, all-in. Yes, of course there are exceptions to both.

Unless you operate stat arb, high frequency or certain types of CTA or quant strategies, capital expenditures are not really a thing unless you’re doing it wrong. Ultimately, you are left with three obvious and not-at-all-unique-to-asset-management overhead levers to determine whether you run with EBITDA margins of 25% or 45%:

  • Breadth of Business (i.e. both channel and product, to the extent product breadth increases operations/investment staffing)
  • Scale of Products
  • Ratio of Seed or Volume Businesses (e.g. new funds, sub-scale low fee products)

The asset manager generating the highest margins is the $10 billion manager with one or two similar products run by a single investment team, where the CIO is also the CEO, and which only sells to institutional clients. I have visited with many privately held managers of this variety. Nearly all comfortably generate 50% EBITDA margins. Some will claim even higher levels, but in practice, the operation of an asset management business at higher margins tends to cause compensation pressure from either the investment or sales side of the house.

The bad side of profitability? It’s a $800 million shop trying to get a full, thematically consistent series of twelve ETFs off the ground. These firms are usually scraping by with promises to employees of a swoop-in acquisition from a growth-starved bigger player.

Even with all the fee pressures, rebellions against active management and rapidly accelerating costs of doing business in retail channels, any asset manager of any meaningful scale must work very hard not to make a reasonable profit. Yes, what “scale” means is rising, and yes, that goes double if you have any designs on selling through intermediaries (i.e. IBDs and wires), but by and large, this is true.

But the fact that Fidelity – or any other asset manager – throws off a ton of cash and has limited capital needs doesn’t explain why they haven’t sold or gone public.

There are plenty of companies with the same traits – because they are traits common to asset management companies operating at scale – that have made very different decisions. They have sold or gone public. In most of those cases, they did it for a simple reason:

Because of a big, concentrated founder position.

Nearly every asset management company that sells itself out of private company status does so because a big founder or concentrated group of founders wanted liquidity. A dominant share of private asset managers, even at significant scale, have big founders or a concentrated group of founders on their cap table. It is worth remembering that concentration of ownership is the other almost inevitable side effect of operating entrepreneurial non-capital-intensive people businesses.

So say what you will about Fidelity, but the reason they’ve managed to stay private is because the Johnsons – and today that means Abby – value something else more than instant liquidity for their immensely valuable stake. Maybe it’s independence, maybe it’s control, maybe it’s avoiding even more regulatory headaches than they already have to deal with, and maybe it’s a belief that continuity matters to investment results. And yes, maybe it’s a belief that now’s just not the right time, that the even bigger liquidity event is still down the line.

But as a rule of thumb, no matter why an asset manager tells you they are selling, you can usually find-and-replace their explanation with “Big founder wants liquidity.” If an asset manager tells you why they are not selling, you can usually find-and-replace their explanation with “Big founder doesn’t want liquidity.”   

How to Live Safely in a Wall Street Universe

Everyone on Wall Street … every guy of a certain age, anyway … loves Mafia movies. The Godfather is the gold standard, of course, but we can all equally quote lines from The Sopranos or Casino or (my fave after GF 2) Goodfellas.

In this crucial way, a life on the Street is a lot like a life in the Mob:

Now the guy’s got Paulie as a partner. Any problems, he goes to Paulie. Trouble with the bill? He can go to Paulie. Trouble with the cops, deliveries, Tommy, he can call Paulie. But now the guy’s gotta come up with Paulie’s money every week, no matter what. Business bad? Fuck you, pay me. Oh, you had a fire? Fuck you, pay me. Place got hit by lightning, huh? Fuck you, pay me.

Wherever you’ve worked in financial services, whether it’s for a big bank or a wirehouse or an asset manager or a hedge fund or an RIA, you’ve worked for your share of Paulies.

It’s not about the money.


We all gotta kick up the chain. We all owe. it’s a performance business. No matter what.

My favorite scene in Goodfellas isn’t a single scene at all, but is the progression of the Lufthanza heist, from Ray Liotta giving Robert De Niro the idea, to De Niro and crew pulling off the huge score, to De Niro getting paranoid as his crew pressure him for their cut and show off their wealth, to De Niro systematically murdering everyone in the crew.

These are the guys Jimmy put together for what turned out to be the biggest heist in American history: the Lufthansa heist. Tommy and Carbone were going to grab the outside guard and make him get us in the front door, Frenchy and Joe Buddha had to round up the workers, Johnny Roastbeef had to keep them all tied up and away from the alarm, even Stacks Edwards got in on it, all he was supposed to do was steal the panel truck and afterwards compact it with a friend of ours in New Jersey. Only Morrie was driving us nuts – just because he set this up, he felt he could bust Jimmy’s balls for an advance on the money we were going to steal. He didn’t mean anything by it; it was just the way he was.

That’s Frankie Carbone who meets his end in the meat freezer.

But Ray Liotta doesn’t get whacked.

Why not?

Because even though it was his information and connections that made the heist possible, he never asks De Niro for a cut of the money.

It’s the most valuable lesson I’ve got for any smart, young coyote embarking on a career in the Mob or on Wall Street.

Never ask for a cut on an existential trade idea.

I wrote a long-form note last week (The Epsilon Strategy) where I talked about my experience co-managing a long/short hedge fund as part of a larger asset manager, in particular the crucial lesson about money flows and the business of asset management I learned from the firm’s co-founder and PM of the company’s large-cap fund (about $4 billion in AUM).

Well, here’s another lesson. This one from 2008.

Now 2008 was a career year for me in the hedge fund. We were up 20-something percent, running slightly net long for the year. In Mob movie parlance, I made my bones in 2008. But we didn’t have a ton of assets in the fund. That would come later. So it wasn’t inconsequential to me from a financial perspective if I could help out with a good trade here and there for one of the other, larger funds at the firm.

One afternoon in early 2008 I sat down with the co-founder/PM and laid out the entire story … how all of the $10 trillion in non-agency Residential Mortgage-Backed Securities was one big inverted pyramid, with its upside-down apex resting on the thin assumption that it was impossible to have a nationwide decline in home prices … how Credit Default Swaps worked and how they were intentionally sold as insurance on the same security over and over and over again, creating something like a $10 million fire insurance policy on another guy’s $100,000 property … how Collateralized Debt Obligations could be constructed out of Collateralized Debt Obligations to make CDO-squareds, where magically the whole was rated higher than the sum of the parts … what Citi was doing with its Structured Investment Vehicles and how ALL of the Wall Street banks had taken a page from Enron’s fraud playbook to use one form of off-balance sheet accounting or another. Yes, ALL of the banks.

[Author’s note: When was I radicalized?

When Dick Fuld walked away scot-free from the wreckage of Lehman after getting half a billion dollars in cash comp and stock sales during his tenure.

But that’s another story.]

Anyway … this large-cap fund had a 30% weight in financials. I know it’s hard to believe today, but financials were, in fact, the largest sector in the S&P 500 back in the day. And this fund owned every piece-of-shit large-cap financial imaginable … Bear Stearns, Fannie Mae, Citi, Lehman … you name it, he owned it.

The next day he started selling, and over a three-day period he took his financials sector weight down from 30% to 5%. In a $4 billion fund. Never seen anything like it. Probably never will again.

It saved the fund. Maybe saved the firm.

I mean, don’t get me wrong … 2008 was an incredibly crappy year for any long-only manager. There was nowhere to hide. But the difference between down 35% and down 25% in a year like 2008 is the difference between life and death in our business.

No one is too big to not get whacked if they can’t pay. Everyone’s got a Paulie.

Ask Bill Miller if you don’t believe me. He went the other way on this trade and was professionally whacked.

My capo went the right way on this trade. It was totally my idea.

And I never asked him for a dime.

Why? Because the genius of this 2008 trade was NOT my idea. The genius of this trade was the PM’s courage to act. The genius of this trade was in not just taking the financials exposure down from 30% to 25%, which is what 99% of PMs and investment committees would do, but in taking it down to FIVE FREAKIN’ PERCENT.

This was an existential trade. The sort of trade you make two or three times in a career.

In an existential trade, the COURAGE TO ACT is the thing. It’s the only thing.

In both the Mob and the Street, you have to recognize the difference between an ordinary-business trade and an existential trade. In an ordinary-business trade, yeah, you can and should get paid for ideas. You should push to get paid, even if that means getting in your capo’s face. After all, our business IS. ABOUT. THE. MONEY.

Except when it’s not.

When the trade is a matter of identity … when the trade is a matter of survival … when someone has the courage to act on an existential trade, it’s THEIR trade. Win or lose, it’s all theirs. You must give them that complete ownership. You must give them that distance.

Because if you treat an existential risk-taker in an instrumental way, as a means to an economic end, they will resent you for that treatment. Win or lose, subordinate or superior, they will resent you. And that resentment never fades. It only grows.

Ultimately you will be whacked.

On the other hand … you can treat the existential risk-taker as an autonomous human being, as an end in themselves. You can be their partner. You can be part of their pack. You can still benefit materially if their existential trade is a success. They’ll never forget what you did for them.

They just won’t pay you for the idea.

And that’s okay. It’s how to live safely in a Wall Street universe.

In 2008 I had an idea on what was coming down the pike. I shared it then, one-to-one, because it was the smart, self-interested play for the metagame of Our Thing.

In 2019 I’ve got another idea on what is coming down the pike. I’m sharing it now, one-to-many, because it’s still the smart self-interested play for the metagame of Our Thing.

Sharing the idea, not to get paid directly but in hopes you will join the Epsilon Theory pack? That’s on me.

The courage to act? That’s on you.

Post Script

Yeah, it’s a weird title for this note, stolen from How to Live Safely in a Science Fictional Universe, a novel I love by Charles Yu. Here’s a quote:

My father built a time machine and then he spent his whole life trying to figure out how to use it to get more time. He spent all the time he had with us thinking about how he wished he had more time, if he could only have more time.

We are all our own Paulie.

We are all taking Paulie’s cut, not from others and not from what we earn, but from our OWN TIME here on Earth.

And that’s okay. That’s the life we have chosen, to paraphrase another great cinematic mobster. That’s the price we pay to put food on the table for our kids and renew that BMW X5 lease every three years.

But then again, maybe it’s not okay. Maybe we get so caught up in being Paulie for ourselves that we forget where our internal Paulie ends and WE begin.

I see this a lot in our business. I see this in myself more than I’d like.

More quotes …

Life is, to some extent, an extended dialogue with your future self about how exactly you are going to let yourself down over the coming years.

How many times have I failed before? How many times have I stood here like this, in front of my own image, in front of my own person, trying to convince him not to be scared, to go on, to get out of this rut? How many times before I finally convince myself, how many private, erasable deaths will I need to die, how many self-murders is it going to take, how many times will I have to destroy myself before I learn, before I understand?

Maybe we spend most of our decades being someone else, avoiding ourselves, maybe a man is only himself, his true self, for a few days in his entire life.

We are all our own Ray Liotta and Robert De Niro.

We are constantly giving ourselves tips and ideas for the next trade … the next score … the next move up the ladder.

And for those ordinary course of business ideas, it is right and proper that we ask ourselves for our cut … that we think in terms of economic success and economic failure … that we treat ourselves in an instrumental way.

But when we give ourselves the idea for an existential move … when our Identity is at stake … for those two or three times in a lifetime when we just might have the COURAGE TO ACT in accordance with our true selves … the failure is never in the outcome.

The failure is in our thinking that it is.

The failure is in the instrumental bargains we strike with ourselves when we should be acting with full hearts … when we should be speaking our I AM.

The failure is in the resentment we feel towards our instrumental selves. Because that’s when we murder ourselves. Over and over again.

There’s a better way. Even in the Mob. Even on Wall Street.

Clear Eyes and Full Hearts, Can’t Lose.

The Ants and the Grasshopper

One bright day in late autumn a family of Ants were bustling about in the warm sunshine, drying out the grain they had stored up during the summer, when a starving Grasshopper, his fiddle under his arm, came up and humbly begged for a bite to eat.

“What!” cried the Ants in surprise, “haven’t you stored anything away for the winter? What in the world were you doing all last summer?”

“I didn’t have time to store any food,” whined the Grasshopper; “I was so busy making music that before I knew it the summer was gone.”

The Ants shrugged their shoulders in disgust.

“Making music, were you?” they cried. “Very well; now dance!” And they turned their backs on the Grasshopper and went on with their work.

I admit I’m quite fond of this fable. It promotes industry, a diligent work ethic and frugality. It also promotes effective risk management. The Grasshopper is not only lazy but blind to existential risk (a.k.a starvation). The Grasshopper not only fails to mitigate this risk but fails to identify it in the first place. The Grasshopper is the OptionSellers.com of the forest. And so the Grasshopper gets her comeuppance.


(of course there’s a BUT)

This fable “works out” the way it does because it’s set in a stable social system that respects the Ants’ property rights. Relax that condition and you might get very different results. Let’s pick up where we left off, for the extended edition:

“Making music, were you?” [the Ants] cried. “Very well; now dance!” And they turned their backs on the Grasshopper and went on with their work.

But the Grasshopper did not go back to dancing. Instead, the demoralized Grasshopper wandered the autumn landscape, sharing her tale of woe with other insects. Much to her chagrin, many others had not saved food for winter, either.

“What right do the Ants have to let us all starve?” the Grasshopper asked. “Why, wouldn’t that make them murderers?”

The other insects who had not gathered food for winter nodded in agreement, muttering among themselves about the greed and selfishness of the Ants. Did the Ants really deserve their hoard of food if they were going to lord the power of life and death over everyone else in the forest? It was hardly a crime to raise arms against someone who intended for you to starve to death, after all.

And so the Grasshopper and the other insects murdered the Ants and ate all their food.

The End.

My extended edition of this fable is about metastability. Or, more accurately, a breakdown in metastability. A superficial reading of metastability might make it seem like a breakdown in law and order. That’s not quite what I’m talking about here. Law and order might break down within an otherwise metastable social system. Whenever there’s a riot in an American city, for example, law and order break down. But a riot in and of itself does not alter the core values and mythology shared by American citizens.

A social system remains metastable as long as there is a reasonably broad consensus regarding its core values and mythology. Without this consensus, metastability weakens. Put another way: first-order threats to social stability, such as isolated riots and street crime, are risks that lie in the body of the distribution of outcomes, both for individuals and society. Metainstability is a higher-order threat. The risks associated with metainstability lie in the tails of the distribution. They fall under the broad category heading of Really Bad Stuff and include things like:

  • violent revolution
  • war
  • property expropriation

Back to the Ants and the Grasshopper. Would it behoove the Ants to share a bit of food with the other insects to shore up the metastability of the forest’s social system?

There’s no “right answer” to that question. This isn’t physics. The policy wonks among us might propose developing some model for relating the conditions of the forest’s welfare state to the political inclinations of its citizens. A neat exercise, but a reflexive one. Ultimately, the whole thing hinges on the insects’ subjective perceptions of themselves and their relationship to the other entities in the forest. The insects’ perceptions of themselves and their relationship to the other entities in the forest may or may not have anything to do with wonky policy position papers. The insects are under no obligation to act “rationally.”

The serious existential risks associated with this concept of metastability, and the reflexive nature of social systems, are the reasons we negotiate a social contract. Modern society is the output of a long and tortured series of negotiations over how and why we should structure the social contract to limit the nastiness and brutishness of the state of nature.

In the language of Epsilon Theory, managing risks to metastability requires the following:

Clear Eyes. Look through narratives and symbolic abstractions to see the world as it is. 

Full Hearts. Treat others as principals in the negotiating process, in a way that promotes potentially cooperative game play. 

My personal answer to the question of whether the Ants should share some of their food (or rather, whether the state should compel the Ants to share some of their food) is yes. Of course, we can endlessly debate the finer points of how exactly such a system should be structured. But broadly speaking, I think it ought to consist of the following:

  • Some form of temporary unemployment insurance
  • Some minimum level of health insurance coverage
  • Some form of old-age pension scheme

Now, I certainly don’t believe these things are an unalloyed good. They have costs. There will inevitably be inefficiency and graft involved with their administration. People will free-ride on them. To me, these costs and inefficiencies are the price of some metastability insurance. 

Am I completely at ease with these policies?


I think any clear-eyed view of them has to acknowledge social welfare programs tend to expand over time, and the power of the state along with them. The historical example of Prussia is instructive here. In the 19th century, the Prussian state was confronted with increasing social and political tensions between its rural and urban classes. Recall that Marx believed socialist revolution would happen first in Germany, not Russia. The tension intensified following German unification in 1871. Germany had a metastability problem. The Prussian solution was, in large part, the creation of a social welfare state. 

In his history of Prussia, The Iron Kingdom, Christopher Clark writes:

The medical insurance law of 15 June 1883 created a network of local insurance providers who dispensed funds from income generated by a combination of worker and employer contributions. The accident insurance law of 1884 made arrangements for the administration of insurance in cases of illness and work-related injury. The last of the three foundational pillars of German social legislation came in 1889, with the age and invalidity insurance law. These provisions were quantitatively small by present-day standards, the payments involved extremely modest, and the scope of the new provisions far from comprehensive–the law of 1883, for example, did not apply to rural workers. At no point did the social legislation of the Empire come close to reversing the trend towards increased economic inequality in Prussian or German society. It is clear, moreover, that Bismarck’s motives were narrowly manipulative and pragmatic. His chief concern was to win the working classes back to the Prussian-German ‘social monarchy’ and thereby cripple the growing Social Democratic movement.

[…] By the eve of the First World War, the Prussian state was big. Between the 1880s and 1913, it expanded to encompass over 1 million employees. According to an assessment published in 1913, the Prussian ministry of public works was ‘the largest employer in the world’. The Prussian railways administration alone employed 310,000 workers and the state-controlled mining sector a further 180,000.

I don’t believe it’s possible to divorce the expansion of the Prussian welfare state, and the Prussian state more generally, from the subsequent arc of German history. Prussia is a cautionary tale.

So, where do we draw the line? Is there a way to balance a pragmatic view of social metastability with checks on the expansionist tendencies of the state? There’s no single answer to that. But there’s a process. Clear Eyes, Full Hearts, again. When considering a particular policy, ask:

Is this policy designed to promote equality of opportunity or equality of outcome?

How might this policy serve the interests of the State and Oligarchy?

What abstractions are being used to sell me this policy?

Does this policy respect my autonomy of mind, or is it a manipulative “nudge”?

Which brings me back to policy wonks. The way I write about policy wonks you might think I’m completely dismissive of them. Not so. We need folks out there conducting social science research. When that research is conducted with a proper scientific mindset (see The Road To Tannu Tuva), it provides valuable perspective on the tradeoffs associated with various policy initiatives. What I am suspicious of are policy wonks as optimizers–policy wonks promising The Answers.

Because there are always tradeoffs. There are always consequences. Some are intended. Some are unintended.

That’s what we learn from the Ants and the Grasshopper.

The Front

Marie: You find something?

Hank: Oh, just this…this guy I’m looking at. You know, everything he buys and eats is organic, fair trade, vegan.

 [Hank looks at a Los Pollos Hermanos napkin with notes on it found in Gale’s apartment]

Since when do vegans eat fried chicken?

Breaking Bad, Season 4, Episode 5 (“Shotgun”)

We have made no secret of our disdain for Fiat News.

If you aren’t familiar with our term, it’s a simple analog to fiat money. Fiat News isn’t outright lies. It isn’t #FakeNews. It is news whose value has been debased by the persistent presentation of opinions as fact.

Because this kind of activity is intentionally subtle, most of our prior pieces have focused on the language used in those articles. We considered whether the authors are using terms which convey strong value judgments, or which beg the question by treating unproven conclusions and assertions as givens. While we haven’t spent as much time on this topic (yet), we also recognize that Fiat News manifests in what is considered newsworthy by editors. The choices they make about what to cover convey a lot of information about what they believe is important, and in effect, what they believe you should believe is important. This is an unavoidable feature of relying on anyone else for information, of course, but the differences in coverage levels of various topics among publications make it clear that it is, in the most charitable interpretation, at least an unintentional mechanism through which Fiat News is transmitted. Even headlines – someone at a news publication summarizing the conclusions of someone else’s article – can be a key point of Fiat News transmission.

But as the Zeitgeist transitions from one in which cooperative games are possible and rewarded to one in which any rational, remotely self-interested participant is forced into a competitive posture, something else has arrived. It isn’t the subtle influence of opinion masquerading as fact. It is the army at the gates, with banners waving, bugles sounding, general on his horse in all his bloody state, saber pointed forward.

It is analysis journalism.

Sure, once upon a time, the news was the main event. It was why we came, and it was why they existed. It was a respectable family restaurant. But today, that above average service and delicious blend of herbs and spices is little more than a front. The real thing is what they do out of the service bay out back, slinging opinions and controversy, explainers and commentary. Yes, most news organizations are now largely a front for analysis journalism.

And we’re just a bunch of vegans, pretending we’re there to eat the chicken.

Let’s talk Mueller Report, y’all.

Regular readers, you know the drill. Below we present the Quid-based network graph of all stories from LexisNexis Newsdesk on March 24th and March 25th (through about 3PM ET) which referenced the terms Mueller, Russia and Trump.

Source: Quid, Epsilon Theory

Each dot here is a node which represents a single document from the LexisNexis Newsdesk database. News articles, opinion articles, basically everything published by most national news sources, major blogs and local publications with at least moderate circulation or web traffic. Quid, a developer of Natural Language Processing technology, compares all of the text in each of those documents to all of the text in every other document. It looks for similarities between each pair of articles and begins to cluster them by similarity in the use of language and phrases. Highly similar adjacent articles – whether within a single cluster or across multiple clusters – are connected by each of the lines you see between dots.

This is a visualization, so it is imperfect as a representation of a complex matrix of data. Still, in general, it is true that proximity visually is an indication of similarity of language. Up and down, left and right otherwise have no meaning outside of proximity. The tags are attempts from us to summarize the n-grams, phrases, keywords and context which serve to define each cluster.

See anything in the graph above? Well, let me tell you what I see.

I see a network where about a quarter of the clusters indicate what we would think of as “News” content.

These are clusters typified by rote quotations from official statements, technical phrases (e.g. ‘nexus’, ‘did not knowingly collude’ or ‘has found no evidence of’) and the absence of strongly value-indicative expressions like, say, ‘Trumpworld’ or ‘The liberal media’, which serve to define the basis of similarity in other clusters. No, this isn’t an objective determination – it is my opinion – but it is aided by the NLP analysis. You see, all of the clusters with these traits occupy the same, somewhat disconnected region of the overall network graph.

Source: Quid, Epsilon Theory

In all, these articles account for 22.5% of the total number of pieces published in the last two days. But the number of pieces published isn’t all that useful. We want to know how influential certain types of language have been on the overall sea of information floating out there for public consumption in comparison to other types of content.

Having started from the highest level, let’s now travel down to the lowest level, that of the individual article. Here’s the question we want to answer next: In this whole mess of articles, which use the language that is most similar, most influential on the structure of all these clusters and the interrelationships between nodes?

Here are the Top 10:

#1 – How the Russia #Resistance nuked the Never Trump movement – Washington Examiner

#2 – Robert Mueller was never going to end Donald Trump’s presidency – Vox

#3 – What we learned from Barrs summary of the Mueller report – The Guardian

#4 – The Last Mueller Report Speculation You’ll Ever Have to Read – NY Magazine

#5 – After Mueller report findings, Team Trump plans to ‘slam and shame the media’ – CNN

#6 – Russia investigation timeline: Robert Mueller and the probe into the Trump campaign’s alleged collusion – The Telegraph

#7 – White House Calls Mueller Report ‘Complete Exoneration’ – AP / KTLA Los Angeles

#8 – Trump upbeat in first tweets since Mueller report sent to DOJ – Washington Examiner

#9 – Mueller report found no evidence of Trump-Russia collusion: Justice Dept – Deutsche Welle

#10 – Adam Schiff: Still Evidence of Trump-Russia Collusion After Mueller Report; Huckabee Reacts – FoxNews

Your mileage may vary in your interpretation of these pieces. For my money, you’ve got six obvious opinion/analysis/explainer pieces, one Fox News video funnel blurb in which half of the story’s text is opinion quotes from an on-air contributor, a Washington Examiner piece about Trump Tweets, and two God’s honest news pieces. The AP / KTLA piece has some Fiat News tells, but yes, it is a news article. The best of the whole bunch is a nice piece of summary journalism from DW. Don’t know what that is? It’s Deutsche Welle, which is Germany’s version of that weird CNN International channel you get when you stay at that hotel in London that still doesn’t seem to have high definition channels for some reason.

Two. Two out of ten.

There are two intuitive ways to think about connectedness and similarity in language from a visualization like this. One is to look for the center of gravity. Where are the connections coming from? What sits at the center, seemingly a bit connected to everything else? The second is to look for the cluster where a lot of nodes are jammed together closely, indicative of strong cohesion within a particular narrative about that news topic.

Again, trust your own perception, but below are the two clusters that jumped out at me from the visualization on this basis. And the matrix data support it. The gray cluster at the bottom left has the highest internal cohesion (i.e. our calculation of the average distance of its nodes to all other nodes in that cluster), and the green cluster has the highest interconnectivity to other clusters.

Source: Quid, Epsilon Theory

What is the green cluster which connects the most different clusters together? What sits at the middle of our media consumption?

Explainers. This cluster is full of them. Five Key Takeaways. Discussion of how Trump is spinning it from Mother Jones. A literal explainer. Foreign Policy’s predictions about the implications.

What’s the gray cluster that dominates the graph, with the highest number of documents and the highest internal cohesion among the stories being told within those articles?

These are stories connecting the Mueller Report and Barr Letter to voting, the 2020 election and the campaign trail. In other words, before the facts had really been reported for us to digest, just about every media outlet in America decided they needed to tell us how to think about what this would mean for the election cycle.

In addition to about half of those pieces in the top 10 (including the top few), this cluster of articles includes a Courier-Journal opinion piece about Bloodthirsty Democrats, a blog promoting the Russia probe as the birtherism of the left, the Hill’s playbook for Democrats’ next steps, NY Mag’s take on the 2020 election impact, and local media discussing that minds haven’t been changed.

Maybe when you looked at the network you drew a different conclusion. Maybe the highlighted cluster below is what you saw. You’re not wrong. When we apply Epsilon Theory’s own attention metric, this IS the second most connected cluster, after the “voting and election impact” cluster. What is it? It consists largely of discussions of Congressman Adam Schiff’s remarks on Sunday that there is “still significant evidence of collusion”, and the retort to those remarks that Mike Huckabee delivered on Fox News. In other words, this cluster is so influential on the structure of the whole network because it literally represents the separate talking points of the two major parties. And it is pure opinion.

Source: Quid, Epsilon Theory

If you really explored this network, you would find that more than 22.5% of articles are ostensibly news pieces. There are news articles in a great many of these clusters. If you will forgive me, however, this is, uh, not fully exonerating. In other words, it is not a good thing when NLP software struggles to distinguish the language in your piece from outright opinion journalism.

Still, there is a difficult line to draw here. The freedom of the press does not, as we sometimes pretend, exist simply to protect the ability of media organizations to report facts that powerful people don’t want coming to light (although it certainly DOES do that). But it also exists to protect the right of media organizations and individuals to express and publicize their opinions and judgments about those facts. There is nothing wrong, unethical or immoral about opinion journalism, explainers or analysis. Hell, I’ll save commenters the trouble of pointing out that this, in fact, is a kind of analysis. Guilty as charged.

For those of us who consume information within the widening gyre, however, I think it is worth being vigilant, frequently checking in on:

  • The overall quantity of analysis and opinions relative to true news, across media;
  • The emphasis placed by individual publications on that mix;
  • The demonstrated commitment of publications to keeping a bright line between their news and analysis content, especially on websites; and
  • The areas and topics about which opinion and analysis journalism most actively seek to influence our perspectives (i.e. in this case, common knowledge about the 2020 election).

And then there’s that whole Fiat News thing…