Mailbag

I don’t write many Mailbag notes these days.

That’s partly because I’ve got so many words burning through my fingers to get out in new notes, but it’s even more so because we’ve created an ongoing Mailbag on the Epsilon Theory website … a place BY Pack members and FOR Pack members, where you’ll find some of the smartest commentary going, and where Rusty and I are in full engagement. At last count, we’ve got something like 2,000 published comments. It’s one of the best things on the internet today.

And yes, our Comment section is for paying subscribers only. It’s the smartest thing we ever did.

But these two conversations with Pack members deserve a wider circulation. They deserve a Mailbag note.

First from T.

Dear Ben,

Six months ago, you extended free premium membership to me because I work in Iraq as an archaeologist. I wanted you to get a sense of what the Epsilon Theory gift means to me.

Everyday we live the widening gyre in ways that Americans don’t appreciate. I work in Ashur, a world heritage site that one day, I hope, will be open again to the world. In order to work there, I rely on human kindness to make the impossible possible. To give you a sense of our gyre.

Archaeologists are targets. We can’t afford private security, so [REDACTED] donates his time and his bodyguard to escort us through ex-ISIS territory to get to Ashur. Once we cross out of the safe zone, the Jaboori tribe (a Sunni tribe) keep us safe with extra patrols and security. We drive through village after village where the war has left a trail of destruction. 

Once you arrive at the once beautiful world heritage site of Ashur, a picturesque complex of ruins on the banks of the Tigris, ISIS’ legacy is in full view. ISIS and its supporters had destroyed the museum, the protective cover for the royal tombs, and the ancient gateway. They systematically stripped the residential house and the local archaeology office. The first night, we slept on the floor, with a drip of water as a “shower”.

However, Ashur is a story of resilience. The local village (Sabka) did not have a single ISIS member. With a small private donation, we turned the taps back on, and we rewired the main house and the guard’s house so that we could get a reliable source of electricity. The local staff started work at 530 AM every day, working 14 hour days, in a country where 9 to 2 is considered sufficient. They donated their time so that our team could finish 3 full days of drone flights in order to take almost 12,000 aerial photographs of the site.

Afterwards, I flew to Baghdad to meet the Ministry and the team from the State Board of Archaeology and Heritage to discuss the future of Ashur. Everyone is helping because of a shared connection to a wondrous place that deserves better.

This is my pack. I hope you and Rusty will come visit it one day.

Best wishes from Iraq,
T.

I asked T. for permission to reprint his email, and he graciously agreed. Here’s a picture T. forwarded of the damaged archaeology office on the left and the damaged archaeology site on the right.

More importantly, T. also forwarded the overview deck for the entire project, which you can download here.

They’re using the drone-based photos to set up drone-based magnetometry and ground-penetrating radar (GPR) studies on the structures below … amazing stuff.

This is our Pack.

AS BELOW, SO ABOVE.


And now from David H. as reprinted from the comments section of The Long Now, Pt. 2 – Make, Protect, Teach.

Long time listener, first time caller.

There are many thing I love about ET, but one of the best things about it is the truths it reveals – truths that are right in front of us but that we don’t see until they are revealed by the truthtellers of ET. I can’t tell you how many ET notes I have read that have made me say “Yes!” and helped me better understand the world.

But not this note.

The “Make, Protect, Teach” principle Ben espouses misses the mark for me. There is a kernel of truth to it, but only a kernel, and it would set us down the wrong path. The error in the “Make, Protect, Teach” principle is in equating a person’s occupation – what they do to make money and survive in this world – with that person’s value to society. Now, I’m not saying a person’s occupation has no correlation to their value to society, but it is not a direct correlation. Take teachers for instance. Just being a teacher doesn’t make you a positive member of society. There are lots of small-minded, petty, vindictive, and generally crappy teachers out there. And by the same token, being a corporate lawyer, banker, or member of business management doesn’t mean that you aren’t a positive member of society. These occupations (and, full disclosure, I am one of those nasty corporate lawyers everyone loves to hate) are all vital and necessary to modern society and have every bit as much intrinsic value to society as those extolled in the note as being “Make, Protect, Teach”-worthy.

For me, it is not what you do but how you do it. Let me explain. I believe that life is the Great Mystery; an unsolvable puzzle. We understand only a small fraction of what goes on around us, and can only hope to gain a slightly better understanding during our lives. My belief that we live in a fundamental state of mystery underlies my small “l” liberal beliefs. Given the unknowable nature of life, all people need the freedom to believe and act differently, to make mistakes (or what I believe to be mistakes), to be wrong (or what I believe to be wrong), to be different. There are three things that give value to my “mysterious” life:

1. Enjoyment. Have fun, Life is a gift!
2. Increasing my personal understanding of life’s mysteries. Think Big Thoughts!
3. Helping others (family, friends, acquaintances) do 1 and 2.

For me, the pursuit of the “good life” is the pursuit of these three things, for myself and others. Jim Valvano said there are three things we should do every day: 1) Laugh; 2) Think; and 3) Have your emotions moved to tears. I don’t do these every day, but I aspire to. I believe that there are three things that give any person “value” to society: 1) Do they enjoy life and help others enjoy their lives?; 2) Are they both truthful and truth-seeking and do they help other seek truth in their lives?; and 3) Do they love and support their family, friends, acquaintances as they seek to maneuver through life’s great mystery? So, an artist that creates a work of art that helps millions better understand life has great value to society. On the other hand, an artist that creates small-minded drivel that speaks to no one has very little value to society. It is not what you do, it is how you do it. “Make, Protect, Teach” is close, but for me it is “Spread Joy, Seek/Tell Truth, Love/Support Others”.

And by the way Ben, despite my disagreement with this note, you are the best Truthteller I have ever known. As always, thanks for making me Think.

– David H.

Heard.

When I wrote this note, I really struggled with the idea of giving too much citizenship “weight” to one’s JOB. As David points out, there are plenty of sociopathic, bad citizens who are also teachers or police or engineers. And there are plenty of full-hearted good citizens who are lawyers or management or bureaucrats. But I really do think (and there’s a long-winded Bayesian argument here that I won’t bore you with), that choosing a profession that inherently emphasizes some notion of service over money (in my lingo, Make/Protect/Teach) over a profession that inherently emphasizes the reverse is a MEANINGFUL SIGNAL that you are a citizen. It’s not the only meaningful signal! Coaching a kids’ soccer team … setting up a Maker space at the local library … spending your time (NOT just your money!) in service to your Pack … these are ALL meaningful (and sufficient) signals that you’re in the Make/Protect/Teach framework.

EITHER of these signals is enough for me to give you the presumption of citizenship in the M/P/T framework.

The reason I’m focused on signals is that I’m trying to find a recipe for a mass society – a nation of hundreds of millions of people – to organize their shared concept of citizenship on something that can’t be BOUGHT and something that requires SERVICE, without creating a caste system of “approved” jobs or a requirement for “national service”. Using signals (EITHER a job that inherently favors service over money OR an inherently service-oriented use of your time) will have lots of false positives (“bad” citizens who generate a “good” signal). But that’s far more just than a system that generates lots of false negatives (“good” citizens who do not generate a “good” signal).

I do disagree with David on two points. First, just thinking well-meaning and society-supporting thoughts is not enough. It’s necessary but not sufficient. There must also be ACTION taken in support of those thoughts. Second, the outcome of that action isn’t the important thing, it’s the EFFORT. It doesn’t matter to me if an artist does crappy art that no one likes. It doesn’t matter to me if a writer publishes a crappy blog that no one reads. What matters to me (and I know that I sound like a contestant on The Bachelorette when I say this) is that Makers/Protectors/Teachers are Making/Protecting/Teaching FOR THE RIGHT REASONS. That’s a really tough thing to evaluate in a mass society (much less a small society like the cast of a reality TV show) – which is why I focus on signals and erring on the side of false positives – but I think it’s the right place to make an evaluation.

One last observation … this is the first in-depth conversation I think I’ve ever had with my brother on the meaning of life (and all that). I’m 55 years old and he’s 53. If Epsilon Theory stopped tomorrow, experiencing THIS ALONE would have made it ALL worthwhile. Full-hearted engagement, bringing us closer together … THIS is our purpose. Thank you, David. I love you.

AS BELOW, SO ABOVE.


As Bill Simmons used to say, “yep, these are my readers.” He meant it as a joke after a silly email, and that’s how I’ve used it in the past, too. But no silly or funny emails today. Just clear eyes and full hearts. Because … you know … can’t lose.

Yes, these are OUR readers, and this is OUR Pack, and this is OUR platform for thought and action in service to that Pack.

Watch from a distance if you like. But when you’re ready … join us.


Does It Make a Sound?

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This is Hong Kong right now. The image is powerful. The audio is more powerful.

The people in this image and this video are singing “Do you hear the people sing,” from Les Mis. It is a common protest song, but not the kind of thing that is allowed in 2019 China. If you know the curtain-dropping line from the play, you’ll know why:

Do you hear the people sing?
Singing a song of angry men?
It is the music of a people
Who will not be slaves again

– Les Miserables (1980)

Here is a video of police firing rubber bullets at well-prepared protesters.

Here is an article from the South China Morning Post discussing the aggressive use of tear gas to break up the protests.

Hong Kong protests: police under fire as viral video shows elderly residents of Yuen Long care home suffering from effects of tear gas [South China Morning Post]

The article is, of course, pure fiat news, an opinion piece that presents itself as a news update. The headline is selective and emotionally charged. The images are selected to evoke a particular response. Even when we agree with the narrative it is promoting – especially when we agree – fiat news should always give us pause.

But they aren’t the only ones creating narratives here. The protesters are, too. Singing “it is the music of a people who will not be slaves again” is beautiful narrative creation. Standing peacefully, armed against tear gas and bullets with spray guns, umbrellas and plywood shields? Brilliantly disarming tear gas canisters with cones and water guns? This is Holy, Rough and Immediate theater, all at once.

And it is amazing.

If you’re reading this, you probably know more about what’s going on in Hong Kong than just an airport shutdown. Like us, you’re probably Very Online, a ravenous consumer of global news. But for most of the country it is a different story.

Here, for example, is the front page of CNN.com as of 7:00 AM CT this morning. Dig a little bit and you’ll find something about the Hong Kong protests. Only don’t look for a story about self-determination, disenfranchisement or extradition. You’ve got to look for a story about how this might affect you, fellow American. Found it yet?

MSNBC’s front page has nothing. Zilch. Lots to say about Russia, though.

If you’re willing to scroll down past fiat news send-ups of Comey and Cuomo, Fox will give you a similar angle to CNN. At least they acknowledge the protests. Unfortunately, in doing so their headline writer unwittingly reveals a bit too much about US missionaries’ awareness of the protests: in short, they have not been paying attention to them for the months, not days, that they have been going on.

The Wall Street Journal puts it figuratively above-the-fold – they’ve got a good Hong Kong bureau – but again, the headliner news story is how this will affect your travel plans and the next two weeks of volatility in your portfolio. It IS a financial paper, so some grace is warranted here. Many of their reporters are doing good work. If you’re looking for someone to follow, @birdyword is a good choice.

The New York Times gives the “airport thing” top billing, too, but the nature of their coverage (presented cheerfully next to “What Would Sartre Think about Trump-Era Republicans”) would easily pass CCP censors. Every piece and every blurb being promoted is about the disruption being caused by the protests, and about the damage being done by them.

ET followers and subscribers – especially on social media – have been openly predicting over the last few days how quickly the Epstein case or the Hong Kong protest situation will fade from the zeitgeist, from the narratives about what’s going on in our world.

They won’t fade.

No, not because they’re powerful or timeless. They won’t fade because they don’t exist.

There is no narrative, no common knowledge in the US about these protests. American media have largely stopped covering them, and they aren’t written about as a “connected issue” for other topics. They have rarely, if ever, been connected to language used to discuss trade disputes with China. They aren’t related to the three or four articles grudgingly discussing the Uighur muslim reeducation villages they’ve set up (shh!). But this isn’t just US media. It’s politicians, too, who seem loath to tie anything of everyday significance to what’s happening over there.

The only reason at all the protests are getting coverage is in context of reports about Asian stocks and reports about flights in and out of Hong Kong. That’s it. From Quid, below we present a network graph of the last two days worth of all global news. In bold at the extremity of the northeast quadrant are the entirely peripheral, unconnected, paltry collection of articles about these protests.

Source: Quid, Epsilon Theory

I’m sure we will get a lot of “isn’t a clear-eyed view of the protests that they are unlikely to be successful” or “this will all be counterproductive” takes, which are very on-narrative responses. They also might not be wrong.

But wherever self-determination and resistance to the encroaching power of the state and oligarchical institutions find expression, there should our full hearts be also.

And our full voices.


PDF Download (Paid Subscription Required): Does It Make a Sound?

The Country HOA and other Control Stories

PDF Download (Paid Subscription Required): The Country HOA and other Control Stories


Ahchoo: You don’t have to do this. Look, this ain’t exactly the Mississippi. I’m on one side, see? I’m on the other side. I’m on the east bank. I’m on the west bank. It is NOT that critical.

Robin of Locksley: Not the point! It’s the principle of the thing.

Robin Hood: Men in Tights (1993)

I visited my parents in Texas last week.

They live on the periphery of Houston exurbs and East Texas country, although – and this is not unusual for Texas – their home is in a development. What’s more, it is a development with an HOA. The kicker is that it is a gated HOA. My parents couldn’t care less about whether the community is gated or not. This just happened to be where they found the home where they knew they wanted to retire.  

But still, there’s a gate.

The nearest business – other than a gas station at the highway exit to get there – is a web-based thing some guy runs out of his house selling pretty rocks and healing crystals. The next closest are a lumber yard and two feed stores. Town doesn’t really have any crime to speak of. Doesn’t really have many people to speak of, for that matter.

And of course they change the code every couple of months. Just to be safe. So when I pulled up in the rental Hyundai with my wife and boys at, oh, around 9 PM, well, I had the wrong code. I sat there texting my dad for the new one, but my dad’s about as good at checking his phone as yours. No joy. Luckily, after a few minutes, some good ol’ boy in a white pickup pulled up. So I looped around the little island in the median where the gate control machine was positioned and got behind him.

He pulled through and did something I never thought I’d see. He stopped. Right past the opened gate. I mean that literally. He inched his truck forward so that there was a hair’s breadth between his tailgate and the now-closing community gate. He wasn’t going to let me in. Not only that. He waited, not for the gate to close completely, but for some new development in this high stakes drama of a family with two kids in car seats clearly visible to him as we looped around, parked in a purple SUV trying to get into a residential neighborhood in a crimeless community. Did he call the police? Did he summon the rent-a-cop working the HOA circuit checking on the length of everyone’s front lawns to make his way post-haste to enforce the community’s important security precautions?

I didn’t end up finding out, because I got the code from my parents and was able to open the gate. As soon as it opened, our knight on his shining white steed proceeded to his house. I hope his family was all present to hear this first rendition of his stirring tale of heroism.

Now, maybe you’re saying to yourself, “Rusty, this doesn’t sound that strange. Maybe there have been break-ins, and he’s just being conscientious of his neighbors.” I would be open to both of those arguments (I probably wouldn’t, actually – gated communities are uniformly ridiculous) if I didn’t have more information:

  1. There is no continuous wall extending from the gate around any portion of the development. The gate is completely ornamental and isolated.
  2. There are two other roads – one through a junk yard and another through a neighboring RV community, which connect to the community and are open at nearly all times to all comers willing to subject themselves to 1-2 minutes of inconvenience.
  3. The gates are wide open and unmonitored every day between 8 AM and 5 PM.

I understand the intent of the gate. It’s an inward-facing narrative, a story to tell people living there that their community is a refuge, a place they can come home to without fear. There is (yes, still) some prestige attached to living in a gated community, and some people derive some pleasure from that. I’m not saying I agree with any of this, or that all of the people living there care about these things, but it isn’t hard to grok the intent.

What was so shocking to me was that someone actually believed in the gate.

The driver of that pickup truck would have blithely entered his community behind a smash-and-grab robber entering when most smash-and-grab robbers do (i.e. during daylight hours when people aren’t there to make it inconvenient) without a second thought. He would never dream of monitoring ingress past this high security feature to the south (pictured below). Probably hasn’t spared a single thought for the two neighboring and connecting properties.

But boy, when someone was trying to get in under a certain of circumstances over which he had some direct control, his hackles were up. He knew his duty.

It shouldn’t have been shocking to me. This good ol’ boy isn’t strange. He’s all of us, as investors and citizens alike.  

Even when we know something is a story written for us, that we are being told how to think or feel about something to serve someone else’s purposes, there is a visceral, emotional part of us that wants to believe it. Needs to believe it. We yearn to see it as an echo of some truth rather than a construction, and when some paltry data emerges to confirm it, it becomes almost irresistible. And when it is something where part of the narrative is control?

There’s a reason why investors loved high-net long/short equity for so many years. Even after they had experienced bad results. Even after they figured out that the incentive fee-on-beta thing was too high a hurdle for even the most gifted stock picker. We wanted to believe the story, and the idea that doing so gave us the ability to be both long or short, to vary our net exposures to respond to market opportunities. Nevermind that we’d never found anyone who was good at those things. It was a story we wanted to believe. More importantly, it was a Control Story.

It was the same thing back when every big asset allocator rotated from the usual awful MSCI macroregional classifications to ACWI and “Global Equities” about ten years ago, and then started rotating back to the old schemes after a couple more years of dominant US equity returns. Gotta be able to more easily overweight the asset classes that did really well in recent years, after all. The story was that managers would have all these levers to pull – Sectors! Countries! Currencies! Cash! Stocks! Even when we know in our heart of hearts that everyone is terrible at making each of these decisions (yes, the exception you’re thinking of in your head is terrible at it, too), it is still a story we want to believe. It is a Control Story.

I leave you to muse about how this could be applied to the stories behind growth PE and buyout funds in 2019.

You and I – and the cowboy in the white pickup – we’re vulnerable to Control Stories because we believe that we and our advisors will make decisions that matter. We will make better use of flexibility, options and control than others. And no matter how much we know in our heads and show in our actions that this is just an ornamental gate built to tell us a story, we will actively seek out ‘evidence’ to prove what we want to believe. If you seek out evidence in that way, you will always, always find it.

So how do we spot gates to a Country HOA in our portfolios, our frameworks and our daily conversations? Here’s a few that spring to mind:

  1. “Multiple Ways to Win” is always and everywhere a Control Story.
  2. Decisions that are designed to allow you to take more risk elsewhere are always Control Stories.
  3. Arguments for transparency and what we will do with it are Control Stories.

You’ve probably got a dozen more. Pop them into the comments below!

No, not every Control Story is wrong. Still, Clear Eyes means dialing up our skepticism when we hear them.

Especially when it’s a story we are telling ourselves.


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What You Call Love

Don Draper: What you call love was invented by guys like me. To sell Nylons.


In certain circles, it’s fashionable to assert that “words are violence.” That is to say, certain language is used to perpetuate and reinforce existing (typically oppressive) social power structures, and this is a form of coercion on par with physical violence. For brevity, I’m going to lump everyone who espouses these beliefs together under the broad umbrella of postmodernism.

In other circles, it’s fashionable to ridicule postmodern ideas and the oft-ridiculous policies they inspire.

However, to the extent postmodern thought keys in on narrative, and particularly the role of symbolic abstraction in shaping individual and group identities, I’d argue there’s plenty of analytical utility to it.

Where people run into trouble is when they attempt to turn a methodology for analyzing signs and symbols into a belief system. Because this type of deconstruction is an inherently nihilistic activity. Ultimately, there’s no there there [Incidentally, this also applies to science. Science is a methodology, not a belief system. And belief systems are what separate the Jonas Salks of the world from the Josef Mengeles]. Or, as Venkatesh Rao put it (much more eloquently):

“Losing [all sense of objective meaning] is a total-perspective-vortex moment for the Sociopath: he comes face-to-face with the oldest and most fearsome god of all: the absent God. In that moment, the Sociopath viscerally experiences the vast inner emptiness that results from the sudden dissolution of all social realities. There’s just a pile of masks with no face beneath. Just quarks and stuff.

But that’s a subject for another note. A full hearts note. This is a clear eyes note.

And in case you’re wondering, no, words are not equivalent to physical violence. That is nonsense.

What is not nonsense is the notion that if you can deftly manipulate the symbols people use to assign and create meaning in their lives, you can manipulate their thoughts and behavior. We have a name for this outside academia and the culture wars.

It’s called advertising.

Let’s unpack that Mad Men quote that led off this note. Don Draper is describing what academic types would call the “signified” and the “signifier.” The signified is the abstract concept, love. The signifier is the ad selling Nylons. The ad signals what love means—how love manifests itself in the world. How you should express it. How it should make you feel.

This relationship is the basis for language (human or otherwise). Heck, it’s the basis for conscious thought. It’s therefore the building block for both fiat news and fiat thought—the raw material our missionaries use to build their wolf traps.

Every missionary has his own version of the Don Draper quote.

Politician: What you call values were invented by guys like me. To win power.

Fancy Asset Manager: What you call ESG was invented by guys like me. To gather assets.

The Sell-Side: What you call a rotation trade was invented by guys like me. To earn commissions.

An important thing to remember here is that awareness of how missionaries manipulate signs and signifiers is NOT the same as saying there are no such things as facts. It is NOT the same as saying there is no point to believing in anything. It is NOT an invitation to nihilism.

It IS, however, the foundation for a clear-eyed view of your world.


The Patsy, Revisited

Image result for warren buffett

As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”

Berkshire Hathaway Chairman’s Letter (1987)

This is the ur-quote. The True Source from which all hedge fund investor letter quotes spring.

I’m not criticizing. It’s a great quote. I’m also not pointing fingers. We’ve used the true-to-Buffett ‘patsy’ version of the quote at least once in past Epsilon Theory notes. We have used the ‘sucker’ version at least six times, by my count.

Funny thing about this quote, though. It means something different depending on who’s saying it.

It is used most often by Very Smart People to wave indistinctly at a crude straw man in the distance they call Most Investors. This straw man is clothed with all sorts of really lamentable traits, you see. He buys when everyone else is greedy. He sells when everyone is fearful. He hates value stocks and he always pays high active management fees. If you ever happen to play poker with Most Investors, just remember that he is always, always the Patsy.

Slightly less often, it is used by equity investors and fund managers in reference to reasons they have incorporated some acknowledgment of behavioral finance, sentiment, consensus views or momentum into their thinking or their process. It’s the calling card of the Wise-Sounding Skeptic, who can always get some street cred for telling you that there’s no free lunch, or that anything that seems too good to be true probably is. Again, before you hit the search window up there, remember: I’m not pointing fingers.

Ironically, in both of these cases, the focus of the aphorism is about you or about them. The other people at the table, who are sort of the whole point of the thing, are rarely more than an abstraction of individual actors into some archetypal idea of “the market”, if not another layer of abstraction into that loosely related piece of conceptual art called Most Investors. Hell, even Uncle Warren’s original bit was about Mr. Market.

You know who gets it, though? Debt guys.

No, not universally. Contrary to popular opinion (see, I built my own Most Investors, too), there’s no ‘smart’ part of the market. There are plenty of lousy credit long-short PMs, and even more dummies who’ve made a nice living getting pensions locked up in sidepockets or second extensions on way too much of NAV because of poorly executed loan-to-own strategies. But the guys who are actually in the business of worrying about where the rights that matter sit in the cap structure are the guys who are also in the business of understanding who is sitting at the table with them.

Not in some abstracted Mr. Market sense, but in the real-world sense of “Hey, who else actually owns this shit?”

In practice, most modestly shrewd equity investors can get away with abstracting the poker analogy to Mr. Market without worrying too much about who else actually owns what they own and why. There are generalizable archetypes of behavior and preferences. We kind of know how the academic factor quants are going to respond to this or that. We kind of know that there are knowable quantities of price-indifferent passive money. We suspect there’s a certain amount of contrarian capital ready to BTFD, and a certain amount of CTA money ready to take one on the chin when they do. We let that one guy at JPMorgan throw a dart to be breathtakingly wrong again about how much risk-targeted AUM is ‘in motion.’ Whatever mental model we have isn’t going to be anywhere close to perfect, but it’s usually going to be good enough for Bayesian work.

But if anyone is willing to tell you that they have a view on how a speculative asset (see here for the particular definition of this term I mean) will perform in a period of stress for risky assets, or that it should have a weak or negative correlation to, say, equity markets, and if their analysis is based on some trait or analysis of the asset itself and not the behaviors of the specific people who own the thing, they are probably raccoons.

And yeah, there are a lot of suspects for this particular crime. Folks selling you crisis risk portfolios holding selling something other than long USTs? Crypto “hedge funds” with correlation matrices in the deck? They deserve your skepticism.

No, not all of them are guilty.

But if a fund manager, salesperson or consultant tells you they know of an asset class that will buck the trend if and when risky assets deflate, here’s a tip: ask them who the other people sitting at the table in that asset are. Ask them to be explicit. Ask them to tell you why they believe those people will respond that way and not in the price-sensitive way Most Investors respond to broad-based risk aversion.

When you do, if they can’t answer, or if they start talking ‘fundamentals’ of the asset, please call your local animal control.

So I got that goin’ for me

Dry a subject as you’d imagine they would be, buybacks have become a topic every bit as polarizing as some of our political discussions. No matter how nuanced your view, it will be auto-tuned to some extreme by the obedience collar-wielding ideologues on one end of the spectrum or the dog whistle-wielding ideologues on the other.

Even now, someone is preparing a “stop with the bothsideism – it’s just math” response without reading any further.

Sigh.

It’s not about the math.

Sure, in nearly all cases where companies buy back stock, in the narrowest interpretation of that specific action of buying back stock, is management acting ethically and in the interest of shareholders”? Almost universally yes, because math. In a nearly universal range of circumstances, stock buybacks evaluated independent of other considerations are a really good, really efficient way to return capital to shareholders to deploy as they desire. In a very real sense, it can represent a company delivering on its most fundamental duty to the people who trusted it with capital: returning it to them with greater value.

So why isn’t it about the math?

Because the questions being asked about buybacks go beyond “in the narrowest interpretation, is management acting ethically and in the interest of shareholders.”

Because what buybacks (and any form of return of capital) tell us in general about corporate opportunities and American willingness to take business risk to produce returns at a macro scale matters.

Because what that tells us about how central banks and other policymakers are artificially influencing the relative attractiveness of those investment opportunities matters.

Because the way in which stock-based compensation structures may be exploiting the general (and appropriate) approbation of stock buy-backs among investors in order to mask the appearance of higher tax-advantaged compensation matters.

Because the way in which financialization in general is squeezing margins higher and making markets as measured on a P/E basis less expensive-looking matters.

Because even if you don’t think these things are nearly as bad as buybacks are good (and they are good), if you don’t realize that Wall Street is losing this meta-game, you aren’t paying attention.


So when you read this article in the Atlantic today, I suspect you will probably respond (or already responded) like I did:

You will cringe at the predictable framing of the issue around Michael Milken for some damned reason.

You’ll have ammunition ready to dispute the conclusions, robustness and analytical quality of the Fortuna study.

You’ll wince at the loaded word choices. “Draining capital.” “Corrupts the underpinnings of capitalism itself.” Really?

You will be ready to highlight how comparison of buybacks to corporate salaries without applying the same logic to dividends, debt reduction or any other effective return of capital is cherry-picking bias meant to inflame a certain kind of reader.

You will read the closing paragraph, chuckle at its sheer cheek, and find your brethren in the break room, colleagues at other shops and followers on social media to laugh about its bias and absurdity.

And you’d be in the right to do so. It is. It’s biased. It’s absurd.


And yet, it is also worth remembering our oft-told tale of coyotes and raccoons.

You see, you and me? We’re the coyotes. We’re wise enough to understand that those jars of pennies the Wilton retiree is shaking at us won’t actually hurt us. We know we’re right about the math of this efficient return of capital that is buybacks, and we’re going to shout down all this terrible analysis until everyone realizes we’re right. We are too clever by half.

Those guys in boardrooms figuring out ways to take advantage of our charitable passion for this issue to immunize their non-cash comp? They’re the raccoons. And they will continue to succeed in skimming the cream off their artificial EPS beats as long as we’re so focused on arguing with the Gell-Mann Amnesia-ridden readership of the Atlantic about the obvious damn math of buybacks.

It’s. Not. About. The. Math.

If we care about maintaining the flexibility of corporate management teams to deploy and return capital flexibly and with the least interference by regulators and politicians – and we should – every moment that we spend as an industry debating and analyzing the math of buybacks instead of actively seeking out and rooting out raccoonish boards and management teams is an utter waste of time. The right to return capital in a very sensible way will be legislated out of existence (again) while we thump our chests about whether the data-set used in some dumb article properly accounted for survivorship bias.

This topic is firmly in narrative land now, folks, and if you’re playing this as a single debate to be won instead of the metagame it now is, you’ll lose. But at least you’ll be right. So you got that going for you, which is nice.

The Problem with Brussels Sprouts

I think it started in 2010.

Within six months of patient zero, they were everywhere. Every gastropub. Every upscale comfort food concept. Every ‘American Brasserie’ in a gentrifying neighborhood. Every farm-to-table that became an OK-maybe-a-little-Sysco-to-table after six months of food cost realities.

Brussels sprouts.

No, not the actual vegetable. That would be gross. No, I mean Brussels sprouts! These things that we quartered, soaked in olive oil and butter, bathed in salt and pepper and scorched until the memory of green was all that was left. These were things that, seemingly out of nowhere, an entire industry sold aggressively to a generation whose smell memory could still produce on command that acrid, metallic scent of unseasoned frozen sprouts being microwaved in water in a shallow Corningware dish – you know, the one with flowers or a cornucopia-style collection of earthy vegetables on the side?

Y’all, the only reason anyone orders this vomitous cabbage is because it is transformed into a cartoon of itself.

But hold that thought for a moment.


I had a colleague – now, sadly, passed away – who had a favorite expression: blue light, blue suit.

The idea behind the idiom was that the job of a fiduciary was not to blindly deliver what a client wanted, but what they needed. Still, one couldn’t get around the fact that clients want to be sold on what they want. If they want a blue suit, then give them a blue suit, dammit. But not an actual blue suit that would be wrong for them. Give them the gray suit they need – and shine a blue light on it if you have to.

I had a boss whose oft-used variant was the red convertible. Do your analysis, add whatever conclusions, bells and whistles you want, even take it up a notch. But the thing I get at the end of the day better at least look like a red convertible.

I met another wealth advisor once who favored a food-related analogy for the same concept. Investors need to eat their broccoli, he said, so figure out a way to make it taste good. It was, as you might imagine, a story offered in defense of investment policy statements which emphasized asset classes and strategies which (nominally, anyway) diversified home country equity risk. Heavy on foreign equities, alternatives, real assets, that kind of thing. After 10 years of S&P dominance, nobody really wanted them, but they needed them. The trick, he figured, was making the clients OK with getting the things they needed but didn’t really care about.

It occurs to me now, I suppose, that the food-related examples of this idea are overwhelmingly common. I know a CIO, for example, who characterized some of his firm’s strategies as hiding the pill in the cheese, a tactic immediately recognizable to any dog owner. It’s your job to give him what he needs, and it doesn’t matter how he gets it.

This is the heart of the meta-game of money management.

It is easy to see for those inside the industry why this meta-game playing is necessary. I hope that it is also easy for those same people to see how it might go very wrong. In practice, however, our own self-deception about why we sell investment advice in certain ways makes it far more difficult to detect. In the interest of circumventing that self-deception, let me offer another axiom:

There is no wealth management firm in the world for which investment expertise is a sustainable competitive advantage.

This is the Brussels sprouts are objectively gross statement of the story I am telling here. The only difference is that whereas some of you may have sufficiently bad food opinions to reasonably disagree with that statement, if you disagree with the above statement about investment expertise, I think you are probably just wrong.

If you think that the edge in your advice service is performance, you are probably wrong. If you think that the edge in your advice service is investment selection, you are probably wrong. If you think that the edge in your advice service is investment insight, you are probably wrong. If you think that the edge in your advice service is uncovering new investment ideas, you are probably wrong. And yet, if prospective clients don’t believe that we can do each of these things, we will almost certainly fail to build a business. What’s worse, those prospective clients will do business instead with someone less scrupulous.

It is an uncomfortable truth, but the only reason we are usually hired is because we have been transformed into a cartoon of ourselves. A cartoon of relative expertise. A plate of Brussels sprouts, charred and covered with so much fat and salt as to be almost unrecognizable.

The inevitable path of the meta-game conscious financial adviser, then, is the creation of that cartoon of expertise. What does that cartoon look like? Well, we either celebrate some expertisey-sounding thing about our firm that really has nothing to do with expertise or the odds of any investment outcome, or we hold out the notion that something we are doing may be related to producing better investment results without exactly saying it.

We tout the home office’s resources.

We talk about the depth of our teams and resources.

We talk about team credentials.

We talk about our access to unique investments.

We talk about our ESG framework.

We talk about our research, our data, our analyst team.

We talk about our process.

We turn ourselves into a talking head. An expert.

In each of these cases, we may not say that these traits are definitely or explicitly related to better investment outcomes, but the reason we cultivate them and talk about them is absolutely to satisfy the client’s desire to hire a financial adviser with the most investment expertise. It is how we create a cartoon about our expertise, knowing full well that the client will associate that with their expected investment outcomes.

So if you’re a financial adviser, here’s the question you’ve probably asked yourself more than once: is this honest? Is it fair and good and right to heavily emphasize things in marketing that aren’t false, but which don’t really matter that much to the client’s outcomes, simply because we know the prospect or client cares about them? Does the fact that we really are delivering a very credible, high quality advice product at a really competitive fee that is far better than what the charlatans and churn artists out there are pitching mean that we can feel less bad about mentioning our amazing stock guy who’s had a great run the last few years ? Or the fact that our US-tilted portfolios outperformed our peer RIA across town, even though our positioning reflected bad diversification hygiene and our results reflected simple good fortune?

There’s a lot of salt and butter on those Brussels sprouts, y’all. These are hard questions. I don’t have an answer. But I do have a process: Clear Eyes, Full Hearts.  

Clear eyes: There’s no way around it. We have got to talk about these things. Our clients are grown-ups, and don’t deserve our condescension. Yes, we’ve gotta have a page in our deck with the team’s years of experience and degrees. Yes, it’s OK to talk about our process and why we think it works. Yes, it’s OK to talk about historical client outcomes, provided we’re doing it in a seriously, honestly, humbly non-promissory (and compliant) way.

Full hearts: No, we don’t have to build our entire proposition on a cartoon of relative expertise. We don’t have to treat clients like children, but we also don’t have to treat them like marks. I think that means emphasizing, not just in marketing but in practice, the elements of financial and investment expertise that are real, important and rare. I can think of six:  

  1. Identifying and consistently reevaluating and delivering the right level of risk.
  2. Delivering a nuanced, real understanding of diversification.
  3. Really influencing household expense management.
  4. Financial, estate, tax and philanthropy management.
  5. Business consulting for entrepreneurs and business owners.
  6. Structuring investments to properly complement existing illiquid holdings.

The more important truth, of course, is that the single most important thing an adviser can deliver isn’t any of these things. It isn’t a question of investment expertise at all. It’s…well…advice. When risk appetites are high, restraining exuberant behaviors. When risk appetites are low, restraining fearful behaviors. And in all cases, working constantly to ensure that when these times arise, we have the kind of relationship and trust with our clients that will make them listen. The relationship is the thing. And while I’m not saying that you, individual FA, don’t have a couple relationships that are strong enough to withstand a pretty rough go of it, I think we all need to be pretty clear-eyed about how much of these relationships will boil down over time to the perception of the results we produce.

I am also not saying that you should not earnestly try to outperform peers. I believe that there are behaviorally-driven strategies that will (nearly) always work over sufficiently long periods, even if those periods do seem to be getting, ahem, a bit longer. I believe that there are inefficiencies driven by non-economic actors in a variety of financial markets that can create opportunities with uncorrelated sources of return. I believe that there are changes in the structure of markets that occur from time to time that can create periodic sources of return. Ben and I spend half our time on these things, for God’s sake.

But they can’t be the fundamental value proposition. Not for someone who wants to do this the right way. Control your cartoon, but don’t let it turn you into a raccoon.

Mailbag: A Modern Vocational Curriculum

Few topics seem to arouse the kind of interest, creativity and occasional rancor as our diversions into higher education. When we wrote about a vocational curriculum that we thought would do a far better job achieving the true professional preparation aims of a mixed post-secondary educational system, we received a lot of thoughtful comments – enough that it made sense to make sure all of our readers saw them:

Interesting selection. You might be interested to know that something very similar (https://lambdaschool.com/) already exists. I have no association with them, other than working with some graduates and recommending people send their kids there as opposed to University. There are a couple of changes:
1. Students pay no tuition until the graduate and get a job that pays $50K plus/year.
2. The annual amount they pay is charged as a percentage of their salary and is capped both in what’s paid in a year (I think around $17K) and in total (I think its around $30).
3. There is testing to get in.
4. It is based around software engineering.
5. The program takes 9 months to complete.
6. Lambda school is incentivized to get the students jobs, though there is more demand for graduates than there are graduates.

I can attest that their graduates are excellent.

– Andrew Meyer (ET Subscriber, via website)

We are big fans of Lambda . That said, it is a software development-focused program, whereas we think the problem it would solve is much larger. Still, both our theoretical solution and the solution Lambda is actually pursuing are both incapable of solving the credentialing problem on their own. This is a demand-side problem (w/r/t labor), not a supply side problem.

I’ll add an anecdote from my earlier years…..I knew a Burmese family that was rather wealthy – the men told me that as part of their social education, they had to spend one month as Buddhist monks , and beg for food on the streets every day . Regardless of the fact that they lived in big houses with multiple servants or that their parents drove expensive European cars.
The idea – to teach them humility ……
Of course, they cheated by asking friends and relatives to give them food every day but I thought the original concept – humility – was a good one.

– Cartoox (ET Subscriber, via website)

One of the primary challenges of the American public school setting, I think, is its inability to cultivate humility. The entire experience teaches most students that strident confidence is the path to success. In fairness, that is ONE path to a form of financial success in some professions, but the kind of self-introspection and honesty necessary to achieve more meaningful forms of success don’t come easily to those who (like me) were educated in environments where maximizing relative comparisons was the most immediately profitable path.

I could quibble in detail and pick nits around the edges, but my first reaction is that I wish that had been there for me. This would change the world, and it got me wanting to start a school.

– Howard Wetsmann (ET Subscriber, via website)

Thanks, Howard. Me too.

This is stellar. I’d add a module on design/aesthetics and probably pull the calculus. Just a tiny bit of design training makes a world of difference in almost every aspect of business.

– Brent Beshore (Via Twitter)

I struggled over this exact thing. I don’t know that I’d swap out calculus (it’s a hill I’ve chosen to die on, for better or worse), but Brent is right – design is huge. The ability to frame an idea in words is powerful. The ability to frame it in visuals is no less powerful, and in some circumstances even more indispensable.

If this was your reaction, too, I probably agree with you.

You inspired me to take a stab at this myself, @EpsilonTheory: (link: https://blog.dthomason.com/a-better-vocational-curriculum-for-university/) blog.dthomason.com/a-better-vocat…. Quite similar to @WRGuinn‘s answer, but with a bit more focus on meta-skills. Interested in your thoughts!

– Daniel Thomason (Via Twitter)

Please take a look at Daniel’s link.

There are some things here with which I’m in violent agreement, and a few which I’m not sure about. Most notably, Daniel’s list is high on meta-skills, as he points out, which I think is spot on in terms of what leads to professional, financial and personal success. These are things like ‘discipline’, ‘decision-making’ and the like.

When we consider education, however, I personally think that we must separate what is important from what a formal direct educational platform is the best venue to convey. I agree with Daniel, for example, that personal discipline, self-control and decision-making processes are going to be far greater indicators of success than whether you remember the derivation of Black-Scholes. Where I differ, perhaps, is that I think that these are skills that are best developed in live workplace situations. Entry-level professional projects have a comparative advantage vs. formal education in developing them, and I would not focus on them in a vocational program. Your mileage may vary, however – just my take.

I’d add a course in ethics. I took an ethics course in biz school that was revealing. The class was mostly mock situations wherein collaboration produced a satisfactory result, but individual promise breakers came out better. Everyone needs to know how it feels to be cheated.

– George Hill (Via Twitter)

Unfortunately, everyone will learn how it feels to be cheated pretty quickly in their career.

This is a similar point to the one I would make to Daniel: much of what we teach is based on what we believe is important, even if the setting isn’t one that will most effectively convey the lesson. Unlike Daniel’s point, however, I think that ethical behavior is a thing which – if it isn’t clear by the time someone has graduated high school – is probably either unlikely to be grasped at all or which has been very consciously ignored by the student. In either case, post-secondary instruction doesn’t seem as useful to me.

If reinforcement is useful, it will be in assuring young professionals that there is a path to financial success and opportunity that permits reciprocity and full heart behavior. Again, however, I think that is a thing that can only be learned in practical settings.

Every Shot Must Have a Purpose

  PDF Download (Paid Subscription Required):  Every Shot Must Have a Purpose


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.



  PDF Download (Paid Subscription Required):  Every Shot Must Have a Purpose


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.


Details:

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.

Perfect.

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.