Let me tell you about an extremely stupid thing I used to do with money.

There was a time, not so long ago, when I couldn’t bear to put money in an idea I didn’t come up with myself. This was dumb. I compounded the dumb with a preference for esoteric, off-the-run stuff with a lot of hair on it. gReEdY wHeN oThErS aRe FeArFuL. nO eDgE iN aNyThInG wElL-cOvErEd. Something like that.

In retrospect this was pure ego. Unearned arrogance.

The small self-directed investor has two key advantages:

Key Advantage Number 1: She has no capacity constraints (there is little slippage when she trades).

Key Advantage Number 2: She does not have career risk to manage.

The small investor is ideally suited to parasitism. The concept of parasitism has a negative connotation. Parasites are pretty gross. (Botflies. Yuck) For Americans like me, parasitism is the antithesis of the whole rugged individualist mythos that is deeply ingrained in our culture. Parasitism is icky.

But for the small investor, parasitism is beautiful.

As a small investor, you can buy almost anything. And you can do it without having to write 75-page diligence memos or pitching positions to investment committees. You are not under pressure to justify a management fee. You are not imprisoned in a small cell in the equity style box. You don’t have to fire yourself for style drift. This is beautiful. It is an enormous advantage.

All you have to do is look for money the big players are leaving lying around.

Then pick it up.

(it’s not that easy, of course, but that’s what it feels like when it’s clicking)

Actually doing this can feel incredibly stupid. Things that can make you a bunch of money are often incredibly stupid. From intellectual point of view, dip-buying large cap equities is super lame. There isn’t going to be a Michael Lewis book about a bunch of pikers dip-buying Facebook to scalp a quick 50% return.

Ignore this feeling of stupidity. The only lame ideas are the ones that lose money!

People expend a lot of time and energy editorializing about how there is no edge in picking large cap stocks. There was a time when I did the same. Now I see it differently. Now, I think an issue is that a lot of strategies are not designed to take advantage of the best opportunities in large cap stocks. Perhaps some of the more interesting opportunities in large caps come from thinking more like a trader than an investor? This is just one silly example.

Muni closed-end funds offer these kinds of opportunities every couple years. The market gets scared. Liquidity dries up. Discounts to NAV blow out. There’s money lying around all over the place, and all you have to do is pick it up. (assuming you’ve got liquidity, of course)

This isn’t to argue that simple ideas are always best, or that complex ideas are never good. This is an argument for maintaining an open mind, and an argument against allowing ego to filter ideas.

Be open to a good idea whenever it may find you! There are no point adjustments for originality or degree of difficulty. It took me too long to realize that and accept it.

Nothing wrecks portfolios quite like fear.

The fear-based failure mode we know best is the whipsaw. An investor suffers a drawdown. He liquidates his portfolio when the pain and frustration become too much. He just can’t take it anymore. Then the market rallies. Our investor becomes paralyzed by indecision. He is afraid the rally will unwind. So he sits in cash. Maybe for months. Maybe for years. Finally, after a period of stability, he gets invested again. Just in time to eat another drawdown. This is a Behavioral Investing 101 case study. It’s a failure mode strategic asset allocations are intended to mitigate.

Other fear-based failure modes are more subtle.

One I frequently see among professionals is the fear-based tactical trade. At any given point in time, financial product marketers and the financial media are usually pushing at least one major fear-based tactical trade. Right now it’s all about inflation. Fear-based tactical trades are the pro and pro-am version of the archetypical whipsaw. These are highly discretionary trades. They’re usually based on some high attention macro narrative.

Macro narratives lend these trades credibility, and perhaps more importantly, Very Serious optics. But make no mistake. Fundamentally, these are emotional, fear-based trades. They just come with more sophisticated-sounding rationales (and sophisticated-looking charts).

So, it’s not that portfolios shouldn’t be positioned to withstand inflationary regime changes.

It’s that if you’ve never spent any time developing a process for handling macroeconomic regime changes, you’re sure as hell not going to develop one reading “timely,” thinly-disguised sales pieces about such-and-such assets as inflation hedges.

At my day job, I often get emails about whether it is time to add TIPS to portfolios, or gold miners, or crypto. My response is almost always some variation on the following:

What are you trying to achieve here?

What role does this asset play in the context of the overall asset allocation?

What process will you use to size and adjust the sizing of this position over time?

Most importantly, how will you know if you’re wrong?

And if it does turn out you’re wrong, what are you going to do about it?

Making highly discretionary trades with a finger in the air based on salesy whitepapers and/or financial doom porn is not a process.

Fear is natural. Occasional bouts of fear are inherent in risk-taking. As long as fear is not persistent, or debilitating for decision-making and daily living, it is a healthy emotion. In a financial context, fear is a signal to revisit strategy and process. Consider fear in the context of the game(s) you’re playing. Much of the time, you’ll conclude that it’s just part of the game. Occasionally, however, careful consideration may trigger an adjustment.

Risk tolerance is not easy to measure. Nor is it static. There is a dynamic element to it. Sometimes fear signals you are taking too much risk relative to emotional or even financial tolerance.

Fear may also point you to vulnerabilities in a strategy you may not have considered previously. This is an opportunity! The inflation example is instructive here. In my experience, “mainstream” portfolios tend not to be well-balanced to highly inflationary regimes (particularly stagflationary regimes). In this case, fear may lead to some introspection that results in a more robust overall strategy.

A wise man once said: there are decades where nothing happens and weeks where decades happen.

This is true in all areas of financial life. There are long periods of relative inactivity. Automated savings programs do their thing in the background. Everything hums along. Then there is a major life change requiring critical decisions be made in a short span of time. You sell a business. You inherit a large lump sum. Someone gets sick. You lose a job. Suddenly a whole bunch of decisions need to be made all at once. When it rains, it pours.

This is particularly true of investing. Investments have their own peculiar tempos. Much of this is a function of investment strategy. Volatility trading is high tempo. “Permanent equity”-style fundamental discretionary investing is low tempo.

You can think of tempo in terms of the velocity of critical decision-making a strategy requires.

Volatility trading requires lots of critical decisions at frequent intervals.

Fundamental discretionary equity investing requires fewer critical decisions at less frequent intervals.

Tempo varies further at the level of individual line items. If you are buying a Class 1 railroad because of the industry structure and potential for excess returns on capital over decades, you are looking at a classical low tempo investment. The cadence of decision-making and information processing should match a multi-decade investment thesis. For investments like this, you might make one or two decisions per year (usually whether to average down or not). You might read an annual report and a couple quarterly earnings reports in detail. You’re going to spend a lot of time thinking about capital allocation. You’re going to spend hardly any time thinking about quarterly earnings beats or misses.

Dumpster diving is a higher tempo activity. If you are buying a deeply cyclical stock early in a recovery with an eye toward a quick double or triple, you will have more decisions to make on shorter time horizons. Here the quarterly beats and misses will matter more. You may need to watch daily newsflow and price action. You should probably trade the position actively.

A pet theory of mine is that high tempo investments and strategies offer the potential for returns less correlated with broader market averages. In theory, these are wonderful return streams. However, they are higher cost in terms of time, energy, resources and degree of difficulty. It’s a higher brain damage approach.

The ultimate low tempo investment strategy is diversification within a strategic asset allocation. Here you rarely need to make any decisions at all, beyond a rebalancing discipline. You’re just harvesting broad market risk premia. The advantage to this approach is that it can be done cheaply and easily. The downside is you’re hostage to broad market risk premia. Broad market risk premia are neither guaranteed nor static.

There is no “right” tempo to maintain in a portfolio. What matters is awareness. Being in sync with the natural tempo of each investment. Don’t fight this! Fighting it is a good way to make yourself crazy. It will also destroy your returns.

In my experience, the more common failure mode is going too fast, and trying to pull large returns forward. There is a human itch for portfolio activity. Sometimes we simply get bored. For professionals, there are business pressures agitating for activity. Investors in funds want to know you’re “doing something” with that management fee. Unfortunately, there isn’t a 1:1 correspondence between “stuff done” and “returns generated.”

Another pet theory of mine is that the best money managers know this, and much of what they sell to investors and consultants under the guise of “process” is just elaborate theatre. Look at all this “stuff” we’re doing with that management fee! Obviously we’re taking all this Very Seriously. Would you like to talk top positions now?

The best way to develop an intuitive understanding of tempo is to spend some time meditating. You don’t have to get all woo-woo about it like me. Any old secular mindfulness routine will do. The important thing here is the experience of observing the activity in your mind from a distance. If you meditate with some regularity, you’ll begin recognizing different states of mind.

Some days you’ll find your mind engaged in constant, unfocused activity (meditators call this “monkey mind”). At other times you’ll find the mind fogged with sleepiness. On occasion you’ll find your mind in a relaxed, yet oddly focused state of readiness. When I’m “in the zone” in this way, directing attention to particular mental objects and holding it there is trivial. Almost effortless. This is what in-tempo investing feels like to me (in-tempo golf, too).

The chief virtue all beautiful investment portfolios share is parsimony. Each line item serves a purpose. Intentionality is evident in the position sizing. There is a clear awareness of risk/reward tradeoffs.

Ugly portfolios are clueless.

Ugly portfolios are tentative.

We’re going to talk about these failure modes today. And because it’s spring, we’re going to do it using golf metaphors.

First, cluelessness. Individuals seeking financial advisors frequently show up with clueless portfolios. People end up with retirement accounts scattered across a bunch of old employers. Maybe some rollover IRAs. They forget about accounts. They make incorrect assumptions about how old accounts are invested. Aggregate the holdings and you find the portfolio is 50% cash. It has been for years. This is not uncommon. The explicit and implicit costs of cluelessness can be immense.

Then there are clueless portfolios that are more or less rudderless. They have no overarching philosophy or strategy. They are invested based on financial news media reports. Financial professionals sometimes display a more sophisticated form of cluelessness, based around an entirely subjective interpretation of macro commentary and sell-side research. There is nothing inherently wrong with discretionary trading and investing. But a discretionary strategy should have some demonstrable efficacy. There should be some underlying rationale for its repeatability.

Cluelessness is a technical failure mode.

In golf terms, you don’t know how to swing. You misjudge distance. You don’t know your game well enough to judge risk/reward across your shot repertoire. Maybe you don’t think about those risk/reward ratios at all. All these issues can be addressed with education, training and equipment.

Tentative portfolios are a different matter. A tentative portfolio is an uncommitted portfolio, which is NOT to be confused with a conservative portfolio. Both conservative and aggressive strategies can result in uncommitted, tentative portfolios.

A tentative portfolio fails the same way as a tentative golf shot. Say you’re playing your second shot on a par five with a creek to carry. You can play a conservative, high percentage shot you’re almost certain will carry the creek and leave you a wedge into the green. Or you could play an aggressive, low percentage shot to go for the green in two. Visions of eagles dance in your head.

A common failure mode is to choose an aggressive shot but not commit to the swing. You’re afraid of mishitting the ball (it’s a low percentage shot after all); the potential for a mishit begins to dominate your thoughts; you take a tentative swing and all but guarantee yourself a poor shot. Perversely, you’re more likely to end up in the creek.

Say you do end up in the creek. Now you’re frustrated. You KNEW you should have hit the more conservative shot but instead you’re lying three next to a goddamn creek that shouldn’t even have been in play. Now you CAN’T play a conservative shot. Now you have to get up and down just to have a shot at par. So you load up for another high risk/high reward, low percentage shot. The cycle repeats.

Tentativeness leads to frustration leads to anger leads to playing on tilt. You will never win anything playing on tilt. Not in golf. Not in the market.

It is not necessarily a mistake to play the aggressive shot. Depending on the round, the juice may be worth the squeeze. The real mistake is choosing a shot you are not committed to executing. And sometimes it is better to play a lofted club to get back on an even keel.

Tentative portfolios take tentative shots. These are equity-centric portfolios with a five percent allocation to VC access vehicles, a five percent allocation to gold, and a three percent allocation to tail risk. These are the portfolios we joke about as contra indicators, that are only invested when it feels good then massively de-risk at the first hint of trouble. They hedge “opportunistically” (read: overpay for downside hedges at the wrong time).

For financial advisors, tentative portfolios often result from principal-agent problems. The client is afraid of hyperinflation, so you add a little gold. The client has FOMO, so you add a bit of VC. The client is a Taleb stan, so you throw in some tail hedging. Taken to extremes, you end up with The World’s Most Expensive Index Fund. A hundred line items and an R^2 of 0.90 to the S&P 500.

A wise man once said of career risk: it is better to fail conventionally than succeed unconventionally.

I would respectfully amend that: it is best to fail conventionally while doing Very Smart Things.

At the principal level, tentative portfolios reflect an unwillingness to accept the risk/reward tradeoff inherent in a strategy. You’re going for the green in two but worried about a potential mishit. So you start doing little things inside the portfolio to make you feel better. Some of them work, some of them don’t. The degenerate form of this is repeatedly whipsawing yourself, in size.

Unlike cluelessness, this is an emotional failure mode.

It’s easy for professional investors to dismiss emotional issues as normie issues. However, all the spectacular blowups I’ve witnessed and studied have had a significant emotional dimension to them. For the professional, getting tilted is more insidious. It’s easy for us to reframe emotionally biased decision-making in optically objective, rationalist terms. Confirmation bias is a hell of a drug.

I’m fond of the golf metaphors because the mental and emotional aspects of golf are quite similar to the mental and emotional dimensions of trading and investing. In both cases, improved performance requires an honest, realistic assessment of your game and a process-oriented mindset. Which is all very zen. If you are a 20 handicap, don’t select shots as if you were a 5 (though it helps to learn to think like one). This is also very zen.

Understand the shots you have at your disposal.

Be intentional about selecting shots to play.

Commit.

Note: I can’t post this note without reference to two of my favorite golf books. Much of this note is based on the material in these books, which is applicable not only to golf and investing, but daily life.

Every Shot Must Have a Purpose by Pia Nilsson, Lynn Marriott and Ron Sirak

Golf is Not a Game of Perfect by Dr. Bob Rotella and Darren Clarke

Here is the attention game in a nutshell:

1. Identify the zeitgeist around certain issues. Preferably related to sex, money and power.
2. Choose a side (there are always sides to choose).
3. Identify your side’s talking points and the opposition’s talking points.
4. Hammer them. Relentlessly. Toss digital Molotov cocktails at accounts with large, bellicose followings. For best results, use memes.

On Twitter, the platform I know best, the game is about attracting RTs and quote RTs from large accounts. It doesn’t matter whether they’re positive or negative. If anything, you’re better off attracting hate readers. Hate readers will do wonders for your metrics. Hate readers are highly engaged.

This strategy is powerful in terms of generating attention and reach. It’s a series of what my friends at Epsilon Theory call mirror and rage engagements. Your team stans you because you’re just like them. The other team trolls you because you’re just like the enemy. Clix for days.

A wise man once said: now you’ve got yourself a stew.

A weakness of this strategy is it’s unlikely to surface information. In the formal sense, we can define information as a signal that changes our mind. The attention and reach maximizing strategy is indifferent to the information content of the responses it generates. It’s about generating large volumes of mirror and rage engagements. It’s culture war arms dealing.

Even if there IS information content in some of the engagement this strategy generates, you’re probably going to ignore it. You’re not looking for information. You’re not open to it.

The cost of an open mind is reduced attention and reach. Nuance, circumspection and introspection do not generate intense mirror and rage engagements. They will, however, surface information. And when they do, you’ll be in the right frame of mind to receive it.

We could launch into a whole elaborate discussion of mental complexity with a summary of Kegan’s five stages of mental complexity here.

But let’s just call this karma.

Once upon a time, I wanted to blog about stocks.

Stock writeups are a literary form unto themselves. A good stock writeup isn’t just about solid analysis. A good writeup keys in on the handful of variables and risks you ought to consider if you own a stock. It’s a useful exercise for crystallizing thinking and creating a record you can review later, for evaluating process improvements.

So why not blog about stocks?

For one, I’m not much of an analyst. I’m drawn more to portfolio construction and management. I’m also a big believer in the Pareto Principle, a.ka. The 80/20 Rule. When it comes to security analysis, I’m impatient. My most successful investments have always been the stupidly obvious ones. Basic pattern matching with some guardrails.

There are times where minute details can make or break an investment. (shoutout to folks who specialize in capital structure arbitrage trades in obscure bank securities) Complex investments requiring lots of analysis are generally not investments I want in my portfolio. I’m not smart enough to carry them off. Even if I were, it’s a lot of brain damage relative to expected returns. So then you end up screwing around with a bunch of leverage to make it worth your while.

I’m not trying to build a world-class hedge fund franchise here. I’m trying to maximize the spread between effort and earnings so I can move onto something useful, like working on my golf game.

This brings me to an interesting failure mode where an investor believes “mainstream” investments are never good enough for her because she she can get an informational edge in esoteric, capacity-constrained situations. Leave dip-buying Facebook for the plebs, she thinks, as if money made from super smart stuff were somehow worth more than the money made from super dumb stuff.

Sometimes the juice is worth the squeeze in the esoteric stuff. Sometimes it’s not. I’m here to tell you parasitism is vastly underrated as an investment strategy.

Moreover, it can be dangerous to write publicly about stocks, if it turns into a exercise in feeding your ego.

Say it with me: I don’t care about being right. I care about making money.

Now ideally I want to make money because I’m right. But I make mistakes. I make mistakes all the time. It’s not realistic to expect to avoid mistakes entirely. I’d rather focus on identifying mistakes quickly, and cultivating the mental flexibility to get off those positions quickly. This goes back to the problem of attachment. There’s a lot of talk about conviction in this business. We tend to fetishize the lone contrarian genius. I am susceptible to the lone contrarian genius mythos, personally.

Conviction is not an unalloyed good. Conviction can be a mental prison. Write about an idea publicly and people will come out of the woodwork to tell you all the ways you are wrong. When you put a lot of work into publicizing an idea and then defending it, it’s easy to get attached. Pretty soon you’re more worried about being right than making money. Players of all skill levels make this mistake.

An old piece of writing advice is instructive here: kill your darlings.

Nonetheless, with the right intention and mental discipline, going public with an idea can be a good way to surface risks and facts you may have missed. People will freely investsplain all kinds of helpful things to demonstrate their intelligence and analytical prowess.

If you are a Very Famous Investor, talking your book can move the market in your favor. Or, perhaps more importantly, move the market narrative in your favor. The best activist investors specialize in this kind of thing. A stock’s “brand” has an immense influence on its multiple. This is a different game than the one I’m playing, or even capable of playing, with my own capital. (though it is worth considering how we, as very small, very not-famous investing parasites might ride the coattails of activism for fun and profit)

I have no doubt there are people in this world who can discuss and defend ideas publicly without becoming attached. Good for them. I admire them for it. I don’t particularly care whether you are one of these people, or whether you’re more like me. I care about recognizing the difference.

Why is there so much woo on this blog?

For starters, it’s the brand. Sometimes I don’t think people take me seriously when I explain this is all laying groundwork for some as-yet-to-be-determined grift. To borrow a koan:

Goso said, “To give an example, it is like a buffalo passing through a window. Its head, horns, and four legs have all passed through. Why is it that its tail cannot?”

Second, I am earnestly into the woo. Sometimes I tweet about the woo. Sometimes I write about it on my other blog. But getting deep into the real woo here would be off-brand. So I won’t.

The Enso brand is about building and maintaining wealth holistically. You can’t do that without addressing issues of values and self. Much of what is written about personal finance and investing is selling particular systems. What I’m trying to sell are techniques and models for navigating those systems. This blog doesn’t read like a system, of course. Thinking about systems is different from thinking within systems, on their own terms.

The very online nerd term for this conceptual layer is “meta.”

A classical text illustrating the meta layer is the 1996 movie Scream. Scream is full of meta takes on the slasher genre. It is explicit in its awareness of genre conventions. The characters know “the rules” of slasher flicks. They talk about them.

Randy: The police are always off track with this shit! If they’d watch Prom Night, they’d save time! There’s a formula to it. A very simple formula!

(yelling in video store)

Randy: EVERYBODY’S A SUSPECT!

Scream (1996)

Since then, meta-horror/comedy has emerged as a genre unto itself. I can’t think of a better example than The Cabin in the Woods. Cabin is meta on almost every level. (example: the special effects and makeup were done by Heather Langenkamp and her company AFX Studio. Langenkamp’s breakout role as an actress was playing Nancy in the Nightmare on Elm Street series)

One way of thinking about various strains of financial advice is as different genres with their own conventions. Enso Finance sits squarely within the Fortune Cookie Advice genre. Fortune Cookie Advice is meditative. It’s about “making people think” (or trying to, anyway). My fortune cookies typically have a meta character, but Fortune Cookie Advice doesn’t have to be meta. The audience for object-level fortune cookies is much larger, anyway.

On the other end of the spectrum sits Fancy Quant Advice. Fancy Quant Advice is about number crunching. Simulations. Backtests. Varying degrees of mathematical formalism. I’ve tried dabbling in this genre a bit, but it just doesn’t come naturally to me. Others do it extremely well. See: Breaking the Market, Philosophical Economics, OSAM, Newfound, Squeezemetrics.

I don’t have much to say about the Investment Tip Newsletter genre. It’s pretty straightforward. Object-level idea generation. Caveat emptor, of course.

Then there’s the Doom Porn genre. This is the reflexive contrarian, “broken clock is right twice a day” stuff where guys have predicted 30 of the last 5 bear markets. Here we’re charting the S&P 500 in Fed balance sheet terms and explaining why everyone’s favorite risk premium harvesting strategy is actually a giant ponzi scheme. Up is down. Black is white.

Of course, we can mash these up, too. Fancy Quant Advice in particular marries well with other genres. Fancy Quant Doom Porn is a potent brew.

This post is primarily a comment on form, not efficacy. Efficacy can vary within each genre. For most genres this is straightforward to grasp. Doom Porn might be the exception. It’s easy to dismiss Doom Porn entirely as an invention of grifters and charlatans. But it can serve a purpose. Per my Attachment Post, Doom Porn can be used as an antidote to complacency. What if the doomers are right? It’s worth considering low probability, high impact scenarios. From a risk management perspective, some of these risks might be worth insuring.

Which brings me back to the woo.

A somewhat woo belief of mine, and a theme of this blog, is that we should not think of systems as more or less “correct” in some idealized form so much as more or less “useful” for particular ends. Systems can be used liked tools on a tool belt.

Don’t reach for a screwdriver if you need a hammer.

Don’t reach for Doom Porn when you’re craving a Fortune Cookie.

I have a little mantra I like to repeat sometimes. It is a riff on the famous quote from Fight Club.

The things you own, end up owning you.

The thoughts you think, end up thinking you.

The masks you wear, end up wearing you.

Me (with apologies to Chuck Palahniuk)

If you’re reading this, you probably think of yourself as having values.

But where do they come from?

Are they your values, or are they merely values that have been transmitted to you via prestigious institutions and mass media?

It is worth meditating on this. Values are not an unalloyed good. Values often function as obedience collars and/or prison walls.

Investors and investment organizations anchor on an identity and its associated values just like everyone else. A lot of this boils down to whether you are a mean reversion person or a trend person psychologically, and where you happen to land in terms of formative market experiences. People internalize this stuff and construct mental and emotional scaffolding around it. If they are successful, their sales and marketing strategies will invariably build on that scaffolding. The scaffolding is used to lay down masonry. Maybe this is the foundation for an exceptional investment career. Maybe it is the foundation for a psychological prison. Maybe it is both.

The thoughts you think, end up thinking you.

Market regimes apply selection pressures. What tends to happen is the poster children for a given regime get killed during regime changes. They are overfit for a particular environment. They cannot escape the psychological prisons they have built for themselves, and/or their investors have become their jailors. Woe unto she who offends the style drift police! (on Twitter, @ebitdaddy90, once commented that we should all strive to be beautiful cockroaches that are maddeningly difficult to kill)

A wise man once said: dinosaurs had their shot, and nature selected them for extinction.

Now do systematic value investors.

(I know value guy. I can see the steam coming out of your ears. That was just some good-natured ribbing. You’re getting your rotation year-to-date in 2021, and this is a big tent. I can’t resist poking the bear a bit is all)

Suppose we want to bust out of our psychological prison. How would we do it?

I would suggest a bit of LARPing. For those who are not huge nerds, LARPing stands for “live action roleplaying” a.k.a playing adult make-believe. As a creative-adjacent, woo-adjacent professional, one of the dumb assumptions I am guilt of making is that everyone plays a lot of adult make-believe in their heads.

I once had a conversation with an acquaintance about US-China relations. It was not an interesting conversation. To liven it up I said: well, what if we pretend it’s a big board game like Risk and we have to play the Chinese side? What might our strategy look like? The conversation got more interesting after that.

Where I think people get stuck is believing LARPing the Chinese side means you must personally endorse the CCP or Chinese government policy in some way. This is silly. But only to a point. If you LARP long enough and hard enough, you might end up coming around to China’s point of view.

The masks you wear, end up wearing you.

If you are an investor trapped in a psychic prison of your own making, LARP a little. Try looking at the world through a different lens. Let’s say you are a value guy anchored on low multiple stocks cuz cheapness. How would a growth guy evaluate opportunities? How would a growth guy think about risk? All you are doing is learning a new way of playing the game. You aren’t automatically going to turn into a sketchy SPAC promoter or a bellicose Tesla stan. I promise.

You can apply this playful LARPing in any area of your life. I’m not joking when I say you should meditate on it. You might be surprised by some of the prison infrastructure built out inside your head.

Like it or not, investing is about making calls.

Many of us resist this fundamental truth. And with good reason. We are inundated with financial pornography. With the perfect clarity of hindsight, look how much you would have made if you put $1,000 in this one amazing stock. People love mocking this stuff. Rightfully so. At best it is schlocky infotainment. At worst, it encourages people to be donkeys, and to make stupid, dangerous bets they do not understand.

By contrast, some people think they can put all their money in a total stock market index fund and coast, as if they’re opting out of making decisions. This is still a call. Not necessarily a bad call. But a call nonetheless. Every position we take expresses a view. There is no opting out. This is perhaps the most fundamental truth of trading and investing.

Now, that doesn’t mean we need to express a view on everything under the sun. What matters is we understand the particular game we’re playing, and focus on the things that matter in the context of that game.

If you are investing on the basis of a strategic asset allocation over a 30-year time horizon, it doesn’t matter what the 10-year treasury yield did this week. Hopefully your strategic asset allocation framework is designed to accommodate longer-term, enduring shifts in the economic regime and cross-asset class correlations, should those shifts materialize. (If not, maybe look into that)

If the game you are playing is trading interest rate and inflation expectations with ZROZ… well… in that case short-term changes in the 10-year yield matter. They are, like, the entire point.

If you are contemplating an investment strategy, or a specific investment, a good question to ask up front is, can I reasonably expect to get this right? Answers will necessarily differ across individuals and firms. Knowledge and resources vary significantly across the spectrum of market participants.

For my part, I believe I can reasonably expect to implement a strategic asset allocation. I believe I can reasonably expect to pick stocks such that running a speculative stock sleeve alongside a strategic asset allocation is a +EV proposition (the jury is out on whether I can reasonably expect “outperformance.” Check back in 20 years and we can look at the data together). More recently, I think I can reasonably expect to spot opportunities to make certain, very simple options trades. This options bit is a new game I am learning, where I am currently a donkey.

Other questions worth asking:

How do I know if I’m wrong?

If it turns out I’m wrong, what is my exit strategy?

My professional experience has been that inertia dictates a surprising number of investment decisions, even (perhaps especially) within optically sophisticated and well-resourced organizations.

A wise man once said: losers average losers.

I have watched investment committees waffle as funds underperformed, bled assets, lost staff, underperformed more, lost more staff, bled more assets, underperformed more, and then ultimately liquidated. The whole way down, the debate at the committee level is whether redeeming out would be “selling at the bottom.” Then, amidst the shattered wreckage of the investment, the committee comes back and asks how the analysts could have done a better job flagging the issues.

This failure mode is not an analytical failure mode. The red flags are trivially obvious to everyone. Rather than an analytical failure, this is a failure of nerve and of will. A sad fact of life is people who think of themselves as smart and successful would often rather lose money than admit they were wrong. This is especially true in the context of group decision-making processes and organizational politics.

Still, there is a silver lining. These people make for wonderful counterparties.

Losers average losers.

I realize this post has been short on the zen vibes. So I leave you with the following story, taken from the book Zen Flesh, Zen Bones:

Zen in a Beggar’s Life

Tosui was a well-known Zen teacher of his time. He had lived in several temples and taught in various provinces.

The last temple he visited accumulated so many adherents that Tosui told them he was going to quit the lecture business entirely. He advised them to disperse and to go wherever they desired. After that no one could find any trace of him.

Three years later one of his disciples discovered him living with some beggars under a bridge in Kyoto. He at once implored Tosui to teach him.

“If you can do as I do for even a couple of days, I might,” Tosui replied.

So the former disciple dressed as a beggar and spent a day with Tosui. The following day one of the beggars died. Tosui and his pupil carried the body off at midnight and buried it on a mountainside. After that they returned to shelter under the bridge.

Tosui slept soundly the remainder of the night, but the disciple could not sleep. When morning came Tosui said: “We do not have to beg [for] food today. Our dead friend has left some over there.” But the disciple was unable to eat a single bite of it.

“I have said you could not do as I,” concluded Tosui. “Get out of here and do not bother me again.”

Zen Flesh, Zen Bones