Every so often people start talking about investing superpowers. If you could have one investing superpower what would it be?

The power to regularly source and legally trade on material non-public information would be my number one pick. But that’s kind of against the spirit of the game.

So my backup pick is “infinite and overwhelming luck in the markets.” I’d rather be lucky than good. Always. Not trying to get onto any World’s Greatest Investor Lists here. I’ll take my winnings any way I can get them and leave it to you all to fight over multifactor return decompositions of my performance.

If you are a regular reader you will recall that my favorite portfolio shape is “core and explore.” There are different permutations of this, but the basic intuition is a diversified core designed to harvest broad market risk premia alongside a speculative sleeve of public and private investments. In the speculative sleeve, much of what I am trying to accomplish is “putting myself in a position to get lucky.”

What does luck look like?

Luck is when something goes from reasonably valued to wildly overvalued.

Luck is when you own something that turns into a meme stonk.

Luck is when the market bails you out of a position when you’re wrong.

I realize this is fairly trite. Of course it is good to get lucky. Money is money. There is a larger point here though and that is to embrace the role of randomness in investment outcomes. Flow with it. Don’t fight it.

Spending a bit of time gambling can teach you a lot about how you respond to risk. Casino games are dumb in the sense that for the most part they are negative expectation games. One (very) small thing you have going for you, if you don’t play regularly, is the short-term variance of outcomes. The casino’s edge manifests itself over many repetitions, across many players. This goes for advantage players, too. A card counter doesn’t win every night. And in the markets, there is a reason “true” quant portfolios have the shape they do.

Anyway, if you spend some time gambling it will not take you too long to experience streaks. Runs of extraordinarily good luck. Runs of extraordinarily bad luck. Of course, mathematically this is just noise bouncing around a (negative) mean. You’re just riding the output of a random number generator.

But that’s not how it feels. For us human beings, random outcomes don’t feel random. One of the hills we die on here on this site is that working within our evolved biological and physiological constraints will lead to better outcomes than fighting them.

A wise man said of investing:

Life goes in streaks and like a hitter in baseball, sometimes a money manager is seeing the ball and sometimes they’re not. If you’re managing money you must know whether you’re cold or hot, and in my opinion when you’re cold you should be trying for bunts. You shouldn’t be swinging for the fences. You got to get back in a rhythm […] If I was down I had not earned the right to play big and the little bets you’re talking about were simply on to tell me had I re-established a rhythm and was I starting to make hits again.

Another theme of mine is that in investing and trading, different failure modes are common to different “levels” of play. Absolute beginners typically suffer from indiscipline. They have no real strategy or epistemology of markets. They risk shotgunning capital all over the place without rhyme or reason, often at the urging of some online grifter.

More advanced players can develop the opposite impulse: holding too rigidly to a strategy, or epistemology of markets, or specific idea. Trying to “force” returns. A hedgie fund on a cold streak should not be taking her gross exposure up, swinging aggressively. She should be working toward re-establishing equilibrium.

The impulse to double down on losing bets is a strong one. Professionals are hardly immune. What’s more, our susceptibility to this impulse is not constant. It changes with time and circumstance. There can be significant personal and business pressure to double down in the investment game. People fetishize conviction. It’s an anchor point in a frightening, dynamic and random world. There is a fine line between courageously pulling the trigger and recklessly doubling down. Walking this line is part of the game.


The last post talked a bit about diversification. We are used to thinking about diversification within a portfolio context, both at the position level and the asset class level.

The diversification math is straightforward conceptually. Ideally, you’d like a bunch of positive expected value bets that are independent and uncorrelated. This is wonderful in theory. It gets tricky in practice. For one thing, correlations tend to go up as you add assets and strategies to a portfolio. For another, cross-asset correlations tend to rise sharply in severe crisis periods, as aggressive selling pressures suck up liquidity.

Sometimes a certain genus of permabear will say something like, “what if the entire financial system collapses? Where will your diversification get you then?”

In one sense, these are silly questions. You can’t address this kind of existential risk through portfolio construction. You can’t even address it with portfolio hedging. If the world ends, good luck collecting on your SPX puts. This is CAPM’s non-diversifiable, systemic risk.

In another sense, these questions aren’t silly at all. I suspect people have come to think of CAPM’s equity risk premium not as compensation for bearing non-diversifiable, systemic risk, but as a free lunch. Something close to a free lunch, anyway. Exhibit good behavior over a long enough time period and these returns will be yours. This interpretation downplays the seriousness of systemic risk. People joke of permabear types that even broken clocks are right twice a day. But catastrophes are catastrophes, regardless of predictability or frequency. This kind of risk is worth taking seriously.

So where does this leave us? We have systemic risk that represents a potential existential threat. This risk is difficult, if not impossible, to hedge in-system. It is meta to the system. It is the risk of the system itself breaking down.

We laugh at people who stockpile guns, medicine and canned goods. But they’re thinking about this the right way. Diversifying against systemic risks requires us to think beyond in-system instruments and methods. This isn’t to argue for stockpiling guns, medicine and canned goods in a bunker (though don’t let me stop you if you are so inclined). For now, it probably suffices to think about ways one can create “value” in the real world, outside the abstracted games of financial markets.

We can think about this in terms of real-world, cash generating assets, like owning and operating a business.

We can think about this in terms of careers and career earnings power.

We can think about this in terms of political participation.

We can think about this in terms of basic skills like cultivating, cooking and building.

What would you do if your portfolio was forced to zero? No more trading. No more investing. This is an extreme scenario to consider, but it’s hardly unprecedented in human history.

In my Values post I quoted the famous line from Fight Club: “the things you own, end up owning you.” I suspect people tend to interpret this line in a narrow, materialist sense. We look down our noses at people spending vast sums on conspicuous consumption. The line is more interesting as a comment on attachment more generally. Attachment to things, sure. But also attachment to particular mythologies, cosmologies, models.

Most things die. All things change.

The ultimate failure mode for diversification is to consider it in too narrow a context, and mistake our attachment to particular mythologies, cosmologies and models for the immutability of those things. There are many triggering ways of illustrating this, but I’ll leave it at this: society can remain communist longer than you can remain alive.

There is a particular zen koan, the buffalo koan, that is relevant here.

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?”

The Christian version of this talks about being IN the world without being OF the world.

I originally titled this post Diversification. That’s what I intended for it to be about. But I came to like Attachment better. Attachment is a core failure mode that extends into many domains.


Concentration gets you rich. Diversification keeps you rich.

For most of us who are not career money managers (or skilled DIYers who might as well be), we are looking for a balance of these two concepts in our portfolios.

There is an ascetic strain of financial advice that abhors any kind of concentrated risk-taking. The world is a random and frightening place. It is difficult to distinguish skill from luck. Concentrated risk-taking is just gambling. Your returns will probably end up looking like the broad market averages over long periods of time, and you run the risk of significantly underperforming those averages. Why bother?

On the other hand, many people have earned vast fortunes through concentrated risk-taking. I don’t imagine they lose much sleep over whether their returns came from luck or skill. Likewise, most of us who spend time editorializing on portfolio construction have obtained our megaphones through some kind of concentrated equity or quasi-equity exposure. We either explicitly own a concentrated equity position in an advisory or asset management business, or have implicitly built a concentrated quasi-equity position in some kind of personal brand.

One of my first posts was about regret minimization as the organizing principle for financial decisions. Regret functions vary. Personal attitudes toward “get rich” versus “stay rich” portfolio construction necessarily vary as well. Overall, I suspect regret functions are relatively normally distributed. There is a thin left tail of extremely fearful investors who abhor the idea of any kind of loss. There is a thin right tail of extremely aggressive investors who cannot stand the idea of forgoing gains. The rest of us fall in the body of the distribution. We don’t want to risk gambling our wealth away, but we’d like to own a few lottery tickets on the side.

I like to think about investing as a series of nested games. The ascetics are right to point out the difficulty many of us face distinguishing between positive expected value and negative expected value games. A positive expected value game that pretty much everyone can play with minimal effort is to shovel money into a diversified portfolio at regular intervals. This strategy has its failure modes (positive expected value =/= guaranteed return), but I believe this is “good enough” for most people who want to spend their time and energy on other pursuits.

Beyond that, the most straightforward +EV game to learn is probably “value investing” and its innumerable variations. In Fancy Terms, this is a short convexity strategy based on mean reversion (a.k.a dip buying). The basic strategy is simplicity itself. Find an asset you believe has suffered a temporary price dislocation for whatever reason, and buy it conditional on some expected return hurdle. You can make a lot of money doing this, though you have to be mindful of additional failure modes compared to the diversified strategy. Chief among these is the “value trap”: the asset that is not merely “cheap” but “cheap for a reason” and does not mean revert. Archetypical, vanilla value investing deliberately disregards market feedback. Smart value strategies develop guardrails to help mitigate this failure mode.

B-b-buh Buffett… some might respond.

LOL. Buffett changes his mind all the time.

There is a subtle difference between what I describe as value investing above and what I would describe as growth investing. My definition of growth investing is different from the widely used style-based concept, which is just the mean-reverting value investing strategy applied to higher growth, more optically expensive stocks. My definition of a growth strategy is a strategy that is long convexity, with a return profile that looks like a call option. The archetypical example is venture capital, though I would also include other long duration, “permanent capital” types of equity strategies under this umbrella.

We could get into games like trend/momentum and some of the more esoteric stuff that goes on in options land. But this post is already running long and, more importantly, I may want to grift off this taxonomy some day. What I am hinting at is a more systematic way of thinking about whether/how to go about concentrated risk-taking.

What is the game I’m playing? (the real game, not the cartoon version people talk about on the internet)

Why is this is a positive expected value game?

Do I have the time and resources to learn this game and play it well?

Who are the donkeys in this game? (remember, when you are learning, you are one of the donkeys)

Do the skills and mindset needed to play this game well match my own skills and temperament? If not, can I develop the necessary skills and mindset? Am I willing to put in the work?

(with some slight modifications you can easily extend this to “real world” risk-taking such as entrepreneurship)

If your reaction to this is “no” or “this is stupid LOL I just want to gamble on stonks” then I would suggest smaller position sizing in your games of choice. Or, consider delegating some of the day-to-day game-playing to a professional who specializes in that type of game.

There is a whole elegant investment manager selection and evaluation framework to be built out here. But in deference to future grifting, I’m not going to get into that here.


If you don’t know who the sucker at the poker table is, it’s you.

If you can’t spot the donkey, you are the donkey.

The donkey is the patsy. The easy mark. Us investor types do not like the idea of being the donkey. Partly because being the donkey often means losing money. Also because finance tends to attract intelligent, competitive personalities who do not like losing, period.

But we are all donkeys sometimes.

In my experience, anyone who has any real experience trading or investing, and has been around for any length of time, will readily laugh about all of the ways they’ve managed to lose money. The more beers you get in us, the funnier the stories get (and the dumber the donkey mistakes). Being the donkey is part of the journey. It’s how we learn. One of my first donkey moves was buying a cyclical stock CuZ lOw Pe. ‘Doh! Classic donkey move. Half a cycle later, I had learned an important lesson about low headline multiples on cyclicals. I paid for the lesson. The best lessons don’t come free.

Of course, being the donkey isn’t an unalloyed good. You can easily blow yourself up being the donkey.

It’s not about making sure you’re never the donkey. It’s a matter of realizing whether you *might* be the donkey in a given situation and adjusting your risk accordingly. Where you’ll run into serious trouble is betting like a shark when you are, in fact, a donkey. This seems like a trivial insight. However, in my experience, it can be fiendishly difficult to practice.

The economics of the finance industry incentivize acting smart and looking smart. Act smart and look smart long enough, and I bet you’ll start to believe you’re pretty smart. The masks you wear, end up wearing you. And don’t think I’m writing this from some enlightened state of consciousness. I’m as guilty of this as anyone.

A wise man once said: never get high on your own supply.

It’s often useful to think of financial markets as a series of nested games. When learning a new game, you are almost certainly the donkey. So, for example, if you are a smart financial advisor or smart high net worth individual who has decided to dabble in private market investing, it would behoove you to proceed under the assumption that you are the donkey. Likewise, whenever you are playing a game with a dynamic ruleset (*ahem* investing), it is possible to become the donkey by refusing to adjust your play style.

A subtle way in which otherwise skilled investors turn themselves into donkeys is through inflexibility. Self-described contrarians–and I promise I say this with love because deep down inside I am one of you–be especially mindful of turning yourselves into donkeys! Our worldview is necessarily dismissive of market feedback. This is both a feature and a bug. Do not be the guy or gal who blows up shorting paradigm shifts.

(It is much easier to be mindful of explicit forms of shorting paradigm shifts than implicit forms of shorting them, btw)

One way of thinking about a “circle of competence” is that you should only do things that fall within the circle. This is dangerous in a dynamic world. Better to think about expanding the boundaries of the circle incrementally, without taking excessive risk.

Take new risks and learn new games.

But play with small dollars until you can spot the donkeys.


You might be under the impression that because we are cultivating zen vibes here, it’s all going to be uplifting and inspiring. Wrong. Today’s topic is existential dread.

Bad things happen. They happen all the time. They happen at the level of society; at the level of the the individual; at the level of the portfolio; at the level of the portfolio line item. Much of the time there is no good goddamn reason for it. We are trapped in an asylum on a rock hurtling through space and oh, by the way, the inmates are the ones running the asylum.

Happy Monday all!

When it comes to financial planning and investing, there are certain shibboleths we wield to ward off existential dread. These shibboleths wear the face of empiricism. Chief among them are normative assumptions about life expectancy and capital market returns, spoken in the language of mean reversion.

We are terrible at predicting economic regimes. We are equally terrible at predicting cycles in style premia (growth, value, etc). Yet, for some reason, we are remarkably comfortable accepting normative assumptions about capital market returns over various periods.

“We have to start somewhere.” Yeah, I know. Perfect is the enemy of good enough.

But I prefer to start with suffering. Ask yourself: what is my maximum regret? Interestingly, in my straw polling of acquaintances, no one has ever identified “foregone investment gains” or “failure to maximize expected utility” as max regret. Max regret is untimely death. Max regret is a market crash at the start of retirement. Perhaps foregone gains are the max regret for some readers, though. And that’s okay! This is a big tent. My friends at Epsilon Theory have written extensively about minimizing max regret as an organizing principle not only for investment portfolios and financial plans, but for life. I happen to agree.

The organizing principle for financial matters should be minimizing the max regret scenario.

Max regret is wonderfully flexible in helping clarify your (or someone else’s) thinking about money. For example, there is always colorful public debate over personal spending as a percentage of income. People make passionate arguments on all sides of this. What’s more, there is a lot of money to be made providing capital-A Answers. This topic is like religion for people. For some people it IS religion. This is hardly a coincidence, and I plan to write about it some day. In the meantime, if you’re angsty about how much to spend or save, I’d suggest identifying your max regret.

If your max regret is risk-centric, target higher savings.

If you are hedonistic, spend more and enjoy the now.

Simple, right?

I’m not here to tell you how to live. I suspect most people want a balance of security and hedonism, and where they struggle is prioritizing things. That is precisely where thinking about max regret helps. Prioritize what will minimize your max regret. Relax! There’s no right or wrong here.

But there are tradeoffs. (Cue existential dread again)

We suffer partly because we know, deep down in our bones, our life decisions involve tradeoffs. Life offers its occasional arbitrages. But for the most part, we are making risky trades. You can trade time for money. You can trade money for time. You can pull spending forward or delay gratification. I’m all for delayed gratification. My personal regret function pushes me in that direction. But in defense of hedonism, it’s not as though you earn points for dying with a large pool of assets. If I am fatally injured in a car accident this week, my dying thought isn’t going to be “boy am I glad I maxed my Roth IRA contribution this year.”

Risk cannot be destroyed, the saying goes, only transformed. Yous buys your ticket and yous takes your chances.

Finance is a microcosm of the human condition, and nature is red in tooth and claw.