* Mental Models Substack Directory *

Sep 17, 2024

5/21/21 - Re: Mental Models-Bubble Assets As Capacitors.

Re: Mental Models-Bubble Assets As Capacitors.

May 22, 2021

I mentioned that there many examples of “Financial Hernias”: “Bubble” assets that have benefited most from low/neg risk-free rates and too much EXCESS LIQUIDITY: Crypto, NFTs, SPACs, high tech stocks/stonks, etc. The problem with the “Hernia” Mental Model is that Hernias are injuries resulting from excess pressure. In financial markets, the injury comes …

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5/28/21 - Re: Mental Models-Inflation Feedback Loops As Recursive Algos.

Re: Mental Models-Inflation Feedback Loops As Recursive Algos.

Michael Kao

May 29, 2021

Re: Mental Models-Inflation Feedback Loops As Recursive Algos.

In computer science, a RECURSIVE function/algorithm involves a function that calls itself, much like the mythological “Ourobouros” consumes itself — there is no seeming end to a recursive loop. A simple example of a problem easily solved by recursion is a function that computes the factorial of a number n. Recall that factorial(n) is mathematically repre…

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12/4/21 - Re: Mental Models-Financial Assets As Levers.

Re: Mental Models-Financial Assets As Levers.

Michael Kao

December 5, 2021

Re: Mental Models-Financial Assets As Levers.

The other day, this Musing invited some questions: Let’s briefly go back to business school and touch on the basic DCF (Discounted Cash Flow) equation, where i = interest rate, CF = cash flow for period n, TV = terminal value at end of term t:Kaoboy Musings is a reader-supported publication. To receive new posts and support my work, consider becoming a f…

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12/10/22 - Re: Mental Models-Destructive/Constructive Interference In Econ Cycles.

Re: Mental Models-Destructive/Constructive Interference In Econ Cycles.

Michael Kao

December 11, 2022

Re: Mental Models-Destructive/Constructive Interference In Econ Cycles.

Econ cycles come in varying wavelengths; LT cycles = long wavelengths & ST cycles = short wavelengths. ST cycles often oscillate within LT cycles. In Oil, LT cycles are driven by capex cycles that have 5-10 year gestation periods and primarily affect SUPPLY. ST cycles are driven by the macroeconomy and primarily affect DEMAND.

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2/12/23 - Re: Mental Models-The Macroeconomic Pond & The Big Chop.

Re: Mental Models-The Macroeconomic Pond & The Big Chop.

Michael Kao

February 13, 2023

Re: Mental Models-The Macroeconomic Pond & The Big Chop.

I’ve been thinking a lot about the low signal:noise ratio in the market lately.

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3/6/23 - Re: Mental Models-Orthogonality & Portfolio Diversification.

Re: Mental Models-Orthogonality & Portfolio Diversification.

Michael Kao

March 6, 2023

Re: Mental Models-Orthogonality & Portfolio Diversification.

Everyone in finance understands the broad concept of Portfolio Diversification. Whether you’re talking about a portfolio of stocks or a portfolio of managers or even a portfolio of asset classes, the general idea is that picking assets with low (or even negative) correlations with

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11/11/23 - Re: Mental Models - Valuation/Risk Drivers of Financial Assets As Partial Derivatives.

Re: Mental Models - Valuation/Risk Drivers of Financial Assets As Partial Derivatives.

Michael Kao

November 11, 2023

Re: Mental Models - Valuation/Risk Drivers of Financial Assets As Partial Derivatives.

I know the title is scary, but if you bear with me, I think this is the most powerful Mental Model I’ve introduced yet, because it ties together so many equivalent concepts from not just different fields but different Asset Classes from within Finance/Economics.

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1/22/24 - Re: Mental Models - The Lasagna Layers of the Risk Edifice.

Re: Mental Models - The Lasagna Layers of the Risk Edifice.

Michael Kao

Jan 23

Re: Mental Models - The Lasagna Layers of the Risk Edifice.

This missive uses examples from Roman Archaeology to explain Capital Structure and what I have repeatedly called the “Risk Edifice.” I also explain the asymmetry of Fulcrum Securities. I just got back from two weeks of intensive tours of Italy, focused specifically on Ancient Roman History and Art History, so apologies in advance for the short digression…

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Re: Investing/Mental Models - The Perils of Surfing the S(e)ine.

Michael Kao

Jul 13

Re: Investing/Mental Models - The Perils of Surfing the S(e)ine.

Ah, Paris! The city of lights, love, and lanes clogged with scooters. I recently returned from a delightful trip to this iconic metropolis, brimming with baguettes, culture, and, of course, the majestic Seine River. As I wandered along its banks, a thought struck me—what if we could surf the Seine? This whimsical idea soon morphed into a mathematical Mu…

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Re: Mental Models - Merton/Real Options Framework for Debt & Equity.

Michael Kao

Aug 17

Re: Mental Models - Merton/Real Options Framework for Debt & Equity.

You may have heard of the Merton Model or Real Options Theory, but might not know how to apply the concepts in everyday investing/trading. This post demystifies the financial jargon into something practical. We are going to use our knowledge of Financial Options

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Kaoboy Musings

* Mental Models Substack Directory *

Re: Mental Models-Bubble Assets As Capacitors.

Re: Mental Models-Inflation Feedback Loops As Recursive Algos.

Re: Mental Models-Financial Assets As Levers.

Re: Mental Models-Destructive/Constructive Interference In Econ Cycles.

Re: Mental Models-The Macroeconomic Pond & The Big Chop.

Re: Mental Models-Orthogonality & Portfolio Diversification.

Re: Mental Models - Valuation/Risk Drivers of Financial Assets As Partial Derivatives.

Re: Mental Models - The Lasagna Layers of the Risk Edifice.

Re: Investing/Mental Models - The Perils of Surfing the S(e)ine.

Re: Mental Models - Merton/Real Options Framework for Debt & Equity.

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