Re: Investing Lessons - A Compilation.
These are what I consider to be “Evergreen” Investing Lessons that I’ve learned throughout my career. I find that re-reading them periodically helps my own process, so I have collated them here.
Many of these Musings have previously appeared as individual Musings on Twitter in the past, but I have cleaned them up and collated them here and plan on keeping this list refreshed.
I find that re-reading them periodically helps my own process, so I have collated them here. Please feel free to bookmark this link and check back every once in a while for updates.
Kaoboy Musings is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.
Re: Investing-Meme Stocks & The Importance of Shorting.
Re: Investing-Deep Dive on SPACS.
Re: Investing Ruminations-Exit Strategies/When To HODL
7/22/21: The Role of Luck
As I get older and wiser, I appreciate the role of luck in investing more and more. In most cases, being in the right asset class at the right time dominates any ability to generate “alpha.”
Of course, the long-term ability to “be in the right place at the right time” can be considered “alpha” in and of itself.
Endless ZIRP/QE has created legions of funds/track records that look like hockey sticks.
Here’s the rub: not everyone can be that good, and only the withdrawal of said stimulus will expose the charlatans usually.
I love this quote one of my old LPs used to say to me to keep me grounded: “You're never as good as everyone tells you when you win, and you're never as bad as they say when you lose.” — Lou Holtz
Re: Investing/Trading Inspiration--Lessons From Bernard Baruch.
11/15/21: Things I Used To Tell My Analysts (And Myself)
“The road to financial ruin is paved with unusually positive carry.”
“The market can stay irrational longer than you can stay solvent.”
12/1/21: Do Not Conflate Genius With A Bull Market!
So many people have forgotten how easy it has been to make money when there has been nothing but DECADES OF ENDLESS LOTTERY.
People also forget that DECADES OF ENDLESS LIQUIDITY LOTTERY were enabled by LACK OF STRUCTURAL INFLATION.
1/12/22: Negative Selection
My biggest concern in evaluating any investment in any asset class right now is NEGATIVE SELECTION.
Key question I ask myself: why is this extraordinary value in a sea of overvalued assets and why am I so lucky to have uncovered it over everyone else?
1/13/22: Should I Stay or Should I Go?
When you’re fighting every instinct to take profits on a winner that’s running — that’s a sign you should stay put.
When you’re rationalizing a loser into a “long-term hold” and find yourself thinking “I’ll sell on the next pop” or “I’ll get out when I’m back to breakeven” — that’s probably a sign you should be out now.
1/14/22: Lessons From Moby Dick
Investing should not be a “You’re either with us or against us” endeavor. If someone gets testy/defensive because their thesis is challenged, it is a sign that ego has taken over objectivity.
Don’t become Captain Ahab — stay alert and skeptical.
1/21/22: BYOBSS - Believing Your Own BullShit Syndrome
A lot of folks have mistaken winning the Liquidity Lottery for being the next Stan Druckenmiller.
Avoid BYOBBS (Believe Your Own BS Syndrome).
Making $ consistently in the markets is hard work and is likely to get a lot harder.
1/22/22: Skin In The Game Changes Everything
Pontificating from the sidelines is easy; anyone can be an armchair quarterback.
Skin in the game changes everything, however; once real $ is involved, Greed and Fear fuck with you.
To borrow from a favorite hobby: “Plan the dive, and dive the plan.”
1/26/22: How To Identify Zealots
There is nothing wrong with questions that can’t be answered.
There is everything wrong with answers that can’t be questioned.
2/3/22: Hubris Often Comes Before The Fall
The market is a harsh taskmaster.
More often than not, the minute you think you got it licked is when YOU are about to get a lickin’. I think the Liquidity Lottery has caused many to forget that.
2/10/22: There Is (Always) Another
Paraphrasing Yoda, “There is always another opportunity.”
Two lessons I’ve learned about investing over the years that I am reminding myself of in this tape:
1. You don’t need to make $ back the same way you lost it.
In fact, fighting a losing trade can blind you to new opportunities.
2. There will always be new opportunities.
2/12/22: Seth Klarman’s Margin of Safety
Not a bad time to revisit the GOAT of value investing. This book is a true gem because it is capital structure agnostic.
If an asset can’t be analyzed in this framework, it’s a speculation and not an investment.
"There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can." -- Mark Twain, by way of Seth Klarman
3/20/22: Avoid Echo Chambers
Echo chambers might be soothing for the ego but can be extremely dangerous for the pocketbook.
Healthy debate, on the other hand, can bruise your ego but save your pocketbook.
3/24/22: Sit Out The Chop
When the market has no memory from one day to another, the best trades are probably no trades.
3/31/22: Micro Vs. Macro
The biggest winners of my career have come from finding IDIOSYNCRATIC VALUE often uncovered amidst a MACRO SMACKDOWN.
Right now, I worry about IDIOSYNCRATIC RISK being hidden amidst MACRO EBULLIENCE — especially when I think that ebullience will be ephemeral.
4/5/22: “Patience You Must Learn”
The best investment results I’ve had usually come from a having well-researched thesis with a well-defined exit strategy — and then getting the fuck out of my own way.
Patience to let things unfold is often the hardest thing to do.
4/6/22: Investing The Pelican Way
I found my “totem animal” on a psilocybin retreat in Jamaica, which inspired this:
Spend most of the time chilling on posts/floating on waves, but ALWAYS staying alert for opportunities.
Expend time/energy VERY selectively; abort quickly when prospects aren’t great.
Act swiftly/decisively ONLY when it’s damn near a sure thing.
4/11/22: Indifference Points
The market has an uncanny way of pricing things right to your indifference point.
It’s never easy.
4/14/22: Be Careful “Fishing For Stops”
The problem when you "fish for stops" is that you have to EXPEND CAPITAL either buying highs or selling lows, and when it doesn't work -- YOU become the one stopping out.
5/9/22: Cheap Tail Puts
Cheapest tail puts in a market with exploding volatility can be had in names held artificially aloft by impending events that are subject to rug-pull. (I was referring to TWTR at the time — before Elon Musk threatened to bail).
Sources of “artificial levitation” could be:
-Takeover/legal event expectations
-Impending bond maturities
6/29/22: Price You Pay MATTERS
Not saying Cathie Wood isn't smart about her insights into innovation, but to paraphrase Howard Marks, the PRICE you pay for an asset MATTERS (perhaps more than what the asset is). She seems to forget this.
I’ve made a lot of money on shitty companies bought at the right price and lost a lot of money on good companies bought at the wrong price.
6/29/22: When Beta Swamps Event Catalysts
This proved true on the way down, but the converse is also true:
Event-driven plays knocked down excessively from beta might be getting interesting, e.g. merger arbitrary plays getting crushed in the wake of beta-driven deleveraging.
I capitalized on this during the LTCM Crisis and again this year (TWTR after it got hammered from Elon’s shenanigans and market beta).
7/7/22: Preferences vs. Constraints
Macro investing/forecasting based on optimal policy PREFERENCES can be deleterious to your financial health; rather, invest/forecast based on what real-world CONSTRAINTS policy-makers face.
8/18/22: Threading The Needle
If you find that your investment thesis requires a threading of the needle of probabilistic outcomes to succeed, it’s probably time to fade yourself.
Corollary: Ignoring your own cognitive dissonance can be perilous to your financial health.
8/23/22: Rationalizing “Hedges”
Here’s a trading psychology question I wrestle with all the time:
When I put on a hedge that loses $, do I keep it and rationalize it as a hedge that’s supposed to lose $, or was it just a bad trade?
This dialogue helped me re-crystallize a couple criteria for hedging:
1. Hedge must be more liquid than underlying.
2. Hedge must be asymmetric (explicit through structure, or implicit through stop-loss).
3. Hedge is meant mainly for UNFORESEEN challenges to core thesis.
4. If Hedge BOLSTERS conviction in core and can be gotten relatively cheaply, it is worth doing.
5. Above all: Hedge MUST help sleep quality!
8/29/22: Precision vs. Accuracy
I’d much rather be generally right than precisely wrong.
10/10/22: Flexibility & Ego
The most important thing in this market right now is to be FLEXIBLE and not ego-attach to outcomes you WANT to happen due to positions you have, the type of job you have, the type of firm/fund you’re at, etc.
10/11/22: Wants vs. Observations
No one should conflate what one WANTS to see happen in the markets with what one OBSERVES is likely to happen.
Positioning should be based on the LATTER, not the former.
10/12/12: Equity Risk For Fixed-Income Return
There is nothing worse than taking Equity Downside Risk for a Fixed-Income Expected Return.
Higher rates will reveal tons of “Short Puts” across ALL Spread-Based Asset Classes (think Credit and RE).
10/20/22: Separating Outcomes From Decisions
"Better Lucky Than Smart"
This term gets bandied about often, and I've used it too, but the truth is much more nuanced.
Being right for the WRONG REASONS is great as long as you don't learn a BAD LESSON from it. Otherwise, you will pay out multiples of those "lucky profits."
Corollary: Being wrong for the RIGHT REASONS should never be a reason for self-flagellation.
LESSON: ALWAYS SEPARATE DECISIONS FROM RESULTS (much easier said than done).
10/23/22: Thinking “Out-Of-The-Box" / My Favorite Interview Question
I think it’s important to hone both your left and right brain hemispheres in the investment business.
Being “data-driven” without an ability to “think out-of-the-box” is dangerous and can give you a false sense of PRECISION without any ACCURACY.
To that end, when I used to interview candidates for my company, I had a 7-question quiz for my second-round all-day interview: 3 analytical finance questions, 1 real-time analysis of an investment, 2 brain-teasers, and 1 open-ended “creative” question.
My favorite analytical question: “Motivate and derive the formula for Bond Duration.”
Demonstrates core understanding of calculus, DCF, time value of money concepts.
My last “creative” question: “How many fish are in the sea?”
I wanted to see an actual calculated number and see how the candidate arrived at it. Was amazing to me how many folks with incredible resumes on paper completely fell apart on this last question.
11/10/22: Do Your Own Homework
Reflecting on my own decisions this month, the best decisions were NOT chasing FOMO trades espoused by others. Sure, you’ll miss some good calls, but it’s the bad calls not backed by your own conviction/homework that are killers.
11/15/22: Know Thyself
Know Thyself from a style perspective.
What works for one person may not work for you. A lot of my fuckups have been trying to emulate trading styles that simply don’t match my emotional makeup.
12/7/22: Accountability Is Determined By Skin In The Game
There are different timeframes for different bets, and SKIN IN THE GAME is the key to accountability.
I’ve had an LT Structural Oil Bull thesis since the depths of 2016 and invested a significant amount with a 10-year horizon. It has grown to be the single largest risk line item on my personal balance sheet outside of real estate.
My point is that if we’re talking accountability, “eating one’s own cooking” trumps everything else. I lived by that mantra when I ran my fund and similarly look for that criterion when I invest with external managers.
1/10/23: Lack of Conviction = Negative Gamma
Lack of conviction is like negative gamma; it makes you buy highs and sell lows.
Big reason why it’s much better to not trade than to trade with low conviction and/or other people’s ideas.
1/25/23: Volatility vs. Leverage
Best quote from last night’s investment dinner:
“As an investor, I love volatility and leverage each individually — never together.”
2/27/23: Far From an Ideal Setup
My favorite investment setup is where I get to sift through idiosyncratic rubble after an adverse macro shock.
The current setup is the OPPOSITE of ideal to me: idiosyncratic anti-value with impending adverse macro and geopolitical overhangs.
3/19/23: Know When To Swing
This is a great variation of my Pelican Investing thoughts (4/6/22).
“A good hitter can hit a pitch that is over the plate three times better than a great hitter with a questionable ball in a tough spot.” - Farnum Street Blog
3/24/23: Simplicity Is Your Friend
As someone who used to be very fond of complex capital structure setups, I will say that these environments are horrendously stressful for HF managers or anyone with complex setups due to mismatched liquidity and basis blowouts.
Simplicity is your friend right now.
5/2/23: The Market Is An Uncompromising Teacher
The market is uncompromising in both its meritocratic and its humbling nature, and it does not care how many followers you have or how much AUM you have.
5/4/23: Jens Parsson, author of Dying of Money, on Inflation:
“In the early part of an inflation, everyone benefits/nobody pays.
In the late part of an inflation, no one benefits/everybody pays.”
5/10/23: Pay Attention To Tells
Every now and then, the market gives you a very clear tell on what it deems most important. It happened this am during an earnings call on a stock I own.
Stock went from -12% to -3% after a key question was asked and answered.
This type of info is GOLD.
5/23/23: False Sense of Precision
A big error I see analysts make over and over is deluding themselves into a false sense of precision. I used to always tell my analysts that I’d much rather be GENERALLY ACCURATE than PRECISELY WRONG.
6/6/23: Commodity Stock Value Traps
The thing with Commodity Stocks is that they often look CHEAPEST at the CYCLICAL PEAK and having the wrong Macro framework can VALUE-TRAP you into oblivion.
9/27/23: Price vs. Quality Matrix
My simple Price vs. Quality Investment Matrix:
1. Good business, but priced to perfection
2. Shit business, yet still priced to perfection
3. Good business, but priced well
4. Shit/ailing business, but priced in deep distress
3 is EXTREMELY rare.
My biggest career wins were actually from 4.
We got a whole lotta 1 & 2 right now.
Where Macro comes in is that ZIRP had perpetuated 1 & 2 for a VERY long time, and the STEEP reversal of ZIRP will transition that regime to 3 & 4. And a VERY sloppy transition that will be.
The Pelican awaits.
9/28/23: Hedges vs. Trades
Many (especially amongst the Twitterati) tend to judge a HEDGE as a TRADE.
A HEDGE, if it serves its purpose:
1. Gives you conviction to ride out the bumps in your main TRADE
2. Allows you to sleep at night
3. Is supposed to lose $
That said, I try my best to structure my hedges AND trades asymmetrically with aim to:
1. Make as much as possible on my TRADE if I'm right
2. Lose as little as possible on my HEDGE and possibly have my cake & eat it too with creative hedges that can WIN even as the TRADE wins
A recent example of #2 for me was shorting CNH as an oblique way of hedging my LT Oil PE exposure.
10/2/23: Long Gamma vs. Short Gamma
Trading Nugget / Reminder To Self:
Being Long Gamma allows a trader to rule his/her emotions.
Being Short Gamma forces a trader to be ruled BY his/her emotions.
10/24/23: What Should Come First? Technicals or Fundamentals?
I find that many traders form their views based on Technicals first and then find Fundamental justifications after.
What works best for me is starting with a Fundamental thesis and only betting the farm when the Technicals line up.
No right or wrong I suppose, but I find that looking at Fundamentals first often in the face of opposing Technicals is what leads to Invariant Perception and Contrarian views.
My MO is to establish a beachhead and then go for the jugular when Technicals come around.
1/25/24: Edge and Asymmetry
As a matter of trading hygiene, I have been asking myself before every trade:
"What is my perceived EDGE in doing this trade?"
More often than not, it is Asymmetric Reward:Risk.
I may not get the Probabilities of outcomes right all the time, but at least I can control R/R.
2/7/24: The Purpose of Insurance
Buying insurance always seems like a waste of money when things are going well, but it increases the chances of reserving you a chair when the music stops.
The trick is to not let insurance costs eat you alive.
2/9/24: The Danger of Value Traps
Value Traps are pernicious beasts because they keep you locked into Hopium and become blinded to opportunity costs of both capital and mindspace.
There must be a path to Value Realization for me to get really excited.
2/21/24: Different Ways To Achieve Asymmetry
There are many ways to "skin a cat" to achieve Asymmetric Risk/Reward, but there is no Holy Grail.
I use a lot of Options/Option Spreads vs. Stops, but the challenge then is to get TIMING right.
This game is HARD -- don't let anyone tell you otherwise.
Kaoboy Musings is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.