Hello everyone,

After writing my piece on Commodities Corporation and revisiting The Man Who Solved the Market on Jim Simons and Renaissance, I pondered the common themes and why they resonated with me. One was the emphasis on systems instead of individual bets. The other was the importance of distance and perspective.

“You can't lose with house odds and time. You can't win with gambler odds and time.” Peter Kaufman via Dennis Hong

Renaissance and firms like it desire to become the casino, with a small yet consistent statistical edge:

“We’re right 50.75% of the time . . . but we’re 100% right 50.75% of the time,” Mercer told a friend. “You can make billions that way.”

While there is little risk in any individual bet, occasionally they run into a streak of bad bets which, when paired with high leverage, can threaten the business. This happened in August 2007 during the so-called quant quake when multiple quantitative investment firms suffered steep drawdowns. In that moment, Simons overrode the trading model once more and reduced leverage by selling positions rather than buying into the decline as the model was going to do.

Some of his colleagues were angry and saw this as a lack of conviction. “You believe in the system, or you don’t,” one told him. Simons thought about it differently:

“Our job is to survive,” Simons said. “If we’re wrong, we can always add [positions] later.”
Simons said he did believe in the trading system, but the market’s losses were unusual—more than twenty standard deviations from the average, a level of loss most had never come close to experiencing. “How far can it go?” Simons wondered.

Like Amos Hostetter at Commodities Corp., Simons had become a veteran of many challenging markets. His scar tissue gave him humility. And he prized longevity over maximizing short-term returns. I thought about the many ways in which this relates to my own life.

When I sit down to work in the morning, do I have an edge? And I don’t mean a trading edge but a high probability that, in aggregate and over the long-term, my individual bets will compound and create a high return on my work? Did I create a system or am I shooting from the hip? As one of my friends put it, did I create favorable conditions that make achieving my long-term goals practically inevitable? And have I created conditions for longevity or am I pushing too hard at the wrong time?

Writing a substack is a bet on a single product. Diversification won’t save the day (although one could think of different types of posts as a kind of diversification). It’s easy to get wrapped up in how individual pieces are performing, whether there is growth in subscribers, and to mentally keep score with others. In other words, it’s easy to get emotionally invested in the outcomes of small bets. And, compared to the market, a drawdown is less obvious. But I am seeing some signs. I have a whole batch of ideas, yet work often seems to move like molasses. There is less flow and more grind.

An unresolved tension that plays into this is the Substack continuum from commercial product to medium of self-expression (Noah Smith wrote a good post on successful substacks). One part of me wants this to be a successful business That part of me wants to win in a traditional sense.

Another part wants to follow curiosity and write about whatever seems interesting and important. That part wants to be playful, self-indulgent even, and it does not care how many people follow along. This tension has existed since I started writing in 2020 and occasionally it needs to be revisited.

I’ve also stopped doing the occasional hedge fund consulting/research project and instead write part-time about investing for a startup called Compound (see the Michael Mauboussin piece below). I’m still learning how to manage both workflows in parallel.

Long story short, my writing about pauses and resilience and stepping away from trading has been a signal to myself to take a much needed break.

Today I will hit Substack’s “pause button” which freezes all billing cycles and suspends new premium sign-ups. There will be no new paywalled content during that time and no subscribers will be charged. Though I might share some travel notes and other observations to all subscribers. I don’t know yet long long the pause will last. It could be 3-4 weeks which will include some travel and family time.

I will be going to Germany soon to see my family and spend time in nature. I always remember this waitbutwhy post on how little time remains with our loved ones and I want to be totally present and not distracted by work deadlines.

This is something I didn’t do well when I was younger. I remember sitting on a couch at my mother’s home on my laptop, running the day’s P&L for the family office. It was a meaningless exercise and a distraction from what (or rather who) mattered.

Kawase Hasui: Spring Moon at Ninomiya Beach - Japanese Art Open Database - Ukiyo-e Search — *Spring Moon, Ninomiya Beach, Kawase Hasui, 1932;* Germany doesn’t exactly look like this but you get the idea.

I remain as excited as ever about writing and about this newsletter in particular. But without a Jim Simons, Helmut Weymar, or Paul Tudor Jones to tap me on the shoulder, I have to do it myself. It’s time for some fresh air and long walks.

I hope you’re all doing well and wish you some beautiful summer weeks!

Summer reading

Over at Compound I spoke to Michael Mauboussin about the investment process, Druckenmiller and Soros, analysts who want to be PMs, and building great teams. “This is the nature of what we do. It's the intersection of business, people, psychology, sociology, and numbers. It's just inherently fascinating. There's a lot of macro factors and stuff that make sure you never have the game beat. Never.”
“So You Want To Be The Next Warren Buffett? How is Your Writing?” (6 traits of great investors)
Rob Citrone at Capital Allocators
Charlie Munger interview

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Also:
- Coatue deck: “Everyone is a macro trader now.” (possibly leaked on purpose as they have been outperforming peers and are raising more capital?)
- Ben Eifert on bullshit in investing: “The lines between over-optimism, deception, and fraud are not always bright, and investment schemes can move slowly between those categories over time. Common red flags include…”
- Tom Morgan’s excellent summer reading list
- Bill Ackman is still concerned about inflation (read: still positioned for higher rates?): “While there are some early signs of a slowdown in real economic growth, we believe inflationary pressures are likely to persist due to ongoing supply demand imbalances … Historical precedents suggest that prematurely easing monetary policy in a stagflationary environment is a serious policy mistake.”
- Gavin Baker on how we are shaped by what we encounter first in markets (also: aggregates stocks for long-term wealth creation; “Pricing power, local monopolies, zero threat of technological obsolescence.”).
  I agree. My first two years were after the financial crisis covering specialty finance. What did I learn? Try to buy an above average business below book value. And as an employee you’re just a number on a spreadsheet.
- A primer on railroads as investments: “Class 1 Railroads have historically been a sleepy sector - but they are poised for a Renaissance due to the aggressively improving prospects of US Commodities”

I spoke to Michael Mauboussin about the investment process, Druckenmiller and Soros, analysts who want to be PMs, and building great teams.

“When you start to understand the fundamental components of complex adaptive systems, there's no way to look at the stock market the same way again.”

I very much enjoyed this conversation with Michael and tried to strike a balance between finding questions that haven’t been asked and exploring his key ideas. It’s not easy to create an interesting conversation with someone who has been interviewed as many times (and written as many pieces) as Michael. But I think he brought his A game and I bet you’ll find at least a couple of interesting questions in the table of contents.

A few highlights from the table of contents:

Holding Amazon through the dotcom bust. “I was very influenced by a wonderful book by Carlota Perez that came out probably in the early 2000s where she talks about the interplay between technological revolutions and financial capital, one of the points she made was, it's often the case that the hard work happened after the financial bust.”
On feedback and learning. “In every domain elite performers tend to practice. Every sports team practices, every musician practices, every comedian practices. What is practice in investment management? How much time should we be allocating to that?”
On elite teams of superforecasters. “There are three important things. How big should it be? How do we compose the team? The third and final piece is how you manage the group. And this is usually where the mistakes happen.”
Lessons for operators from Expectations Investing. “Very few executives really understand how capital markets work. This is almost like our analyst portfolio manager conversation. When you get to that seat, all of a sudden you have responsibilities and skills that become important that you may not have ever dealt with before.”
‍On position sizing. "Here we have George Soros and Stanley Druckenmiller, two legendary investors who say that this is the main thing that drives their returns and results over a long period of time. Whereas we look at the real world, we find that most people don't create a lot of value from sizing and it's all security selection. The question is can we bring those things together to some degree?"
On analysts and portfolio managers. “A very good portfolio manager will be able to focus on the two or three issues that matter most for a particular company. And they're very good at identifying those and honing in on those."
“There was a letter from Seth Klarman at Baupost to his shareholders. He said, we aspire to the idea that if you lifted the roof off our organization and peered in and saw our investors operating, that they would be doing precisely what you thought they would be doing, given what we've said, we're going to do. It's this idea of congruence.”

Reflections on the Investing Process with Michael Mauboussin

“So You Want To Be The Next Warren Buffett? How is Your Writing?” (6 traits of great investors)

This is a speech Mark Sellers gave to a group of Harvard MBAs in 2007 (my Twitter notes). It’s well worth re-reading. Sellers’s main argument is that you can learn a lot from the greats. You can become a proficient investor and apply their ideas in many other areas of your life. But becoming a great investors goes far beyond a collection of skills and mental models. Much of it is about psychology - temperament, as Buffett would say.

"If your competitors know your secret and yet still can't copy it, that's a structural advantage. That's a moat. Just like a company needs to develop a moat or suffer from mediocrity, an investor needs some sort of edge over the competition or they'll suffer from mediocrity."

6 key traits:

"Trait #1 is the ability to buy stocks while others are panicking and sell stocks while others are euphoric. When 1999 comes around and the market is going up almost every day, you can't bring yourself to sell because if you do, you may fall behind your peers."

"The second character trait of a great investor is that they are obsessive about playing the game and wanting to win. These people don’t just enjoy investing; they live it. They often have a hard time with personal relationships because they don't always give them much time."

"A third trait is the willingness to learn from past mistakes. What sets some investors apart is an intense desire to learn from their own mistakes so they can avoid repeating them."

"A fourth trait is an inherent sense of risk based on common sense. People fall into the habit of sleeping well at night because the computer says they should."

"Trait #5: Great investors have confidence in their own convictions and stick with them, even when facing criticism."

"Sixth, it's important to have both sides of your brain working, not just the left side (the side that's good at math and organization) You need to perform calculations and have a logical thesis. But you also need to do things such as judging a management team from subtle cues."

Needless to say, this one spoke to me:

"Most important, I believe you need to be a good writer. Look at Buffett; he's one of the best writers ever in the business world. If you can't write clearly, it is my opinion that you don't think very clearly. And if you don't think clearly, you're in trouble."

Finally:

"The most important, and rarest, trait: The ability to live through volatility without changing your investment process. People don't like short-term pain even if it results in better long-term results. Very few investors can handle the volatility required for high returns."

Rob Citrone on Capital Allocators

Loved this conversation with Rob Citrone who worked with Julian Robertson before setting up his own firm (Twitter notes). He also worked with Soros which was one of the really interesting comments.

Commonalities between two very different investors:

“Totally different in how they approached things but two things I learned that they did the same. The first thing: When they lost conviction on an idea they got out. They didn't wait around, they didn't take half the position out, they just got out. And they took whatever the market price was. They didn't wait for a better price because what happens, it tends to go against you and you never get out, or at a much worse level.
The second thing they did was they always cross referenced their ideas. If I went to Julian with an idea, he'd always say, what do our other investors and partners think? Who else can I talk to about that? And George did the same thing. Both of them had incredible rolodexes.
During the financial crisis George asked, what do you think is the next big problem? I said Eastern Europe and Western European banks. What can we do about that? ... Ten seconds later, Gordon Brown is on the line. The next day I see, Gordon Brown has big plan to save Eastern Europe.”

Life of a global portfolio manager:

"We have a 24-hour trading desk. I get woken up at 3am every day every night and have for 24 years. I see the close of Europe, I see the open of Asia. I can feel the markets."

Charlie Munger interview

AFR did a little two-part interview with Munger. The first part is about his LP investment in an Australian private equity manager that follows the Berkshire model.

Waiting for fat pitches:

“Life is a game where you work very hard and deal only occasionally.”
“It’s very hard to acquire unrelated companies, earn a higher return on capital and pay market prices for them. Most people who try and do that, fail. And the only reason that Berkshire and Stonehouse succeed is that we don’t do it very often, and we’re pretty careful.”

How to get Munger as an LP:

“The money is not all that material for the Mungers,” Mr Munger said of his personal investment with Stonehouse. “I did it because I admired him, and he’s a rare type and I thought it would help him.”
“My experience has been that if I meet good people and get to know them and like them and help them a little bit, maybe someday it helps me or Berkshire.”

The second part Revealed: Charlie Munger’s best investment tips is also worth skimming with comments on three subjects:

Inflation:

“I’m 98½ years of age, and I’ve seen a lot of inflation. I intend to live through inflation. I’ve lived through a lot of it already in my long life. It doesn’t discourage.”
“I’m always aware of it, but it doesn’t stop me from operating,” Munger says. “That’s what modernity causes. So, eventually, I assume every currency in the world will go down to nothing. That’s my basic cynical view.”

Cash:

“We didn’t accumulate the cash because we were anticipating a big decline where you can spend it,” Munger says. “We accumulated the cash because things got so competitive and prices for good businesses ... we couldn’t find any good buy. Of course, we hope that eventually Berkshire will find a good investment for its accumulated cash.”

Energy:

“I think we’ll be using fossil fuels for a long time ahead. And I also think more of the world’s power generation will come from renewables. Both things are going to happen.”

Chevron, which is an owner of Western Australia’s Wheatstone project, the North-West Shelf LNG operation, and the massive $US54 billion ($78 billion) Gorgon gas project. “That project is a brilliant feat of engineering,” Munger says. “Chevron is very good at that kind of engineering and it was very desirable to Australia to get that wonderful natural gas. But it required a certain amount of patience on Chevron’s part. That thing was very expensive.”

Neckar's Minds of the Market

Time for a walk (taking a summer break)