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Last week, we went through ’s (AKA Moontower Meta) journey from options trading to investing and his excellent set of tools and frameworks which you can start using right away to think probabilistically and make better decisions in investing and life.

But trading and investing are just one aspect of Kris’s writing - He is also passionate about learning and has created many excellent resources to help investors better their game. Whether you’re a beginner looking to get a solid footing or trying to broaden your horizon after years of investing, his resource lists are invaluable!

In part 2, we cover the challenges in educating yourself as an investor, the most common mistakes and no-brainers, and how to tailor your approach to investing. If you’re strapped for time, here are the

Key Takeaways

The quality of your information sources will determine the quality of your returns. Invest time into looking for credible sources.
Wasted attention is expensive. Guard it ruthlessly.
To guard your attention and improve results, match your dashboards to your objective and game. Your goals should inform your strategy.
Too much information is actually counterproductive. Identify the highest signal factors and reject the rest.
It’s easier to spot another person’s mistake than your own - So forming a community of trusted people will accelerate everyone’s improvement.
Stock picking is over-rated. Focus on portfolio construction instead.
Investing is about covering your bases rather than looking for brilliant decisions.
There is no risk premium without risk. Think of it as fees vs fines.
Human capital is the most important form of capital. Focus on growing it.

But I highly recommend you read the whole thing! It’s packed with useful information which will change the way you approach systematic learning.

Self-education

MS: Another area you’re passionate about is learning - I want to pick your brain on that. Some people jump into investing without studying it much, burn their fingers, and turn away. There are others who read the theory for years together and don’t even get started. What’s the right balance?

Kris: Start with a model portfolio suitable to your goals and risk tolerance. 60/40 isn’t necessarily horrible, but it’s not that hard to just go with a permanent portfolio. Use its performance to explore topics related to portfolio construction. Your asset allocation is the foundation of performance because inter-asset performance spreads are wider and less correlated than intra-asset.

But if you want to be a hands-on learner (or satisfy a gambling itch) have a laboratory for more speculative ideas, carve a well-defined percent of your portfolio for that and use those experiments to learn about interesting things (BTC, SPACs, closed-end funds, individual stocks etc).

MS: How can you learn about investing effectively and also validate it by putting it into practice?

Kris: a) Learn by reading and talking to good sources. How do you identify credible sources? That’s already a hard meta-problem. Charlatans are masters of blending in with well-meaning people and the intersection of well-meaning and competent is itself smaller than anyone wants to admit.

My friend Khe had me talk to a group of people that were aspiring personal investors. The feedback was that it was very helpful so maybe start there to see what credibility (I hope) looks like. It includes a reading list → Investing Q&A.

b) On validation: It’s a hard problem because the Signal-to-Noise Ratio is low. If the signal to noise were strong the strategy's capacity would quickly get filled or you are underwriting a risk that doesn't show up often. Validation is never fully possible in the same way that scientific inquiry never proves anything… It can be used to reject a hypothesis but not prove the success of any one theory. (This is really just a restatement of the black swan problem. No matter how many white swans you see, you can never rule out the possibility of a black one.)

Using the right information

MS: Another problem with investing is the deluge of information out there. How do you personally filter out the noise and design a feed that fits your investing approach the best? Do you have any advice for readers?

Kris: Match your dashboards to your objective and your game. You don't look at fundamentals when evaluating a daytrade anymore than Warren Buffet looks at a chart when he considers buying a business. When I traded equities I barely knew what some of the companies even did. Trading is about playing the player, not the cards.1 If you find yourself citing fundamentals, you have lost the script. Appreciating this would have saved the people who said Gamestop is overpriced a lot of money. So don’t drift into another style when your dashboards are designed to understand your own approach.

Wasted attention is insidiously expensive. Guard it ruthlessly. Ask yourself, “Am I equipped to know how this piece of info can even inform a decision?”2 The Paul Slovic horse handicapper study showed how excess information raised bettors’ confidence but not their accuracy. A dangerous combo.

Horse handicappers are experts who game betting by studying the various factors that winning and losing horses have. A study of horse handicappers found that the accuracy of their predictions improved for every new variable they considered, up to 5 variables.
But beyond that, the accuracy of their predictions did not improve from the original 5 variables they selected from a large menu of data. As they were given more variables their confidence went up (confirmation bias effect) although their accuracy did not!
In addition, the handicappers with only 5 variables were well-calibrated. They were close to 2x better than chance at predicting the winner - 20% vs 10% - and they estimated their confidence as such. When they were given more variables their accuracy remained 20% but confidence grew to 30%!

So it’s better to assess the few pieces of information that really help and calibrate your confidence accordingly.

MS: True. The most important thing is to not fool yourself. As you mention in one of your pieces, it’s better to have an IQ of 130 and think it’s 120 rather than have an IQ of 150 and think it’s 160. Could knowing their limitations help individuals set different goals, and what would that look like?

Kris: Understand that in investing, the ratio of return-to-effort is low for most ranges of effort. To make a high signal difference in your portfolio, investing would need to be a full-time job.

Although a little knowledge can go a long way by sparing you big mistakes. (Understand diversification, understand explicit vs implicit costs, avoid being adversely selected, understand what fees are reasonable and for what purpose, understand risk as the possibility of failing to match your liabilities and has nothing to do with your performance relative to peers).

The best use of your time is to learn the basics and implement them in a disciplined way, then get on with making money with your human capital.

Why community is important

MS: How can you assess your own investing knowledge to avoid delusion and figure out what to improve?

Kris: Talk to trusted others!! The importance of a team is hard to overstate in trading and the lessons can be ported to life:

In this summary of SIG’s Todd Simkin’s chat with the Knowledge Project, I wrote:

“There’s a paradox in cognitive science. Knowing our biases doesn’t seem to help us overcome them. This is a topic the brilliant Ced Chin has studied in depth. Ced told me that the literature suggests the only way cognitive bias inoculation works is via group reinforcement. I told him that was exactly the cultural DNA when I was at SIG which makes me believe there is a lot of value in being aware of bias. Anytime you replayed your decision process, it was a cultural norm to point out where in the process you were prone to bias.

Todd Simkin addresses why this works:

It is definitely true that it is sort of descriptive of the past. A lot of these heuristics and biases are things that we can see after we’ve already identified that a mistake has been made. And we say, Okay, well, why was the mistake made? Say, oh, because I was anchored, or because of the way the question was framed, or whatever it might be, we have a really hard time seeing it in ourselves.

But here’s the key: We have a really easy time seeing when someone else is making that type of stupid mistake. A big part of our approach to education is to teach people to talk through their decisions, and to talk about why they’re doing what they’re doing with their peers, the other people on their team. If we can do that real-time, that’s great. Often in trading, you don’t have that opportunity, because things are just too immediate. But certainly, every time things have changed. If you’re doing things differently, it’s a really good time to turn to the traders around you. And the quantitative researchers around you and the assistant traders and your team and say, Hmm, it looks like all the sudden Gamestop is a whole lot more volatile than it was a week ago. Here’s how I’m positioning for this trading. What do you guys think? And have someone say, oh, it seems like you’re really anchored to last week’s volatility. If things have changed that much, you need to move much more quickly than you’re moving right now.

So you don’t realize that you’re anchored - that’s the whole nature of being anchored, is that you don’t recognize the outsized importance that the anchor has on your decision, but somebody else who’s a little bit more distant from it can. So if we’re good at encouraging communication, then we’re going to be really good at getting other people to help improve your decision process.

So cultivating a community where you can spot each other’s mistakes and errors faster is an accelerated way of overcoming your biases.

Over-rated and under-rated advice

MS: What investing advice is over-rated according to you?

Kris: Two things.

A) Stock picking. Focus on portfolio construction instead. So much brain and compute power is thrown at picking stocks that beating the spread consistently is nearly impossible. Charley Ellis really brings this to life in Notes from Capital Allocators: Charley Ellis when he describes the evolution of the investing business.

B) Concerns about de-worsification. How concentrated you are is downstream of your goals – get rich vs stay rich. If you are trying to get rich relatively quickly you need to take lots of risk, and that means concentration - either in your investments or ideally in your own career/business. Once you are in stay-rich mode, then deworsification isn’t really a thing and if it were it’s not especially expensive unless you confuse fake diversification for real diversification (ie both value and growth are long risk).

MS: What investing advice is under-rated?

Kris: A) Appreciating that markets are biology not physics, so history is actually a poor guide. Markets are “complex” in the chaos theory interpretation of the world. They’re so-called “wicked” learning environments where causation is opaque. This means the future is more random than you think. Another framing is what Nick Magguilli calls the “privilege of knowledge”. Index investing has been a great strategy but it’s only been a recently available technology (1 generation). Now that everyone knows it works means it should be more crowded going forward. That’s exactly what we see with the rise of “passive indexing”. Knowing that indexing was a great strategy would have been hard to see 30 or 40 years ago and even if you knew it it would still be costly to implement. The corollary to this is what I call the “no easy trades principle”.

B) Investing is a “loser’s game”. An excerpt from Investing Is A Loser’s Game:

Tennis author Simon Ramo described professional tennis as a "winner's game" — the superior skills of the top players drive the score. This is deeply contrasted with amateur tennis where winning is determined by the player who makes less mistakes. This should seem intuitive to any weekend warrior. If you play tennis with your spouse the winner will be the player with less unforced errors. In other words, it's a "loser's game".

In the 1975 paper, Loser's Game, published in the Financial Analysts Journal, investor Charley Ellis described investing as a "loser's game". In a winner's game, you need to perform spectacularly. You need to be elite. This is not the case for investing where survival is at least half the battle. You are not trying to win. You are trying to not lose.

Handling risk and advice for beginners

MS: How do you handle risk?

Kris: Here’s how:

Way in first place: Hard rules – never risk what you need for what you want no matter how attractive the proposition is.
Diversify not concentrate. (I’m trying to maintain wealth and have it keep pace with liabilities. I don’t even call it investing. It’s more like “savings plus”. To get rich, focus on building or using your human capital where the signal has a chance of swamping the noise.)
Understand how your portfolio can zig or zag together.
Minimize drawdowns – you care about geometric returns because the math of investing is a serially compounding process. You do this by not concentrating (and being wary of false diversification – unlike many foreign indices the SPX is mercifully well-diversified across style and geographical source of revenue. But it's still levered to earnings and therefore economic growth risk premia.. so diversification means not just equities)

MS: What advice do you have for retail investors related to risk, managing volatility, or anything that they may be missing out on which could make a big difference to the psychological aspect of investing?

Kris: A few pieces of advice:

Don’t compare yourself to others. Your goal isn’t to beat some abstractly constructed basket of 500 stocks, rebalanced annually and chosen by a committee. For most people, the goal is to keep pace with their liabilities so they can enjoy their life. If your goals differ, fine, just be explicit because the goal will inform the strategy.
If you don’t want to deal with it, hire help.
Satisfice, don’t optimize. Try to reach good-enough and do it robustly, not perfect. Robustness > perfection
Sizing is more important than entry so stop trying to time markets. There are 100 chumps for every hero you see.

Closing thoughts and recommendations

MS: What is one idea you discovered in the last few years that blew your mind and changed the way you think about something?

Kris: People care more about protecting their ego than accuracy. We want to feel safe and we can think we are right cheaply, so that’s basically why confirmation bias is the mother of biases. Actually being right is expensive (ie it’s hard) and it does matter since we need bridges to stand up. But everything that matters philosophically has been unanswered since the Greeks. There’s a temptation to either be nihilistic (pure relativism, nothing matters) or a temptation to subscribe to a coherent and therefore perfectly prescriptive worldview (like fundamentalist religion) that alleviates the burden of thought and the inevitable paradoxes that torment people who need closure. See: How The Need For Coherence Drives Us Mad

If I had to make a speculative link to this idea to investing – it can explain why people do stupid investments – they’d rather be “right” than make money so they invest according to what they’d like to be true instead of what is true. Maybe “fighting the Fed” fits this. I don’t know. Just waxing poetic here.

MS: Which article of yours is the most popular, or most talked about? Does it surprise you?

Kris: It’s this one: Why Investing Feels Like Astrology. It surprises me just a little bit. I know when I write a technical article that it will be well-received because if you break down something complex, you do people a favor. But with an editorialized article like this one, it’s hard to predict if it will “land”. So if the popularity was an example of upside variance it’s not really that surprising because I just expect a lot of variance in those types of posts in the first place.

MS: Which article or idea of yours is your personal favorite?

Kris: Sacrifice To The Delta Gods is my favorite.

MS: You have an entire library of investing resources for readers. But is there a personal favorite or something that you are consuming now - a book, podcast, blog, or anything else - that you would like to leave as a recommendation here?

The best book on the topic of “trading as life lessons” is Agustin Lebron’s Laws Of Trading. You should read it but my notes are here as a refresher when you’re finished.

MS: Finally, do you have any idea or suggestion that our readers can take away to become more well-informed investors, or even make investing a little more enjoyable and stress-free

Kris: I have a work-in-progress for some evergreen ideas for appreciating the nature of investing. I will point to 2 important points that I think are counterintuitively liberating:

1. The fact that markets are relatively efficient should actually calm you. You are benefitting from the wisdom of crowds by passively participating in a risk premia that you can’t control anyway. You just attenuate your exposure to it.

I call this The Gift Of Market Efficiency and the point is to not waste time on things you can’t control, cannot get useful feedback from, or are random and focus on your human capital. It’s the most important input into your capital allocation especially when you are young. And it doesn’t show up in a spreadsheet. And closing the loop on acceleration curves, if you focus on what you like and are good at, you will get better faster…your human capital will compound faster. See:
The Gift of Market Efficiency
Time and Human Capital

2. Understand that without losses there can be no gains. There are no risk premia without risk. If X was a sure thing, it would earn the risk-free rate. (Be careful of the converse, just because something is risky doesn't mean it will earn a return).

Morgan Housel has a good framing:

The way that I’ve phrased it in the book was “understanding the difference between a fee and a fine,” which seems like they’re really similar but there’s a very important difference which is, a fine means you did something wrong like, “Shame on you, here’s your speeding ticket. Don’t do it ever again, you’re in trouble.” And a fee is just a price of admission that you paid to get something better on the other side. Like you go to Disneyland, you pay the fee, and then you get to enjoy the theme park. You didn’t do anything wrong, it’s just that’s the fee.

I think if you could situate your life to where you view a lot of the ups and downs, not all of it, but a lot of the volatility in investing, a lot of the volatility in your career, as a fee instead of a fine, then it just becomes a little bit more palatable. And when the market falls 30 percent, it’s not that you enjoy it, you don’t think it’s fun, but you’re like, “Okay, I understand this is the fee that I have to be willing to pay in order to do well over a long period of time.” Most investors don’t do that. When their portfolio falls 30 percent, they say, “I fucked up. I did something wrong. I clearly made a mistake. And how can I make sure this never happens again?” And that’s the wrong way to think about it. And I think if you view it as a fee instead of a fine, it’s just much more enjoyable. It’s much more realistic to deal with.

Now, I said earlier that there are some areas in life where it’s like that. If you’re talking about a death in the family, a divorce, there’s things that’s like, “No, that’s not — that’s just a straight negative.” Like no silver lining to some of these things in life so I want to be careful at parsing that. But particularly investing, the huge majority of the pain that people go through and put themselves through is just the fee for earning superior returns over time. And if you’re not willing to pay that, then you’re probably not going to get the reward on the other side. And that’s why you can see so many people who at the first experience with being uncomfortable in investing with a loss, they view it as they screwed up and then they want out. They want to move on to something else.

And of course, they’re not going to get the rewards over time. Nothing in life is going to give you those rewards for free. There’s a cost to everything. And just identifying what the cost is then realizing that the cost is not on a price tag, you’re going to pay for it with stress and anxiety, and dopamine, and cortisol, like that’s how you pay for these things, I think that’s the only way to deal with those big ups and downs.

See:
Risk Is Unavoidable Let’s Get To The Good News

MS: That’s it for this week’s interview folks. Let me know which idea you found most interesting and would like to know more about. If you have suggestions for future guests, do let me know in the comments.

If you enjoyed this piece, please do me the huge favor of simply liking and sharing it with one other person who you think would enjoy this article! Thank you.

But first, check out Moontower Meta and subscribe to (it’s free!) for Kris’s posts on volatility, risk, investing, and learning.

If you missed the link at the beginning, do take a moment to let me know what you felt about the interview.

Disclaimer: I am not a financial advisor. Please do your own research before investing.

1

See Part 1 for a detailed breakdown of playing the player vs playing the cards.

2

Note from MS: Warren Buffett doesn’t just have an in and out pile, he also has a “too-hard” pile of businesses - Companies that might be good whose business model he doesn’t understand, but doesn’t want to waste his attention on. A good framework!

Market Sentiment

Interview: How to educate yourself as an…