Sunday, February 28, 2021

What Intellectual Progress Did I Make In The 2010s?

Scott Alexander (blogger of "Slate Star Codex" and now "Astral Codex") recently wrote a post titled "What Intellectual Progress Did I Make In The 2010s?", a stunningly long list of new ideas and mental models - some of which even seem true. (Alexander finished his reflections on the 2010s much more quickly than I did. On the other hand, he only has a one-quarter interest in a girlfriend, so you can see how he has more time to write.)

It made me ask myself the obvious question, what intellectual progress did I make? It seems like a valuable exercise to conduct, and the way that makes sense to write it is as a tip sheet to my 2010 self. What would have been valuable to know then, that I ultimately did figure out over the decade? Here are some of the top themes that come to mind:

(1) Diet/exercise. Ten years ago was before @Mangan150, who has done a fantastic job uncovering important information about health, both theory and practice. (My reading on this topic started with Art De Vany who independently invented the glycemic index and figured out insulin resistance.) I have seen increasing numbers of people benefit from starting some kind of low carb / keto / carnivore program. The precise details of the diet do not matter as much as eliminating sugar and controlling carbohydrate intake.

I ate breakfast cereal, or pancakes, at the start of the decade! Now, I eat far more eggs. I think a good breakfast is 4-6 eggs with a cup of coffee (black or cream, no sugar). Of course you can hard boil, scramble, or poach them but an interesting new idea is to "slonk" them (drink them raw): raw egg nationalism. Egg and butter consumption per capita in the U.S. is lower than it was a century ago, thanks to the mistaken saturated fat hypothesis of heart disease. That was an incredibly lethal scientific mistake, perhaps the worst ever. Taubes' Good Calories, Bad Calories is the story of how that happened.

It used to be well known that high carbohydrate diets caused obesity - see for example William Banting who wrote a low-carb dieting booklet in 1863. Then people like Ancel Keys developed the hypothesis that saturated fats in the diet raise cholesterol and cause heart disease. If you lower the amount of dietary fat, you're going to be eating more carbohydrate. So for the past fifty years, the establishment "consensus science" has been high carbohydrate diets. And we've seen the results: obesity, heart disease, cancer. (Some of which wrongly blamed on smoking.) An unbelievable amount of money has been wasted trying to prove that eating saturated fat causes heart disease or that high carbohydrate diets prevent it. Even more money has been wasted trying to find cures for diseases caused by high carbohydrate consumption.

I do take supplements, but I focus on things that are artificially scarce in our lives and diets: Vitamin D, Omega 3 fats, and magnesium, for example. I do not directly supplement any antioxidants anymore because of hormesis theory. (See: 1, 2, 3, 4.) I wasted a lot of time trying to prevent and cure colds with vitamin C, until I read about how the vitamin-C molecule is similar in configuration to glucose, so glucose and vitamin C compete in the cellular-uptake process, and the uptake of vitamin C by cells is "globally inhibited" when blood-sugar levels are elevated. Having a low carbohydrate diet and maintaining high vitamin D levels seems to prevent colds and keep a lot of other blood chemistry metrics in check. Respiratory virus infections, in particular, seem like a manifestation of hypovitaminosis D. (This is especially relevant in the covid era!)

The estimated per capita consumption of soybean oil increased 1000-fold from 1909 to 1999. Mangan has dug up a lot of evidence that all of these industrial cooking oils need to be avoided. These toxic oils have also been sabotaging the scientific inquiry into low carb high fat diets. If you feed lab animals a "high fat" diet of soybean oil and sugar, you have not demonstrated anything about the effect of a steak and eggs carnivore diet, for example. I've also discovered that these bad omega 6 (seed oil) fats are everywhere, and very difficult to avoid. Restaurants and food manufacturers put them in surprising places like bread or in pizza crust. There is some interesting natural history about why you do not want your body to be made up of these fats:

[P]lants are composed of polyunsaturated omega-6 fats as an evolutionary last resort. In order for plant cells to function normally, the lipids (oils) that make up their cell membranes must remain liquid at all temperatures typical of their natural environments. Since all fats and oils are liquid at high temperatures, plant fats optimize for the extreme colds in their environments. Sunflower must be prepared for the cold of Russia, avocado for a cool Mexican night, and coconut for the occasional lukewarm temperature of the tropics.  As a result, sunflower seeds contain about five times as much omega-6 as avocados, and avocados contain about five times as much omega-6 as coconuts.  Plants evolve to contain the most stable fats possible, which means minimizing omega-6 unless absolutely necessary for their fats to remain liquid at cold temperatures.

But if you delegate your food preparation - whether to a restaurant or a processed food manufacturer - they will use these bad fats because they are much cheaper and also easier to work with. This is one of many manifestations of the principal-agent problem. (The generalized form being one of my intellectual progressions over the past decade.)

Fixing this health stuff makes life a lot better, and more productive. A day feeling sick or lethargic is a day that is not really fully lived, or useful to advance any goals. It is shocking how many Americans are wandering around so fat and sick that they must feel far worse than I ever did. No wonder they watch 40 hours of television per week, and can't think straight.

Which reminds me - the reason that I had to become an entrepreneur was that I could not get a job for a big corporation doing things that I found interesting because I did not have "experience". There must be so few Americans with the intelligence, curiosity, and neuroplasticity to learn how to do something new that big corporations will only hire people who have done the exact function that they need performed for years on end. When you think about how sclerotic the world is, remember that everyone's neural synapses are now made of oxidized fats from soybean oil.

(2) High agency mindset, which is the broader category of taking personal responsibility, for which diet/exercise above is just a subset. And just in the past five years or so, a big fraction of high agency people have taken to Twitter, found each other, and started rethinking entire categories of knowledge. One example of this is diet/exercise Twitter, as seen above.

High agency mindset led me to make an immense investment in reading and general knowledge acquisition, which you can see in the Links and the book reviews. From 2017-2019, I read and wrote up notes or reviews on 229 books. And before that I had written a total of 118 full book reviews.

Another example is wuflu or coronavirus twitter. Smart, high agency people saw this coming early on in January and were always weeks ahead of the government and news media in understanding the implications of new developments. We had guest posts from @pdxsag, other good accounts included @Barton_options, @LokiJulianus, @toad_spotted, @HalifaxShadow, @__ice9.

Unfortunately, advance knowledge of the pandemic and ensuing economic calamity (and then bubble reflation) has not led to particularly useful investment results - not so far. Perhaps our reading TSLAQ autist Twitter will ultimately be fruitful, though. King of the Autists Michael Burry has weighed in on the side of TSLAQ, and it seems like you can always trust bodybuilders and autists to be right about things that they have researched. (Even if market prices can take a long time to reflect this.)

(3) Investing. Here is an investment idea in Callon Petroleum bonds that I wrote a decade ago. I did not understand then, the way I would now, what an attractive idea that was. At the point when I wrote about the idea, $144 million of the company's total $194 million of senior notes had accepted an exchange offer to extend their notes (which were about a year from maturity) by six years. There was a strong likelihood that a holdout bondholder would be redeemed because the company had $30 million of available senior secured borrowing ability. Ultimately, 92% of holders tendered and holdouts made ~60% on a safe bond investment in a year.

Looking back, I spent a lot of time over the past decade trying to predict macroeconomic outcomes rather than hunting for arbitragable mispricings like Callon, Georgia Gulf, or U.S. Concrete. Or rather than buying more companies that people were giving away for free, like Conrad Industries and all of the other net nets, or small banks trading below book value.

So from that experience over the past decade, and also by running the prediction contest for several years in a row, I have learned just how hard the future is to predict. Another example: even as a very early optimist on Trump's chances to be elected president, I did not predict that his term would be a nearly seamless transition from the Bush/Obama years. As I said at the end of the 2020 (final) prediction contest,

The winners of the contest are never the same from year to year. The one constant is that the overconfident do poorly. Having extremely confident predictions (e.g. 90% or 10%) on any event that is contentious among participants (has a high standard deviation) is associated with poor performance in the contest. The better performing contestants seem to have an easier time intuitively feeling the range of outcomes that a trip through life's quincunx can deliver.  What seems to happen specifically is that a very rigid set of expectations, a very definite view, a simple narrative, crashes on the rocks of reality. In fact, I am learning to avoid any kind of simple narrative for thinking about the future. Consider predictions such as, "there's going to be hyperinflation / a crash / a civil war" next year. Reality is a lot more complicated. Bitcoin hit an all time high and oil hit an all time low in 2020. What probability would anyone have given that? And does it fit a simple label like "hyperinflation"?  Since we can't predict, what can we do? The only investing strategy that I can think of for coping with the utter impossibility of prediction is diversification among that which is cheap.

The best investments that I have found can be explained to a financially literate audience in one short blog post. Another good sign is when the mispricing consists of two markets (e.g. debt and equity, or public companies and private companies, or value stocks and growth stocks) that are not talking to each other.

It is probably wise to be skeptical of any extremely verbose investment thesis, investment debate, or macroeconomic view. What is all the verbosity likely to be? Why, an assessment of a series of conjunctive probabilities. And as Kahneman explains, "the general tendency to overestimate the probability of conjunctive events leads to unwarranted optimism" and this is certainly true in investment theses.

I don't think that shorting is unworkable, or that it is as bad as it seems right now (at the top of the biggest bubble ever), or as good as it seemed after 2008-2009. Nothing is ever as bad as it seems at its worst moment or as good as it seems at its best moment. But the frightening persistence and extreme overvaluation of this bubble have made shorting very difficult:

I am out of step with the market this cycle because I truly believe that companies that are not bootstrap profitable - that grow revenue but have to do it by selling debt and equity instead of reinvesting profits - are destroying value. They are Soviet style "negative value added" businesses, they are only worth money as enterprises in a bubble context, and they will eventually have to go away because there is not an infinite amount of wealth in the world to destroy. (Another example that cannot report profits even with the most aggressive accounting assumptions is Tesla.)

Businesses that create value return capital to their owners. The best businesses in history have been able to do this while growing. Think about it: what is a legitimate market signal that many more customers need to be served, and money invested in expanding to serve them, except profits?

Bulls will argue that Netflix could be, will be, more profitable when it raises prices. Why wait? Do you know many real entrepreneurs who borrow money instead of charging more if customers are happy to pay?

I think there will be another handsomely profitable run of shorting when the current bubble in growth stocks (2009-2021?) pops. Imagine shorting unprofitable companies as they fall from 10 or 20 times revenue to 1 times a lower revenue. But after that, I would like to "retire" from it, like Buffett and other successful investors.

The problem with shorting, that true entrepreneurship does not have, is that the profit can only come from a change in what you must believe are irrational opinions of others. As we have seen, even defaulting on debt and going bankrupt does not mean the other investors will give up - not in this cycle. In the future, I would rather make my money cashing dividend checks than waiting for the models in the soybean brains of other people to update on painfully obvious facts.

Shareholder activism is entrepreneurial and does not require a change in others' opinions. It profits from sweat, brains, and muscle. It is like buying a business - you never want to buy a business that is running perfectly. You want to buy one that has problems, preferably so bad that the business is losing money and available for almost nothing, but where you know exactly how to fix the problems.

(4) Staying in the game. I appreciate the importance of this more than ever before. In one sense, every investment decision I have ever made was wrong. Anything that worked I did too small, and anything that didn't work was too big.

At the same time, the sum total of all my investment decisions has been profitable and has kept me in the game through multiple bubbles and crashes. There is a concept from Graham Harman that is applicable here:

I also introduced an intermediate category between constant flux and permanent stasis: the symbiosis, a term I borrowed from the great evolutionary biologist Lynn Margulis. I hypothesized that pretty much any object will experience five or six symbioses during its lifespan: irreversible changes that moves the object to a new stage of existence before it eventually stabilizes, rises, declines, and dies. This has some interesting corollaries. One of the ways we can be sure that the Dutch East India Company is a real object is because it has many early failures: a failure, as long as it does not destroy us, means that we are something real that does not yet fit easily into our environment. Something that immediately succeeds, by contrast, is often just a spare part for something that already exists perfectly well. Notice that important intellectuals often had a very rough time as students, while the "teacher's pet" often has a thoroughly mediocre post-school career. I think the symbiosis model is a powerful tool, one that –among other things– allows us to determine that a great number of supposed objects aren't real objects at all.

"Something real that does not yet fit easily." Remember my idea of investor genotypes in an investing ecosystem? The problem with investing is that this is measured on the wrong timescale. The different parts of economic cycles occur so infrequently that the intervals between them exceed the working lifespans of investors.

Lyall Taylor makes some incredibly important points in this essay about liquidity flywheels and redemption flywheels, but applicable here is this point:

Outperforming in the short term with consistency, by contrast, is extremely hard. The best way to do it is usually a momentum strategy, which works most of the time, but occasionally yields disastrous results on sudden momentum reversals. Momentum is the polar opposite of value - it generates good returns most of the time, and disastrous returns a minority of the time.  The latter strategy is a more remunerative strategy for fund managers, however, even if it often leaves long term investors worse off, which is why it is more popular/common. While the good times roll, large performance fees are banked, and it is investors that are left with the losses when it all turns to custard. This is why value investing remains relatively uncommon, despite its long track record of success, and in my view a combination of agency conflicts, information asymmetry, volatility-phobia, and the desire for quick results, will all but ensure market inefficiencies continue, and considerable opportunities for long term value investors will remain for many generations to come.

That's a principal-agent problem, and what is great is that it implies that there will always be cheap investments somewhere! Which brings me to my next point.

(5) You can't beat something with nothing. The 07-09 crash caused me to overestimate the potential of short-selling as a standalone full-cycle strategy. (Everybody has a susceptibility to this problem; it's called "overplaying your hand".) A related problem was that I was scarred by the slow recovery and difficulty finding a job at the start of the decade. I was in the worst hit age bracket in the worst hit industry in one of the worst hit states in that crash. The reason I did not buy Apple in 2009 was because I thought that $600 and $80/mo for a phone was a lot of money.

Contra Bob Prechter, some investments can be cheap even (or especially) when there is a bubble someplace else. See another point from the same Lyall Taylor essay that I linked above:

Outperforming in the long term is actually not very difficult, but it requires highly lumpy results, often marked by long periods of lackluster returns, punctuated by short periods of spectacular results, which happen alongside liquidity flywheel/momentum reversals, which are inflection points that do not happen very often. Furthermore, usually, the worse value is performing, the closer one is to the end of a liquidity flywheel bubble cycle (value had a woeful time in 1999, for instance), because value is the 'anti-bubble' expression - a Newtonian equal and opposite reaction - of liquidity flywheels driving bubbles elsewhere in markets. It is redemption flywheels that drive value opportunities, and redemption flywheels are often the result of investors pulling money out of unpopular areas of the market in a rush to get exposure to hot areas of markets.

Lyall’s liquidity and redemption flywheel theory would mean that instead of a bubble making it so that you have to sit on your hands because everything is expensive, a bubble causes the tide to go out from investments that are “cold” and you should be looking for those. Based on the redemption flywheel theory, they would be things that had done poorly recently for whatever (possibly idiosyncratic) reasons. The value ideas that we have been looking at lately - resources/minerals, pipelines, banks - have had a bad run and have downward price momentum even though they have stable or improving profits.

Even though late-career Peter Cundill still seems very mediocre, I think he was right that There Is Always Something to Do. When I bought SFBK in 2014, other banks were trading at discounts to tangible book value - Nate Tobik was writing about them. It was good to do activism on one cheap bank, but it also would have been good to buy a basket of other cheap banks. In 2014, WLT and RSH debt was yielding over 50% to maturity. I remember I also did a big cap earnings yield screen in May 2014 that turned up Intel, Microsoft, and Apple all at around 14 times earnings.

At the time I correctly saw what was expensive (overleveraged, unprofitable companies particularly but not exclusively in the resource sector) and what was cheap (small banks and mature tech) but I was so infatuated with the Prechterian idea that Everything Is Correlated that I did not just focus on buying cheap and selling expensive. A couple years later, WLT and RSH were gone and small banks had become overpriced. Microsoft is up 6x since May 2014.

(6) Rich people are long assets. I mean that in both a prescriptive and descriptive sense. The people on the Forbes 400 or living in Pacific Palisades did not get there by being short assets. Sure, as we saw with the previous (#5), put options on worthless equities can be a great hedge. (Let's do a backtest on companies with low revenue volatility and low industry competitiveness trading at high cash flow yields, hedged with the furthest out put options on companies with high bond yields to maturity.)

And if Michael Burry and I are right, TSLAQ will be a historic short the way housing was in 2008. Peak market cap of $900 billion and maybe averages 25% short interest on the way down, maybe a couple hundred billion dollars will be made being short it. But that is peanuts compared to $2 trillion annually of corporate profits in the U.S. And you can't compound tax-free for long periods of time by being short assets. 

Again, the key is Lyall's framework which says that the momentum of the $1.5 trillion cryptocurrency bubble and the $1.6 trillion Robinhood bubble (not to mention the private venture capital bubble which is probably of similar size as those two) have created an anti-bubble, a redemption flywheel, in other areas of the market that became unpopular for their own idiosyncratic reasons.

I want to make money when life catches up with Musk, I want to use his overvalued stock promotion as a hedge against drawdowns, but what I really want over the next decade is to collect dividend checks from my portfolio of real assets: tobacco, hydrocarbons, pipelines, other minerals, land and timber. The more Tubmans they print, the more our businesses will charge for a pack of smokos, a barrel of oil, a ton of met coal, etc.

And because rich people are levered long assets, they do not tolerate deflation. They will scream if they are getting squeezed and the central bank will devalue (Martingale) and only the most leveraged rich (financially and/or operationally) will lose their seat at the table. That is why I am very interested in industries that are concentrated and/or Lindy, with stable revenues, with small enough operational and financial leverage for robustness through panics, and available now at reasonable valuations.

(7) Sort of related to the principal-agent problem and the requirement for high-agency: "Everything is a Scam". Here are some examples I followed over the past decade: modern art, war (2,3), corporate governance (2,3,4,5), health care and big pharma, government (2), and fractional reserve banking. Having to go to college to get a job instead of taking an IQ test and getting applied vocational training is a Scam. That's 2/3 of GDP right there!

You're going to pay a tax every time that you as principal have an agent doing something for you or when you have to engage with something that is a societal Scam. The size of the tax depends on the relative bargaining power - e.g. your alternatives - and your knowledge and ability to monitor the agent or your ability to use your own agency to get around the scam. On the far extreme, we have a literal tax, income tax, where we have no bargaining power and we get nothing in exchange for our single largest annual outlay.

(8) Dissident politics are not going to work. This is because the vast majority of people are low-agency, and all humans, low-agency or not, have primate brains. In our brains, status is all that matters. While Twitter autists and bodybuilders (call them "autodidacts") can read and come to their own conclusions, normies can't.

Normies care only about status, not facts, and when it comes to communications media status comes from high production values. An anti-war newspaper will have no advertisers. A pro-war newspaper will have advertisements from war profiteers. The mass media that works for Scams will always have higher production values than the honest ones, and so they are the ones that normies will believe.

This would also tend to show why revolutions are just a circulation of elites - rulers are not overthrown from below.

6 comments:

Anonymous said...

There is some Biblical wisdom in your post:

For it will be like a man going on a journey, who called his servants and entrusted to them his property. To one he gave five talents, to another two, to another one, to each according to his ability. Then he went away. He who had received the five talents went at once and traded with them, and he made five talents more. So also he who had the two talents made two talents more. But he who had received the one talent went and dug in the ground and hid his master's money. Now after a long time the master of those servants came and settled accounts with them. And he who had received the five talents came forward, bringing five talents more, saying, ‘Master, you delivered to me five talents; here, I have made five talents more.’ His master said to him, ‘Well done, good and faithful servant. You have been faithful over a little; I will set you over much. Enter into the joy of your master.’ And he also who had the two talents came forward, saying, ‘Master, you delivered to me two talents; here, I have made two talents more.’ His master said to him, ‘Well done, good and faithful servant. You have been faithful over a little; I will set you over much. Enter into the joy of your master.’ He also who had received the one talent came forward, saying, ‘Master, I knew you to be a hard man, reaping where you did not sow, and gathering where you scattered no seed, so I was afraid, and I went and hid your talent in the ground. Here, you have what is yours.’

Matthew 25 - The Parable of the Talents

Anonymous said...

Outstanding post!

AllanF said...

This was an excellent post. I was about to be all cynical and black-pilled when I read the headline and intro paragraphs. Thankfully, your first point is both right and set the right tone.

It's a good question everyone should ask themselves: Compared to the last decade, what do I know now, that I didn't know then.

If there's not one thing that immediately jumps to mind, and you don't have least a couple other non-trivial things, you're probably not a high agency person.

I'm going to work on a more lengthy reply to comment with because I think this post deserves it, but one thing that stands out is I definitely under-estimated the breadth of low-agency normies among us. In all seriousness, while I don't under-estimate how dumb the average person can be, I did under-estimate how passive the vast majority of people are.

To put it into standard deviations and IQ terms, I'm feeling like anyone less than +2 sigma is almost worthless. Well, that's 98% of the population. I could do the math more carefully, but crucially it means 80% of the people you're used to considering intelligent and useful (+1 sigma population), are actually not. Seeing it now, I gotta admit that it does have ring of truth to it in my experience.

CP said...

Prechter and Hussman have a lot of interesting observations.

But their mental models have a similar feature, which is that Everything is Correlated and It's All the Same Market.

Lyall's theory that bubbles result in anti-bubbles is more nuanced and subtle.

It reminds me of the conclusion from the prediction contest experiment - that the course of events resists easy black and white characterizations.

If Lyall's theory is true, it means that a high-agency approach to looking for opportunity will pay off. And it means that Prechter & Hussman are wallowing in low agency frustration.

I thought of a logical reason for a Newtonian anti-bubble reaction to bubbles. Besides the liquidity/redemption dynamics of money chasing hot funds, the investment theses underlying the bubble and anti-bubble investments are in conflict.

If Tesla could make enough money selling electric vehicles to justify a trillion dollar valuation, there would probably indeed be big problems for crude oil and pipelines.

Tom said...

Great post! Thanks for sharing!

Tom said...

Great post! Thanks for sharing!