Brainstorm: Inflection Points and Peak Performance
Are you framing performance correctly?
I hope you are enjoying the weekend. Here is what we will be covering today: Let’s jump right in!
The story of an artist monetizing his craft
How time lags and narratives work
Peak Performance Routine
S&P500 model and the logic of identifying inflection points
The story of an artist monetizing his craft:
Let me start with a story. The other day, I was sitting in a coffee shop doing some work when a guy sat down next to me, and we struck up a conversation. I asked him what he did for work and was immediately fascinated when he told me that he writes poems on an old-fashioned typewriter for special events and weddings. Basically, what happens is, you would go up to this guy at a wedding or event, he would ask you some questions, and then type up a poem on the spot that is uniquely crafted for you. Amazing!
When I hear about people like this who are actually monetizing their artistic passion, it always makes me happy. It just goes to show how the world is changing. Pessimistic people will say that this guy is just a sign of too much money or extravagance in the system. I'm sure the same type of people said the same thing about every type of service-based entertainment model.
Just look at Twitter. People are able to monetize their content and create communities around it. This is so powerful! There are always going to be people who despise wealth creation or are too stingy to pay a couple of bucks a month. But think about it, the poem writer doesn't need everyone to believe in him. He just needs a couple of weddings a month to believe in him.
I believe so much of the future is heading in this direction. Things are changing, and your information or entertainment sources can be uniquely curated by you. This goes back to my quote:
"In the information age, you simply need to be at the right place, at the right time, with the right information to succeed."
The biggest problem I see a lot of times is people don't appreciate the value of information because they don't have the ability to monetize it by trading it or building a business around it. For example, if I find out a specific piece of information about an oil and gas well, it would be difficult for me to monetize it if I don't have a preexisting structure for capitalizing on that opportunity. The same can be true in any domain. This is why it's always important to have the ability to monetize information. Obviously, it is much easier in the market because we have liquid derivatives and leverage. But think about it in other domains of life as well. There are so many ways to make tons of money outside of markets. Just remember, if you despise wealth, it will always elude you.
How Time Lags and Narratives Work:
Shifting topics a little to the interpretation of information during time lags...
I've touched briefly on how time lags function in complex systems, but I would direct people to "The Origin Of Wealth" by Beinhocker (Link ). There's a great section on quantifying time lags. The big idea is that during time lags in complex systems, people over-extrapolate BOTH the upside and downside, which leads to oscillations. This usually skews positioning and expectations, thus creating the preconditions for a nonlinear move and inflection point.
I believe we are in such a time lag. Just think about the two sides of the story right now. One side points to unemployment being incredibly low, inferring that the economy is fine. The other side points to data supporting a recessionary outlook with credit stress ahead. We see stocks pricing in an incredibly rosy future while bonds are back at lows.
What is going on?! Well, first, I will say this. You never want to make binary bets. I mentioned this in a Twitter spaces conversation the other day, but when you construct bets, you want them to be set up in such a way that they succeed in multiple outcomes. Having binary bets with 50/50 odds is a sure way to lose money over the long run. What I want to find is a bet that works in multiple scenarios AND has an exceptional risk-reward ratio. This is literally what we get paid for in the market!
There was a particularly interesting Tweet recently from one of the more prominent accounts on Twitter:
Everyone keeps saying unemployment is low, so everything is fine. First, our job is literally betting on the future, so you should be trying to identify the left-tail and right-tail risks of a situation. Low unemployment is already priced into the market. How is that going to change?
Here is the unemployment in the 1930s. Just notice how it goes up for over 3 years from almost 0%!
Here's the deal: I am not a doom and gloom guy, but you need to accurately identify what you DON’T know. We have yet to see the impact of the monetary policy time lag on the system. The crux of the matter is that people need to roll over their debt at higher interest rate expenses. When this happens while prices and top-line revenue are falling due to decelerating output, it can certainly cause unemployment to rise.
Do I think we will have a replay of the 1930s? No, not necessarily. It’s always possible, but I don’t see it as probable right now. However, don't mistake a time lag for a regime shift.
Shifting topics to something a little more practical.……..
In the research drop article that I pinned to this Substack (link), I mentioned that I view myself as an intellectual athlete. I've decided to share a little more about this because seeing this side of trading is incredibly beneficial for people.
So what does peak performance mean? Well, the way I think about it is that you want your entire body aligned in a state of flow as you focus on a specific task or goal. This means my mental, emotional, spiritual, and physical body are all operating in confluence to create a positive feedback loop.
Mental: this relates to my cognitive abilities. For instance, spending time on activities like memorizing languages, doing math, playing chess, or playing poker actively engages your mind’s cognitive function. Social media, TV, YouTube videos, and many forms of entertainment can actually diminish your cognitive abilities due to how they shape your neurological pathways via dopamine rewards.
Emotional: This pertains to how my emotions are functioning at any given time. Am I feeling greedy, fearful, confident, happy, sad, lonely, comforted? How do these limit or enhance my performance in specific situations? People often say emotions in trading are bad, but I believe they are one of the best signals if you've properly educated your intuition.
A great verse I was reading recently in the Bible is: "Better a patient person than a warrior, one with self-control than one who takes a city." - Proverbs 16:32 (NIV). The main idea is that a person who can control their emotions and spirit is powerful.
Spiritual: The spiritual side of an individual inevitably intertwines with everything because it concerns my relationship with God. Just like in any relationship, if things aren't going well, it can spill over into other aspects of performance. One of the things I do daily is pray. It helps me significantly.
Physical: I know many people create a divide between mental and physical. They might point to Warren Buffett, who eats poorly every day yet remains one of the “best investors of all time.” I believe the physical body is directly connected to all the other points I mentioned above. Sleep, diet, sunlight, and exercise are all key inputs into this. I work out every day, do a cold plunge, maintain a relatively clean diet, and always aim to get around 6 hours of sleep (I’m working on getting better at this :)).
The main takeaway is that all of these things can be in a feedback loop, fueling each other in either a positive or negative way. Often, people will have a couple of these going well and then a couple dragging down performance. Here's the deal, it’s really difficult to silo these portions of your life. It’s like knowing there is a water leak in the guest room but pretending it doesn’t matter because there isn’t water in the master bedroom yet. My goal is to have all of the pieces I mentioned operating optimally. When I'm doing well on each of these levels, it increases the efficiency of my work and execution. It also helps me learn MUCH faster.
Circling back to the main idea, I want to be operating at peak performance because I am an intellectual athlete in the markets. I want to win.
“If you think the price of winning is too high, wait until you get the bill from regret” - Tim Grover
S&P500 Model and The Logic Of Identifying Inflection Points
Now to some important market signals!
This next section will focus on identifying inflection points in the S&P500 and the current parallels I see.
Keep reading with a 7-day free trial
Subscribe to Capital Flows to keep reading this post and get 7 days of free access to the full post archives.