Brainstorms: Creativity and Complexity
Markets and madness
It’s interesting, I am spending the majority of my time right now reading old books and reading newer academic papers. I remember when I first discovered academic papers, it was pure information where the main idea was provided at the top of the page. I was getting really tired of reading the 8th-grade reading-level books to find the snippets of important ideas. I like reading older books to learn how to think and structure ideas. I like reading academic papers and modeling data to have a read on the current state of information.
One interesting idea is how the decisions or actions you make are either dependent or independent of experience. For example, some things that are highly complex require zero experience to come to a conclusion on or do. Inversely, some things might be incredibly simple but require significant experience.
When uncertainty exists and there is a “fog of war” environment, experience in making decisions with incomplete information is critical. When there are no rules and no model for how to act, it’s experience that provides the most value. (book: link)
The interesting thing about financial markets is that so many systematic strategies are operating today. The reliance on experience and discretion is becoming less and less of the overall makeup of things. Passive flows are obviously taking over a lot and the active space is turning more systematic. To be fair, the market has become significantly more efficient in pricing things and reflecting constraints of agents. Everything has been turned into a beta that you manage.
I like to think of this TYPE of dynamic as compressing the risk of assets on a positioning basis. No one wants to take volatility and everyone wants predictable returns (even if they are bad).
The problem with this whole situation is that everyone becomes more and more sure that the market operates according to the rules they believe to be true.
It’s when people throw their hands up in the air and say “ok I have no clue what’s happening” that the rules of the game have clearly changed. Until this happens, we will keep sailing smoothly and compressing volatility.
Where Do We Go From Here?
The old-school traders like this guy aren’t around anymore for a generation of new traders to learn from:
In today’s world, the path has become increasingly difficult and unclear for the active space. The amount of obvious opportunities has decreased in many respects as the algos take over.
Instead of getting caught up in the conventional path everyone takes, you should be identifying unconventional paths. What are all the things people CAN’T learn or experience when they go the traditional route? Systematic strategies and algos are part of the world we live in now. Instead of trying to compete against them, create something based on different rules.
Escape competition through authenticity
-Naval
It is clear that in this new age of money management, people are focused on two things: minimizing volatility and short-term time horizons. Focus your creativity, research, and acquiring of expertise in the OPPOSITE of these things.
Something people hate hearing is that diversification is the enemy of performance:
https://twitter.com/Globalflows/status/1646907973690888193
Bringing It Home:
Where does that leave me? I like to apply my focus on learning and acquiring expertise with unparalleled intensity for a period of time that I know no one else can persist in. The whole goal of creativity is to come up with a unique insight that solves a problem at scale. Copying people automatically means failure. The key to “success” is to recognize there isn’t a prescription or clear path and still figure it out.
Stop looking for the “magic answer” and ask why you would even think such a prescription would work in the first place.
If all of this was too theoretical then check out the Bitcoin strategy report I wrote :)
Have a great weekend. You know what I will be doing.
The theoretical pieces are my favorite ones :)