Plus Sizing Is Not Intuitive
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"Simplicity is the ultimate sophistication."
—Leonardo Da Vinci (probably apocraphyl, but whatever)

Hey there,

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We published a new podcast at Mutiny: Commodities with Carry and Convexity with Robert Mullin. Robert is an expert in investment strategies focused on income generating natural resource equities in the energy, mining, agriculture and renewables space. We talk about if ESG is the new OPEC, the "fake" vs. "real" economy, and how to hedge risk in a secular bull market.

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The Best of What I've Been Consuming

Newsletter Economics in 2022
The Diff

A must-read post for anyone who has a newsletter or is considering starting one.

It starts with a key observation on the tradeoffs in time invested in a newsletter.

Basically any media business is a balance between monetization and growth. Conveniently for newsletter writers, the same raw material can be used as either a way to advertise the newsletter or as a way to harvest that demand. Usually, the right growth pattern is to slowly reduce the share of free content as the newsletter gets closer to saturating its target market.

And also gives advice that resonates with my own experience: it’s basically impossible to know what posts you write will do well and which will do poorly.

Writers have a terrible sense of which posts will be popular with readers. Writing about how Canada's economy looks like that of poorer countries, just with a higher GDP] and the economics of gas stations wasn't supposed to be a way to play to audience demand, but got lots of reads. Other posts seemed destined for virality and fell a bit flat. Because that's hard to predict, and because the impact of a single hit is so extreme that it's worthwhile to up the odds, and doing that means writing more.

The solution is simple, but not easy.

So if you're building a business around content, it's a good idea to aim for volume, at least during the growth phase. Building a publication is partly an exploratory process of building an audience, figuring out what they like, and iterating on that. And volume means sample size. It's also a good way to get practice, and a good way to get mistakes out of the way early.

My honest, but not-really-helpful advice for people that ask me about starting a blog or newsletter is to first write one million words online and by the time you get there then you’ll know the answers to all those questions.

I have been doing something in the blog/newsletter vein for just shy of a decade now and I continue to remain optimistic about the future of the medium and hope to keep going for many years to come.

Party at the Moontower

I think if there’s one lesson that good traders understand better than bad traders, it’s the importance of bet sizing. Most people focus their energy on good investment ideas and devote far too little time to sizing them correctly.

Consider this experiment done on college-age students in economics and finance and young professionals at financial firms.

61 individuals start with $25 each. They can play a computer game where they can bet any proportion of their bankroll on a coin. They can choose heads or tails. They are told the coin has a 60% chance of landing heads. The bet pays even money (i.e. if you bet $1, you either win or lose $1). They get 30 minutes to play.

Most of the time in investing there is no strictly "correct" way to size a bet because the payouts are unknown.

However, in this experiment where the payouts are known, there is absolutely a correct amount to bet! It’s relatively easy to calculate using a technique called the Kelly Criterion.

If everyone bet the correct amount (or in the correct range) then 95% of participants should have ended with $250 or more. How many did?

Only 21% of participants reached the maximum payout of $250.

Many made not merely suboptimal betting decisions, but downright stupid ones.

1/3 of the participants finished with less money than the $25 they started with. (28% went bust entirely!)

Only 5 out of the 61 finance-educated participants were familiar with Kelly betting. I don’t know why this is but apparently "the syllabi of MIT, Columbia, Chicago, Stanford, and Chicago MBA programs do not make any reference to betting or Kelly topics in their intro finance, trading, or asset-pricing courses."

For most investors, the lesson of Kelly is to bet less - almost all non-professional traders I know tend to bet way too big on individual ideas. More tortoise, less hare.

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The Interesting Times is a short note to help you better invest your time and money in an uncertain world as well as a digest of the most interesting things I find on the internet, centered around antifragility, complex systems, investing, technology, and decision making. Past editions are available here.
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Futures and options trading involves a substantial risk of loss. You should therefore carefully consider whether such trading is appropriate for you in light of your financial condition. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts. Opinions expressed are that of the author. The mention of specific asset class performance (i.e. S&P +3.2%, -4.6%) is based on the noted source index (i.e. S&P 500 Index, etc.), and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self-reporting, and instant history.


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