Episode 54: Kris Abdelmessih – Alpha Is Illusive

In this episode, I talk with Kris Abdelmessih, Volatility Trader and also the Author of Moontower Weekly.

Kris has been actively involved in options trading for 21 years. His background encompasses commencing his journey within the trading pits alongside SIG, establishing his personal market-making team, and overseeing the commodities book for a distinguished volatility manager.

We talk about:

  • Adverse Selection
  • Discretionary Edge?
  • Manager Fee Alpha
  • Confidence Intervals
  • Life Optionality and more!

This podcast was recorded at the Edgewood Resort, situated by the serene Lake Tahoe, where a wonderful private event was organized by Collective.

Collective is a curated community investors and entrepreneurs eager for in-person experiences, authentic connections, and idea sharing. 

I hope you enjoyed this conversation with Kris as much as I did!

 

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Have comments about the show, or ideas for things you’d like Taylor and Jason to discuss in future episodes? We’d love to hear from you at info@mutinyfund.com.

Download Transcript

Transcript Episode 54:

Taylor Pearson:

Hello and welcome. This is the Mutiny Investing Podcast. This podcast features long form conversations on topics related to investing, markets, risk, volatility, and complex systems.

Disclaimer:

This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect opinions of Mutiny Fund, their affiliates or companies featured. Due to industry regulations participants on this podcast are instructed to not make specific trade recommendations, nor reference past or potential profits. Listeners are reminded that managed features, commodity trading, Forex trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they’re not suitable for all investors and you should not rely on any of the information as a substitute for the exercise of your own skill and judgment in making a decision on the appropriateness of such investments. Visit mutinyfund.com/disclaimer for more information.

Jason Buck:

So here we are in beautiful Lake Tahoe at the Edgewood Resort at this unbelievable private event thrown by Shannon and the collective, and I had my great friend Kris Abdelmessih with me. I’ll start with Kris. We’re in Northern California, Lake Tahoe. You and I both live in Northern California. During the pandemic we tried to explore living in different parts of the country, but you came back. Do you think you’ll ever leave Northern California?

Kris Abdelmessih:

That’s a great question. Not for the foreseeable future. It could be some one of these things that it’s a great place to raise our kids, we love our neighborhood, we love the nature around us, and when we traveled we thought about moving to different places and when we came back we just realized that between family and friends and the beauty of where we were, that every place has warts. We look around, every place has warts. California has its warts. They’re well advertised. I don’t need to rehash them, but maybe the biggest wart for California is that you have, it just has a very high cost of living. It’s a bit obnoxious, but you have to pick your wart that you’re going to live with. So living with the higher cost seems fine, especially because we’re enjoying our time with our kids there. So we might revisit that once we have an empty nest, but for right now we’re staying in northern California.

Jason Buck:

That’s the thing. A lot of people that always ask us why we live here and they usually reference taxes and people that especially move to low tax states of Puerto Rico, it’s like obviously the natural beauty behind us. There’s no bugs out here. We can record a podcast outside, and so we live this indoor outdoor lifestyle and I feel like everybody that tries to shit on it, why would you live in California? Is like, have you ever lived in California? And until you’ve really experienced day-to-day what it’s like to live this indoor outdoor lifestyle, to be surrounded by this immense natural beauty, it’s really hard to comprehend I think for most people.

Kris Abdelmessih:

Yeah, Highway 24 runs through the area that I live in and there’s so many times when I’m just driving just to run an errand and I just think to myself, I’ve got Mount Diablo in the background and I’m just like, I live in a very beautiful place and while at the same time I’m 10 minutes from Oakland, 10 minutes from Berkeley, 20 minutes from San Francisco, so I’ve got cities right near me and it’s beautiful. So I don’t know, I think when you live here you realize how nice it is and the other place that I lived for a lot of time was in New York City and that’s another one of those places that people are like, oh, could you spend that much money to live in a shoebox? I’m like, I don’t know. Are you surprised that real estate is priced by the one thing that matters the most, which is the location?

You can get a big house and live in some middle of nowhere and if that’s what you like, that’s fine, but you live in the middle of nowhere and that’s completely the bottom of my list of what I would want to do. I love cities and this is the closest I can get to it while still being able to afford raising my kids in a place where they get to do the things I want them to have a chance to do, like run around.

Jason Buck:

And part of it, I wonder how you think about the dichotomy of you grew up in Jersey, I grew up in Michigan and I think you really have to be a transplant to Northern California to truly appreciate how amazing it is. You have to go through the pain of living through winters on the East Coast or the Midwest, but at the same time, I always think about my friends that are raising their kids in Napa Valley and I’m like, your kids are, it’s top of the mountain from their life from here is just downhill. When they go anywhere else to experience, they don’t realize how great it is because they don’t have the context. So how do you think about, do you appreciate more than you think your kids would? Understandably because to them it’s just water.

Kris Abdelmessih:

Yeah. Yeah, I’ve heard this expression before that the East Coast is a better place to grow up, and California is where you’ll end up later. You want to do it in another order. Given that I’ve done it that way, I tend to agree with it. Looking back it felt harder to grow up in crappy weather and I’m Egyptian, I hate cold weather and I really despise it. When I met my wife, my then, when I first met her in New York City, we met in a bar and after our first couple of days of hanging out, there was something there and she had said something to me, she’s from California, and she said, if this is going to work, you’re going to need to move to California at some point. And I’m like, yeah, anytime you want, I’m done with this place. I’m happy to move to California. So I always had it in my mind that I wanted to end up on the West Coast. It was just a matter of timing.

Jason Buck:

So I start with all this stuff. To me, sometimes these seems like arbitrary decisions, but what I love always talking to you about with our private conversations is those choices on real estate or state you live in, the taxes, you always see the embedded optionalities there and you really are able to express those in ways that I find are truly unique because of your background. But right now you actually have my favorite job title of all time is retired. So you have the best job title of anybody I ever interviewed. That’s the one I guess we all aspire to. But before we get there, why don’t you go through the background of your business and trading history and optionality and so that gives everybody a jumping off point to think these things through.

Kris Abdelmessih:

Yeah, so I grew up on East Coast and I went to college, was mostly not knowing what I wanted to do, switched majors a bunch of times and then I decided I wanted to get into trading. I did an internship, got me interested in it, thought the whole idea was intriguing. And then I ended up getting a job with Susquehanna coming out of college, mostly, and I would say a fun part of this thing is that in 1999 when I was looking, walking around the career fair, at that time a lot of people wanted to be bankers because tech hype was was crescendoing and everybody wanted to be on that side of it and they were all in suits.

And I’ll be honest, I’m inherently lazy, so in my mind I’m thinking I don’t want to work that many hours and I also really don’t like the idea of work that much, but I like games and when I was walking around the career fair SIG had a booth that the guy that was at the booth there, he had a deck of cards and dice at the booth and he sees me, I look like a lost fawn at the career fair because I said, I’m just dressed pretty casually and there’s not that many trading firms. And so he sees me, calls me over, starts asking me some questions. And I end up… He asked me these questions and I don’t do well on the questions at all, but I was interested and I just asked him how do I get better at this? And he gave me the book to read, which was Getting the Best of It by David Sklansky, actually specifically he told me to read the first chapter, which is about expectancy, it’s about edge.

And then when they called me for a second round, even though I didn’t do that great on the first round, called me for a second round and I ended up, all the questions in the second round were pretty much right out of the first chapter. So then I realized, wow, this guy, he gave me the answer key. I think he just saw my enthusiasm for wanting to learn this. It didn’t matter to him that much that maybe my aptitude wasn’t quite what they might’ve wanted. Anyway, so I ended up going on a trading floor. They were like, you’re going to get going to get stationed in a trading pit at some point. I was in the Amex in New York, traded equity options there. And eventually five years later moved to the, I spent some time on the New York Stock Exchange as a specialist actually in ETFs as a floor broker.

And then I went over into the commodity options market for SIG and I went to the NYMEX, traded commodity options there for three years and then left to start my own natural gas options market making group. Did that for another three to four years. And in that time branched out into more commodities, mostly because I got beat up in natural gas at the end of it but as the vol collapsed because of the overhang of supply, this was the beginning of the shale boom. And I remember thinking to myself, I did something I very rarely do would just draw a line in the sand and say, I want to buy a bunch of vol at 40 to only see it crash below 40 and it probably puked it all out at 32 and it never really recovered. A lot of times when you give up on a trade, it recovers right after you get out. It’s the dynamics of points of maximum pain.

But it actually just kept going down and the market had changed fundamentally and being just some floor monkey, didn’t really look at the bigger picture. I’m not a fundamentals kind of guy. Didn’t really see how that would affect the market in the long run in the volatility. So anyway, pulled out of there, just got beat up really bad and ended up trading, I went into cotton options, coffee options, gold and silver. I was one of the first market makers in Silver Options on the screen at the time when silver went up to 50 bucks, I went into the cotton pit when cotton got short squeezed up to two. I actually think I may have sold the highest print ever in cotton just because I was trading the options synthetically and I was long a bunch of upside vol. So I was pretty much just Delta hedging. I sold cotton at 2,24 I think.

And then that experience made me think, you know what? I should back up and look at all commodities instead of just focusing on I’m a natural gas market maker, or I am a gold options market maker. Let me look at all of them and construct a more zoomed out cross-sectional approach. And it was at that time that a hedge fund called Parallax, which is based in San Francisco, they were expanding and they didn’t have a commodity options business at all. So I got a phone call from them, do you want to move to California? I looked at my wife and said, I think time has chosen us and moved to California, started that business for them, ran that for nine years and then I left the business two years ago, although I wouldn’t call myself retired.

Jason Buck:

I know, we’re going to get into that.

Kris Abdelmessih:

I hate this word-

Jason Buck:

You work way harder than I do and you’re supposed to be retired and I can’t believe it’s been two years. I was trying to think in my head I was like, has it been a year yet? It’s almost two years, almost.

Kris Abdelmessih:

It’s almost two. It is two years. It’s two years.

Jason Buck:

So many things jumped out at me there. One when you said instead of just going from nat gas or being a single commodity options trader, and you said you were able to zoom out and maybe trade options on all commodities. How do you think about that difference? Some people said if I have a trading style or strategy, I can apply it cross-sectionally across all assets. But a lot of times or other ways to look at it bottom up is each market slightly idiosyncratic, but I can have in the overlay of the strategy, how do you think about the push, pull of those dynamics versus overarching philosophy versus individual market?

Kris Abdelmessih:

Yeah. So I have a phrase that I like to use that trading is a measurement, not prediction. And what that phrase means is I don’t really have much view on the future at all. I can’t predict anything. I don’t know what’s going to happen of course, but if I can measure in a cross-sectional way, the job to be done there is normalization. So you have to take into account the idiosyncrasies of the market and the fact that you are normalizing. So if something has a very fat term structure but always trades with the fat term structure, then that doesn’t mean that the term structure is a sale, it just means that this thing always trades… So I’m normalizing to how this thing typically trades and then I’m structuring trades where things are getting out of whack with each other, baseline to each other, but also baseline to how that thing trades itself.

So by doing that, what you’re doing is, what happens is you end up trading things like that and what happens is you find a fair value that you end up saying this is what these parameters are roughly worth. And those parameters are roughly worth that because lots of liquid markets are pointing in that direction and they’re telling me that this is what these parameters should be worth. So you can use that and say that’s fair. And then what is sticking out? If you thought about as a heat map or just looking for things that are sticking out in that framework, then what you’ve done is you’ve created a top of a funnel and you say, these are my candidates to investigate because, and what will happen a lot of times is you’ll investigate it and say, ah, it makes sense that that thing is trading in that way.

That is where you’re taking into account the idiosyncrasy. So the cross-sectional model points you to possible opportunities, but then you have to use a set of drilling down tools to say, okay, is this actually an opportunity or is there something going on in this name. That might require investigation with calling around the brokers, reading some sell side research, you’re not doing these things because you care about their opinion necessarily. You’re looking at these things because you care about being alerted to what are the key elements, catalyst dates in this market that could be creating the anomaly. So I don’t know that when I’m looking at the cross-sectional model necessarily. So when I drill down, that’s when I find out about that and then I say, okay, you know what? I’ve normalized for all of these things and I still think there’s an opportunity. Well now I have a possible trade. So that’s how you zoom out and think about things broadly while still respecting the idiosyncrasies of any particular market.

Jason Buck:

Yeah, I was thinking about in the last year, especially in vol space, everything’s been around these one day events with FOMC meetings and so it made me think about if you’re training the oil complex, how much effect does OPEC have when they have an announcement, when you have a cabal like that, like you said, there’s these event driven maybe pieces to that where maybe, I don’t know cotton markets that well, but I assume it’s more dispersed on the active players and maybe there’s not less event driven. And then I am certain on coffee you have to really pay attention to Brazil as the 800 pound gorilla. So yeah, you have to have those bottom up overlays or else you could get caught in a different situation where each market’s not quite the same.

Kris Abdelmessih:

The most basic example in options is some markets have inverted SKU. So coffee SKU looks the opposite of the S&P and that’s what’s normal for it. So it doesn’t mean that there’s any opportunity there, it’s just the way that it trades.

Jason Buck:

And then my mind works pretty abstractly sometimes probably too much. And one of the things we’ve been thinking about and talking about at this event is how as we get older as men, we tend to form less and less friendships and all the data shows our friend circle gets smaller and smaller. And we were joking with Shannon is like, she’s basically matchmaking for all these very type A men that are out there hard charging in their businesses, they’re trading and all the stuff you’re doing now. And what’s nice about these circles, it introduces us to new people and then due to the intimacy of the environment and spending all this time together over multiple days, it forces us into these new friendships that we probably wouldn’t seek out otherwise, because most of us are pretty introverted as well I think. But you count yourselves as an extrovert though.

Kris Abdelmessih:

I do, I do count myself as an extrovert, but probably 55 out of a hundred. I’m not a life of a party kind of guy, but I can’t be by myself for that long. It’s like even my wife leaves for two days. I’m like, come on, I’m going to drive myself crazy or definitely feel more like an extrovert. I get my energy from people.

Jason Buck:

So the reason why I brought that up is because it reminded me when you were talking about pit trading and I have this very much romanticism for the old school pit traders and everything, but then when you’re moving to a desk, and the reason I also love picking your brain because you have a very unique perspective that a lot of people I talked to don’t have, and we always talked about you thought it was like blue collar, you’re bringing your lunch pill to work and some days you’re trading over a hundred thousand option contracts a day. And I don’t think a lot of people have that kind of experience. Most people are at best maybe trading a handful of contracts a week. And so it’s a very unique perspective, but part of that is I’m wondering how much do you miss, I think about this website very abstractly is the other thing is not only do as we get older as man, we form less and less relationships. There’s also all this data about human touch and everything in both good bad ways that we have less human touch.

So I wonder, I think a lot about Brazilian jujitsu and everything, those guys have human contact in a way that may be more grounding psychologically than we realized subconsciously. So I wonder when you were in the pits and there’s a physicality to the pits and you’re always around a big group of people and there’s a lot going on and there’s a lot of interaction with other humans. When you go to trading a screen and a desk, how much does that change for you? Do you really miss that pit structure more for the comradery of almost your tribe and the pits?

Kris Abdelmessih:

Yeah, I got to tell you, it’s such a fun question because that transition was really big for me. It was very stark when you’re on the floor, camaraderie aside, and that’s there, and I’ll talk about that in a moment, but when you’re on the floor, there’s an energy to the floor. So when the market starts moving, you can hear the place get louder, there’s more activity, there’s more the phones are ringing, and then when it’s quiet and dead, people are sitting on their step in the pit, the pits are tiered, they have steps where the brokers stand on the top and the traders are on the steps and down in the pit. When it’s slow, people are sitting down, they’re just banter and chatter and they’re just hanging out or they might even walk off the floor and grab some food. But when the market gets very busy, it gets very loud.

And when you leave that environment, I remember how it felt very disorienting to me because this place, it feels like a library all the time upstairs, you can’t tell that the market is moving around because it might not be that loud up on the desk. So just from a feel component, you were missing that other sensory stimulus that you would get on the floor and the camaraderie thing. So I would say this, it was interesting to me and probably why I think a big reason why I may have left trading and thinking about it was I like the game of standing on the floor and yelling and trading and standing next to your competitors is also a lot of, it’s neat for multiple reasons because there is a frenemy aspect to it and some of those people become very good friends of yours too.

So when I left SIG, I was hired by competitors that had become my friends that said, you really should come trade with us, let us back you. And that was how that happened. And it’s a very unique situation, environment because you’re standing next to your competitors, but those competitors are also future employers and future employees. So you are in a way, you are interviewing 24/7 by standing next to your competitors. So there are dynamics that emerge in there where factions emerge and you have friends. And if you’re an independent trader, I made the analogy here actually at this event that I thought one of the cool things about this event was it reminded me of in the pit where let’s say a broker comes in and says, I’m 10 bid for a hundred contracts and you say, sold, it’s a good trade. And you turn around, you say to your buddy, I’ll give you 25 of… I just sold a 100 of these. Do you want 25 of them?

And you might give 25 to your buddy knowing that he’s going to do the same thing for you if a trade comes on the other side of the pit. So what happens is both of you collectively are covering more of the pit by sharing trades with each other. And this event feels like that to me where I’ve like, oh, here’s this group of people that we are covering more of the pit. Almost nobody here is directly competing with one another. And a lot of people here, maybe some are managing their own money, some are managing other people’s money, there are different mandates. So somebody says, Hey, there’s an opportunity in my market, I’m small, I can’t fill the opportunity, take a look. You should be interested in doing this trade too if it fits your mandate. Or maybe it’s just, hey, something just doesn’t fit my mandate, but it’s interesting. Maybe you take a look at this. And what happens is between us all, we’re just covering the pit.

Jason Buck:

Yeah, it’s a form of hive mind where we can have experts in many different realms in the same room. So we can, iron sharpens iron, we can get great feedback and you can really get good feedback on your ideas if it helps confirmation bias or disc confirmation bias to really hone in on your ideas. But then there’s a collective sharing of ideas too of like, check this out, you might be interested too. So it’s amazing give and take. But one of the things you and I have talked about in the past is the idea around time, and I’m glad you brought that up with the pits, you could palpably feel of going to sped up. And I always use back in ancient crease, they allegedly had Kronos and Kairos and you and I’ve talked about this, the idea of clock time is Kronos and then Kairos was they called, it translates loosely to the opportune moment. But I think about when time speeds up or when you have to act effectively in that moment, it’s a very different thing.

And so especially in markets, time can be very slow on Kronos and they can speed up in Kairos. There’s a timing effect to markets and that’s what’s great about options is, Gem Carson has pointed out it’s the underlying distribution, but then the best part about options is it’s 3D chess because it incorporates time.

Kris Abdelmessih:

Yeah.

Jason Buck:

We always have the duration of whatever or the tenor of what we’re trading. But recently you wrote a great series called Variance Time. So if you could start fleshing that out a little bit, how do you think about variance time?

Kris Abdelmessih:

Yeah, so the concept of variance time is that the amount of time, it starts with this idea that the implied vol that you’re looking at in your option model is wrong. It’s any off the shelf model because let’s say it’s got 365 days in the model, that’s the most common model. There are also trading day models that may have 252 trading days or two, I forget what, 253 maybe. But anyway, the point is they’re both wrong because vol is not equally distributed over 365 days. We know that vol is higher Monday through Friday on business days and it’s lower on the weekends and it’s lower on holidays.

But it’s not zero on those days and news can come out over a weekend. So the question is, is how does time pass? If you run a 365 day model and I run a 253 day model and the straddle is trading for $10 and we trade with each other, our models tell us that we traded at different vols, but we traded at the same price on something that expires at the same time, but we both got a different vol. And the paper goes into the math of, well, what it starts with is the idea that first of all, let’s relax this assumption that the vol is evenly distributed throughout and in the case of the trading day model, let’s remove this assumption that holidays and weekends have zero vol. That’s also not true.

So let’s try to ascribe what proportion of the volatility occurs in a business day versus a holiday or a weekend day. And by doing that we can better get assessment of implied vol. This is a very big issue when you start to trade cross asset because if the error cancels out if all you do is trade equity options that always expire at 4:00 PM on Friday, then you’re trading all the same things. So no matter if all your vols are artificially high relative to a more accurate tenured model, then it doesn’t matter. But it really does matter if you start to trade assets that commodities can expire at different times, different days, and then also this is just cross asset, but then you have the other issue of volatility itself unfolds at a different rate per asset.

So gold is a 24/7 asset. Crypto is a 24/7 asset. So how its vol is distributed throughout the day, how you should decay time in your model may vary for gold versus say Microsoft or something or take a stock that doesn’t have even that much international exposure that vol might even decay at a different time for that. So you have basically this concept of vol time is just saying, Hey, our option models are not right. We can try to make them more accurate and able to… But the reason is to be able to compare. The end of the day this goes back to the measurement thing. The job to be done in trading, a lot of the jobs to be done is to measure accurately. And if you’re using off the shelf models and you’re trying to trade cross asset, you are not comparing apples to apples.

Jason Buck:

But part of it too is whether you’re using a full calendar year, a full trading year, you’re going to have different vol metrics like you’re saying. A lot of times if we go even more granular, if you use close to close data, open to close data or intraday data, it is all going to be different. But when you think about optimization versus robustness, and there’s trade-offs for every model you’re going to use, it’s like how do you think about blending those models to create your own theoretical vol? And then secondarily, not to pile onto the question, but how do you think about then even I think you expressed in the paper, you’re still putting bands around that of your own theoretical ideas or fudge factors around even that variance time.

And so it’s like you’re trying to get a better measurement, but you’re still acknowledging that the measurement is, map is not the territory and it’s not a perfect measurement.

Kris Abdelmessih:

Yeah. So it isn’t going to be perfect, no measurement process is perfect, but I would back up here and just say I don’t want to overkill people on this stuff because the idea of variance time and whether your model, your vol model is accurate and your IVs are accurate does not matter to 99.9% of the population of people using options. Most people are using options in a directional way and the vol trading business is when you think about options, I think about using them for multiple reasons, but one is hedging, one is speculating on direction, and then the other one is vol trading, where the vols themselves are the reason to do the trade. Vol trading is a scale business, it’s tons of contracts, you’re talking about edges that are sub-penny and accuracy matters an enormous amount because when you’re trading for less than a penny, you can’t afford to be off by a penny.

So vol time ideas are only going to really matter to vol traders where that is their business, their business does not start with an opinion about the underlier. Most people just care about, I’m trying to hedge something or I have a directional view. When you’re doing those kinds of things, most of the work is upstream of the option expression, especially the directional trade. With a directional trade, the directional trade idea is really not complete unless you have come up with some idea of what the distribution of what this asset looks like, and you’ve done that in some fundamental way and you’ve put a bunch of diligence into figuring out this stock is probably worth this and that disagrees with the market. That’s why I’m doing the trade. If that’s the case, the options piece is super trivial because options are priced for specificity as you said, they’re priced for this other dimension of time, fall and time.

If you have a view on the stock that is very different from the market view, the options market is definitely going to be an attractive place to put it on in the sense that it’s priced so specifically to some general model, but you have some very specific knowledge which makes you think that this thing that’s priced very specifically is just way off. It’s like, I think Warren Buffett has talked about that why he may trade options because people are using a generic approach to pricing, say like a leap, but you actually know something about the stock be like, well, this distribution of the stock is very different from any typical model, even net of the fact that SKU is trying to make adjustments in the distribution.

So the most users of options, they don’t have to worry about variance time. Most of the work is done upstream of all considerations. And so I don’t want people to feel like they should obsess over this. One of the reasons I do like writing and talking about this stuff is because options are a bicycle for the mind. They are. I think that thinking about options and thinking in replication and in derivatives terms sharpens your thinking about separating what bets when I want to express a bet, am I expressing what I want to express, am I shedding the parts of the bet that I don’t want getting rid of the artifacts and getting a pure expression of my idea. So derivative thinking and options thinking is very helpful in that way. The specifics might not matter to what you’re doing.

Jason Buck:

And we’ll get into that hopefully later about how you have been teaching and using tools and games to teach probability and options theory, but they also, and so I’m not remiss, and I don’t forget, you wrote, like I said, several part series on variances time on your wonderful blog Moontower, but where can people find Moontower?

Kris Abdelmessih:

Oh, you can go to, the blog itself is moontowermeta.com, and then you can go to notion.moontower.com, which is the home of all my writing. So there’s a lot of things that are not on the blog that you can find there that are, I read a lot of almost tutorial pieces where it’s very Socratic. So for the variance time piece or a lot of these pieces will start with, I’ll ask you a question and then you can toggle to see what the answer and what the reasoning is. And I build up to a concept very, very gradually. And the point there is I’m a big believer in this method because that a lot of times when you just read how something is done, the problem there is you think you got it, you read it and you’re like, ah, oh, I got it.

But that’s how we work. We look at things and we’re like, oh, that makes sense, therefore I must understand it, but I think it’s better to ask the question and have somebody struggle against it for a little bit and then reveal the answer. Then at the end the insight is theirs, or you’re closer to owning the insight. You probably need some practice before you can actually own the insight, but you need to work through it and think about it yourself and not just read about how it’s done.

Jason Buck:

Well and also, I think as I know all too well and as people that start, if they read your blog and go find it, it’s like you’re have an unbelievable ability to educate and take people up that learning curve in a very specific way. That’s just nobody else is doing it that way. But the other reason I bring up the variance time thing, and like you’re saying, maybe it’s getting too deep dive and in the weeds or geeky for options traders, which it is, but at the same time it’s helpful for everybody because what I think the greater takeaway from variance time is know what you’re actually trading, is your implied vols can be very different depending on what timeframe you’re using and you just need to know what you’re actually doing. And so that’s what I think of a takeaway, and part of that, knowing what you’re doing and really being specific about what you’re actually trading, or a lot of times in ETFs, people buy ETFs and they don’t even look into what the underlying is and they don’t realize some of the exposures they ever have.

And that’s why I think it’s important to even think these things through, even if you may not be trading on variance time, it gives you a way to think about the other trades or investments you’re actually doing. And so that transitions us nicely to the way you think about alpha and beta, because what I love about variance time and the things we’re talking about is everything we think is a first principles or a truism of trading is when you dig a little deeper, the nuances there and it doesn’t have the specificity we think, and there’s a little bit more fudge factor there than we realize and everything’s a little bit more nebulous and grayer and nuance than we ever give it credit for because we do a shorthand to be able to communicate. But part of that is this leads me a thing I’ve been thinking about for the last few years, that’s very interesting to me, but how do you think about what is alpha and beta?

Kris Abdelmessih:

What is alpha and beta? So I think of this concept you may have heard in finance where you don’t get paid for diversifiable risk. And the idea comes from the fact that you can have two assets that have their own properties of risk and return volatility and expectancy. And if you combine those assets in a portfolio and if they’re only loosely correlated, possibly negatively correlated, the portfolio can have a better attribute than either of the assets. That’s basic cap end portfolio theory stuff. The implication of that however is very significant because it leads to this idea that you don’t get paid for diversifiable risk and let me give you a concrete example of that. If I’m trading, the example I like to use here is every year Pemex comes in and they hedge their oil production. So they come in and they buy a bunch of puts because it’s a gigantic order, sometimes it can last over a month and that will end up pushing out the vol surface and will presumably these options to trade at a premium because the only people taking the other side is risk capital traders.

The only way for them to hedge that is really to, Delta aside is really they need to charge enough to be able to warehouse the risk of being short these puts. And one of the years I remember there was not, the premium did not go out that much because Delta Airlines who is, if you think about it, they are a natural of the other side of that trade. They are natural buyers of oil. So for them, they came in and just thought of it as like, I’m just going to sell the puts because if the price the of oil goes down, I’m happy anyway, so I don’t care. And what happens there is that risk in the marketplace of the producer needing to hedge found the other side. In other words, that other side was diversifiable to Delta. Delta said, I can diversify my risk by selling these puts.

So what happens is a risk premium that may have existed for the arbitrage community no longer exists because a natural came in was able to diversify. So if Delta doesn’t exist, then that risk is not diversifiable and therefore you would expect there to be a premium in those puts to compensate people for… The only way you can get people to step in and take it is to offer them a yield in a sense. But if it diversifies somebody else’s business, somebody else’s book, you shouldn’t expect that risk to have a premium. It should offset because that person will find out that there’s somebody that needs to buy these puts. They’ll come in and they’ll sell them and there won’t be any premium. And both those parties are going to be better off. The risk will have been transferred and the system will not have a risk premium there for risk capital to earn a yield from.

So any kind of business, if there is transparency in access in a market and there’s liquidity, somebody will find say, Hey, I sell sunglasses and there’s an umbrella company that’s trading. I’m the most efficient holder of the risk of owning the umbrella company because I do well when it’s sunny and then now I do well when it rains. So I can afford to pay more than anybody else for the umbrella company because at the portfolio level, my business improves even though the individual line items, I can pay a lot for this line item and you can’t because it doesn’t actually improve your portfolio. So I should expect that the risk would be held by the most efficient holder of the risk and that’s the holder for which that risk is diversifying. I think of beta as everything that’s left over from that. It’s, hey, the S&P, the world is long. I know you guys have talked about this before. The world is long assets.

There is no natural to being on the other side of the S&P going down. So puts and the S&P and the equity risk premium exists because somebody needs to be paid to own these things. Otherwise I could just own the risk-free rate, but I need to be enticed and there’s nobody for which that risk is diversifying. So there must just be a premium. So I think of beta as all these forms of premium and alpha is really just the idiosyncratic stuff that is temporarily out of line that you can find and you can capture for whatever reason you have for thinking you have an advantage there, timing, information, whatever your edge is. But those alphas are fleeting and you have to keep refining them. But beta is just the risk cream of everything that’s left over.

Jason Buck:

Now I want to come back to other forms of alpha in that sense too. But that was a huge unlock for me and I told you I appreciated that you brought it up in the room the other day was because all the explanations I always hear for equity risk premium, voluntary risk premium, never quite made sense to me. And we also have to find our own individual narrative sometimes subjectively, but that non-diversifiable risk was a huge unlock for me and I’ve never heard anybody really put it that way before. And that really opened up my mind to thinking about what risk premium really is. And so I appreciate that from you. And then what we pointed out too, that we always talk about is a lot of times people think markets are zero sum, but I always think about maybe futures or derivatives markets are not necessarily zero sum because you have to think about the large players, the manufacturers, the producers, the corporations, because in that Pemex Delta trade like you were talking about is you’re not looking at their overarching business in their book.

And a lot of times they can reduce cost of capital, they can hedge risk, they both can have a positive sum outcome for exchanging those risk transfer services in real time. Part of that though, do you think that the futures market is good enough or do you think blockchain can help these matching services better in the future between corporates or real economic players that need to hedge out some of their production risks? Or you think the future industry is good enough or you think it can change?

Kris Abdelmessih:

I’ll be honest, I have very no real opinion on that. I’ve never thought about it.

Jason Buck:

We talked about this like a matching problem, at the Pemex Delta trade you need them to trade almost a similar quantity at the same time and sometimes there could be mismatches. And so in a way, maybe I’ll tell you in a different way, is a lot of times when you talk to trend following CTA futures managers, a lot of them talk about the behavioral psychology of market expansion and psychology and all this stuff. But Eric Crittenden and I talk about it’s risk transfer services. So a lot of times if Pemex and Delta are not there to line up on the fringes, you need a speculator to do those risk transfer services and that’s what he feels CTAs get paid for. And that was an unlock for me because that’s the way I saw it. That’s why you actually get paid as a CTA, not these nebulous behavioral things.

Not saying that’s not the right answer, who knows what the right answer is, but maybe that’s why I wondering, and maybe the matching services, maybe it’s hard to say if they’re better or worse with blockchain, maybe you do need those liquid markets in the intermediaries in between because we’re never matching perfectly on volume and time.

Kris Abdelmessih:

I guess, okay, the way you framed it there, first of all, I listened to that interview you did with Eric. I actually wrote up notes on it because I thought he did a fantastic job of explaining exactly the risk transference properties of the futures market. But okay, so the way you’re describing it makes me think of, reminds me a little. You’re saying using the blockchain to intermediate and what you’re talking about is a method of transacting that might be an improvement over the prior method. This does remind me a bit about as options became more electronic, there was this discussion of is voice brokerage going to go the way of the dodo? And the reality is it doesn’t because what happens is the most liquid part of the curve does become completely electronic. There’s not a lot of opportunity for voice brokers in front month spy options.

But if you need liquidity in once you’re outside the top 50 names or once you’re outside the front six months of expires, liquidity falls off quite a bit. And in this case it’s just like real estate. You need to source that liquidity, you need a broker because if you try to chip away electronically, you’re going to get gamed. So the broker is going to go out there and who needs… Who’s axed on the other side of this. A good broker should have a good feeling of who might need to offset that particular risk. Take the other side of what you’re doing. If your broker’s a fool, they’ll go to somebody that probably has the same needs as you and all they’ve done is tip them off that you need to be doing that trade. But a good broker will know who might actually have interest on the other side of that.

And so I think there’s room for a hybrid approach to thinking about these things. I don’t think blockchain is solving any problem on where should long-term oil future, or oil options trade or some long-dated thing because nobody’s going to show their acts. Nobody’s going to reveal in such a transparent way because they’re just going to get themselves gamed.

Jason Buck:

How do you think about, our mutual buddy coder? Holstein always talks about that crypto’s like speed running Tradefy, it’s going through the entire history and in a much faster form. But when you start thinking about NFTs and fungible versus non-fungible, coming from a future space, that’s what we know is you actually need these fungible contract sizes. And so maybe that’s part of it too because that’s the matching problem is who’s going to come with this size and volume and price and find somebody perfectly matching. It’s like we need these fungible contracts. So we’ve been dealing with fungible versus non-fungible contracts and whether you’re a hedger or a producer versus coming to the liquid exchanges where you can have a fungible contract size and maybe that’s the important for that liquidity, you need everybody to agree on a size maybe, and that’s part of that makes that matching problem even more difficult.

Kris Abdelmessih:

Totally. Standardization is a trade-off that we choose. We choose to standardize and then we accept the basis risk off of that risk that we’re actually trying to hedge. And in exchange for that, we get better pricing, price discovery and more liquidity to accept the standard. So I might need to, I want to hedge, I would like to hedge something out from here until 20 days out, but the only thing that exists is an option that exists for 30 days out. Okay, well I’m going to have to take 10 days of basis risk on that option, but in exchange for that, I don’t have to call up a bank and say, make me a price on the 20-day option that expires at 10:45 in the morning, which is exactly what my risk might line up to be. What you’re saying is I’ll accept the basis risk in exchange for liquidity and better prices.

Jason Buck:

And then you brought up real estate brokers really. So I want to take a tangent there for a second, because I always think it’s interesting, usually finance guys or whatever, they usually hate real estate brokers, they think they shouldn’t be around or in Bay Area a lot of VCs or quants, they don’t like real estate brokers. They don’t see the point. But what you brought up is, the way I always think about is they’re there to make the market and somebody’s got to close the emotional delta between buyer and seller. They got to bring them to the table. So I’m just curious, when you’ve been doing more real estate transactions, recently renovating, selling, buying in different locales, how do you think about real estate brokers and a good one versus a bad one?

Kris Abdelmessih:

Yeah, I think about it very similarly to say an option broker, which is, look, if I’m trying to buy a place in a masterplan community where every house looks the same, I don’t really see why a broker needs to be very heavily involved in that process. It’s highly commoditized. It’s a box. There’s other boxes we can price this thing. You live in the Bay Area, there’s tons of grade in people’s houses, there’s slopes, there’s clay soil, there’s foundation issues are very common out here. Locations are very idiosyncratic. There are climate, even microclimate stuff. There is a lot of variation in homes out here and there’s not a lot of masterplanned homes say out in our area, every house is very idiosyncratic. We can debate whether the fee is the right fee, whether the broker deserves “five or 6%,” or whatever it is.

Looking at that industry and I’ve seen massive dispersion between what’s a good realtor and what’s not a good realtor. So I think it’s a bit of the teacher problem. It’s like the good realtors are worth, probably worth the full fee and the bad realtors probably aren’t. And like teachers, if we’re going to pay everybody the same rate, talented people are going to be selected out of that pool because if you’re just going to pay the average. I think with realtors it’s similar. There’s huge dispersion in their abilities. And also if we look at it from the supply side of that job, the supply of brokers, that’s a job where a couple of people make lots of the money and many people might be toiling to make one or two deals a year. So there’s some efficient market part of me that’s like, well, I’m guessing that the market clears at a pretty close to the rate at which it would take somebody to want to do the job.

Jason Buck:

My business partner Taylor and I always talk about, what’s interesting too to me about real estate always is what the measurements we use, everybody aggregates this measurement of square footage and then multiplied by price per square foot. And what that miss is, like you said, the nuance of non cookie cutter properties is we always talk about the alpha maybe in the light, the architectural nuances and the actual sizing and configurations of rooms. That’s never in the input on the listing price on Zillow or Redfin or whatever. It’s always priced per square foot. And that’s what that nuanced aspect of it is like, what does it feel like to live in there? And that can be dramatically underpriced or overpriced when you actually get inside-

Kris Abdelmessih:

100%.

Jason Buck:

… the house. That’s always interesting to me. So I want to go back to this concept alpha beta. You were explaining interesting earlier when we were talking about risk premium, and then you also said a lot of times for you alpha is those arbitrages that pop up, disturbances in this forest as our friend Ben would say. And so those are great, but as you know about any arbitrage you’re really chasing, it’s just a constant red queen principle. You’re faster, faster, you’re looking for the next arbitrage that close so quickly. So that’s one way of playing the alpha game. But what you were hinting at the other day that I’ve been ruminating my head for so long now is the idea of alpha and beta for a lot of people is everybody thinks that they can reduce everything to a factor.

And if they can’t reduce it to a factor premier, then they go, it’s unexplainable and then it’s therefore alpha. And then what’s interesting about that, so everything reduced as a factor is a beta factor, and then everything they can explain they call alpha. But what’s interesting when you talk to clients or other investors, they always want the explanation of where your return’s coming from. And it’s interesting, they want it to be explainable and repeatable. And if you say, I don’t know where it’s coming from, that’s real alpha, but nobody wants to say invest in, I don’t know. And so just dig, open that up for me how you think about that.

Kris Abdelmessih:

Yeah, so this is an idea.

Jason Buck:

It’s the rub.

Kris Abdelmessih:

I wrote a very, very short post that I call the paradox of provable alpha. And my point in it was that everybody wants to see the proof that it works, the mathematical whether whatever the metrics are that would constitute proof for them-

Jason Buck:

Because we always need a narrative fallacy. We need something to explain something just so our minds can rest. We can’t deal with the anxiety of not knowing.

Kris Abdelmessih:

Maybe. But I wasn’t even talking about the narrative piece. It was more of if we think about a quant strategy that just… Think about an HFT that if it was an investible, and they’re not investible, but if it was, they would have sharp ratios that would bogle people’s minds. Obviously they’re capacity constrained strategies, but if you look at some of those strategies, it would be self-evident that there’s alpha in doing this. You wouldn’t need to look that hard at it, be like, there’s definitely money. You’d literally make money every single day. There’s money in this.

So quant strategies can be, there’s seductive because they offer this promise of being able to prove the edge, and some of them can. The problem is that you can’t invest in them because if it was that provable, then they get to choose their investors. And that manifests in several ways. A, they don’t take advances at all, they choose to have none. B, they set their fees so high that they capture all the alpha, and then you are still left with something that looks like a beta, or C, and this is one I think is very underappreciated. If you have a box that spits out gold dollar bills, and but you want to expand and you need investors, you get to pick who your investors are. You’re not just going to open that up and to anybody. You’re not going to go on some platform on the internet and just ask for money. You’re going to say, who is a strategic investor? Who makes me smarter? Who can help me?

And you’re going to only offer that investment to people that you have something that you can get back that’s not just dollars. Dollars are fungible and commoditized, it’s just money. You’re going to want people on your cap table that can help you. And I think that if you’ve ever been in a position where you’ve owned something of a lot of value, you can see that that’s true. That you are sitting there saying, I don’t just want money. I’m going to pick who’s in there. So what ends up happening is if all of these things are true where the person with the provable strategy gets to pick their investors, that means that most likely, the only place where there actually is alpha is in the discretionary strategy that cannot be proven, so where the LP always has to worry that the GP is full of shit and that it’s not repeatable, and it’s just they’re always going to be worried that I’m just trusting. But that’s probably the only place where you’re ever going to find alpha in that situation because if it was provable, you would never see it.

Jason Buck:

Part of the analogy reminds me of the show Silicon Valley is like, you always want to be pre-revenue. Don’t ever show revenue because your multiple will come down because now your real business-

Kris Abdelmessih:

Totally.

Jason Buck:

And this is what I think is the unbelievable paradox of that alpha beta argument and to me just basically dismantled our entire business and one fell swoop, which is always amazing to me.

Kris Abdelmessih:

Sorry.

Jason Buck:

No, it’s great. It’s perfect. So I was thinking I would come up full circle on this probability and option thinking, and I remember I was talking to you in the past about how everybody is well-versed in the Navy SEALs have hell week, and it’s a really interesting training exercise. And I thought it was fascinating that some former Navy SEALs opened it up to civilians where they do a similar version of hell week for civilians. And so obviously a lot of type A men are very interested in that and they go and they want to see what it’s like to train like a Navy SEAL for a few weeks.

And so I always told you that I think [inaudible] or SIG is the Navy SEALs of probability training. And I was like, man, I would love to be able to just go back and be in the training class at SIG and just to be able to learn the way that you initially did. And so you figured out with your team with Steiner. Steiner was who educated you on this and it’s come full circle that you created a trading game to be able to replicate what that training was like at SIG or what it’s like to work in the pit. The trade now is called pit bulls the game.

Kris Abdelmessih:

Yeah.

Jason Buck:

And so tell me a little bit about how you think about trying to educate people in probability theory and thinking about optionality even if they don’t need an everyday life, you feel that everybody, if they have proper assessment of probabilities and optionality and arbitrages, that’s helpful for everyday life in different ways, it’s shapes and forms.

Kris Abdelmessih:

Yeah, I think that trading is a great laboratory for decision-making. It teaches you to, and this is said a lot these days, but probabilistic thinking and being in a culture, a trading culture teaches you to sharpen your thinking because you cannot just spout out things because if you say I could run a five minute mile, somebody’s just going to say sold. So you need to be able to have a great assessment for what is my chance of actually running a five minute mile? What odds do I need to take that bet? And so what we do with pit bulls is pit bulls is a reduction of the mock trading that we did in training. And it is not just SIG, all the prop firms did this back in the day. SIG was probably the most fleshed out in that they would literally pull you away from your job for 12 weeks to go live in Bala Cynwyd and go to a mock trading room and all this stuff.

So obviously they put a lot of resources into that, but everybody did it to some extent in the prop trading world and the beauty of the mock trading experience, and by the way, these prop trading firms are still using this to this day, which I think is a natural question would be like why? Floors are, again, it’s a sign of the past. Why would you be doing it that way? And it’s because it is a very effective way to open up a conversation into decision making. I liken it to, if you want to learn poker, yes you should read the books, you need to learn some math. But if you really want to accelerate your learning, you want to sit down in a poker game and have a poker coach sitting next to you that says to you at every node, well what range of hands do you think you’re playing against right now given the betting situation?

Why did you do that? Why did you call versus fold there? Really, really dig into your decision-making process. And mock trading is doing the same thing. In a mock trading session you might be trading and if we’ve been playing, we played here last night, which was great fun. I think everybody had a blast doing this. But if I was doing it in an educational atmosphere rather than just for fun, I might stop the game, say, wait, why did you pay that? Didn’t you notice that you paid seven for blue? Meanwhile, red is at the same level in the game and it’s offered at five. Why did you do that trade? Or why did you… The one by two is bid here, can you price it off the legs and where is it synthetically bid or synthetically offered? And these kinds of ideas really help you to basically untangle your thinking.

So I take that, I think that that process, the probability stuff is just part of it. There’s still the game theory and the understanding when you’re looking at people trading and you say, this person is very focused on the fact that they bought yellow for a price and now they’re just looking to sell it. But you might look over at another person and realize, hey, that person is just trying to trade for edge. They’re just trying to buy things below what they’re worth and sell things for above what they’re worth. A lot of times I don’t even remember what price I traded the thing at because I’m not anchored to trying to create a profit on the thing that I did. All I care about is what do I think things are worth? Let me buy them for less and sell them for more.

And then every now and then I might peek down at my hand and say, whoa, I’m pretty long blue, it’s a lot of concentration risk there. Let me try to, maybe I’ll kick out some blue for fair value. I’ll find somebody that’s short blue and we can pair up and match up our risk. So all of those things are part of the game. And I want to add one thing about the game, which is I think analogizes well to the real world, which is in order to win the game one round, you probably have to take a high variance strategy. You’re going to have to huddle one color. The issue is that there’s no expectancy in doing this because all the colors chance of winning is equal, but it’s probably the only way in a winner take all situation, it’s the only way to win the game. However, if all you did was focus on trading for edge and then making sure that you don’t get too concentrated, you will always make money in the game, but you probably won’t win.

So if you expand that, and by the way, trading for edge, nobody knows anything about what the future is in this game. The trading for edge is just saying, Hey, fair value is this because the consensus of the marketplace has said that colors in this position at this time of the game are worth about X. And sometimes people make mistakes or they’re motivated because they’re thinking about their portfolio, and I just want to get rid of yellow and they’re going to sell it too cheap. So the point here is if you played the game multiple rounds, the person that never won any one particular game but traded for edge throughout has a very good chance of being the leader after multiple rounds, whereas the person that huddled, they’re going to win one out of eight matches, maybe they win two out of eight matches. But the point is that was random. There was no expectancy in doing that. So what it takes to win one round is not the same as what it takes to win in the long run. And that is a very useful life investing lesson.

Jason Buck:

Yeah, it is. And I want to tie that in because it was also interesting, obviously the dozen of us had a great time, we were having fun, but almost like you were talking about on the floor of the pit, how energy expands extract when people start yelling, it starts speeding up towards the end. Everybody’s getting very, a little bit more aggressive. They’re jumping up and down, yelling back and forth. But then slower parts, everybody’s a little bit calmer. It’s times when we’re slow, people are talking shit about other things. So it has that very feel of the pits like you’re saying. And then more importantly, not only did everybody have fun, but I always think about the follow-through effects around breakfast this morning, before breakfast, everybody was talking about different strategies, everybody’s continuing to talk about the game, everybody’s picking your mind about questions, like you’re saying, but like you’re saying the individual game strategy versus a cumulative game strategy is the things like we talk about a lot with compounding return versus arithmetic return.

It’s ways of explaining this crazy word ergodicity or [inaudible] systems. I’m always trying to find different ways of saying it. And when you were talking about the pit trading thing too, with the trading with a guy next to you, is playing finite versus infinite games.

Kris Abdelmessih:

Yes.

Jason Buck:

You knew those guys in the pit they’re going to be next to you, so you got to play this infinite game. So you might give up something that might be negative EV right now, but it’s positive EV over the long run or when you compound. And I’m always trying to find easier and simpler ways to say it. And of course you have this unbelievable ability to educate and you make it look so easy and it’s so hard to do and it’s always fascinating to me that people can make it look a lot easier than it is. But the one things you talked about the other day was reinvesting and that, can you flesh that out?

Kris Abdelmessih:

Yeah.

Jason Buck:

Because I thought that was just a much simpler way of putting all these things that we talked with these highfalutin words about ergodicity and arithmetic versus geometric direct return. But an easy way to say it’s like reinvesting.

Kris Abdelmessih:

Yeah. So this comes back to investing and trading are different. Trading is a business. Investing I think should be rebranded. It sounds a little silly maybe, but it should be rebranded in my mind as reinvesting. And an analogy that I liked, there’s a lot of differences between trading and investing. Trading is usually shorter term in nature. There’s convergence. A future is going to converge to spot, options are going to converge to realized, or whether or not somebody will take you out of the option might not matter because you can always use realized to capture the value of the option. Whereas with a stock in the absence of M&A or corporate actions like more issuance, a stock can stay irrational for a very long time. So in a sense it’s a much more longer term game.

Now but I think a very useful way to think of the reinvesting versus trading and making sure that you understand the difference is if I told you, if you came to me and you told me that you have the ability to buy real estate for 30% off or 20% off, whatever, I would say you need to structure a, you’re not investing, you should structure a business around that because the right way to do that is to then churn. You want to be, let me capture the thing because the way I think of it’s like I capture 20% alpha right now, but then if I just held this for a long time, I’m just getting the beta return of that asset for the remainder of the period. So what I should do is create a business around capturing that 20% over and over again. The answer is throughput. That’s what I care about here because I’m just trying to get as many transactions as I can.

Whereas because if I buy something for 30% off or 20% off and I hold it for 30 years, I’ve basically diluted the edge over the whole time. The thing that’ll drive most of the return will simply be what happened to rents over the next 30 years in this locale that I happen to buy this one specific property. And same thing with a business. A business is it doesn’t matter if you buy well, if the business over the long run isn’t going to be able to invest its capital at attractive rates of return. A buddy of mine that is a fundamental investor, when other people might look at a value stock, I think his framing is super useful. He just calls it, oh, that’s just a stock that has a low implied rate of invested capital.

So it looks cheap, but he’s saying, no, no, no. If you zoom out and look at this in the long run, it looks like it’s going to be very difficult for them to reinvest at attractive rates of capital. So it might look cheap today, but if you’re investing in this thing, it’s probably not cheap. So I think of investing, my personal investing, I call it reinvesting or if you want to think about long-term investing, it’s reinvesting. But I think of my personal portfolio, very cockroach here forever portfolio where it’s savings plus. I’m not trying to hit it out of the park with the core of the portfolio, I’m trying to maintain the purchasing power of the portfolio. I’m trying to preserve wealth. And then by creating that slack in my system, by not having to worry about the wealth exactly, I can then use my human capital or I can find a sandbox where I can take my shots, maybe 10% of my portfolio is devoted to idiosyncratic opportunities that I get to see that have some asymmetry to them.

And those things can be a place where either I can put financial capital or I can put my time into those and I would rather rely on me and my agency and my ability to try to generate excess return. I don’t want to pretend that the market can give me that. I just want the market to give me to preserve my capital. And so I’m just investing in forms of beta that I have no alpha in what I’m doing with my portfolio in general.

Jason Buck:

I’m just going to chop out that quote and put it on the homepage of our website. But there’s a couple of things that a lot of people know about Harry Brown’s permanent portfolio, but they don’t realize he also had a variable portfolio. It was basically the same as put 90% in the permanent portfolio, 10% in the variable portfolio. And then almost like the rebalancing effects are like this is a Talebian barbell. So I want to take us in a different direction to finish on as the sun’s coming in on me here and we’re running up on time. But like you said, you’re “retired,” but you always work on board games, chess, educating your kids, and all this [inaudible] thinking. You’re writing your blog on Moontower, which is absolutely fantastic. You’re helping out this game, pit bulls, trying to refine the game and work with these cohorts to, how you can be approved on it.

You help some of your friends in the business with biz dev and everything on the side. But what I want to come to is a little bit something different. So Shannon’s so amazing at here. Like I was saying here, it’s people that make the complex look easy is I think swans on the lake. It looks so elegant and smooth and then they’re churning their feet, they’re paddling so hard underneath. And when we’re at these amazing events and we have these great rooms and it’s just so effortless and nobody has to worry about anything, it’s amazing how you can create that.

But when I look historically, I always worry about almost every utopia end up devolving in a dystopia through those ideas. And it is really hard to get groups of people together and find those right dynamics in a group. So what you’ve done in your neighborhood, you guys have built a neighborhood clubhouse, and I think you’ve learned a lot through that process. But what have you learned about creating these groups and thinking about these dynamics to almost going more for a robustness probably than optimization or how do you think about building community in general?

Kris Abdelmessih:

Yeah. Well first of all, I think that the yearning for community is an evergreen, powerful human impulse. And I don’t think I’m reinventing a wheel by saying that. I think that’s well understood. But I think taking that idea very seriously is useful because, and acting on it. And that was the genesis of the, it’s a social club that we built in town and there’s nothing exclusive about it. There are dues because we have costs, but it is registered as a, it’s a nonprofit, but the idea behind it, and it’s really to join it it’s just a no asshole policy. It’s really, you just have to be recommended by another member. And it’s mostly couples. But what we do is we focus on a couple of different specific things. One is someone is just having fun, especially a lot of people that live where I live and I live in a suburb, and a lot of those people have spent times in big cities and city people are often, they look at going to the suburbs as giving up. It’s like, that’s it. I buy jeans at Costco or whatever now.

But the truth is, is if you think that and you’re in the suburbs, you realize that lots of other people that are in the suburbs are doing that. You’re all doing it for whatever the reasons are, usually revolves around kids and stuff like that. But there are other like-minded people. The truth is we’re not that different from each other. So other people are thinking the same way. So we said, you know what? Let’s create this club where you can join it and it can be a place to get together to have fun. It could be a place to get together to network. It could be there’s so many talented people in our community and that knowledge is spread very unevenly. I would love a vetted, trusted source for, Hey, can you help me with that? Can you have… The guy that’s the best cider maker in America is part of this group.

And we do these events and we say, Hey, whatever your skill is, your talent is, come and just teach everybody about it. Just do a coffee house kind of thing. And he’ll come in like a salon, and he came in and did a cider tasting with everybody and he shared his love of making cider. He explained it, it turned into, it felt like going to church because he was so eloquent and beautiful about how he explained it. And everybody had a really great time. We all learned about cider, and I’ve done this with board games. I brought board games. I say, okay, tell me all the kids’ ages that are coming and I will have suitable things for every one of them, for every group. And I’ll play with them and with the more advanced kids, or the older kids I should say, we stop and Hey, why’d you make that decision? I do the same thing I do with pit bulls, I just do with the games with the kids.

And so I can offer that to the community, or if somebody’s interested in an options I can offer, I can explain that to them. So we can have these comradery events, we can have these learning events, and then we can have these events where people can continue to grow in a trusted, loving environment. And you think that you have to lose that when you lose density and everybody holds up in their house with their kids and whatever. And we went back to the Bay Area thing. I feel really blessed because where I live, I live around a lot of curious people. Curious people are everywhere. I feel lucky that I have a particular density of that around me. And that made it very easy to see the opportunity in creating, helping to create this club. And it’s like a co-op, everybody brings… Some people are really handy and they really, they built the bar and the club and I’m like the webmaster. I call myself the ’90s webmaster of the club. I manage all the web presence of it.

So anyway, it’s just something I think is really, really important. And this is an experiment to try to flesh out what it takes to build a community. Hopefully one day I can take the lessons that we’ve learned from it and maybe we can publish something about them, like a manual of how to do it. I think it would be an attractive thing in lots of communities. Other people have told me that, and I would love to be able to go to people and say, Hey, this is how we did it. This is what I think you’re going to need. This is with the got yous. And help people do the same thing.

Jason Buck:

Just another service you’re providing. Well, I’m sad to leave this beautiful Alpine Lake setting, but we’re both going back to the Bay Area. Like you said with the cider master, passion is contagious. And I just want to thank you. Your friendship has been amazing to me. It’s been nothing but value add and accretive to my life, both you and your wife. And that passion is truly contagious. And I really appreciate every time I get a chance to talk to you, whether it’s over the phone, via text message or their face-to-face is always the best. But so I want to thank you for coming on the podcast. I also want to give a shout-out to Shannon at the collective for putting together this amazing ambiance experience and for us to all have these very creative communications and passions and building our networks of like-minded people that gives us those diverging opinions. So thanks for coming on.

Kris Abdelmessih:

Feeling’s totally mutual, and I was happy to be here and shout out to Shannon for helping me meet some new friends.

Taylor Pearson:

Thanks for listening. If you enjoyed today’s show, we’d appreciate if you would share this show with friends and leave us a review on iTunes as it helps more listeners find the show and join our amazing community. To those of you who already shared or left a review, thank you very sincerely, it does mean a lot to us. If you’d like more information about Mutiny Fund, you can go to mutinyfund.com. For any thoughts on how we can improve the show or questions about anything we’ve talked about here on the podcast today, drop us a message via email. I’m taylor@mutinyfund.com. And Jason is jason@mutinyfund.com, or you can reach us on Twitter. I’m @TaylorPearsonME. And Jason is @JasonMutiny. To hear about new episodes or get our monthly newsletter with reading recommendations, sign up at mutinyfund.com/newsletter.

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