Just wrapped a 3 hour drive back from Tahoe. Listened to the December @LeitnerJim interview on MacroHive that led to some investing strategy discussion with the wife. Here's a bunch of random thoughts from our chat and the pod...

My favorite idea from the pod: the discussion of replacing equity allocation with digital calls. He talks about buying say 5 year 100% OTM digital for 7 cents on a dollar. You should listen for his full reasoning...

It rhymes with Warren Buffet's thoughts on option pricing which is ultimately the difference between no-arb risk neutral derivs pricing and odds implied if you believe in an equity risk premium.

covered by @alphaarchitect team here: https://alphaarchitect.com/2018/12/28/warren-buffett-is-wrong-about-options-except/

Let me add some thoughts to that.

1.The contra case is the US ERP is a big fat example of survivorship bias.

but...

2. Indulge this lazy theory as to why Leitner's idea might be correct for a technical reason he can probably feel more than explain...

Suppose we quintiled the broad market by valuation. Whatever metric, the US is in the highest partition. I would not be surprised if stock replacing your equity exposure with options would have been historically a good trade conditioned on extreme valuation....

Not because you win more, but because you lose less when the markets roll over. And of course that means you can rebalance with a better hand after a drawdown. Total CAGR improves.

I'll go a step further...the market might price the vol too cheap on those OTM calls. Why?

Again a lazy guess...perhaps a very expensive market exhibits autocorrelation on longer time frames (ie monthly vs weekly returns). In other words, momentum prevails.

The momentum can lead to cheap implied to realized vol ratios in the same way that a stock that rallies 1% per day for 20 straight days will have been a bargain buy at 16% implied vol.

So when Jim gets 13 to 1 on that digital, perhaps the true odds conditioned on an expensive market are 8 to 1 or 10 to 1. Again, this is a lazy car ride musing, would love to see if there's any work out there on this.

This whole exercise is the upside version of Spitznagel's point about conditioning convex trades based on valuation. The piece very much flies in the face of anti-timing arguments and it's quite robust to how expensive the convexity actually is.

https://www.universa.net/UniversaResearch_SafeHavenPart3_Tenbaggers.pdf

Spitznagel's piece is a marketing type of white paper not a research doc so it warrants replication and a transparent process but the intuition is sound to option traders (but probably not widely appreciated).

Shifting gears...

Jim's discussion of BTC was ok but prompted 2 thoughts:

1. Your time horizon should dictate the dashboard of metrics that informs your decision.

2. Disagreements about the "right" price are always a disagreement about time horizon. That's what makes a market.

One of the points he made was about PayPal making it easy to buy BTC was bullish. This kind of argument is simultaneously insightful and deranged because it is reflexively Ponzi but also right.

The "horizon" field is left blank and for the investor to fill in.

Jim's book recs:

The Checklist Manifesto

Doctors make lots of decisions under uncertainty and Gawande's book has many transferrable lessons to investment processes.

Superforecasting

Predictions should have time horizons and a confidence interval. Score yourself and over time you will improve.

Other recs:

Keep a journal of trades and the reasoning behind them. Your future self will thank you.

Open a play account where the money isn't make or break. His is $100k (my wife's is as well -- I have no gambling gene).

This account absorbs the trades which come from "feeling the need to do something".

For your real accounts, most of the time you should sit on your hands.

And an fyi...

Covid meant that Tahoe was not crowded on a long weekend. We were at Alpine so not one of the big resorts but there were no lines and there was no traffic.

My boys (4 and 7) first time on the slopes. I didn't step foot on a mountain til I was 19. Spoiled kids. But overall a very nice weekend with our extended quaranteam family (punctuated by my car sick 4 yr old puking 1000 ft from home).

Back to the grind tomorrow.

Yalla bye