mining concentration concerns me so this is a good thing.
shitposter actually. similar but different.
thatâs referred to as âzapsturbationâ in the biz.
just came back from the Icelandic Symphony Orchestra playing Tchaikovskyâs Fifth Symphony in E Minor.
8/10, would recommend.
the Bitcoin Is Venice abstruse crypto-anarchist sympathies pipeline:
yesterdayâs post on portfolio construction heuristics generated a much more interesting discussion here than on twitter, just as expected!
today Iâm reposting a much longer one (25 mins, per medium) that again got little to no meaningful engagement on twitter - this time about accounting, essentially.
if you are a professional accountant, have any experience in tradfi, or in a finance department in a role that requires interpreting accounts, please please please do me a favour and take the time to read this and give me some feedback!
TLDR: working capital is really not well understood or *accounted for* (lololololol) in traditional financial and accounts analysis, and I have come up with 2 ways of treating this mathematically that tease out how to think about it more sensibly:
i) adjust DuPont to better reflect the differences between net working capital and fixed assets and between cash flow from operations and working capital adjustments. once you read it and grasp what these adjustments achieve, you will appreciate what I am getting at here is something like âtrue capital employedâ and âtrue cash profitâ.
ii) extend the concept of âcash conversion cycleâ from working capital to *all capital employed* so as to be able to directly mathematically interpret the effect the working capital position is having on returns.
enjoy!
https://allenfarrington.medium.com/days-of-capital-returns-d2520382638f
okay, enjoy, but also please reply đ
Bitcoin Magazine should get Schiff at the conference and you can bareknuckle box him on the main stage for Carlaâs honour.
people seem very annoyed this doesnât have a direct application to bitcoin đ
but it seriously doesnât - not just because the presence of bitcoin in an investable universe is clearly a freakish anomaly, but also because the only way to take advantage of it requires you be perfect at identifying *both winners and losers*, which defeats the purpose of the thought experiment. the point is to assume your time/energy/skill/whatever is limited and âfocusingâ has an opportunity cost. if you just happen to know that one asset will destroy everything else over an unbounded interval of time then there is nothing to think about.
yesterdayâs post on portfolio construction heuristics generated a much more interesting discussion here than on twitter, just as expected!
today Iâm reposting a much longer one (25 mins, per medium) that again got little to no meaningful engagement on twitter - this time about accounting, essentially.
if you are a professional accountant, have any experience in tradfi, or in a finance department in a role that requires interpreting accounts, please please please do me a favour and take the time to read this and give me some feedback!
TLDR: working capital is really not well understood or *accounted for* (lololololol) in traditional financial and accounts analysis, and I have come up with 2 ways of treating this mathematically that tease out how to think about it more sensibly:
i) adjust DuPont to better reflect the differences between net working capital and fixed assets and between cash flow from operations and working capital adjustments. once you read it and grasp what these adjustments achieve, you will appreciate what I am getting at here is something like âtrue capital employedâ and âtrue cash profitâ.
ii) extend the concept of âcash conversion cycleâ from working capital to *all capital employed* so as to be able to directly mathematically interpret the effect the working capital position is having on returns.
enjoy!
https://allenfarrington.medium.com/days-of-capital-returns-d2520382638f
on your last point, it depends heavily on the underlying distribution. the more skewed it is, the riskier Nancyâs approach becomes, but arguably only at insane extremes of a handful of investments driving the entirety of index performance and not because Peterâs approach is intrinsically better - rather because âbuying the indexâ becomes the best approach in that case if you have no skill in weeding out losers.
tbh though, this isnât supposed to lend itself to specific investment advice, but more to draw attention to coherent ways of thinking about investment edge. in our experience (and I think just a priori too) it is highly counterintuitive to people that âbeing really good at picking winnersâ is actually a bad strategy. itâs essentially a blindness to opportunity cost because nobody cares about the absolute number of winners you picked; what matters is portfolio construction.
you should be really good at picking losers, because that way you *just will* have a higher allocation to winners.
no, almost certainly not, and thatâs the highly counterintuitive part. Peter gets *more* outliers but their impact in the portfolio is diluted by being wrong about them at the base rate. Nancy only ever invests in outliers, *because* she knows how to avoid failures perfectly.
the only way Peter could beat Nancy is essentially by sheer luck and tapping into an *extremely skewed* underlying distribution: i.e. there are one or two super duper pooper scooper extreme outliers that Nancy happens to miss because she is very picky, and Peter happens to get because he sprays and prays.
but if you think about it, this is essentially arguing for an index approach to outlier capture, which in turn solidifies that Peter has no relevant skill. it really is just luck, and entirely relatedly is extremely unlikely that Nancy would fail in this manner.
maybe in a kind of inception/subconscious sense - but there is a very strongly engrained idea that âyou canât miss winners.â like thatâs the worst thing that can possibly ever happen because âupside is asymmetric.â the 2010s everything bubble undoubtedly made this much, much worse. Iâm certain many people got fired or lost clients for being underweight some or other complete joke of a company that has only destroyed massive piles of capital in real terms (not to name names, but you donât really need to there are so many examples)
again - conditional probabilities are highly counterintuitive. I donât think thatâs a bitcoin thing or even a finance thing. itâs just a math and psychology thing.
we wanted to do a followup that was much more in-depth and numerical, having got the basic idea out the way, but never got around to it.
man, Elmo has some sick quotes.
I posted this on twitter at the time (~november) but Iâm coming around to the idea that twitter is just for shitposting and if you want to have serious, nuanced discussions, you have to do them here.
itâs not a long read but TLDR is that there is a highly counterintuitive logic to embracing conditional probability in investing. and I really mean counterintuitive - Sacha and I have explained this directly to highly intelligent financial professionals who seem to follow all the individual steps but still canât accept the conclusion.
we cheekily distil this down to the Meyers-Farrington Law: âitâs better to be right when you think youâre right than it is to think youâre right when youâre right,â but the fun thing is that this is really just a rigorous mathematisation of a Buffetism.
Warren do be smarts tho (other than on bitcoin):
comments and commentary very welcome, especially since nobody cared on twitter đ
If you refer to mining as ânonce poundingâ itâs a lot more palatable.
âflexiblerâ should be a word
oh I know this one!
âit would seem a lot like thisâ đ