Monday, May 11, 2020

CB Prosperity Diaries #9 - Thoughts on Stationarity

Book review: Radical Uncertainty by John Kay and Mervyn King ...

I just completed Radical Uncertainty by John Kay and Mervin King and I would just like to touch on a concept explained in the last few chapters which had a significant impact on me.

Since almost the beginning of conducting the Early Retirement Masterclass, the one bugbear that myself and my entire community is trying to fight against is non-stationarity. And I admit that it's a losing battle most of the time.

Non-stationarity is that property of financial markets that say that measures of volatility are itself unstable across time and the models we build to simulate the markets have largely an unknown shelf life. This keeps myself and my community humble because we will never know when our models break down.

For example, when we were leveraged in the REITs markets, we knew that it was a very smart decision at that time since returns exceeded 12% and the standard deviation was only about 10%. During the start of the COVID-19 crash when we retreated from leverage, annualised returns for 1Q2020 dipped towards -60% and standard deviation jumped to 27%. And I was ridiculed for doing so.

After the retreat, I became optimistic again after volatility has dropped and I am now taking an aggressive stance again, being a minority who believe that betting on a V-shaped recovery would not be all too bad even if we turn out to be wrong. Of course, I continue to attract the possibility of further ridicule in the future, but that's a price to pay for having skin in the game.

Non-stationarity is the Great Humiliator in financial markets. The only investor who can benefit from it is the great Nassim Taleb. Anti-fragile portfolios go really long on volatility with options bets, but such funds are hard to build because for long periods of time it may be unprofitable and I doubt I can teach this in a program.

Back to the book, the book was enlightening because it gave a different view of non-stationarity. The book compared a country like Denmark, a paragon of stationarity and the US, which is all about Chaos led by a Lord of Chaos. Countries that exhibit stationarity with social welfare systems and big government can be boring to live in with entrepreneurs that can't really move the needle. One possible reason why the US has Silicon Valley is that the US government refuses to go big on social insurance so US citizens are willing to bet the farm.

I don't want to get into an argument about which country is better because the book also reminds that countries like Zimbabwe exhibit even greater non-stationarity and the US may suffer the consequences of a small government over the next few months.

( Singapore is quite balanced in my view with a big government and healthcare system but disdain for welfare. )

Instead, we can examine stationarity at a personal level.

My biggest career failures came from a working environment that was stationary. When I as in government, I was buried in procurement paperwork and I had a shitty CEP as I was not a scholar. Opportunities to develop technical skills were non-existent, and the only guys I can have a good tech conversation with were vendors and partners but never fellow colleagues!

On the other hand, my years in SMX, a commodities exchange with Indian origins was chaotic and I had to survive a Hindi-speaking environment as an IT governance guy who frequently did audits,  but I played a role getting an exchange approved in Singapore, which is something not everyone can claim to be able to do. Transitioning into self-employment was even crazier but for the first time in my life, I can be financially rewarded for just being myself and solving interesting problems with all my skills. In my current environment, I am only as good as my latest ticket sales, but I can do a lot of crazy things to meet that objective so long as they are legal.

COVID-19 is the ultimate event that makes a stationary life non-stationary. A lot of folks are not making money right now, but if you know how to exploit non-stationarity in your life circumstances, life might even better in lockdown.

I am now reading faster, my Python skills are developing to the point I can start enjoying reading the source code produced by fellow programming bloggers. Pivoting to webinars allows me to have crowds of unprecedented size every week with almost the same level of business but with dramatically lower costs. Even as I return to face to face classes, webinars will be a permanent strategy moving forward.

Also, I have returned to my Otaku BBFA roots since I paint miniatures, play D&D and watch anime.

At the end of the day, some folks exhibit stationarity, these are the guys who need a structured environment to survive. A lot of civil servants are like this. They will make it because they are protected by a powerful bureaucracy. After a while, you can smell a person who is like this.  These guys may wear some uniform, have a tendency to be highly conceptual, with a lot of emphasis on what systems and policy ought to be like.  It's always, "Things would be better had the government done this instead."

At my age, it's tiring to discuss conceptual maters with some of my friends, no one has the balls to place bets on their beliefs and I do not know of a single soul shorting this market due to W-shaped recovery beliefs.

Other folks are the opposite. They either attract Chaos or find ways to thrive in it. They don't challenge reality and often just want to know the best thing to do given such a situation. They may cut corners but they will act and live through the consequences. These guys prefer to think about what society is right now at this moment. Bonus points if they can predict how society will evolve. Many of these guys will ultimately be destroyed by the Chaos they attract but those that survive can become highly successful.

I am 45 years old right now and after a string of career failures and some minor successes, I am starting to have a clearer idea of what kind of person I am and how I need to evolve moving forward. I have gained a portfolio over my career stint, and it remains 7 digits till this day, my days answering to a corporate machine is over.

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