Finance For Everyone | 10-K Diver on Infinite Loops with Jim O’Shaughnessy

Check out the Infinite Loops episode page

Key Takeaways

  • “We are deterministic thinkers living in a probabilistic world, hilarity or tragedy often ensue” – Jim O’Shaughnessy
    • Many of 10-K Diver’s Twitter threads point out the faults in deterministic thinking by analyzing mathematics and using first principles thinking to study financial concepts
    • We often ask the wrong questions – this thread is a great example
  • Studying history can save you from FOMO investing
    • In the 1900s, there were 200 car manufacturers. Obviously, only a few survived. Knowing this context can help you slow down your decision-making before rushing into the next hyped tech stock.
  • Always work through the numbers before ever opening your mouth
    • If you think you know something, write it out. You’ll more often than not realize that you’re not prepared to speak about it yet.
    • Intuitions can lead you astray from the truth and even your actual opinion on something
  • 10-K Diver thinks Warren Buffett’s and Charlie Munger’s buy-and-hold philosophies get overgeneralized, leading to misconceptions about their actual investment strategies

Intro

  • 10-K Diver (@10kdiver) is an anonymous FinTwit educator, famous for his Twitter threads that break down high-level finance and investing topics into consumable content. Check out his new show ‘Money Concepts‘ on the Callin app as well.
  • 10-K Diver discusses how his Twitter threads about financial concepts are designed to help us counter our deterministic thinking by using mathematics and first principles thinking.
  • Host: Jim O’Shaughnessy (@jposhaughnessy)

10-K Diver

  • 10-K Diver is a computer scientist by original trade, not a financial professional
    • Started investing in 2011. Struggled with independent research because all the educational material was designed for people with a financial background already, this market gap was the inspiration behind the 10-K Diver account.
    • “The priesthood doesn’t want the laity to know what they’re talking about” – Jim O’Shaughnessy
    • 10-K Diver attempts to explain financial concepts from first principles rather than jargon
  • 10-K Diver studies the basic fundamentals of many relevant tools like probability, base rates, etc. and applies them to financial literacy
    • “Extraordinary claims require extraordinary evidence” – 10-K Diver

Curating a Great Twitter Feed

  • Twitter can be one of the best sources of information when curated correctly
    • There is a delicate balance between being intentionally selective with your curated feed and creating an echo-chamber

Volatility Tax

  • Volatility tax isn’t a tax in the traditional sense, it’s a probabilistic concept
    • In any given year, a stock has a 50/50 shot at doubling or halving
    • The number of times stock doubles and halves over its lifetime are relatively equal, so the most likely return you’ll get is zero percent
    • With this in mind, the geometric return matters far more than the arithmetic return when compounding over the long term, but everyday investors struggle to realize this – Check out the full thread on this concept
  • 10-K Diver thinks Warren Buffett’s and Charlie Munger’s buy-and-hold philosophies get overgeneralized, leading to misconceptions about their actual investment strategies
    • For example: The two say they are fundamental investors that don’t care about the day-to-day volatility, but the actual math behind their strategies says otherwise—we often get blinded by the halo effect
    • “We are deterministic thinkers living in a probabilistic world, hilarity or tragedy often ensue” – Jim O’Shaughnessy

Do Markets Have Memories?

  • “Having a completely memoryless system would be an unnatural thing” – 10-K Diver
    • All prices are an aggregate feedback loop of the buyer’s and seller’s previous experiences
  • History can save you from FOMO investing
    • In the 1900s, there were 200 car manufacturers. Obviously, only a few survived. Knowing this context can help you slow down your decision-making before rushing into the next hyped tech stock.
  • The Misbehavior of Markets: A Fractal View of Financial Turbulence by Benoit Mandelbrot
    • This book applies mathematics to the market—they may not be as safe as your broker claims

Mental Models

  • Always work through the numbers before ever opening your mouth
    • If you think you know something, write it out. You’ll more often than not realize that you’re not prepared to speak about it yet.
    • Intuitions can lead you astray from the truth and even your actual opinion on something
  • Mental models work best when they are natural and habitual, not in some sort of checklist

Asking the Right Question & The Lindy Effect

  • Let’s consider 10-K Diver’s thread where he discusses the life expectancy of a restaurant
    • Restaurants last eight years on average, but restaurants that last more than three years have a greater likelihood of achieving a much longer life
    • So, we shouldn’t be asking what the average lifespan is, we should be asking what the average lifespan is for restaurants that have already lasted three years
    • This process negates the sensitivity to initial conditions—many people skip this step
  • The Lindy Effect is a probabilistic statement, not a deterministic one
    • States that non-perishable future life expectancy is proportional to its current age
    • Doesn’t apply to everything, but it shows how death can become less likely as you age (which is a counterintuitive statement to most people)
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Notes By Drew Waterstreet

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