April 26, 2022

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

Check out the Infinite Loops episode page

“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

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 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

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 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

“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

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

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)