NOAH
JACOBS

TABLE OF CONTENTS
2025.02.09-On-Overengineering
2025.02.02-On-Autocomplete
2025.01.26-On-The-Automated-Turkey-Problem
2025.01.19-On-Success-Metrics
2025.01.12-On-Being-the-Best
2025.01.05-On-2024
2024.12.29-On-Dragons-and-Lizards
2024.12.22-On-Being-a-Contrarian
2024.12.15-On-Sticky-Rules
2024.12.08-On-Scarcity-&-Abundance
2024.12.01-On-BirdDog
2024.11.24-On-Focus
2024.11.17-On-The-Curse-of-Dimensionality
2024.11.10-On-Skill-as-Efficiency
2024.11.03-On-Efficiency
2024.10.27-On-Binary-Goals
2024.10.20-On-Commitment
2024.10.13-On-Rules-Vs-Intuition
2024.10.06-On-Binding-Constraints
2024.09.29-On-Restrictive-Rules
2024.09.22-On-Conflicting-Ideas
2024.09.15-On-Vectors
2024.09.08-On-Perfection
2024.09.01-On-Signal-Density
2024.08.25-On-Yapping
2024.08.18-On-Wax-and-Feather-Assumptions
2024.08.11-On-Going-All-In
2024.08.04-On-Abstraction
2024.07.28-On-Naming-a-Company
2024.07.21-On-Coding-in-Tongues
2024.07.14-On-Sufficient-Precision
2024.07.07-On-Rewriting
2024.06.30-On-Hacker-Houses
2024.06.23-On-Knowledge-Graphs
2024.06.16-On-Authority-and-Responsibility
2024.06.09-On-Personal-Websites
2024.06.02-On-Reducing-Complexity
2024.05.26-On-Design-as-Information
2024.05.19-On-UI-UX
2024.05.12-On-Exponential-Learning
2024.05.05-On-School
2024.04.28-On-Product-Development
2024.04.21-On-Communication
2024.04.14-On-Money-Tree-Farming
2024.04.07-On-Capital-Allocation
2024.03.31-On-Optimization
2024.03.24-On-Habit-Trackers
2024.03.17-On-Push-Notifications
2024.03.10-On-Being-Yourself
2024.03.03-On-Biking
2024.02.25-On-Descoping-Uncertainty
2024.02.18-On-Surfing
2024.02.11-On-Risk-Takers
2024.02.04-On-San-Francisco
2024.01.28-On-Big-Numbers
2024.01.21-On-Envy
2024.01.14-On-Value-vs-Price
2024.01.07-On-Running
2023.12.31-On-Thriving-&-Proactivity
2023.12.24-On-Surviving-&-Reactivity
2023.12.17-On-Sacrifices
2023.12.10-On-Suffering
2023.12.03-On-Constraints
2023.11.26-On-Fear-Hope-&-Patience
2023.11.19-On-Being-Light
2023.11.12-On-Hard-work-vs-Entitlement
2023.11.05-On-Cognitive-Dissonance
2023.10.29-On-Poetry
2023.10.22-On-Gut-Instinct
2023.10.15-On-Optionality
2023.10.08-On-Walking
2023.10.01-On-Exceeding-Expectations
2023.09.24-On-Iterative-Hypothesis-Testing
2023.09.17-On-Knowledge-&-Understanding
2023.09.10-On-Selfishness
2023.09.03-On-Friendship
2023.08.27-On-Craftsmanship
2023.08.20-On-Discipline-&-Deep-Work
2023.08.13-On-Community-Building
2023.08.05-On-Decentralized-Bottom-Up-Leadership
2023.07.29-On-Frame-Breaks
2023.07.22-On-Shared-Struggle
2023.07.16-On-Self-Similarity
2023.07.05-On-Experts
2023.07.02-The-Beginning

WRITING

"if you have to wait for it to roar out of you, then wait patiently."

- Charles Bukowski

Writing is one of my oldest skills; I started when I was very young, and have not stopped since. 

Age 13-16 - My first recorded journal entry was at 13 | Continued journaling, on and off.

Ages 17-18 - Started writing a bit more poetry, influenced heavily by Charles Bukwoski | Shockingly, some of my rather lewd poetry was featured at a county wide youth arts type event | Self published my first poetry book .

Age 19 - Self published another poetry book | Self published a short story collection with a narrative woven through it | Wrote a novel in one month; after considerable edits, it was long listed for the DCI Novel Prize, although that’s not that big of a deal, I think that contest was discontinued.

Age 20 - Published the GameStop book I mention on the investing page | Self published an original poetry collection that was dynamically generated based on reader preferences | Also created a collection of public domain poems with some friend’s and I’s mixed in, was also going to publish it with the dynamic generation, but never did.

Age 21 - Started writing letters to our hedge fund investors, see investing.

Age 22 - Started a weekly personal blog | Letters to company Investors, unpublished. 

Age 23 - Coming up on one year anniversary of consecutive weekly blog publications  | Letters to investors, unpublished.

You can use the table of contents to the left or click here to check out my blog posts.

Last Updated 2024.06.10

Join my weekly blog to learn about learning

2024.12.22

LXXIX

The more you disagree with the average opinion, the more you stand to gain by being right where they are wrong.

Subscribe

-------------------

Your Bet is Not Your Bet

One of the most interesting things I ever learned from financial markets was that no action you take or belief you hold operates or exists in a vacuum. 

In other words, if everyone already expects something to be true, and you do to, then your reward for it being true is low. 

Believing the contrarian view and being right has a higher reward than believing the consensus view and being right. Often times, if you factor out the cost to the ego, being contrarian and right has lower risk, too.

Not Like Us

Take some simple fair bets* on the outcome of an event–one thing happens, or another thing happens. For example, at the time of writing this, there are about 1:1 odds that Kendrick starts the Super Bowl halftime show by performing Not Like Us.**

The pricing of a fair bet tells you the average belief of the other participants who are betting. So, 1:1 odds means that roughly half of the betters think that Kendrick will lead his show with Not Like Us, and the other half don’t. 

If you agree with these odds and place the bet anyways, the expected return of your bet is 0%. To calculate this return, you multiply the probability of each outcome by its value, find out how much in excess of the investment this number is, and then convert it to a percentage on your original investment. 

((Not Like Us*.5*$200) + (Dif. song*.5 *$0) -$100) / $100 = 0%

If the odds are 50/50, and you believe they are right, you have no financial incentive to place the bet other than wanting to gamble. 

Now, if you think the odds are under pricing the probability that Kendrick plays Not Like Us as the first song, now you have a financial incentive to place the bet. Maybe you’ve analyzed his psyche deeply and are convinced that the probability of him playing this song first is 75%. Based on this belief, the expected return is a whopping 50%.

((Not Like Us*.75*$200) + (Dif. song*.25*$0) -$100 ) / $100 = 50%

Okay, so you might place that bet. But, now watch what happens if your belief stays the same and the odds in favor of not like us go up to 20:1? Maybe Kendrick has a rare tweet that increases the market’s certainty that he’ll play the song. Now, a correct bet of a $100 gives you $105 back, a 5% return.

But, if your belief is still that there is a 75% chance he plays the song, the expected value of the bet has now become negative.

((Not Like Us*.75*$105) + (Dif. song*.25*$0) -$100 ) / $100 = -21.25%

So, you can agree that the market is right about the event happening (you still think there is a greater than 50% chance he plays it), but still have a negative expected return if you bet. 

As the odds become more favorable for some event, your own certainty has to become higher to place the same bet.

Alternatively, you could now just bet against that same event you believe will happen and have a very positive expected return:

((Not Like Us*.75*0) + (Dif. song*.25*$2100) -$100 ) / $100 = 425%

Huh, there’s an asymmetry here… when your belief was 25% away from the 1:1 consensus odds, your expected return was 50%... now, when you’re less than 25% away from the 20:1 consensus, your expected return is 425%... 

Of course, your expected return isn’t worth shit until it’s dollars in the banks. That being said, we have some take aways:

  1. You are not betting on an event, you’re betting against other people’s expectation of that event.

  2. The magnitude of your reward for being right is directly proportional to not only how much you disagree the consensus belief, but also directly proportional to how strong the consensus belief is.

*The payout is proportional to the purported odds–if you bet $1 with 1:1 odds (50% chance), you get $2 back, or a 100% roi. If you bet $19 with 19:1 odds, you get $20 back, or a ~5.3% roi.

**The prop bet is not actually binary, you can bet on him playing a number of songs. The probability is also actually lower than 50%, the 50% “odds” are after fees. We ignore fees for simplicity.

Know what you’re betting against

These two notions of betting against expectations and your reward being effected by how contrarian you are map quite cleanly to financial markets.

It’s perfectly coherent to accept the fact that Nvidia is changing the world and will continue to make gobsmacking amounts of money while refusing to invest in the stock. 

By purchasing Nvidia now, you are not just betting on Nvidia, you are betting on Nvidia doing better than the current average expectation. 

The investment itself is important, but so is the current consensus on it’s value. You can make a lot of money on 2.5x YoY returns. But, every time that happens, your expected value for getting in now gets worse.* 



Caption: Just because you would’ve made money by buying in 2021, it doesn’t mean you will make money now. Of course, it doesn’t mean you’ll lose it, either.

The stock market is not an inherently zero sum game, as would be the case with a true betting market. When you look at nosebleed price appreciation that outstrips business value creation, however, I would follow suit of Marks, Buffet, Munger, etc in the belief that it becomes more akin to zero sum as we are playing with speculating rather than betting on value creation. The Greater Fool Theory takes over and the “greatest fool” ends up “holding the bag.”** 

However, that also doesn’t mean you have to bet against a company like Nvidia, either. You can also go the other way, and buy companies that are worth a decent value but priced as if they are worth nothing. Here, the rewards for being right are disproportionately favorable, and the downside risk for betting against the market is considerably smaller than is the case when betting against an equity going up.

*If you trade momentum or otherwise exploit the greater fool theory, your roi may actually get better after price increases, as per Mandelbrot… as long as you sell before the momentum goes the other way.

**I have been the greatest fool before, and have evidence in the form of ownership of Canadian psychedelic companies.

Life is Like the Market

Now, I’m not clever enough to prove this, but I’d posit that these same two rules apply to a lot of other areas in life. We’ll succinctly formulate it as follows:

The Law of Contrarian Returns: The benefit you get from being contrarian and right goes up both as the strength of the consensus strategy increases and the degree to which you diverge from it increases.

Again, I can’t give you proof, but I can tell you I have substantial skin in the game on it, on many different levels. From the business I chose to start in college to the seemingly non sequitur of a business I am running now to the fact that I am even running a business and living at home with my parents instead of getting a real job out of school to my diet, I tend make a lot of contrarian decisions.

But don’t take it just from the conviction reflected in my actions—I’m young, naive, and perhaps overly ambitious. Instead, I’ll leave you with a few other examples that, the first two of which at least on the surface, support the claim. The third, on the other hand, is very mathematically sound and may be the strongest evidence for the claim there is.

Subscribe

-------------------

So, not only is it cool to be a contrarian, it can be profitable, too.

Merry Christmas,