A Money System That Is Actually Working For Me

[thewalkingtemple]

Hello everyone,

I've had a weird journey where I've actually managed to work out an effective money system before I've established a money engine (process) to feed the money system.
Regardless, I thought that I would document this journey as a post for anyone to benefit from my knowledge so far. As a new member here, I've been reading and benefiting from a wealth of knowledge. So this is my way of giving back to the community that is currently helping me.

Disclaimer: Before you get super-hyped or completely turned-off (the two possible extremes), I'd like to clearly state that this involves actual mental effort, and a certain level of mathematics to understand and appreciate.

TLDR Takeaways:

* Whenever you wish to get into a market (trade), look at the top and bottom most quartil performance. You basically look for the top most performer and the bottom most performer and calculate how much market percentage each holds. This will enable you to see which markets are monopolised (a negative), which ones are too tight and over-competitive, where there is room for arbitrage, etc.

* Find ways of gaining regardless of what the market is doing. For instance, my system works like this (idealistic definition): When the market is booming, I gain linearly at around 70-80% with the market. When the market is moving sideways, I gain pennies from the market. When the market is tanking, I lose pennies until a certain point, beyond which I gain geometrically (very big numbers).

* Start thinking second and third order consequences. The price of an equity for instance can go to infinity or zero without stopping (theoretically), but the volatility has mean reverting tendencies (known as regression to the mean in statistics). This can be used to your advantage.

* Learn to define risk. This means you pre-define how much you wish lose in the worst case, and by doing this you pre-define how much you are willing to win if things go best case. Think in extremes.

* Always think about your portfolio as a whole unit (thank you Khaneman and Tversky). Never look at a trade as a single entitiy. Think about it as one element of the whole portfolio (like literally your entire existence). This is a game changer.

* Achieve uncorrelated movement between the different components of your portfolio.

The System (narrated via 7 checkpoints):

Checkpoint 1: I started out as any other naive guy would: buying into mutual funds. Within a couple of months, I smelled something wrong and bailed.

Checkpoint 2: Then I ended up with the next best thing I could find, which was investigating and researching ETFs (yikes). But hey, at least there was one middle man out of the window by now. I actually never trust anything very easily, and try and rework the mathematics myself. I picked up PhD theses in the field of investing, and started studying papers published by Nobel Prize winners in the field of economics. In the end, I figured out what a basket instrument is capable of (potentially), and realised this is probably not the immediate solution I am looking for. But I parked part of my savings into such a vehicle anyway because it was at that point of time (given my lack of better knowledge) better than my local bank account. A couple of images illustrating my journey and thought process during this period (apologies for the mixed English-German; I'm a bit weird like that):






Checkpoint 3: I worked out a TER equation that was low enough whilst injecting a factor (small cap) premium into the mix. After I spread the money, and parked it into the vehciles as planned, the thought that I could do better than this didn't let me go. A simplified version of the equation below (example calculation; not actual sum ivested; I'm skipping gold and bonds because I'm still young and have a relatively low net worth, where bank balances are covered by state insurances):

​

Checkpoint 4: By this time, COVID happened, and my portfolio got a nice boost. However, I was still not convinced if this was the way to go. I was getting more and more dissatisfied with my job by the day. Therefore, I decided to take action, and started learning active methods. In this space, there is a lot of bullshit to evade (B schools can go to hell; all those wasted lecture hours :/ ). Eventually, I worked my way to the beautiful work done by Nassim Taleb. The math was/is hard, but the potential of the thought process started to blow my mind. I got into understanding random variables.


Checkpoint 5: I continued studying Taleb, and in parallel, incorporated psychology from Khaneman and Tversky (two of the most awesome minds I've come across). By this time, I started to understand the math of risk taking, and figured out ways of pre-defining how much I was willing to lose to define probabilities of how much I could gain. Later, I would learn that this concept is known as static hedging. Below, you can see a very simplistic, yet very powerful model that I came up with, after it came to me as a dream when I was half asleep during the night (yes, I was that deep into the subjects back then). I scribbled it in such a hurried manner with goosebumps, and didn't sleep for the rest of that night due to sheer excitement (M.K.V. = Max. Cumulative Loss / P.S. = Position Size):



Checkpoint 6: As the journed continued, I started learning dynamic hedging. This is literally one of the hardest things I decided to do; very difficult mathematics, at least for me. I convinced myself to jump into an active model without perfecting my knowledge in this area. I knew very well back then that this is gonna take years. I didn't want to stay theoretical for years without any practical experience. Besides, I realised that I didn't enjoy working with my boss anymore. As a stop-gap solition, I started learning the work done by Tom Sosnoff. A few images illustrating my struggles with derivatives, and the mathematics behind them:





Checkpoint 7: As of the date of this post, my passive strategy (codenamed Virgin Beta) was up 15%, and my active strategy (codenamed Dirty Alpha) was up 48.89%
A few caveats here: These numbers are before taxes and before inflation. Plus these numbers are from relatively low cap investments (less than 50k USD). As the capital increases, the mathematics does not scale linearly, meaning, the numbers will most likely come down with larger capital inputs. However, I am proud of the knowledge I have been able to accumulate over such a short period of time. Even in its incomplete form, my knowledge is giving me such a significant advantage (especially in its Apha form). I have now quit my job, and am working on my unscripted money engine to feed my money system. While I will be turning to you guys for advise and suggestions for my money generation engine process, feel free to benefit from the money system knowledge I've been able to build until now.

P.S.
I am still continuing to learn Dynamic Hedging. This takes years to perfect. However, by now I have realised the importance of a money generating engine, and am focusing on solving this problem first before I dive full length into dynamic hedging back again.

 

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[Mutant]

Random question out of curiosity - how did you happen to start on Beta before Alpha? I'm guessing it's just semantics of how you chose to label your approaches, but it intrigued me.

In finance beta refers to what the market does. So if you have an FTSE tracker fund, you will follow the market exactly. If it rises by 7% in a year, you too will gain 7%. You did not outperform the market. You only achieved beta. This can obviously be done passively.

Alpha refers to what you achieve over & above the market index. It’s what actively managed strategies strive to achieve.

Hence:

my passive strategy (codenamed Virgin Beta) ... and my active strategy (codenamed Dirty Alpha)

Now I aim to be helpful, but I must confess answering this was merely a ruse to post one of my favourite memes.

 

[thewalkingtemple]

Yeaaaa I got that part. It was the how to which kinda confused me. I’m trying here dude, I really am. I’m hoping more ppl start talking to you so we can figure out your genius.

I'm no genius mate; just another guy giving life his best. You are confused because what I have posted is not a how to guide. That's my mistake; I should have made that clear in the post. I've just tried to introduce what I consider as valuable concepts. Those need to be learnt. Depending upon someone's level, it could take a few months or a year or two. But anyone can get there.

Let me give you a fictional example (which I randomly came up with as I typed ) of the kind of thinking I'm talking about.

Let's say you have four neighbours:

a. Luca, who is a wheat farmer.
b. Sarah, who is an insurance provider.
c. Tom, who runs a bakery.
d. Rusty, who is just a wealthy floater.

Before you arrived, Tom used to buy wheat from Luca for his bakery. Rusty didn't give a F*ck about anything or anyone, whereas Sarah was selling random insurance coverages to all three.

You now arrive into the scene with your fancy cash. You have enough to buy three seasons' produce from Luca. You go to Luca first, and negotiate with him to purchase his produce exclusively and continuously for the next 3 years at a fixed rate. Luca agrees to it as soon as you promise him that you are willing to pay one half of the capital up-front.

You then go to Sarah and tell her that in case there is a poor harvest (pre-defined using a threshold number), you would like to cover your losses using a custom insurance package. You start working on a deal and come up with Y as the price of the insurance package.

You then go to Tom, and offer wheat for a fixed price for the next three years at a standard rate (with a profit mark-up). This price is 10 cents higher than what Luca offered it for (this ensures you a 130% profit during the first year, and 150% profit during year 2 and year 3, provided the minimum harvest target is met). So Tom is skeptical. But you question whether Luca had kept the same rate over a three year period. Tom realises that it was not the case, understands the benifit of a standard rate, and signs the deal. You setup Tom also with an insurance coverage with Sarah in case of a low produce year. You get brownie points from Sarah for helping with the deal.

You then go to Rusty, and offer a unique deal. You tell him that if your yield exceeds x (which is Tom's share), Rusty can have everything beyond it for his rich family. The only thing Rusty needs to pay is a small amount of Z per year (Z = your insurance cost owed to Sarah (y) + 0.5 of insurance cost owed by Tom to Sarah). Rusty is skeptical. But then you show him that 8 out of 10 times the last 10 years, your leased farm has produced much more than x, so Rusy is essentially making a favourable bet. Rusty finally agrees to buy the contract from you.

You then go back to Tom, and offer to pay one half of his insurance costs as sign of good will and continued business relationship for the future.

After one year Luca is happy and hard at work, Tom's business is doing reasonably well, and he is extremely thankful for your deal that enables him to sustain competitive prices, and Rusty is stocked with surplus produce you delivered. He treats you like you are his new best friend. You have made a handsome 130% profit on your intial investment. You now take 20% out of that and go back to Luca, and offer to pay for one half of his and his family's life insurance coverage costs (which starts to melt Sarah's heart). Luca is pleasantly surprised, and assures you of a long lasting continued business relationship. Sarah is so impressed with you, that she starts dating you (OMFG!!).

And they lived happily ever after.

Even though this was just a randomised story I made-up, there are some very fundamental concepts, and derivative instruments used intuitively without explaining what they are or how they work (i.e., the mathematics).

 

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[Tourmaline]

somebody on this forum has got to understand what you’re talking about.. I’m gonna randomly tag some smart money ppl and see if they comment.

@JScott @biophase @Tourmaline

I have not fully deciphered it into human language yet,

but in short,

the fine @thewalkingtemple here has seemed to,

or is seeming to,

create an anti-fragile investing system.

No matter what happens,

he wins,

without trying to predict the future.

It's like setting up a deal between the gold miner and the shovel maker,

while taking out insurance on both sides,

just in case things go very awry.

I have literally spent hours mulling over how exactly to create such a system,

So color me extremely enthused.

This is also a multi-disciplinary approach,

where the broad picture of humanity is considered,

and not just one aspect as is the tendency of many traders/investors.

 

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[Primeperiwinkle]

I’ll be sure to Google all this the second I have some time.

1. ETF’s
2. Math
3. TER equation
4. Small cap premiums
5. Nassim Taleb
6. Math
7. Nassim Taleb some more
8. Math
9. Nassim Taleb so close I can smell him
10. Khaneman
11. Tversky
12. Dynamic Hedging
13. Math
14. Tom Sosnoff
15. Derivatives
16. Math

 

[Tom H.]

I'm no genius mate; just another guy giving life his best. You are confused because what I have posted is not a how to guide. That's my mistake; I should have made that clear in the post. I've just tried to introduce what I consider as valuable concepts. Those need to be learnt. Depending upon someone's level, it could take a few months or a year or two. But anyone can get there.

Let me give you a fictional example (which I randomly came up with as I typed ) of the kind of thinking I'm talking about.

Let's say you have four neighbours:

a. Luca, who is a wheat farmer.
b. Sarah, who is an insurance provider.
c. Tom, who runs a bakery.
d. Rusty, who is just a wealthy floater.

Before you arrived, Tom used to buy wheat from Luca for his bakery. Rusty didn't give a f*ck about anything or anyone, whereas Sarah was selling random insurance coverages to all three.

You now arrive into the scene with your fancy cash. You have enough to buy three seasons' produce from Luca. You go to Luca first, and negotiate with him to purchase his produce exclusively and continuously for the next 3 years at a fixed rate. Luca agrees to it as soon as you promise him that you are willing to pay one half of the capital up-front.

You then go to Sarah and tell her that in case there is a poor harvest (pre-defined using a threshold number), you would like to cover your losses using a custom insurance package. You start working on a deal and come up with Y as the price of the insurance package.

You then go to Tom, and offer wheat for a fixed price for the next three years at a standard rate (with a profit mark-up). This price is 10 cents higher than what Luca offered it for (this ensures you a 130% profit during the first year, and 150% profit during year 2 and year 3, provided the minimum harvest target is met). So Tom is skeptical. But you question whether Luca had kept the same rate over a three year period. Tom realises that it was not the case, understands the benifit of a standard rate, and signs the deal. You setup Tom also with an insurance coverage with Sarah in case of a low produce year. You get brownie points from Sarah for helping with the deal.

You then go to Rusty, and offer a unique deal. You tell him that if your yield exceeds x (which is Tom's share), Rusty can have everything beyond it for his rich family. The only thing Rusty needs to pay is a small amount of Z per year (Z = your insurance cost owed to Sarah (y) + 0.5 of insurance cost owed by Tom to Sarah). Rusty is skeptical. But then you show him that 8 out of 10 times the last 10 years, your leased farm has produced much more than x, so Rusy is essentially making a favourable bet. Rusty finally agrees to buy the contract from you.

You then go back to Tom, and offer to pay one half of his insurance costs as sign of good will and continued business relationship for the future.

After one year Luca is happy and hard at work, Tom's business is doing reasonably well, and he is extremely thankful for your deal that enables him to sustain competitive prices, and Rusty is stocked with surplus produce you delivered. He treats you like you are his new best friend. You have made a handsome 130% profit on your intial investment. You now take 20% out of that and go back to Luca, and offer to pay for one half of his and his family's life insurance coverage costs (which starts to melt Sarah's heart). Luca is pleasantly surprised, and assures you of a long lasting continued business relationship. Sarah is so impressed with you, that she starts dating you (OMFG!!).

And they lived happily ever after.

Even though this was just a randomised story I made-up, there are some very fundamental concepts, and derivative instruments used intuitively without explaining what they are or how they work (i.e., the mathematics).

Great posts and so are all your other posts in this thread.

LOL at people asking for examples of profitable trades. I think that's missing the point.

I'm working on avoiding intellectual distractions that take focus away from working to make money, and finance is definitely one of those topics that can get me totally engrossed, it is a huge waste of time, except, I guess, when it isn't.

Lots of respect for the work you've done putting your system together and I hope it keeps getting better.

I've read Taleb's popular books, but none of his academic stuff. I'm jealous of the studying you've done, but I'm forcing myself to wait until AFTER I've got a solid CENTS business running and then I'll allow myself to get back into nerding out full time.

To everyone that didn't understand the OP, I'll try to explain what I got from it: instead of just trading stocks or whatever like a noob, @thewalkingtemple is acting like a professional money manager, making full use of financial instruments such as options to minimize loses and profit on both bull and bear markets. Lots of small bets that work together.

He had some other considerations, but that's the gist of it (I think, lmk what I missed).

i.e. the better you are at math the more effectively you can hedge your bets

Thanks for the thread @thewalkingtemple , very fun to read

 

[Primeperiwinkle]

somebody on this forum has got to understand what you’re talking about.. I’m gonna randomly tag some smart money ppl and see if they comment.

@JScott @biophase @Tourmaline

 

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[thewalkingtemple]

somebody on this forum has got to understand what you’re talking about.. I’m gonna randomly tag some smart money ppl and see if they comment.

@JScott @biophase @Tourmaline

Apologies that my post is ambiguous.

Let me give you a non-technical description of what this is about in a couple of sentences:

Let's say you have a running unscripted system that earns you regular income. You would ideally want to setup a money system to protect and grow your saved income (wealth); MJ covers this topic on the surface level in his 2nd book. The worst thing you can do is depend on some third party "expert" to manage your money. Period (there are several scientific papers that have studied this phenomenon). The second worst thing you can do is start trading as a regular market participant (my strong opinion). If you have money to invest, you do not need to be at the mercy of any market. The system I am developing (in it's childhood phase) is already showing signs of breaking market dependency. This means that I do not care if the market goes up or down. I don't care about which is the next best evaluated stock. Heck, I don't even watch the news. I use mathematics and set it up, and do something more productive with my life. No middle man. No news. No caring about who's president. More caring about actually helping people.

P.S.
In its current state, I still have to spend like 15-30 minutes on it during each weekday.


EDIT:
Also, the original post is not meant to be a step by step guide, but is just a key-point illustration (those key points are more than enough for someone new to get started on it) to show that if one is willing to put in the effort, this is very much possible. I started knowing none of this shit in January 2020 (minus the mathematics part). And now I feel this is a wonderful skillset to have. The way it has shaped my thinking alone is a major tool to kick consumerism in the nuts.

 

[Bekit]

Awesome thread! Even though it's way over my head. It sounds like you've developed some keen insights due to the amount of thought and effort you've put into this topic.

Random question out of curiosity - how did you happen to start on Beta before Alpha? I'm guessing it's just semantics of how you chose to label your approaches, but it intrigued me.

Random question that's a little less tangential - Let's imagine I'm a total beginner and have no clue where to pick up even the basics of understanding this area, so I'm hesitant to start to invest because my understanding is so severely lacking. What resources would you recommend as a good place to start learning?

I had to google what Cliffs notes are. So, the short answer is no.
However, if there are enough people demanding, I'd happy to invest the time to look into it further.

Haha I think it's fair to say that the original post WAS the cliffnotes version. Did anybody SEE the whiteboard photos? Obviously, there's a ton of depth implied in the summary of the 7 stages you passed through on the way to where you are now.

I'm no genius mate; just another guy giving life his best. You are confused because what I have posted is not a how to guide. That's my mistake; I should have made that clear in the post. I've just tried to introduce what I consider as valuable concepts. Those need to be learnt. Depending upon someone's level, it could take a few months or a year or two. But anyone can get there.

Let me give you a fictional example (which I randomly came up with as I typed ) of the kind of thinking I'm talking about.

Let's say you have four neighbours:

a. Luca, who is a wheat farmer.
b. Sarah, who is an insurance provider.
c. Tom, who runs a bakery.
d. Rusty, who is just a wealthy floater.

Before you arrived, Tom used to buy wheat from Luca for his bakery. Rusty didn't give a f*ck about anything or anyone, whereas Sarah was selling random insurance coverages to all three.

You now arrive into the scene with your fancy cash. You have enough to buy three seasons' produce from Luca. You go to Luca first, and negotiate with him to purchase his produce exclusively and continuously for the next 3 years at a fixed rate. Luca agrees to it as soon as you promise him that you are willing to pay one half of the capital up-front.

You then go to Sarah and tell her that in case there is a poor harvest (pre-defined using a threshold number), you would like to cover your losses using a custom insurance package. You start working on a deal and come up with Y as the price of the insurance package.

You then go to Tom, and offer wheat for a fixed price for the next three years at a standard rate (with a profit mark-up). This price is 10 cents higher than what Luca offered it for (this ensures you a 130% profit during the first year, and 150% profit during year 2 and year 3, provided the minimum harvest target is met). So Tom is skeptical. But you question whether Luca had kept the same rate over a three year period. Tom realises that it was not the case, understands the benifit of a standard rate, and signs the deal. You setup Tom also with an insurance coverage with Sarah in case of a low produce year. You get brownie points from Sarah for helping with the deal.

You then go to Rusty, and offer a unique deal. You tell him that if your yield exceeds x (which is Tom's share), Rusty can have everything beyond it for his rich family. The only thing Rusty needs to pay is a small amount of Z per year (Z = your insurance cost owed to Sarah (y) + 0.5 of insurance cost owed by Tom to Sarah). Rusty is skeptical. But then you show him that 8 out of 10 times the last 10 years, your leased farm has produced much more than x, so Rusy is essentially making a favourable bet. Rusty finally agrees to buy the contract from you.

You then go back to Tom, and offer to pay one half of his insurance costs as sign of good will and continued business relationship for the future.

After one year Luca is happy and hard at work, Tom's business is doing reasonably well, and he is extremely thankful for your deal that enables him to sustain competitive prices, and Rusty is stocked with surplus produce you delivered. He treats you like you are his new best friend. You have made a handsome 130% profit on your intial investment. You now take 20% out of that and go back to Luca, and offer to pay for one half of his and his family's life insurance coverage costs (which starts to melt Sarah's heart). Luca is pleasantly surprised, and assures you of a long lasting continued business relationship. Sarah is so impressed with you, that she starts dating you (OMFG!!).

And they lived happily ever after.

Even though this was just a randomised story I made-up, there are some very fundamental concepts, and derivative instruments used intuitively without explaining what they are or how they work (i.e., the mathematics).

OK, yes you are a genius, because not everyone can put together such a clear, understandable, relatable analogy on the spot like that.

"The definition of genius is taking the complex and making it simple." Albert Einstein

Thank you. But I wouldn't be focussing on those numbers. To put things into perspective, ever since I launched my system 5 months ago, I've made enough to pay for just 4 months of my living expenses in a year. And ALL of it is unrealised, because I don't need any money at the moment. This means that the numbers paint a much better picture than what I actually get in the end.

The numbers are based on low cap input. Like I mentioned in the OP, the bigger the capital, the tougher (non-linearly) it is. I'm like a kid who's learning to drift a buggy. It's difficult, but I'm able to pull it off somehow. But with bigger cap, it's like powersliding a space ship.


Today morning, as I was running, I was trying to process Kevin's POV here. And a mathematical thought struck me. I thought I'd share that with you all.

If I were to write down Kevin's thought process as an equation, I would do so as follows:

0.9 U + 0.1 M 9 = 1 L ---------->(1)
where, U = Unscripted Business system,
M = Money System,
L = The Unscripted Life, and
the numbers 0.9 and 0.1 are risk weights.​

Basically, Kevin's experience has led him to use a system where he swears by a low risk weightage (0.1) to the money system, and this doesn't require him to be dabbling into "financial alchemy". He is then comfortable with letting his unscripted business system do the heavy lifting of income (0.9).

I don't know about you all, but what inspired me the most about MJ DeMarco is not what he achieved, but his orginial thinking clarity. That's what makes his work authentic and valuable to me (personally). So I infuse my own original thinking here. I start with generalising eq. (1)

(R1 * U) + (R2 * M) = (1 * L) ---------->(2)
where, R1 and R2 are generalised risk weights.
​

For a guy like me, who has a reasonably strong Money system, I can push R2 to much more than 0.1. Let's say I am okay with going upto 0.5. That means I can afford to work with a risk weightage of 0.5 for R1, meaning that I can go for safer bets with my business system (meaning lesser effort than, say, in comparison to Kevin) and achieve similar global results. My equation (just for illustration purposes) then becomes.

(0.5 U) + (0.5 M) = (1 L) ---------->(3)​

To proceed however, I have to acknowledge the following limitations of such a definition.

1. M cannot be sustained / exist without U. Therefore, M is a function of U, which makes the real equation more complicated than what I have presented above.
2. The real relationship between the risk weights is likely non-linear.

With such a setup, I could even go as far as building a dynamic system where I can dynamically change R1 and R2, and de-correlate U and M to such an extent that one saves the other in a tight scenario.

I believe there is a lot of room for flexibilty in approaches than just the one Kevin has expressed. So much for just a thought experiment. Thank you for your post @Kevin88660 It was the source of inspiration for this little post

EDIT: My Dirty-Alpha went live 5 months ago. The Virgin-Beta went live 3 months before that. So you could say that the whole system has been up for 8 months.

This post reminded me of the following post that @MJ DeMarco shared a while back post where he boils down his money making system into an equation. You two seem to be thinking along somewhat of the same wavelength. Love it! (I also echo ZF's recommendation that you'd enjoy the INSIDERS post on selling options. Look for "The Printing Money Thread.")

GOLD! - MINDSET - How to create monetary wealth in just 5 years. (Or less!)

Asked on Quora which I answered... https://www.quora.com/How-can-I-create-massive-monetary-success-in-five-years/answer/MJ-DeMarco-1 Create yourself a mathematical equation that scales, then work that equation to death while acting, assessing, and adjusting along the way. Few people...

www.thefastlaneforum.com

 

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[Tom H.]

The business model here is to invest the largest portion of my capital into this venture, thereby funding my daily expenses, and then bootstrap any future business ventures that I am working on. And I am very serious about the bootstrapping bit. The only thing I'm willing to spend money on is improving my own skill-set, nothing else.

It's very cool to hear about how you're going to commit, you've put a lot of work into your finance system and built up a real skill set there.

I want to share some of my feelings about bootstrapping, in case it helps you formulate your own plans. Bootstrapping doesn't necessarily mean sweat-equity longer you're implying here, it just means avoiding outside investment.

You're willing to invest capital in your finance system because you designed it and you have confidence in it. If you end up designing a business system that you have confidence in, then you may find it better to invest capital in the business rather than doing the work yourself.

In my experience, I really prefer hiring people to work in my business, rather than doing the work myself. There are a lot of magical qualities in paying someone to work for you, but the bottom line is that if I can't afford to pay someone else to do the work, then I certainly can't afford to do the work myself. I'm investing in the skill sets of hiring and managing. These can sound like bullshit skills, but done people really do suck at these things and they do make a difference.

I still believe in gaining hard skills myself. I think I'm better at hiring programmers because I am a good programmer. I can't afford to be ignorant, it's just that I also can't afford to work for myself.

Maybe there are opportunities in the areas where you already have a high level of hard won skill? I don't know what opportunities might be in the motorsports world, but that's the point, you have a unique position that you can build on to get rich.

I can't wait to see what comes next!

 

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[thewalkingtemple]

So in a nutshell you have a fancy algo for trading?

I'd say no. I do not actively use any set algorithm. You can for sure algorithmise any thinking pattern, but what if the thinking pattern keeps changing every second day? An algorithm that is so nimble to change requires a lot of resources to sustain, which I currently do not have.

There is zero prediction involved in my sytem. I'm merely reacting with the help of systemic knowledge (developing systemic knowledge is what the OP is about).

 

[ZF Lee]

Hello everyone,

I've had a weird journey where I've actually managed to work out an effective money system before I've established a money engine (process) to feed the money system.
Regardless, I thought that I would document this journey as a post for anyone to benefit from my knowledge so far. As a new member here, I've been reading and benefiting from a wealth of knowledge. So this is my way of giving back to the community that is currently helping me.

Disclaimer: Before you get super-hyped or completely turned-off (the two possible extremes), I'd like to clearly state that this involves actual mental effort, and a certain level of mathematics to understand and appreciate.

TLDR Takeaways:

* Whenever you wish to get into a market (trade), look at the top and bottom most quartil performance. You basically look for the top most performer and the bottom most performer and calculate how much market percentage each holds. This will enable you to see which markets are monopolised (a negative), which ones are too tight and over-competitive, where there is room for arbitrage, etc.

* Find ways of gaining regardless of what the market is doing. For instance, my system works like this (idealistic definition): When the market is booming, I gain linearly at around 70-80% with the market. When the market is moving sideways, I gain pennies from the market. When the market is tanking, I lose pennies until a certain point, beyond which I gain geometrically (very big numbers).

* Start thinking second and third order consequences. The price of an equity for instance can go to infinity or zero without stopping (theoretically), but the volatility has mean reverting tendencies (known as regression to the mean in statistics). This can be used to your advantage.

* Learn to define risk. This means you pre-define how much you wish lose in the worst case, and by doing this you pre-define how much you are willing to win if things go best case. Think in extremes.

* Always think about your portfolio as a whole unit (thank you Khaneman and Tversky). Never look at a trade as a single entitiy. Think about it as one element of the whole portfolio (like literally your entire existence). This is a game changer.

* Achieve uncorrelated movement between the different components of your portfolio.

The System (narrated via 7 checkpoints):

Checkpoint 1: I started out as any other naive guy would: buying into mutual funds. Within a couple of months, I smelled something wrong and bailed.

Checkpoint 2: Then I ended up with the next best thing I could find, which was investigating and researching ETFs (yikes). But hey, at least there was one middle man out of the window by now. I actually never trust anything very easily, and try and rework the mathematics myself. I picked up PhD theses in the field of investing, and started studying papers published by Nobel Prize winners in the field of economics. In the end, I figured out what a basket instrument is capable of (potentially), and realised this is probably not the immediate solution I am looking for. But I parked part of my savings into such a vehicle anyway because it was at that point of time (given my lack of better knowledge) better than my local bank account. A couple of images illustrating my journey and thought process during this period (apologies for the mixed English-German; I'm a bit weird like that):


View attachment 35593

View attachment 35594

Checkpoint 3: I worked out a TER equation that was low enough whilst injecting a factor (small cap) premium into the mix. After I spread the money, and parked it into the vehciles as planned, the thought that I could do better than this didn't let me go. A simplified version of the equation below (example calculation; not actual sum ivested; I'm skipping gold and bonds because I'm still young and have a relatively low net worth, where bank balances are covered by state insurances):

View attachment 35595​

Checkpoint 4: By this time, COVID happened, and my portfolio got a nice boost. However, I was still not convinced if this was the way to go. I was getting more and more dissatisfied with my job by the day. Therefore, I decided to take action, and started learning active methods. In this space, there is a lot of bullshit to evade (B schools can go to hell; all those wasted lecture hours :/ ). Eventually, I worked my way to the beautiful work done by Nassim Taleb. The math was/is hard, but the potential of the thought process started to blow my mind. I got into understanding random variables.
View attachment 35596

Checkpoint 5: I continued studying Taleb, and in parallel, incorporated psychology from Khaneman and Tversky (two of the most awesome minds I've come across). By this time, I started to understand the math of risk taking, and figured out ways of pre-defining how much I was willing to lose to define probabilities of how much I could gain. Later, I would learn that this concept is known as static hedging. Below, you can see a very simplistic, yet very powerful model that I came up with, after it came to me as a dream when I was half asleep during the night (yes, I was that deep into the subjects back then). I scribbled it in such a hurried manner with goosebumps, and didn't sleep for the rest of that night due to sheer excitement (M.K.V. = Max. Cumulative Loss / P.S. = Position Size):

View attachment 35597

Checkpoint 6: As the journed continued, I started learning dynamic hedging. This is literally one of the hardest things I decided to do; very difficult mathematics, at least for me. I convinced myself to jump into an active model without perfecting my knowledge in this area. I knew very well back then that this is gonna take years. I didn't want to stay theoretical for years without any practical experience. Besides, I realised that I didn't enjoy working with my boss anymore. As a stop-gap solition, I started learning the work done by Tom Sosnoff. A few images illustrating my struggles with derivatives, and the mathematics behind them:
View attachment 35598
View attachment 35599

View attachment 35600

Checkpoint 7: As of the date of this post, my passive strategy (codenamed Virgin Beta) was up 15%, and my active strategy (codenamed Dirty Alpha) was up 48.89%
A few caveats here: These numbers are before taxes and before inflation. Plus these numbers are from relatively low cap investments (less than 50k USD). As the capital increases, the mathematics does not scale linearly, meaning, the numbers will most likely come down with larger capital inputs. However, I am proud of the knowledge I have been able to accumulate over such a short period of time. Even in its incomplete form, my knowledge is giving me such a significant advantage (especially in its Apha form). I have now quit my job, and am working on my unscripted money engine to feed my money system. While I will be turning to you guys for advise and suggestions for my money generation engine process, feel free to benefit from the money system knowledge I've been able to build until now.

P.S.
I am still continuing to learn Dynamic Hedging. This takes years to perfect. However, by now I have realised the importance of a money generating engine, and am focusing on solving this problem first before I dive full length into dynamic hedging back again.

I'm no genius mate; just another guy giving life his best. You are confused because what I have posted is not a how to guide. That's my mistake; I should have made that clear in the post. I've just tried to introduce what I consider as valuable concepts. Those need to be learnt. Depending upon someone's level, it could take a few months or a year or two. But anyone can get there.

Let me give you a fictional example (which I randomly came up with as I typed ) of the kind of thinking I'm talking about.

Let's say you have four neighbours:

a. Luca, who is a wheat farmer.
b. Sarah, who is an insurance provider.
c. Tom, who runs a bakery.
d. Rusty, who is just a wealthy floater.

Before you arrived, Tom used to buy wheat from Luca for his bakery. Rusty didn't give a f*ck about anything or anyone, whereas Sarah was selling random insurance coverages to all three.

You now arrive into the scene with your fancy cash. You have enough to buy three seasons' produce from Luca. You go to Luca first, and negotiate with him to purchase his produce exclusively and continuously for the next 3 years at a fixed rate. Luca agrees to it as soon as you promise him that you are willing to pay one half of the capital up-front.

You then go to Sarah and tell her that in case there is a poor harvest (pre-defined using a threshold number), you would like to cover your losses using a custom insurance package. You start working on a deal and come up with Y as the price of the insurance package.

You then go to Tom, and offer wheat for a fixed price for the next three years at a standard rate (with a profit mark-up). This price is 10 cents higher than what Luca offered it for (this ensures you a 130% profit during the first year, and 150% profit during year 2 and year 3, provided the minimum harvest target is met). So Tom is skeptical. But you question whether Luca had kept the same rate over a three year period. Tom realises that it was not the case, understands the benifit of a standard rate, and signs the deal. You setup Tom also with an insurance coverage with Sarah in case of a low produce year. You get brownie points from Sarah for helping with the deal.

You then go to Rusty, and offer a unique deal. You tell him that if your yield exceeds x (which is Tom's share), Rusty can have everything beyond it for his rich family. The only thing Rusty needs to pay is a small amount of Z per year (Z = your insurance cost owed to Sarah (y) + 0.5 of insurance cost owed by Tom to Sarah). Rusty is skeptical. But then you show him that 8 out of 10 times the last 10 years, your leased farm has produced much more than x, so Rusy is essentially making a favourable bet. Rusty finally agrees to buy the contract from you.

You then go back to Tom, and offer to pay one half of his insurance costs as sign of good will and continued business relationship for the future.

After one year Luca is happy and hard at work, Tom's business is doing reasonably well, and he is extremely thankful for your deal that enables him to sustain competitive prices, and Rusty is stocked with surplus produce you delivered. He treats you like you are his new best friend. You have made a handsome 130% profit on your intial investment. You now take 20% out of that and go back to Luca, and offer to pay for one half of his and his family's life insurance coverage costs (which starts to melt Sarah's heart). Luca is pleasantly surprised, and assures you of a long lasting continued business relationship. Sarah is so impressed with you, that she starts dating you (OMFG!!).

And they lived happily ever after.

Even though this was just a randomised story I made-up, there are some very fundamental concepts, and derivative instruments used intuitively without explaining what they are or how they work (i.e., the mathematics).

You might want to check out MJ's thread on options in the Fastlane INSIDERS.
You could find something there.
MJ suggests taking on the seller's role on the insurance-deal though, given advantages like theta time decay.

 

[Johnny boy]

only thing you should do now is get a hundred thousand dollars from a russian loan shark

 

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[thewalkingtemple]

I’ll be sure to Google all this the second I have some time.

1. ETF’s
2. Math
3. TER equation
4. Small cap premiums
5. Nassim Taleb
6. Math
7. Nassim Taleb some more
8. Math
9. Nassim Taleb so close I can smell him
10. Khaneman
11. Tversky
12. Dynamic Hedging
13. Math
14. Tom Sosnoff
15. Derivatives
16. Math

I couldn't have done a better job of that myself. I didn't even tell anyone on this forum how much I love mathematics. But somehow, it made it 5 times on the list.

 

[thewalkingtemple]

If you are doing it for fun that’s okay. But asking everyone else to adopt a complicated DIY approach for possible superior return in exchange for a large amount of gut wrenching time spent figuring out the financial market, in my opinion, is not a good advice.

I respect your opinion. I am not asking everyone else to do this. Who am I to do that? Heck, I don't even consider my post advice.
I am merey sharing what I think are valuable tools for any entrepreneur who has a working unscripted business system. Such a person would ideally need to work on a money growth system anyway. Whether a person chooses this path or not is upto them. Of course, if it helps at least one person, I personally feel happy that I was able to contribute a tiny bit.

 

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[thewalkingtemple]

Your numbers are amazing! I don't get the details completely but the bottom line looks really good.

Thank you. But I wouldn't be focussing on those numbers. To put things into perspective, ever since I launched my system 5 months ago, I've made enough to pay for just 4 months of my living expenses in a year. And ALL of it is unrealised, because I don't need any money at the moment. This means that the numbers paint a much better picture than what I actually get in the end.

The numbers are based on low cap input. Like I mentioned in the OP, the bigger the capital, the tougher (non-linearly) it is. I'm like a kid who's learning to drift a buggy. It's difficult, but I'm able to pull it off somehow. But with bigger cap, it's like powersliding a space ship.

The fastlane approach here is to generate large income from business activities so that they do not have to be a genius in investment, to have high recurring investment income (even with average investment return).

Unless someone is aspiring to be a professional money manager, in which they have the scalability of managing other people’s money, devoting a lot of time to “financial alchemy” according to my observation, is almost always a super waste of time and energy.

I know this does not sound like music to your ears, but I have seen too many men sucked into this.

Today morning, as I was running, I was trying to process Kevin's POV here. And a mathematical thought struck me. I thought I'd share that with you all.

If I were to write down Kevin's thought process as an equation, I would do so as follows:

0.9 U + 0.1 M 9 = 1 L ---------->(1)
where, U = Unscripted Business system,
M = Money System,
L = The Unscripted Life, and
the numbers 0.9 and 0.1 are risk weights.​

Basically, Kevin's experience has led him to use a system where he swears by a low risk weightage (0.1) to the money system, and this doesn't require him to be dabbling into "financial alchemy". He is then comfortable with letting his unscripted business system do the heavy lifting of income (0.9).

I don't know about you all, but what inspired me the most about MJ DeMarco is not what he achieved, but his orginial thinking clarity. That's what makes his work authentic and valuable to me (personally). So I infuse my own original thinking here. I start with generalising eq. (1)

(R1 * U) + (R2 * M) = (1 * L) ---------->(2)
where, R1 and R2 are generalised risk weights.
​

For a guy like me, who has a reasonably strong Money system, I can push R2 to much more than 0.1. Let's say I am okay with going upto 0.5. That means I can afford to work with a risk weightage of 0.5 for R1, meaning that I can go for safer bets with my business system (meaning lesser effort than, say, in comparison to Kevin) and achieve similar global results. My equation (just for illustration purposes) then becomes.

(0.5 U) + (0.5 M) = (1 L) ---------->(3)​

To proceed however, I have to acknowledge the following limitations of such a definition.

1. M cannot be sustained / exist without U. Therefore, M is a function of U, which makes the real equation more complicated than what I have presented above.
2. The real relationship between the risk weights is likely non-linear.

With such a setup, I could even go as far as building a dynamic system where I can dynamically change R1 and R2, and de-correlate U and M to such an extent that one saves the other in a tight scenario.

I believe there is a lot of room for flexibilty in approaches than just the one Kevin has expressed. So much for just a thought experiment. Thank you for your post @Kevin88660 It was the source of inspiration for this little post

EDIT: My Dirty-Alpha went live 5 months ago. The Virgin-Beta went live 3 months before that. So you could say that the whole system has been up for 8 months.

 

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[thewalkingtemple]

Awesome thread! Even though it's way over my head. It sounds like you've developed some keen insights due to the amount of thought and effort you've put into this topic.

Random question out of curiosity - how did you happen to start on Beta before Alpha? I'm guessing it's just semantics of how you chose to label your approaches, but it intrigued me.

Thank you for your positve feedback, Bekit! Yes, to a certain extent, I agree with you. These days, I am able to see opportunities, where folks around me see danger. It's a weird feeling, but I try to be wary of other intellectuals' intuition/opinion that differs from mine, as those usually lead to binary results. One of us is usually right.

@Mutant has answered your question about beta and alpha naming conventions. They come from the academia. Originally, they were variables used in equations that solved for optimising portfolios. But it's all FUBAR now, and they've grown to mean entirely different things in different circles.

Random question that's a little less tangential - Let's imagine I'm a total beginner and have no clue where to pick up even the basics of understanding this area, so I'm hesitant to start to invest because my understanding is so severely lacking. What resources would you recommend as a good place to start learning?

I think that the Antifragile way of dealing with risk in investing is interesting, at least in theory. I don't know much about the actual math behind doing it and how hard it would be for folks to pick it up, amongst other mathematical concepts or calculations that you use.

Perhaps OP can share more in regards to how can people start learning this, as echoed by @Bekit ?

In my perspective, there is no "starting" to investing. You guys are already investing. "What are you currently investing? (time? money?)", and "In what are you currently investing? (job? relationships? health?)" are two questions you have to ask yourselves and dig deep to find honest answers (it's amazing how much we lie to ourselves). In my case, I had to build a proper tracker system for all my incomes and expenditures (both in terms of time and money, and what it revealed (the truth) shocked me). Once you figure that part out, you could choose to write down questions and answers as to what is stopping you from making better decisions. Then, you could search for time-independent literature (think books that are hundreds of years old, for instance) that answers these questions (time usually weeds out noise, and is an excellent filter for true value). I have learnt through experience that text books offer more value/noise ratio (which is preferable) than scientific papers or blogs or instructional videos. Once you answer your initial questions, new and better questions start popping up in your head, and from then on, it's a spiral in growth of knowledge. What is key is to execute in parallel, and not become tied down into theoretical space (my weakness, which I'm actively working on). I would be arrogant and stupid to say that this IS the way to go about it, but this is what I would recommend, based on my experience so far, of course. It's an old school approach, and ensures CONTROL and ENTRY, to say the least.

EDIT:
Mathematics is an entry pillar here. I cannot sugar coat that any further. But if it helps, I was never good at math. I just love it, even though I'm bad at it. Even my aging dad is able to do mental calculations faster than me, while I usually have to write it down. Having said that, my love for the subject has taken me far through sheer execution. I have a math heavy degree behind me, and am able to use math tools many don't learn in their lives at all. Math is like a vision filter that lets you see phenomena that normal people don't. It's a pity how math is taught in school. I hated how it was taught in school, and am now spending a lot of time unlearning all of that shit, and am re-learning math (even grade school level stuff) the way that suits me better.

Now I aim to be helpful, but I must confess answering this was merely a ruse to post one of my favourite memes.

View attachment 35635

Thanks for that! I've never seen that meme before :O

 

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[thewalkingtemple]

Haha I think it's fair to say that the original post WAS the cliffnotes version. Did anybody SEE the whiteboard photos? Obviously, there's a ton of depth implied in the summary of the 7 stages you passed through on the way to where you are now.

Thanks for revealing something I never realised!

OK, yes you are a genius, because not everyone can put together such a clear, understandable, relatable analogy on the spot like that.

"The definition of genius is taking the complex and making it simple." Albert Einstein

Thanks again for the compliment! I like Einstein's definition of genius; it implies that one can develop the skills to be come a genius.

A person well versed in these concepts would have spotted a tonne of loop-holes in the story I narrated. To save time, I didn't make it perfect, just sufficient enough to convey the message across.

This post reminded me of the following post that @MJ DeMarco shared a while back post where he boils down his money making system into an equation. You two seem to be thinking along somewhat of the same wavelength. Love it! (I also echo ZF's recommendation that you'd enjoy the INSIDERS post on selling options. Look for "The Printing Money Thread.")

GOLD! - MINDSET - How to create monetary wealth in just 5 years. (Or less!)

Asked on Quora which I answered... https://www.quora.com/How-can-I-create-massive-monetary-success-in-five-years/answer/MJ-DeMarco-1 Create yourself a mathematical equation that scales, then work that equation to death while acting, assessing, and adjusting along the way. Few people...

www.thefastlaneforum.com

Thanks, I'll be sure to check the thread out. I don't find it surprising that there's thought allignment there. MJ DeMarco represents an extrapolation of my half developed concpets (someone who has taken it all the way, while I am still developing). That's how I landed on this forum. I realised that no one around me (physically) thinks like me, and I shouldn't be the only one in human history with thoughts like these. After a bit of search for literature, I came across MJ's name a couple of times, and that's how I landed here.

 

[Primeperiwinkle]

Apologies that my post is ambiguous.

Let me give you a non-technical description of what this is about in a couple of sentences:

Let's say you have a running unscripted system that earns you regular income. You would ideally want to setup a money system to protect and grow your saved income (wealth); MJ covers this topic on the surface level in his 2nd book. The worst thing you can do is depend on some third party "expert" to manage your money. Period (there are several scientific papers that have studied this phenomenon). The second worst thing you can do is start trading as a regular market participant (my strong opinion). If you have money to invest, you do not need to be at the mercy of any market. The system I am developing (in it's childhood phase) is already showing signs of breaking market dependency. This means that I do not care if the market goes up or down. I don't care about which is the next best evaluated stock. Heck, I don't even watch the news. I use mathematics and set it up, and do something more productive with my life. No middle man. No news. No caring about who's president. More caring about actually helping people.

P.S.
In its current state, I still have to spend like 15-30 minutes on it during each weekday.

Yeaaaa I got that part. It was the how to which kinda confused me. I’m trying here dude, I really am. I’m hoping more ppl start talking to you so we can figure out your genius.

 

[Raoul Duke]

@Primeperiwinkle

For only $397.97 You can buy his/her future trading course! Now his/her money system can now work for you!!

 

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[ZF Lee]

Thanks a lot for your reply man. I was seriously starting to doubt my communication skills, as nobody so far has been able to understand what I'm trying to convey here.

What you are saying is along the line of thought I'm trying to convey. While I'm not precisely advocating being a seller, I think I have to read the thread to precisely understand what MJ says. I understand that I have to pay to get into fastlane INSIDERS. I'll consider it, but I'm being held back by the paywall. :/

You can also check out TastyTrade's videos.
If I remember, much of them are free.

And they espouse a similar selling position as MJ.

Here's one discussion from the TastyTrade folks:

INVESTING - Jack Bogle BTFO! (Compound Interest Scam?)

Thought this was a good take by Tom Sosnoff (I consider him the Fastlane version of Finance) on Vanguard / Jack Bogle and the old MSM darling compound interest of "set it and forget it." Here's the VIDEO: Thoughts on Wealth Creation & Retirement | Daily Recap | tastytrade | a real financial...

www.thefastlaneforum.com

I wouldn't be surprised few folks here truly understand derivatives.

It's like a shadow market of sorts...and the financial pundits don't promote it just as much as mutual funds, taking long position on stock, etc. It's still hard to shake off the old financial SCRIPT to take on a whole set of skills.

 

[thewalkingtemple]

You can also check out TastyTrade's videos.
If I remember, much of them are free.

And they espouse a similar selling position as MJ.

Here's one discussion from the TastyTrade folks:

INVESTING - Jack Bogle BTFO! (Compound Interest Scam?)

Thought this was a good take by Tom Sosnoff (I consider him the Fastlane version of Finance) on Vanguard / Jack Bogle and the old MSM darling compound interest of "set it and forget it." Here's the VIDEO: Thoughts on Wealth Creation & Retirement | Daily Recap | tastytrade | a real financial...

www.thefastlaneforum.com

I wouldn't be surprised few folks here truly understand derivatives.

It's like a shadow market of sorts...and the financial pundits don't promote it just as much as mutual funds, taking long position on stock, etc. It's still hard to shake off the old financial SCRIPT to take on a whole set of skills.

If you read the OP, I've mentioned that I'm using Tom Sosnoff's work as a stop gap solution for my lack of better knowledge (which I'm predicting will take years to perfect). Tom Sosnoff is one of the original founders of TOS, and later, one of the original founders of Tasty Trade. So, yes, I indeed have exposure to Tasty Trade's methods. I am using some of the methods as part of my system for now, but I am convinced that it is not a long term solution for me. What I find truly inspirational from these folks is how they disrupted an entire industry with innovation via TOS. That's true entrepreneurship skill.

I see your point about the script being the reason why folks struggle to understand what I've been talking about. I'll be sure to checkout the TT thread you've linked. Thanks again mate!

 

[thewalkingtemple]

only thing you should do now is get a hundred thousand dollars from a russian loan shark

View attachment 35614

Jokes aside, three reasons not to do it:
1. I lose control; same reason why I wouldn't go to a venture capital as a young business.
2. I make mistakes all the time; but I design my system such that no single mistake bites me more than xx%. Leveraging using a loan shark is likely to bite my head off if I do a mistake.
3. It is a shortcut in the form of trying to buy wealth instead of earning it. Without the skills, scaling seldom sticks. I'm much more likely to grow long term if I grow organically.

It is perhaps confusing to me because you are making a very personalized investment solution for yourself using personalized way of explanation.

It is not clear that if you are dealing it with from a portfolio asset allocation perspective (top down approach), or active trading (single strategy approach).

From a product and marketing perspective such managed fund products are serving either sophisticated hnw or bigger funds looking for fund to fund services. It is not good to tell them them “hey I am coming here to solve all the problem in one fund in having superior returns across all marker conditions”. They are already looking for for specific tailored product, mainly single strategy product because they are their own portfolio managers.

One popular product is fund that makes a lot of money during high volatility in years like 2008 and 2020, and the ability to do decently well in choppy years like 2018. It is okay that if the fund loses money (not too much) in a bull market year 2017 that has very low volatility. This is because all investors are basically having large exposure to risk assets these days and looking to buy the best “insurance” in the market.

The trend in the fund business is to focus less on portfolio allocation and its related skills financial mathematics, because these are the centralized decisions that your investor clients are not going to outsource. It is focusing on the trading and perfecting a single strategy these days. Core skills are computing and data processing related. If you google trading firms job hire advertisement these days they are asking for python skills instead of financial modeling.

I would advise you talking to the proprietary trading and fund management community then you can have a better understanding on what skills to build and what product to create.

I understand your concern. I think it stems out of a misunderstanding of the OP, which I'll try to clear.
I do indeed share a personalised account of my approach. The reason to do this to share with forum members the tools I have used to achieve monetary growth as a single person. I actually want to share with folks here that they can stop looking at it as a product to be purchased from someone else. Kick the F*cking middleman out of the window, put in the effort, and set your own personlised system up. That's pretty much my message. I do not share a how to, but rather, the tools I've used to set up mine. There are valuable key words littered all over this thread by now. I hope someday that someone who first started from this thread gets it and grows strongly.

I am not trying to build it as a product. I think if I were to do that, it would take me a few years to scale my knowledge to do it. Right now, as the system's designer, I have full control of my input variables. For a fund, client no. 225689 will want to randomly take his money out of the system on any given day. That becomes a totally different problem to solve, which requires me to scale my system as a human resource system.

I would never have another fund as my client. This is because Umbrella funds leech their investors one by one, and move onto the next ones. There are quite a few research papers that go into this. This goes against my sense of ethics. Besides, if someone is spreading their risk into 10 smaller funds, and you are one of the 10, who is the smart guy here? It's the same concept with Venture Capitals. They pressurise any given start up to go all in and not deviate at any cost. They exert immense pressure. But in parallel, the same venture capital invests in 50 different diversified startups. This means each start up carries huge risk, while the venture capital's risk is statistically diversified.

So following example with Luca and others, would it be something like this:

Luca is airline (say AA) stock
Tom is some travel agency stock
Sarah does insurance (say Prudential Financial) stock
Rusty is Rusty

Does it work only when
there are lots of plane tickets sold?
And bummer when there is covid and no one flies?

Unfortunately, no. That's not what the story implies. Instead of thinking in stocks, try to embrace the concept that you can cover all blindspots (in your financial life), even without knowing where the blindspots could be (hence zero prediction required). It is a way of thinking. It needs to be learnt. And this takes effort and time. It cannot be understood by reading a few posts. Think Entry. If it were that easy, everyone would be doing it.

 

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[Kevin88660]

I respect your opinion. I am not asking everyone else to do this. Who am I to do that? Heck, I don't even consider my post advice.
I am merey sharing what I think are valuable tools for any entrepreneur who has a working unscripted business system. Such a person would ideally need to work on a money growth system anyway. Whether a person chooses this path or not is upto them. Of course, if it helps at least one person, I personally feel happy that I was able to contribute a tiny bit.

The fastlane approach here is to generate large income from business activities so that they do not have to be a genius in investment, to have high recurring investment income (even with average investment return).

Unless someone is aspiring to be a professional money manager, in which they have the scalability of managing other people’s money, devoting a lot of time to “financial alchemy” according to my observation, is almost always a super waste of time and energy.

I know this does not sound like music to your ears, but I have seen too many men sucked into this.

 

[thewalkingtemple]

The fastlane approach here is to generate large income from business activities so that they do not have to be a genius in investment, to have high recurring investment income (even with average investment return).

Unless someone is aspiring to be a professional money manager, in which they have the scalability of managing other people’s money, devoting a lot of time to “financial alchemy” according to my observation, is almost always a super waste of time and energy.

I know this does not sound like music to your ears, but I have seen too many men sucked into this.

I see your point. I also appreciate your intention to protect people who might end up being sucked in.

However, as I take a look at this keyword list from @Primeperiwinkle, I cannot imagine anyone who looks into these words (especially the people's names) ending up not gaining profitable life knowledge (not just financial knowledge). In the end, I'm not so full of myself to be blindly convinced of my ways. I've been wrong about many things in the pasth, and I could be wrong again. I'll let the folks choose for themselves.

I’ll be sure to Google all this the second I have some time.

1. ETF’s
2. Math
3. TER equation
4. Small cap premiums
5. Nassim Taleb
6. Math
7. Nassim Taleb some more
8. Math
9. Nassim Taleb so close I can smell him
10. Khaneman
11. Tversky
12. Dynamic Hedging
13. Math
14. Tom Sosnoff
15. Derivatives
16. Math

 

[Kevin88660]

Thank you. But I wouldn't be focussing on those numbers. To put things into perspective, ever since I launched my system 5 months ago, I've made enough to pay for just 4 months of my living expenses in a year. And ALL of it is unrealised, because I don't need any money at the moment. This means that the numbers paint a much better picture than what I actually get in the end.

The numbers are based on low cap input. Like I mentioned in the OP, the bigger the capital, the tougher (non-linearly) it is. I'm like a kid who's learning to drift a buggy. It's difficult, but I'm able to pull it off somehow. But with bigger cap, it's like powersliding a space ship.


Today morning, as I was running, I was trying to process Kevin's POV here. And a mathematical thought struck me. I thought I'd share that with you all.

If I were to write down Kevin's thought process as an equation, I would do so as follows:

0.9 U + 0.1 M 9 = 1 L ---------->(1)
where, U = Unscripted Business system,
M = Money System,
L = The Unscripted Life, and
the numbers 0.9 and 0.1 are risk weights.​

Basically, Kevin's experience has led him to use a system where he swears by a low risk weightage (0.1) to the money system, and this doesn't require him to be dabbling into "financial alchemy". He is then comfortable with letting his unscripted business system do the heavy lifting of income (0.9).

I don't know about you all, but what inspired me the most about MJ DeMarco is not what he achieved, but his orginial thinking clarity. That's what makes his work authentic and valuable to me (personally). So I infuse my own original thinking here. I start with generalising eq. (1)

(R1 * U) + (R2 * M) = (1 * L) ---------->(2)
where, R1 and R2 are generalised risk weights.
​

For a guy like me, who has a reasonably strong Money system, I can push R2 to much more than 0.1. Let's say I am okay with going upto 0.5. That means I can afford to work with a risk weightage of 0.5 for R1, meaning that I can go for safer bets with my business system (meaning lesser effort than, say, in comparison to Kevin) and achieve similar global results. My equation (just for illustration purposes) then becomes.

(0.5 U) + (0.5 M) = (1 L) ---------->(3)​

To proceed however, I have to acknowledge the following limitations of such a definition.

1. M cannot be sustained / exist without U. Therefore, M is a function of U, which makes the real equation more complicated than what I have presented above.
2. The real relationship between the risk weights is likely non-linear.

With such a setup, I could even go as far as building a dynamic system where I can dynamically change R1 and R2, and de-correlate U and M to such an extent that one saves the other in a tight scenario.

I believe there is a lot of room for flexibilty in approaches than just the one Kevin has expressed. So much for just a thought experiment. Thank you for your post @Kevin88660 It was the source of inspiration for this little post

EDIT: My Dirty-Alpha went live 5 months ago. The Virgin-Beta went live 3 months before that. So you could say that the whole system has been up for 8 months.

The issue is less about risk. It is about diminishing return to effort after a certain point.

Beating an high income portfolio (dividend stocks and corp bonds) even by a few percentage point (without taking much higher risk), requires a serious amount of work. This has negligible impact on your wealth assuming you start with your own small capital.

The whole argument centers around the opportunity cost of your time. How would you best invest your non-sleeping hours to maximize the total expected increase in your net worth in the next 5-10 years?

 

[thewalkingtemple]

Hello all,

I just thought I'd post an update on this topic / situation. I closed 2020 very strongly. I'm not going into numbers as they are irrelevant for this post. After a tonne of experimenting with other possible ventures for 2021, I came to the realisation that this money system is the only real profit earning CENTS based system I have in my arsenal (everything else is still under development). My job, sure as hell, is not.

At some point, I took the plunge, and decided that I will be switching to investing using my money system as a prime source of income in 2021. The two reasons for this decision: 1. It's a CENTS based system 2. It gives me time to develop other CENTS based business systems. I'm most probably not going to cover my entire year, but I plan to take oddjobs to cover the exposure there.

The business model here is to invest the largest portion of my capital into this venture, thereby funding my daily expenses, and then bootstrap any future business ventures that I am working on. And I am very serious about the bootstrapping bit. The only thing I'm willing to spend money on is improving my own skill-set, nothing else.

Let us see where this takes me. I have fear and my emotions are quite high, as uncertainty mounts, but I'm giving it my best.

 

[thewalkingtemple]

It's very cool to hear about how you're going to commit, you've put a lot of work into your finance system and built up a real skill set there.

I want to share some of my feelings about bootstrapping, in case it helps you formulate your own plans. Bootstrapping doesn't necessarily mean sweat-equity longer you're implying here, it just means avoiding outside investment.

You're willing to invest capital in your finance system because you designed it and you have confidence in it. If you end up designing a business system that you have confidence in, then you may find it better to invest capital in the business rather than doing the work yourself.

In my experience, I really prefer hiring people to work in my business, rather than doing the work myself. There are a lot of magical qualities in paying someone to work for you, but the bottom line is that if I can't afford to pay someone else to do the work, then I certainly can't afford to do the work myself. I'm investing in the skill sets of hiring and managing. These can sound like bullshit skills, but done people really do suck at these things and they do make a difference.

I still believe in gaining hard skills myself. I think I'm better at hiring programmers because I am a good programmer. I can't afford to be ignorant, it's just that I also can't afford to work for myself.

Maybe there are opportunities in the areas where you already have a high level of hard won skill? I don't know what opportunities might be in the motorsports world, but that's the point, you have a unique position that you can build on to get rich.

I can't wait to see what comes next!

Thanks a lot for your positive and encouraging feedback Tom. I really do appreciate it!

Thank you also for sharing your views and experience about bootstrapping. I'm taking some points out of your input, and I'll have to evaluate how to incorporate into my own systems and thinking / working style. The reason why I am not willing to spend any money outside of my skillsets at this point is that everything else that I am doing is in the evaulation phase, where the I'm just market testing or evaluating demand / feedback from the market. And spending money without market approval doesn't sit right with me. But as you say, it might be that my perspectives would change if I have a system that has market approval and my confidence going for it. I've never had this experience before, so I'm drawing some perspectives from your experience here. Let's see how it goes there. I'm giving it my best

*****Apologies in advance: The following is a segway into another venture of mine. I don't wish to make a separate execution thread for it, as it is nothing unique, and we have already many powerful exectution threads around the same topic. I simply am not able to offer any new value to justify creating a new thread around it.******

Let me give you a tangible example of one of the things I'm currently doing (other than this money system of mine). I love to write, and write in my own blog, which has a very small, yet trusty following. They often give me feedback around the lines of "Your thinking is unique and profound." Now I'm not convinced that I'm either, but I see the value in such comments. Apart from this long term project (where I'm trying to incorporate MJ's advice), I decided to repurpose one of my recent articles into a script that I can use to make a short documentary. The idea is to use it as a means to develop my brand further beyond just my website. Now, I have no experience with media / video / voice over / youtube, etc.

I started taking some video editing courses (coupon code powered free subs), and just started with it, learning every bit as I was doing it. When I was looking for helpful information here, I got really inspired by @Valier and read his execution thread fully. I'm eternally thankful to all the valuable information this guy has offered in his thread. Again, a testament to why this forum is such a powerhouse. While @Valier chose to use Adobe Premier Pro, I chose Davinci Resolve, purely because it's free. I didn't even want to spend $200 (or whatever Adobe charges) on software to make my frickin documentary. That's in direct reference to my stingy nature before seeing market approval. So, without any skill sets, and armed with a wealth of knowledge from @Valier, I just went ahead with my first documentary video. After 20 or so long days and poor sleep, I published my first video a couple of days ago:

View: https://youtu.be/kC-aWuWKfLk


Now, the video looks like it's gonna bomb. In hindsight, I chose the wrong topic, but heck, I started reading @Valier 's thread when I was halfway into making my video...too late to back out then. But I'm in it for the long run and will continue making documentaries, and continue improving. It makes sense to me to invest more capital into this venture, and start outsourcing only after I start earning from it (my definition of market approval).

@Valier, I took a lot of inspiration from you, and so did my channel. As a thank you, I've linked your law of attraction (part 1) as the only end card in my video. I'm a beginner, and my video doesn't have any views, but still, I just want you to know that I am thankful, and am trying to do something for you in return.

@Andy Black Thank you for your youtube subscribe logo, and the thread you made for it. I use it in my channel, and found it helpful!

 

[traction2]

Hello everyone,

I've had a weird journey where I've actually managed to work out an effective money system before I've established a money engine (process) to feed the money system.
Regardless, I thought that I would document this journey as a post for anyone to benefit from my knowledge so far. As a new member here, I've been reading and benefiting from a wealth of knowledge. So this is my way of giving back to the community that is currently helping me.

Disclaimer: Before you get super-hyped or completely turned-off (the two possible extremes), I'd like to clearly state that this involves actual mental effort, and a certain level of mathematics to understand and appreciate.

TLDR Takeaways:

* Whenever you wish to get into a market (trade), look at the top and bottom most quartil performance. You basically look for the top most performer and the bottom most performer and calculate how much market percentage each holds. This will enable you to see which markets are monopolised (a negative), which ones are too tight and over-competitive, where there is room for arbitrage, etc.

* Find ways of gaining regardless of what the market is doing. For instance, my system works like this (idealistic definition): When the market is booming, I gain linearly at around 70-80% with the market. When the market is moving sideways, I gain pennies from the market. When the market is tanking, I lose pennies until a certain point, beyond which I gain geometrically (very big numbers).

* Start thinking second and third order consequences. The price of an equity for instance can go to infinity or zero without stopping (theoretically), but the volatility has mean reverting tendencies (known as regression to the mean in statistics). This can be used to your advantage.

* Learn to define risk. This means you pre-define how much you wish lose in the worst case, and by doing this you pre-define how much you are willing to win if things go best case. Think in extremes.

* Always think about your portfolio as a whole unit (thank you Khaneman and Tversky). Never look at a trade as a single entitiy. Think about it as one element of the whole portfolio (like literally your entire existence). This is a game changer.

* Achieve uncorrelated movement between the different components of your portfolio.

The System (narrated via 7 checkpoints):

Checkpoint 1: I started out as any other naive guy would: buying into mutual funds. Within a couple of months, I smelled something wrong and bailed.

Checkpoint 2: Then I ended up with the next best thing I could find, which was investigating and researching ETFs (yikes). But hey, at least there was one middle man out of the window by now. I actually never trust anything very easily, and try and rework the mathematics myself. I picked up PhD theses in the field of investing, and started studying papers published by Nobel Prize winners in the field of economics. In the end, I figured out what a basket instrument is capable of (potentially), and realised this is probably not the immediate solution I am looking for. But I parked part of my savings into such a vehicle anyway because it was at that point of time (given my lack of better knowledge) better than my local bank account. A couple of images illustrating my journey and thought process during this period (apologies for the mixed English-German; I'm a bit weird like that):


View attachment 35593

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Checkpoint 3: I worked out a TER equation that was low enough whilst injecting a factor (small cap) premium into the mix. After I spread the money, and parked it into the vehciles as planned, the thought that I could do better than this didn't let me go. A simplified version of the equation below (example calculation; not actual sum ivested; I'm skipping gold and bonds because I'm still young and have a relatively low net worth, where bank balances are covered by state insurances):

View attachment 35595​

Checkpoint 4: By this time, COVID happened, and my portfolio got a nice boost. However, I was still not convinced if this was the way to go. I was getting more and more dissatisfied with my job by the day. Therefore, I decided to take action, and started learning active methods. In this space, there is a lot of bullshit to evade (B schools can go to hell; all those wasted lecture hours :/ ). Eventually, I worked my way to the beautiful work done by Nassim Taleb. The math was/is hard, but the potential of the thought process started to blow my mind. I got into understanding random variables.
View attachment 35596

Checkpoint 5: I continued studying Taleb, and in parallel, incorporated psychology from Khaneman and Tversky (two of the most awesome minds I've come across). By this time, I started to understand the math of risk taking, and figured out ways of pre-defining how much I was willing to lose to define probabilities of how much I could gain. Later, I would learn that this concept is known as static hedging. Below, you can see a very simplistic, yet very powerful model that I came up with, after it came to me as a dream when I was half asleep during the night (yes, I was that deep into the subjects back then). I scribbled it in such a hurried manner with goosebumps, and didn't sleep for the rest of that night due to sheer excitement (M.K.V. = Max. Cumulative Loss / P.S. = Position Size):

View attachment 35597

Checkpoint 6: As the journed continued, I started learning dynamic hedging. This is literally one of the hardest things I decided to do; very difficult mathematics, at least for me. I convinced myself to jump into an active model without perfecting my knowledge in this area. I knew very well back then that this is gonna take years. I didn't want to stay theoretical for years without any practical experience. Besides, I realised that I didn't enjoy working with my boss anymore. As a stop-gap solition, I started learning the work done by Tom Sosnoff. A few images illustrating my struggles with derivatives, and the mathematics behind them:
View attachment 35598
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View attachment 35600

Checkpoint 7: As of the date of this post, my passive strategy (codenamed Virgin Beta) was up 15%, and my active strategy (codenamed Dirty Alpha) was up 48.89%
A few caveats here: These numbers are before taxes and before inflation. Plus these numbers are from relatively low cap investments (less than 50k USD). As the capital increases, the mathematics does not scale linearly, meaning, the numbers will most likely come down with larger capital inputs. However, I am proud of the knowledge I have been able to accumulate over such a short period of time. Even in its incomplete form, my knowledge is giving me such a significant advantage (especially in its Apha form). I have now quit my job, and am working on my unscripted money engine to feed my money system. While I will be turning to you guys for advise and suggestions for my money generation engine process, feel free to benefit from the money system knowledge I've been able to build until now.

P.S.
I am still continuing to learn Dynamic Hedging. This takes years to perfect. However, by now I have realised the importance of a money generating engine, and am focusing on solving this problem first before I dive full length into dynamic hedging back again.

Is there a Cliffs notes version?

 

[traction2]

So in a nutshell you have a fancy algo for trading?