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RR Journal No. 12

“Do you know who you really are? Are you sure it's really you?”

- “I Sat by the Ocean”, The Queens of the Stoneage

Every heavily organized life should have a cozy ‘lil corner for chaos. Yes, chaos. Because the thinking (wo)man also deeply understands the value of randomness. And this is coming from a guy who's so regimented that he built his own goal tracker. Randomness is fresh input into the machine–an opportunity to learn or test the entire structure that you’ve built for yourself to see if it’s as sturdy as you think it is. Of course, it’s not every day that you want to throw a big wrench in the gears, but it needs to be regular enough so that you don’t end up becoming fragile, isolated, and stupid.

And before this starts to get abstract, let me share an example.

The math whiz and options trader, Nicholas Nassim Taleb, best known for his book on the fragility of financial systems, The Black Swan, has an unusual habit. He goes out and parties. This is a bit odd for a relatively older gentleman, worth a few hundred million, who’s also a prolific writer. I don’t mean he’s passing out, forehead-down at the bar at Bradley’s Cafe in Providence, Rhode Island, but he makes it a point to show up at the well-heeled cocktail parties he occasionally gets invited to and gets deep in his cups (supposedly on red wine). He doesn’t go home early. He’s known to get rowdy.

Now, I’m the last person who is going to condone reckless behavior. But, to be truly intelligent, you need to behave like an idiot every once in a while just to keep things in check. If you’re a doctor, lord knows, you can’t spend 100% of your time hanging out with doctors. You become a lopsided softie only mixing with people directly in your line of work or belief system. According to Nassim Taleb, without parties you have no opening for randomness in your life–a new friend, business partner, investment, lover…a heck of a lot can come out from a big night out in the right circumstances.

Having the desire to keep my hangovers to a minimum these days, I’ve been experimenting with a new corner specifically designed for randomness. By unlocking a few hours on my calendar every month and taking consulting calls, I’ve met some seriously interesting people I wouldn’t otherwise. These calls aren’t a profit center, they’re far below the value of my hours (and I don’t recommend selling your time by the hour in the first place). The cost serves as a simple filter to limit demand and separate the serious from the unserious. I’ve found that this method is a very simple way to open up my week for a wildcard encounter. And, so far, it’s been extremely fruitful.

I’m confident that both you and I have no idea how close we are to uncovering a new path or new opportunity. It may be one conversation away. Sometimes strangers are the best individuals to knock you over the head with an observation.

Fancy people call this serendipity.

So, solely for your entertainment, I’m going to list a few chance encounters where I’ve met amazing people that have changed my life:

  • Friend, filmmaker, and collaborator: a tiny mezcal bar in Mexico, “So, [sees cowboy boots] what part of Texas are you from?”

  • An ex (but wonderful, nevertheless) girlfriend: coffee shop, “That's my favorite record too.”

  • Close friend and mentor: Art Basel Miami afterparty, “You’re a mental patient.”

  • My barber: hallway of a building in New Orleans, “Do I really need a haircut that bad?”

Do you want to get to know cool people? Do you want to find collaborators who are going to challenge you and keep you sharp? Do you want to fall in love? Do you want to have a great haircut? Then, I suggest picking one day a month (to start) when you break all the rules.

Open your calendar, open your front door, treat yourself to a fancy dinner all alone and see what happens. I can all but guarantee if you see me there and send me over a glass of wine I’m going to drink it with you and order another bottle.

This week, I’m taking meetings from Miami, FL


Global Markets: Stress Testing

Those that had the pleasure of living through the 2008 Financial Crisis as an investor (or trader, as I was at the time, sleeping under my desk briefly after I loaned Lehman over a billion dollars of Treasuries I wasn’t sure I’d ever get back) can quickly call to mind all of the major investment banks voluntarily (at first) then mandatorily (soon after) performing “stress tests” on their balance sheet. This is a fancy and kind of annoying way to describe scenario analysis. Meaning, if this thing happens, this is how screwed we’ll be.

I think everyone should be able to perform a simple one of these tests at home in order to ensure you don’t get crushed should things continue to disintegrate in the economy. Why? Because if you map out three paths, you’ll begin to prepare for each as necessary.

Currently, we can simplify the next 2 years into three scenario buckets: another drop, stay the same, or bounce back. If we drop another 20-30% in the S&P500 are you going to be able to survive? Are you borrowing against your portfolio and will need to come up with cash fast? Is the current downturn already causing a headache for you? Are rising rates going to give you a headache on an adjustable-rate mortgage or credit product? This isn’t the time to be in denial.

Here’s the move.

Build a simple spreadsheet that slashes your portfolio by large percentages and see when you start to get in trouble over a two-year period. The first line of defense is cutting your personal consumption to build a cash buffer. The second, which is way more complicated for the beginner is to use options. To hedge such a move, if you’re so inclined, you can buy put options on the S&P500 when levels hit your “danger zone” –this way you start to make money if things should get really bad. You can buy puts on SPX, XSP, or SPY underlying depending on the size of protection you need. Advanced practitioners should check out this article in order to make sure you’re actually protecting yourself when modeling scenarios. This free tool lets everyone price options too.

The chart below shows what would happen to the cash value of a portfolio with an initial year-one "crash" of 20%.

*Not investment advice


About this newsletter.

This weekly email is written by me, Nicholas Crown. Meaning: this email is not professionally edited (yet), so please reach out with any suggestions or errors by replying. This is not investment advice.

If you want to meet me 1:1 you can always book a time here.

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