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Matt Hollerbach Profile picture
Matt Hollerbach
@breakingthemark
Profiting from randomness, focus on the geometric return Not investment advice Founder, https://t.co/LwwzO0pwTs
9 subscribers
Nov 11, 2022 • 25 tweets • 8 min read
Two years ago SBF wrote a thread on bet size and Kelly betting.

I questioned him on it. He engaged with me.

Let’s take a look at this thread and SBF’s views on bet sizing in light of the events with FTX and Alameda this week. First off, nearly all financial blow ups arise from too much leverage. Too much leverage is a killer. So right away, you should question the idea that “better is bigger”.

Often bigger requires leverage. Often “bigger” is bigger than a fully Kelly bet therefore it's not better.
Jun 10, 2022 • 12 tweets • 3 min read
Some of it is probably because of my geometric reference point.

I view everything through Geometric return. It's what I focus on, so anything that is critical to maximizing CAGR is really important to me. And if it’s that critical, then how can it not be “real”? From my perspective, if rebalancing maximizes CAGR, and not rebalancing produces less CAGR, then that is a “premium” that is earned from rebalancing

Apr 13, 2022 • 12 tweets • 3 min read
I've written before about how multiplicative games (like investing) begin as arithmetic averages, but as time and repetitions increase, trend more and more to the geometric average.

This great game shared by @10kdiver shows the effect beautifully. On the first card draw, the "edge" for that draw alone is clearly the arithmetic edge, and it's really really large.

But as you pull more and more cards, that edge decreases.

Ultimately, if you pull every card rolling the outcome from one round to the next, the edge disappears.
Mar 13, 2022 • 16 tweets • 4 min read
I made a conjecture a couple years ago that very often gets a lot of push back:

That the optimal leverage of individual stocks is 1.

The evidence I found supports this theory, but many people really hate it.

breakingthemarket.com/stochastic-eff… The actual math is often criticized as controversial because I presented it though the lens of @ole_b_peters and @alex_adamou 's work on Ergodicity Economics.

But it's not really a new equation. A version has been used before by titans of finance and investing.
Mar 12, 2022 • 14 tweets • 3 min read
Let’s dive into this idea further.

There isn’t a subject in the entire world that can only be correctly viewed from one perspective. Investing is one of the most complex fields out there.

Investing certainly doesn’t only have one correct, view point. Traders, long term investors, value investors, quants, asset allocators, etc, none on them have a monopoly on truth in terms of investing.

None of these styles are necessarily superior to the others. They just approach the market from a different perspective.
Mar 10, 2022 • 5 tweets • 3 min read
Three years ago today I started my blog. How time flies.

I wasn't on twitter then, and therefore I never put the first post on here. Since I didn't complete a new anniversary post, here's the one that started it all:

breakingthemarket.com/welcome/ And since this the blogs birthday I'm going to reminisce about a few of the comments that meant a great deal to me.

First, if you've ever read @moretothat 's own ridiculously high quality writing, you'll understand why I'll always remember this one:

Feb 1, 2022 • 6 tweets • 2 min read
Have you heard of "The Baltimore Stockbroker" mail stock tip scam? @dollarsanddata explains it well in this post.

It goes something like this:

You mail out a bunch of stock tips about the market. Half up, half down.....

ofdollarsanddata.com/the-mcrib-effe… Which ever one was right, you mail back more stock tips, half up, half down.

And you repeat this pattern for a while.

After a few letters some people will have received a long string of perfect stock tips. It will look like you are exceptional at predicting the market...
Dec 31, 2021 • 7 tweets • 2 min read
Who was the first to advocate using the geometric return in investing? Both Mark Spitznagel and I agree it was Daniel Bernoulli.

Most investors would benefit from understanding the true message from his brilliant 300 year old paper on measuring risk.

breakingthemarket.com/the-earliest-a… The thread from last December where I first approached the topic.

Oct 18, 2021 • 7 tweets • 2 min read
Showing why vol targeting produces a higher compound growth rate portfolio, through coin flips.

Odd rounds, heads: +10%, tails -10%

Even rounds, heads: +20%, tails -20%

Both games average 0% gain each flip. The even rounds have 2X the volatility of the odd rounds though. This game is supposed to mimic how markets have variable stable volatility. There are periods of high vol and period so of low vol.

Total volatility for this game is sqrt(10%*10% + 20%*20%)/2 = 15.8%

Vol drag is 15.8%^2 /2 = 1.25%
Aug 26, 2021 • 9 tweets • 3 min read
This is a deep point.

If you only sampled data at one month you shouldn’t “expect” to find the true arithmetic return. That was the point of this post.

breakingthemarket.com/the-arithmetic… When you sample from a distribution which was created through compounding, you need a very large amount of samples to expect to “find” the arithmetic return with the sample because compounding skews the data.
Aug 13, 2021 • 29 tweets • 6 min read
I’m often asked my views on long vol and tail risk hedging and if I’ve looked in it.

I haven’t really said much on the topic before, but I have explored it quite a bit.

Here’s what I’ve found in my journey into the long vol universe On paper, long vol is a great asset to rebalance and run a Shannon’s Demon type approach. Its negatively correlated with many things, often times very negatively correlated. It’s the perfect type of asset to rebalance with other assets to increase the long term(geometric) return.
Aug 11, 2021 • 7 tweets • 2 min read
An investing story about the rest of this year:

Covid finally starts to diminish in the rest of the world.

I think most American’s think that because we have lots of vaccinated people and our lives mostly normally now, the rest of the world is similar, but they aren’t, Their vaccine levels are far below America’s and they have still been dealing with outbreaks and lockdowns as the USA has trended towards normal.

But that will change. They will get vaccinated, and go back to somewhat normal life as well. Here’s what’s going happen when they do.
Aug 7, 2021 • 6 tweets • 2 min read
How do you determine a car's speed?

Well one way is to measure the flow of gas going into the engine, do some math with that and the size of the engine, further calculate it with the dimensions of the crank shaft, input the current gearing ratio... of the car, apply the weight of the car and the diameter of the wheels, and then add in the slope of the road and wind speed.

With all that you could calculate how a cars speed and you would have a good understanding of why its at that level.

Or...
Jun 16, 2021 • 7 tweets • 2 min read
Is Geometric Balancing actually a value strategy?

Here’s the logic
When prices pop up, all other things being equal, Geo-balancing says the asset is now overvalued in the portfolio and sells it.

When prices fall it says the asset is now undervalued in the portfolio and buys it. The decision to buy or sell is entirely based around the value that asset provides to the portfolio at its current price.

There are two key difference here to traditional value investing
Jun 9, 2021 • 12 tweets • 3 min read
With talk recently about improving a portfolio by adding new assets, I want to talk about the opposite.

Can removing assets improve your portfolio?

Let’s start off with a sports analogy from one of the greatest basketball teams ever. The 2015 Golden State Warriors were a great basketball team. But in the championship they fell behind early.

Their coach then tried something different. He removed the “center” position from his lineup and replaced him with another forward.
May 25, 2021 • 8 tweets • 2 min read
Hedge funds, are the spices of the investing world.

By themselves, they often don’t taste spectacular, but when you mix them with other ingredients they improve the flavor of other foods. Many specialized funds do not actually produce much, if any, return. But they are often negatively correlated to the market.

This means that adding them to a foundational “beta” portfolio improves their geometric return by lowering portfolio volatility.
Apr 15, 2021 • 18 tweets • 3 min read
I think the real scarce resource in Bitcoin isn’t created by the the 21 million coin limit, but by the 7 transactions per second limit.

The real money will be in controlling that resource.

A thought experiment... Let’s assume Bitcoin is successful from a store value/digital gold perspective. People will use it like a savings account or investment account.

Suppose there are a billion wallets, a touch more than 10% of the global population (of course organizations will have wallets to).
Jan 31, 2021 • 11 tweets • 2 min read
Some of the takes lately on short sellers have been exaggerations of reality in my opinion.

Short sellers serve an important roll in the markets. They dampen out volatility because they often cover when prices fall rapidly to cover their positions, and sell on rapid... .., unusual price increases on the way up. Usually this improves market stability.

Others have pointed out they also ferret out fraudulent companies like Enron and Worldcom. All true.

Lately, I have seen the following companies being short squeezed described as frauds:
Dec 17, 2020 • 30 tweets • 9 min read
I just re-read Bernoulli’s 1738 paper “Exposition of a New Theory on the Measurement of Risk” which is the foundational paper of Expected Utility Theory.

It’s Amazing

It’s so wildly different than EUT that its hard to believe this was its beginning.

Let’s see if you agree. The paper isn't about utility. It’s about expected value.

Bernoulli used the utility concept to get the reader to abandon the traditional view of expected value(arithmetic average), and then used it to derive the equation for valuing risk.

The final equation doesn’t use utility
Dec 14, 2020 • 7 tweets • 2 min read
If everyone is society optimized for arithmetic return, or linear utility, then society would grow wonderfully at first. Society's geometric return would be high. Some people would win big, some would lose big, and the average would be good because many are involved. Through time though, many people would get unlucky by losing a few times in row and would fall out of contributing because they don’t have much capital/resources/access any longer to help. So now the number of contributors to society’s growth is smaller.
Jul 4, 2020 • 7 tweets • 2 min read
There are two side to the Kelly Criterion which I think often get equated as the same when they really are not.

Traditional Kelly betting is about limiting your exposure to a risky bet. The bet in question is usually a "bet" in that when you lose, you lose everything you expose. So you scale back and don't risk everything. Most casino games fit this description as do some financial instruments like options.

The optimal leverage here is less than 1. You want to hold cash on the side to buffer the future losses.