Jan 2021 was way worse than what we just had.

In Jan 2021, the most shorted stocks went up ~55% as a basket in 3 weeks. 18%/week moves. And very important: this happened while the general market was flat.

In their recent jump, the most shorted stocks went up ~35% as a basket in 8 weeks. 4.5%/week moves vs the above 18%/week. And this happened while the general market was up 19%. Really, that's just in line with the beta - it's just what you'd expect the short term moves to be.

A small counterargument is that breadth was weak in the last couple of months, with $RSP only up 10%. If someone has no exposure to AI stocks, and they were short lots of junk, they probably made nothing on longs and lost big on shorts. They had plenty of time to risk manage, vs Jan 2021 where the gap ups were extreme. Thinking on this, I guess that's the factor that just blew out, right?

That was the bet.

Long 150% $RSP
Short 10% $SOXX (Negating $RSP's exposure to AI)
Short 30% most short

Those guys lost bad.

It's really been since just April 13th that my results have been so bad. Before that, YTD alpha was very strong.

What changed on April 13th specifically? For people who specialize in market regimes: What factors went wild from April 13th until April 22nd?

I've been reviewing what's been going wrong for me since March 1st in the hedge fund. I'm personally in a 20% drawdown (-15% after fees), which is particularly bad for me.

Usually during tough periods it's my short book causing problems. This time it's not. My shorts are only losing me 11% since then, while I have been 165% gross short and the Russell 2000 (best proxy for my short book) is up 9%. Gross adjusted, my shorts should be down 15%. Plus, my shorts run higher beta so really they should be down 20%. So alpha on shorts has actually been strong. The market did go up real fast, so of course I lost a lot, but I still consider this a big victory.

It's the long book where I am getting *killed*. This is so different from past junk meltups.

Stocks like $9022, JR Central who's main asset is the famous Shinkansen that links Tokyo with Nagoya, Kyoto and Osaka. This is one of my big losers. This trades for 7x earnings with solid earnings growth. More of my big losers:

$3288, Open House, a rapidly growing home builder, who's signs I notice constantly when going around the city. This trades for 9x earnings.

The more bottlenecks there are to AI, the better the AI business becomes, right?

If the world is beholden to $NVDA, $NVDA makes all the money.

With 6 different bottlenecks, AI supply is capped and prices can just keep going up. Committed hyperscaler spend becomes great. And aren't these bottlenecks going to last at least a few years?

I'm still skeptical on memory specifically. But some of these ... who knows.

Militia Capital my hedge fund lost 10/12 of the last trading days. Pretty brutal stuff! A straight line down of death. Alpha is sometimes correlated, even when the bets aren't fundamentally related whatsoever.

In this case, the explanation is incredibly obvious, which is rare. This time is happening because money is flowing out of other stocks and into AI stocks. The last time it was obvious what was happening was during covid, when the infinity money printer caused money to flow into the most speculative and trendy trash possible.

It's really nice to see why this happens. Most of the time you don't even really get to know why. It just seems like market spirits.

When things like this happen, long/short funds are getting slaughtered on their long beta, they have to degross/derisk as a group. Which pushes up bad companies that are more shorted on average, and pushes down non-AI companies.

These are the of moments that make long/short investing so hard. And who the hell knows when it will end.

I think I've solved the game theory of the Hormuz situation.

The IRGC doesn't care about their people. But they care a lot about their oil revenue.

"End your blockade or every day we will blow up 5% more of your oil infrastructure." That's how to end this very fast. I'm pretty sure it's that simple. And the people running this strategy probably already know. But I still think it's a good, loud and clear wake up call for the world that they let themselves get into this situation. So letting the world see cause and effect is important.

People investing with Lynch won a lot less than his fund's long term performance because they attempted to time the market.

It's genuinely sad that people do this. I think it's an argument to only even have the market open once a month for an hour. A big upside of a hedge fund structure is that people do only get monthly redemption windows, so only one chance a month to make a mistake. And they're expected to give advanced notice. And because of the human/relationship element, they are a lot less likely to do it.

To young people considering living in Japan or Asia generally, this area of Osaka is a very good option: $300/month in an outstanding (truly) location. Tiny room, but good enough for a bed and desk.

suumo.jp/chintai/bc_100…

People who want to break into the investing industry need to realize just how bleak things are for the legacy active management industry. Their marketing-first (marketing-only) playbook does not work anymore, and this will keep getting worse. When one of these legacy marketing professionals tells you how to manage your own career, do not listen to them.

You have to be different.

And, you actually have to add value / have an edge today.

Top talent "leaving to start their own firm" coming from major investing shops almost never really own their own business.

When they don't truly own their own business, it makes it impossible to get the incentives right for that firms own truly top talent. The major investing shops are psychopathic in how they operate.

All within the letter of the law, of course.

I was short $SILJ at $12 this year, like an idiot. My thesis was that BTC was a new substitute for gold, thus silver should do terrible.

But this terrible short was fine because I quit after it went up enough. It was fine because I did not stay wrong. On the other hand, I've been shorting a diamond mine all year. Diamonds have kept going down. And I have been adding to that short.

Do more of what works. And do less of what does not work. So much of investing success boils down to that.

I keep reading things like this about the companies I'm studying,

"In North America, in response to tariff uncertainty in 2025 ... the company is scaling up U.S. capacity to localize supply."

Economists argue this creates inefficiency.

I argue it creates stability. By itself, that is likely worth some loss of efficiency. I could just stop there.

But another point: economists ignore real world shocks and the extreme costs that come from them. This is particularly true for companies that offer critical inputs to much larger customers. They don't want to run the operation as an insurance policy for larger companies for years, who stand to have an extreme loss when the shock inevitably happens. Normalized, having more critical operations in the USA - especially for the critical, lower cost inputs - is a complete no brainer. For me, the American jobs point is secondary. But also important, particularly as a political necessity - hollow out the middle class enough, and you create an even larger political instability problem. Even if in theory it's more efficient.

Economists are so dumb...

This is by far the craziest move in junk stocks since January 2021. The move right now is about 60% of January 2021's at the very top.

Most shorted stocks are up ~100% since April. That's by one measure.

Another way I can look at it, we're only at around 40% of January 2021's move.

The best way to improve your long term track record is removing downside.

Go through your record and study your largest 5 drawdowns and truly understand what happened. Then make an improvement.

Way too many people focus on making large scores when this should be their focus. I think there's a lesson here for life generally, not just investing or money.

The Hang Seng index is down a bit in real terms in the last 15 years.

Despite Chinese stocks going nowhere for so long, and China's seeming large economic progress in that time, today's PE multiple is now the same as 15 years ago.

Has the situation in Hong Kong and China improved since then? That's partly a rhetorical question, since no seems really obvious. And I'd just say no. But to play devil's advocate... either of these seem possible?

1. Xi making himself supreme communist dictator and disappearing business leaders and creepy Jack Ma happy bicycling videos etc is actually good for shareholders.

I'm trying to take this idea seriously. It's maybe possible?

or

2. Xi's grip on power is not truly strong, and China is still about to become a capitalist country.
This post is really to say, of course, that China's rally seems very questionable. If last time shareholders got a terrible return at 12x earnings, why should the situation be different this time, if not worse?

I've been studying the true cost of clothes. Very rough numbers:

Shirts,

Decent $30 polo last 30 machine washes, $1/wear.

Lululemon $80 polo last 50 machine washes, $1.6/wear.

Zegna $700 polo lasts 80 professional hand washes (machine is no longer economical), $12/wear including laundry cost

Loro Piana $1,200 polo last 80 professional hand washes (machine is no longer economical), $18/wear including laundry cost.

Per year that is $365, $584, $4,380 and $6,570.

Shirts are by far the most expensive since they have to be washed every wear.

Pants,

Decent $50 pants last 30 machine washes, $1.6/wash. Washed every 4 wears, $.4/wear.

Lululemon $120 pants last 50 machine washes, $2.4/wash, $.6/wear.

Zegna $1,200 pants last 80 hand washes (machine no longer economical), $15/wash, $3.75/wear.

Loro Piana $2,000 pants last 80 hand washes (machine no longer economical), $25/wash, $6.25/wear.

Per year that is $146, $219, $1370 and $2,281. It's easy to see how the lower end of luxury fashion gets killed in a downturn, because the cost bump including laundry cost is so high. These clothes will wear out very faster with normal washes.

It's also easier for me to see how a top brand like Hermes does so much better - people that rich do not care about the cost, and the care cost as a % is much smaller.

Today's market is a mix of:

1972 with bubbles in large cap "generals".

and

1996 in the middle of the AI narrative.

Which is to say, it's impossible to know what happens with the broad US market right now.

The only key variable I can think to watch is the progress of AI. If ChatGPT6 is an even smaller upgrade that 5 was over 4 - if AI progress stops - the market will become predictable. The music will stop.
What do Bitcoin and Costco have in common? They're both considered the generals of their category.

AI stocks themselves are pricing in quite a binary outcome still. If AI continues to improve, both the earnings and multiples will expand a lot.

Subtle part of the Kelly Criterion:

Sharpe goes up as fraction of Kelly goes down, especially from .5 -> 1 Kelly.

You should want a margin of safety on never going above .5. Which is an argument to aim for most like .25 Kelly. It's impossible to put a hard number on what the true Kelly size is. Edges on bets are not fully known. So is downside risk. Correlations between bets isn't even that clear. And all of this constantly changes.

In the outcome that $NVDA:

A: Stays dominant in AI hardware, it's going to beat $TSM a fair bit.

B: Stops being dominant in AI hardware, it's going to drop a lot. Plus, $TSM will benefit from even larger volumes of hardware spend.

$TSM seems the much better risk:reward. The tail risk with $TSM is China invades Taiwan. But after studying modern submarine tech, I'm convinced that's very unlikely. And over time, $TSM is going to bring more of its capacity to the USA reducing that risk.

I'm seeing many posts calling an ai peak, or pointing out near record high positioning in semiconductor stocks.

I'm in the camp that this is more like 1995. The ai show hasn't even gotten started. AI is not a fad, and the great white-collar displacement hasn't even really begun yet. And that is going to happen.

I think it cannot come soon enough. We can once again make real progress in the physical world.

A few guys I know already do pretty well beating the market.

If they'd just take on a fair bit of leverage, they'd be absolutely killing the market instead.

https://twitter.com/walt373/status/1941969351822717421

This is the key way to use leverage well. If you're only 40% gross long - both in terms of beta adjusted and the raw gross - then you're so unlikely to drawdown even as much as the market generally during a meltdown. Never mind having a crazy blowup. The only way that's really even possible is concentration, which also does not mix with leverage.

"Stress-test at 100 % correlation: Size gross leverage so the portfolio survives if every sleeve gaps down together. (I aim for <–30 % projected drawdown at 100% correlation).