The First Car on a Foggy Highway

Sun, 02 Jan 2022 16:39:46 -0500

The Fog

On Thanksgiving 2014, I made a trip from San Francisco to Portland, along the Pacific coastal Highway. It was a trip that fundamentally shaped my thinking on many things.

As I was driving on the highway, I saw fog flowing between mountain valleys, like a river or a waterfall in the middle of the air. Tall hills on the ocean side of the highway would create pockets of clear view, but as soon as you turn a corner, you plunge into a cotton candy of mist.

In the daytime, the fog creates some comfortableness for me to drive, but overall the visibility wasn’t too bad. Then the night fell, and everything changed.

The Beast and the Beacon

Driving in the foggy night was scary. In fact, words could not fully capture that bodily feeling. All my muscles were tensed up. One part of my brain, out of the primal instinct, kept raising the question “is that danger” on every visual signal, while another part of my brain was busy computing the scene to actually determine the road condition. No matter how many deep breaths I took, I could not turn off the thought that a beast was lurking in the dark.

I mean, how could I? The instinct, in every sense, was warranted. With the headlight on, I could only see about 20 feet ahead – or about 1/4 seconds of the car’s traveling time. I’d hit and die first before I had time to brake in an accident.

Wait, what is that dim red light ahead? It is so dim that I cannot always see it, but it is there. As the dim red light slowly moved right and left and became more clear, I realized that it was another car ahead of me.

The red tail lights of the car ahead allowed me to infer where the road goes. My brain quickly learned to focus on the dim red light. No more beast in the dark for me. Instead, now I have a beacon.

Two Modes

I adjusted my speed to maintain a safe but visible distance from the car ahead. I became more relaxed. I even turned on the radio and laughed at some of the jokes. As we drove past towns along the way, the two-car group turned into a caravan of seven cars.

Some impatient drivers would pass me from the left, but once they passed all the cars and became the leading car, they slowed down and became the second car.

Indeed, it is hard to be the first car. When you are the first car on a foggy highway at night, your prime directive is not about speed. You have a very limited view about what’s ahead. You have to navigate the great uncertainty. The road, if there is any, is defined by the direction you travel.

If you are following a car, life is much easier. Yes the fog is annoying and the night is dark, but you have a beacon. You can anticipate the turns, you have longer time to respond to or prepare for situations. You can be more relaxed.

But it would be a mistake to extrapolate the relaxed experience. The moment a car becomes the first car, the mode of operation immediately changes and now uncertainty is the beast.

On Life and Conflict of Visions

In many situations in life, I found it useful to ask whether I am the first car on a foggy highway. The answer would then dictate my mode of operation.

If I want to do something never done before, speed won’t be the goal to optimize. Instead, finding what’s right in this case is. Conversely, if I am trying to replicate others’ success, or applying other’s ideas, then speed or efficiency is likely mandatory.

This framework can also be used to analyze many other aspects of the world. For instance, China’s industrial policy can be thought of as the mode of operation for a car following the leading car, in this case the US. It would be a mistake, however, to extrapolate such policy and think industrial policy can propel a country into technological leadership.

In his book “A Conflict of Visions", Thomas Sowell laid out the conflict between “constrained” and “unconstrained” visions. The first car vs following car narrative here resembles that dichotomy. Most things in life lie somewhere in between. Nevertheless, this dichotomy is useful for me. May it be useful for you.

On Investment Style

Fri, 20 Mar 2020 13:39:46 -0700

Just a Name

Be water, my friend. — Bruce Lee

In a way, investment is not that much different from martial arts.

Many white belts set out to “beat” the market and end up getting beaten up by the market. Of course you will get beaten up by the market, it is as inevitable as the daily sun. Those who advanced to black belt without getting KO’ed by the market learned the art of balancing risk and reward. At the end of the day, you don’t beat anything, you better yourself.

People ask me what the investment style of Leaps Capital is. The answer is there is none, or the style is mu (無). Fundamentalists, chartists, contrarian, momentum… There are only names, and names do not define my fund.

Like martial arts styles, investment style is merely a handy name (i.e. a meaningless label) to a collection of tools used in investment. Choosing a style oftentimes means using a set of tools, while not using another set of tools.

It may well be a good strategy to NOT learn how to kick and focus on perfecting punches when you are boxing in the ring, because the rule prohibits kicking. Real-world investing is not a sport with rules, however. Given the ever-changing world, we strive to be open and adaptive.

The Leaps Style

Adapt what is useful, reject what is useless, and add what is specifically your own.
— Bruce Lee

This is not to say that I hop from one tool to another without sensible focus. I will dive into details about the tools I primarily use in the next few months.

For now, a quick outline of the tools I use, which would form my “style” – the leaps style, if you have to give it a name. These tools are chosen as they represent my core strength. At this point, I also know the limitations of these tools reasonably well.

Ergodicity Economics - Focus on CAGR, Kelly’s criterion, Tail-risk hedging
Noncontinuous Leaps - Phase transition , Ising models, LPPLS models
Computational Tools - Hamiltonian monte carlo, TensorFlow probability, GPU