The grind is what's real

Vol #213: February 6th, 2025

North of a four handle latitude, it’s the small things that keep winter moving.

In the bowels of the city, not much light gets through. Even less in January. But there is a phenomenon, thanks to the just right tilt of the earth, that brings a beam of sunshine onto the counter of the Grand Central Oyster Bar right at the peak of lunchtime.

For a few weeks of the year, these precious rays make their way through the majestic arches above, and hit right on a small window in the otherwise vaulted and tile covered ceiling. When it’s sunny outside.

The century old bar serves as the junction point for travelers from Poughkeepsie to New Haven. Over two dozen varieties of oysters are available - Blue Points, Kumomotos, and Pink Moons coming together at the end of the line.

Of the hundred plus seats, I prefer one of four. Right behind the check in desk is a small bar, tended by the kind of barkeep whose book recommendations bring you back next month for another Bloody Mary and thoughts about the protagonist. Spicy.

If impromptu lit crit isn’t your thing, the conversation quickly flows amongst those who know the right place to carve out some extra time at the appropriate point in their journey. There’s an entire other blog to write about how to allocate the windfall of the young (my age) couple who are now shopping for small town music schools. Or the distribution schedule for a retiree who must do the Biennale every other year.

As luxurious as those investment problems sound, whether you have one comma or three, most of allocating is about mechanics. Letting your portfolio reflect your long term objectives is a grind. The liquor saleswoman and attorney at the other end of the stick know what I’m talking about.

David Swensen famously invented the “Endowment Model” of investing during his long tenure running up Yale’s billions. While the low liquidity vehicles favored by wealthy universities are usually not appropriate for individuals, his thoughts about long term performance ring true.

Returns in a portfolio come down to three simple things; which assets you choose to hold, when you buy and sell them, and which securities you choose within that asset class.

Duh. Buy low, sell high, amirite? No but seriously, the market only went up because there were more bids than offers.

There can be endless debate about those three answers, or there can be none at all. Buy a diversified basket of equities, regularly when you can, and sell them in a long time. Swensen liked inflation protected securities, so perhaps include a mix of them and a few bucks on the coins if you’re feeling frisky.

What I yadda-yadda’d over is the last part - “in a long time.” If you don’t have a specific edge, the free one is time. Free but for the fact that you have to watch the turbulence of your positions wiggle and scream.

Last week I talked about how efficient options markets are, viewed through the lens of basic 0DTE strategies, selling straddles and condors.

“Edge starts with enthusiasm”, I wrote. That is true. Secretly in whipping up the sell straddle backtest code I was hoping maybe there was a little bit more juice in those. The endless debates about fine tuning allocations are for the market participants whose hunger keeps the spreads tight.

The benefits of no free lunch, at the money or in the skew, mean deep and liquid markets for investors to transfer their risk preferences. But there is so much more time than trades. There are so many more ticks than your individual buys and sells. Gyrations that seem programmed to drive balance checkers mad.

Winter comes every year just like the market draws down 14% a year on average. 19 of the past 35 years have 10% or more corrections. Those two months of less than ten hours of day light are highly predictable, but man the winter solstice is a drag.

Less well known is when the grey sky dissolves. You can’t book lunch at the Oyster Bar a week in advance and be certain to sit underground before a plate of sun speckled Quahags. But if it is sunny, it’s a sure thing.

That’s how I know it’s real. Why it happens is logical, but not predictable. It consistently repeats itself, according to no set schedule. The dopamine hits extra hard when it’s random.

Apply this thinking to your next trading strategy. Put selling for income instantly breaks down, because you’re getting paid to short vol not to pad your account. YouTube isn’t finding loopholes. Blind condors aren’t VRP harvesting either. Without any further decision filter you’re just feeding the beast of structural alpha as exchanges, brokers, and market makers each take their slice.

There are two major red flags to be aware of when you’re looking at opportunistic strategies. If something makes less or loses worse than expected, cut bait. You’re missing something, and it’s time to step away from whatever table you’re playing the mark at. This should also be the default reaction - it’s really tough to find a true and durable edge.

60% win rate, 40% chance of rain, you’re dealing with probabilities. What comes down the pike next is anyone’s guess, but a robust system handles them as expected.

A basic diversified strategy ain’t much, but it’s about as bullet proof of logic as the market is able to offer you. To get an edge in stock picking or vol pricing you need to spend a lot of time outsmarting everyone else. That’s a job.

The options strategies that are going to be successful for most investors have that same robustness. If you define outcomes with collars and spreads overlaid on equity holdings, you don’t know when the next market fracture will happen, but you know exactly what part of the drop you’re covered in.

A simple structured product buys calls or call spreads with zero interest bonds. At the end of its life you get back the principal and have some kicker if the market goes up. That’s it - every single possible scenario is covered whether the SPX is 20 or 20,000.

The grind of continuously applying that exposure is rebalancing, rolling, sweeping up the cash. But also the mental aspect of it - having faith that you’re doing the right thing even as you’re ideally doing very little.

Check back next month, I hear there’s better weather coming.