Dave Portnoy said it himself, the first million is the hardest, it took him roughly ten years to accumulate that kind of wealth.  Most never get there.  Why?  

The math and economics are painfully simple, it's about convexity. 

Dave actually understands this qualitatively, his formal quote: 

"Once you get it [money], it's easy to get a lot more..."

That's literally convexity.  

But there's no free lunch, right?  

If it were that easy, why isn't everyone a multimillionaire?  

I'll let Harvey Specter explain the hidden piece of the puzzle...

Geometric growth, multiplicative growth, compound growth, growth on growth, convexity is typically discussed in the context of interest.  This bores everyone, including me.  Which is unfortunate, because it's how all growth occurs.

The big payoff that awaits you is primarily a function of what?

Rates?  Nope.  Principal?  Nope.  Time.

Shocker, everyone wants the payoff now but this leaves an incredible amount of opportunity for the patient and capable to accumulate gains in the long run.  

The start, however, is slow, sometimes painfully so.  

Other methods may appear to be outpacing the long term methodology.

But what good is wealth in the short run if it doesn't make it to the long run?

This is textbook tortoise and the hare.  

Boring?  Maybe, but do you want to make money?

The most important idea that I can convey to you in this note that I am writing today: convexity does not stop at interest.  It applies to everything, even qualitative skills.  Trading, investing, sports, ..., anything you can improve at.

Think of it this way, when you learn a new skill or idea are you the same person as when you go out and learn another?  No, you have acquired a skill since then, and you can apply that knowledge to the next thing, and the next.  You do not learn or acquire skills on fixed principal, they compound together over time until you become exorbitantly competent in a field(s).  But it takes time.

The biggest problem with this framework?  There isn't always a quantitative way to gauge your growth profile.  This doesn't change the fact the framework holds, but it makes it difficult to assess progress along a stochastic path.  

You may have quantitative proxies for progress in the form of match score, rankings, even P/L but it does not do the broader idea justice.  When we start the path at the start of any journey we see people much further along than us.  It is difficult to understand the climb or how they got there.  It wasn't over night, not even close, and it wasn't one lesson they learned, it was a series of (extraordinarily painful) failures that produces that growth on growth: convexity.

If time is literally what produces this convex reward profile, what's the difference between someone who makes it and someone that doesn't?  Clearly not everyone is a millionaire, famous athlete, so on and so forth...

The "winners" survive.  A violently underestimated idea because it's not sexy.

I talk about it all the time.  The objective in the trading and investment management space is to make it to the long run.  You now have an idea as to why that is the case.  That is where the convexity of your payoff lives.  This is not conjecture, this is not some abstract thought experiment, this is the truth I wish I knew when I was younger.  If you survive you can make it there.  If you don't survive, you never will.  Conjecture?  No, but contingent on Bayesian updating?  Sure, a topic I've discussed and will continue to discuss another time.

Survival is more important than everyone realizes.  

How many people quit because they run out of money?  Perhaps infrequent.

How many quit because it got really hard?  It's more common than you think.

Or perhaps the ever common "why should I bother even try?"... "just coast"..."at least I'm never disappointed"...what devastating ideology, those poor minds...

I knew a fantastic tennis player, he could've easily been top 100 in the world.  That was the payoff waiting for him along the convex return profile, but he didn't survive.  He quit.  It "stopped being fun".  That's what not surviving looks like.  He still loves tennis, but not like that.  It's a shame, it was always fun, that was his mistake, he did not survive.

Which is why I will always win with my like minded brothers and sisters, I'm too insane to quit even when things get really hard.  And if you've been following me for quite some time you will know, things have gotten really hard at times...

Roman these are arbitrary platitudes "don't give up" etc...

No, this is not motivation, this is math.  There is a difference, one has structure.

Want to make a whole bunch of money?  Why is it easier when you have it?  

Need to pay your bills?  Your income only covers your bills?  What is left to save and invest?  Exactly.  When your living expenses are covered by your investments, every dollar you earn goes toward the same investments funding your living expenses, and the budget grows then at a growing rate: convexity.

🔥 Hot Take of the Week: Convexity and Wealth Tax

I have an important remark now, at least to me, maybe it's even a little political (exciting!).  I was debating whether I should even bother to include it.  Talked to the boss man about it and he said the second you can't say whatever the fuck you want on a platform you've built from nothing you've sold out.

Or worse, you're afraid of what other people might think of you.

So thanks boss man (me, yes, I'm crazy :P), here's my hot take of the week:

Do you want to take some of my muscle and cardiovascular health because I understood (at least qualitatively) the convex payoff of maintaining fitness at age 12?  Now that I'm in tremendous shape, do you wish to charge me a fitness tax for the work that I put in?  It's easier for me to maintain, so if you take some I can get it back faster: convexity.  

It seems fair, take some of my muscle and cardiovascular health...because I did what everyone else wasn't willing to do?  5am strength training, 6-13 mile runs at 10pm after work, getting kicked out of the gym after closing time, eating chicken broccoli and rice everyday.  

Wait.  Why am I the adult in the room they can virtuously take from?

But it's fair right?  The folks who are out of shape just couldn't do what I can.  

They didn't have the opportunity I did...them as adults now...that I did at 12?  

Ok, what if you take from me now too much?  Oh I get it...I can just work hard and make it back faster than they could have gained it in the first place, right?  

But what if you take too much from my reserves.  What you thought was fair was what I needed to function.  

You and I will always disagree over what that sum is.

Now I get injured, and I never recover.  You've just stunted not only my growth, but irreversibly destroyed my trajectory.

But it's fair because I had it at one point in time, right?  Nobody cares what it looks like after you take from me, just that I have something to take in the first place.  

And of course, it'll then be my fault for not protecting it, right?  After you took what you deemed to be a reasonable sum to take for me to recover?  Then when I am in need of taking, I, alongside everyone else, can go to take from those with their health together and the cycle begins anew.

Or we could all just literally do it ourselves.  Hard?  Yep, shocker, taking is easy.

Cool, now let's apply this idea to wealth.  RoMAn iT'S nOt thE SaME.  Actually, it's exactly the same.  Wealth is often compared to quality of life, base health is arbitrarily the closest thing governing a covariance structure between it and anything else.  But hey, if you believe you are entitled to my health for the work I've done then mannnnnnn, you aren't gonna like this next one.

I'm not rich, but I can't stand the "rich stay rich so take from them" idea.

Because they understood convexity earlier than you or your bloodline we deserve to take more?  Give me a break.  Someone along the way suffered more than you know to build that.  They did their 5am strength training, 6-13 mile runs at 10pm, and that is their payoff.  Nobody is entitled to any sum of that, especially if it's being lit on fire anyway...  Mad?  Unsubscribe here

In any case, that's why the first million is the hardest, Dave.

You have to cover all the shit you need to stay alive while simultaneously trying to keep the ship from sinking.  It's quite an unpleasant experience.

Couple that with people actively rooting for your downfall, which every founder or allocator of risk will face, and you've got an environment that is too difficult to face without a silver bullet.  That silver bullet is confidence.  And it's directly related to your ability to stare into the abyss of uncertainty and act optimally.

People love to call it cockiness, but (as usual) they're wrong.  Which I will continue to discuss in my note next week with more on Bayesian updating.

With that I will leave you to the Weekly Guild Letter.  

I hope you enjoy, and I hope you learn something!

- Roman