Taleb talked about this with his recommendation to get exposure to randomness that has asymmetric upside, and is analogous to luck is preparedness meeting opportunity. What I like about the OP's model is it also explains the asymmetry of social media where people do very little at all and talk about is a lot because the kind of non-linear success we are aiming for is a function of exposure.
When you have wealth of any kind, you naturally orient to getting exposure to opportunity for diversified parts of it, but when you have a scarcity view, your decisions are necessarily all/nothing, and it even becomes a class culture thing. It's circumstances, but also learned attitude.
Related, I'm sympathetic to what's happening with GME and WSB, if a young persons net worth is four digits, it seems insane not to gamble it on options, as the housing bubble has cut off the last way for working people to get leverage. GME may mark the inflection point in the markets where young people realize it's their best or even only opportunity for leverage, and meme stocks are going to be the new normal because the economy doesn't provide anything better to invest in for under $50k. (that is, unless remote work makes distant property viable to live in)
Your observation about young people with four-figure net worths thinking it’s rational to gamble it all on options is pretty much this week’s equivalent of those living paycheck-to-paycheck “investing” in the lottery.
The bigger problem is that this is rarely just a one-time decision to gamble. And repeatedly doing this is statistically pretty certain to lose you significant amounts of money—particularly when compared to just investing in the market as a whole—over the long run. It’s just another way that the poor are trapped in poverty, even though you can of course always find individual cases where someone got lucky and made millions.
This is one of the reasons I think Robinhood is a fundamentally an evil company. It’s been pretty conclusively demonstrated that the more trades you make as a retail investor, the worse your returns. To wit: Fidelity did some internal research on their customers to see which cohort had the highest returns. The winning cohort? The dead. Dead people don’t make trades, and so perform better than the living who do. I’d be willing to bet a large sum of money that Robinhood’s internal metrics conclusively prove that the net effect of their existence is a wealth transfer from the poor to the rich.
The real Robin Hood-esque company in this whole thing is Vanguard, who have almost certainly done more than most any other company in this space to return profits from the market to customers of all wealth ranges.
Being a 4 digit net worth grad student in Europe, riding a few meme stocks just for a short-while has increased my 'wealth' and given me tremendous amount of financial freedom. I understand that the odds are against me, but really, the expectation even when accounting for variance, and adjusting for risk tolerance are a no brainer to me.
I made >40% of my net worth in the first 2 weeks of January alone, and with GME I have multiplied my net worth by (>tenfold). Yes I understand that these are 'extraordinary times', but accounting for everything. I have literally nothing to lose. I can fast for a week if I need to, I can walk instead of taking the metro. Whatever. I am not going to lose a lifestyle that I never had and I never had a safety net to begin with because being a 4 digit net worth student doesn't give you any safety net.
Keeping track of my bets even before getting into this, I was right more often than not, and I am aware of survivorship bias and confirmation bias. In the limit, it makes more sense to spend 4-5 hours per day learning about market analysis, observing trends close to me and making decisions about sectors/fields that I know about.
The trouble is that, if it works, why wouldn't you try it again? You're not only a single data point, you are also a snapshot in time. Two months ago, you didn't have much. And, unless you truly decide to stop doing what you're doing, you are likely to have about the same two months from now.
This is exactly right. Posts just like OPs can be found all over the internet, yet it doesn't change the simple facts. Rarely, if ever, do these people come back months later to report that indeed they kept trading and lost all of their gains (if not more). What you have in OP is a snapshot in their time; hardly the complete story. Time will tell, as they say.
I said this in another related discussion, but I hear countless stories from friends about their incredibly prescient trades that net 50% returns in a day. I never hear stories about the losses.
Somehow, despite funding this hobby with their outsized tech worker salaries, none of them seems to have made their millions yet.
Then you may not have been in WSB before GME blew up. Especially during March and August, there was a lot of 'loss porn' and it is always interesting to hear how people lost their money.
Fair point. By playing with the same amount of money each time, I can repeat the conditions and my behaviour. That is, I can easily 'yolo' the same amount in a year and behave in the same or similar manner. The reason being that changes in circumstances significantly alter our behaviour and perception. By simulating the conditions I can possibly emulate the behaviour and thought process.
I understand that this sounds like a rationalising gambling behaviour, and in part it is, but on the other hand, making money it is a multi-objective problem.
Maximize net worth subject to minimizing risk and time.
There are many ways to play this; you can throw a considerable amount of money in stuff like AAPL/MSFT and so on, and that is a good position to be in, infact MSFT went up 350% IIRC in the last 5 years, that's nearly +35% YOY.
Alternatively, you can gamble small amounts and capitalize on the FOMO by identifying bubbles, riding them, and getting out fast enough by not getting too greedy. This isn't the best strategy long term because you can miss good opportunities, like AMD, but this falls into acquiring more domain knowledge. Plus it sounds like trying to time the market, as many do, but I disagree. Many who try riding the bubble try to time the peak. I disagree with that approach. The goal is to get out fast enough to outpace the market.
> Plus it sounds like trying to time the market, as many do, but I disagree.
You can disagree all you want, but this is attempting to time the market. It’s literally the exact thing that’s repeatedly warned about. Trying to be the next-to-last out in a Ponzi scheme is a dangerous game, and one that many “smart” people have lost.
That’s not to say that some people won’t succeed at trying to time the market. It’s just essentially roulette: you can do well for yourself or you can lose money, but on the whole it’s a losing proposition and winning isn’t particularly correlated with skill. And—perhaps more like poker—even repeated bad plays can be rewarding in the short or even medium run.
Also like poker, taking big gambles can be profitable in the short term, but any time you put your bankroll on the table you’re risking going bust. Even a 10% chance is going to send you back to square one eventually.
Other than exceedingly rare cases, people who perform well in the markets don’t seem to be the same year-over-year, except at the rate you’d expect from random chance. Smart plays can turn catastrophic, bad plays can be profitable, and it takes a lot of honest introspection to assess whether or not a play was smart or simply bad but lucky.
I bought into AAPL early in my investing career. It was right around when Rails was taking off. I saw a UNIX system with great interface design and better stability than popular Linux distros, and developers flocking to the platform for tools like TextMate. I knew AAPL would take off in the end if they were grabbing such developer mindset.
I was right, but for all the wrong reasons. AAPL took off, but it was pretty much just because of the iPhone. It had nothing to do with what I thought it was, and in the end I was just lucky. That’s a lesson that stuck with me.
In the short term, when someone gains in the stock market, someone else loses. Because of “invisible” transaction fees that go to Wall Street, retail is losing on net. So in the bigger picture, small investors aren’t winning, despite our insistence that we are. Some of us are winning. Most of us are losing. And the net result is that Wall Street is getting richer. That’s not good.
Expected utility is positive implies that people have discontinuous utility functions wrt. money. That is, utility will jump significantly after reaching a certain net worth.
Another explanation that is consistent with gambling behavior is that people have inaccurate risk functions; that they overestimate positive upside and underestimate downside.
I am not familiar with the economic literature. But I believe that there is more evidence to support the second hypothesis. Behavioral economics has showed that humans are notoriously unable to estimate risk accurately. I have not seen as much evidence that humans have discontinuous utility functions.
Behavioral economics also tells us that humans are also terrible at estimating their actual utility functions. So I also don’t trust the original poster who claims that they have a discontinuous utility function. The only way to test that is to observe actual human behavior.
> The obvious discontinuity is "never have to work".
First, wanting to achieve "financial independence" does not imply a discontinuous utility function.
Suppose it takes $X to reach financial independence. Let's say that when I achieve $X, I have utility Y. It is possible that as I approach $X from the left, my utility continuously approaches Y.
In fact, I argue that's what happens for most people who have a FIRE goal — they get happier and happier until they reach their goal. (It's true that once they reach their goal and experience retired life, they decide that retirement's not all that it's cracked up to be, but I argue that's because their utility has dropped because of another variable has changed: they have stopped working.)
In other words, "wanting to not have to work again" and "having a continuous utility function" do not contradict each other. And the people who are dedicated to saving enough money to not have to work (FIRE) almost always have utility functions that are continuous wrt. money!
> when they talk about this stuff.
Again, people might say that they have a discontinuous utility function, but talk is cheap. Real economists (TM) measure utilities through examining a consumer's revealed preferences because what people say doesn't always reflect what people do.
It really depends on an individuals displeasure at work though right? To take a ludicrous example my utility function for eating a sandwich is has a sharp discontinuity as a function of how much Polonium is in the sandwich. So too with some people for money and work, especially when it is far away from your current state. I don't think this is an experiment that a real economist (TM) has ever performed on an individual to discover what the true utility function is (happy to be wrong though).
> To take a ludicrous example my utility function for eating a sandwich is has a sharp discontinuity as a function of how much Polonium is in the sandwich.
Well, in the real world, every sandwich likely has a little bit of polonium in it; maybe an atom or two. If that increased to three or four, you would be slightly unhappier, but not sharply so. Every little increase in polonium slightly decreases your utility until you reach a point where you do not derive any utility from your polonium-laced sandwich, and so you would not eat it. Therefore, I argue that your utility function is still continuous wrt. polonium in your sandwich.
(In economics this isn't really how you'd model utility because the assumption is that you always have the option to throw away the sandwich; therefore, having the polonium sandwich gives you more utility than not having it.)
Same with money. Imagine you had a "life changing amount of money," whatever number that means to you. Call that number $X. Now imagine that you instead had $X - $1. And then $X - $2. Even $X - $1000. How much less happy do you feel in those imagined scenarios? A lot less happy? I bet you feel marginally less happy and not sharply. Which implies a "smooth" utility function.
I believe that non-continuous utility functions can exist -- suppose someone says that they will kill you unless you give them $50,000 -- but for most people that's not a real scenario.
> I don't think this is an experiment that a real economist (TM) has ever performed on an individual to discover what the true utility function is (happy to be wrong though).
I don't think ever with polonium, but here's a short video about revealed preference theory. https://www.youtube.com/watch?v=kPXov3D1tfA. In practice, applications of revealed preference theory happen all the time.
But your example did make me think more about "continuity" and "sharpness" and I now think that continuity is not strong enough to support my original claim. Continuous does not mean "smooth" [1]. To define "smooth," I would instead say that most people have utility functions that have positive first derivatives and negative second derivatives; that is, their marginal increase in utility for a good is positive but diminishing.
> Imagine you had a "life changing amount of money," whatever number that means to you. Call that number $X. Now imagine that you instead had $X - $1. And then $X - $2. Even $X - $1000. How much less happy do you feel in those imagined scenarios? A lot less happy? I bet you feel marginally less happy and not sharply.
Talking only about myself and not claiming anything about humanity at large:
There is a particular number of USD that, if I have in my account, I feel calmer and non-chalant about losing a job. Let's call it $20000. If I have $19900, it's the same. But if I have $15000 then I'd start feeling uneasy and would revert to trying hard to refill that minimum leisure savings amount.
So IMO it's not a gradual linear function. It's more like, for values between X1-X2, Y remains relatively constant. Then for values X2 to X3, Y is a higher value compared to the previous bracket of X values but also stays relatively constant for the current range of X.
Maybe I am missing something obvious but isn't watching stocks, analyzing news and predicting stock prices so you can multiply your money, an actual work?
You do spend time and energy chasing an income, no?
You can get a net positive utility gain from a net zero money gain with a continuous function, if it were say, logarithmic. A has 1X$ and B has 10X$, then an exchange occurs where 1X$ moves from B to A, now it's 2X$ and 9X$, but the change in happiness for A could be log(2/1)~=.30 while B log(9/10) ~=-.04
This is just one utility vs wealth model that would argue wealth transfers improve net utility in some contexts.
If you buy and hold, hold, hold, the transaction fees become inconsequential. I've owned some stocks for 40 years. I've ridden some down to zero (Enron, cough cough).
My advice to you would be to have an exit plan. For example, set aside 20% of your assets in a savings account, maybe even some type of account where it's not that easy to cash out, to limit the temptation of dipping into it. Then, as your assets grow (if they do), at various thresholds, you set aside preset amounts of money. This way, if you "lose it all" one day, you don't get to "walk instead of taking the metro", you get to afford a down payment for a smaller apartment instead of a bigger one.
Look, it's great that you managed to be one of the people who came out ahead in all of this.
But while you personally have seen some success so far, it's important to recognize that overall this is a transfer of wealth from people in your financial situation to the wealthy. The fact that this one situation is so incredibly newsworthy should be strong evidence of how unlikely such successes are in practice.
Further, a lot of the people holding on to $GME right now will be caught holding the bag once the selloff begins. Once the reversion happens, there won't be buyers willing to take this rapidly-pluging asset at every price point along the way. Certainly some people will get out at sky-high prices, but the overwhelming majority will be left holding a $10 asset they purchased at $400+.
> I made >40% of my network in the first 2 weeks of January alone...
Only if you've sold. And if you haven't, I do genuinely hope that you're one of those who manages to get out in time. But even if you are, it's important to realize that the eventual winners of this scenario aren't going to be the Redditors holding on to $GME shares, but the wealthy short-sellers who manage to either predict the pop or simply have enough assets to hold on long enough for it to happen.
> I have literally nothing to lose.
No, you had 4 digits of net worth to lose. And while that might not seem like "much", it's quite literally not nothing. And while you've been fortunate to win on this play, the statistics are pretty clear that plays like this keep more poor people poor than make the poor rich.
> Keeping track of my bets even before getting into this, I was right more often than not, and I am aware of survivorship bias and confirmation bias. In the limit, it makes more sense to spend 4-5 hours per day learning about market analysis, observing trends close to me and making decisions about sectors/fields that I know about.
First off, compare your plays to overall market returns, not to net-zero. Your benchmark over the past five years should be something around +90% (about 14% YoY returns). Actually, you need to be a little better due to trading expenses and (in the U.S. at least) short-term capital gains tax raets vs. long-term gains.
Second, it's astonishingly easy to be profitable when the overall market is having record returns. The trick is not losing your shirt when the market goes upside down, and everyone thinks that part is going to be much easier than it really is in practice.
In sum, I genuinely wish you luck, but I'm sadly all too aware that the statistical reality is that spending 4-5 hours per day learning about market analysis and making trades based on your findings is overwhelmingly more likely to leave you poorer than richer.
You can find people who've become rich betting it all on black at the casino, but that money didn't come from the house. It's just redistributing funds from all of the other suckers at the table, while the casino takes home the real winnings.
Thank you for your concern, I appreciate it. Yes I have an exit strategy, and with the second semester starting again, I won't really have the time to deal with this all of this. I made enough to setup a system to run experiments and fund my research for a year or two without needing to bug professors or make commitments on topics that don't really interest me.
> But even if you are, it's important to realize that the eventual winners of this scenario aren't going to be the Redditors holding on to $GME shares, but the wealthy short-sellers who manage to either predict the pop or simply have enough assets to hold on long enough for it to happen.
What the hell are you talking about? The short sellers are literally losing tens of billions of dollars, and I believe they are going to lose several times more within the next week.
The short sellers are overleveraged right now, and unless they find some bullshit way to fuck everybody (people are switching away from RobinHood in droves) then they are going to not just lose more money, but go insolvent.
I don't know what's going to happen, and rumors are Melvin is about to get a giant capital infusion, but it really seems like the short sellers are the ones that are fucked and believing otherwise is ignoring data and simply assuming nothing ever changes. The fact that they're doubling down is a sign of desperation, not strength. It's like saying Lehman Brothers can never lose money in 2008.
> What the hell are you talking about? The short sellers are literally losing tens of billions of dollars, and I believe they are going to lose several times more within the next week.
Yes, Melvin is losing their shirts.
But if you accept that the price is going to go down, and sharply at that, then somebody is going to make an absolute killing here from a short position when the price inevitably craters. And that amount will utterly dwarf the gains from WSB redditors, mostly coming at their expense.
There’s orders of magnitude more money to be made today shorting $GME at $400 than there was shorting it at $20.
> There’s orders of magnitude more money to be made today shorting $GME at $400 than there was shorting it at $20.
I have been running scenarios of this in my head over the previous days. This play would be to short while the squeeze is near closure and force the remaining shorts to purchase your stock. The problem with this play is that eventually you need to cover, albeit at much lower price, unless, of course, the bag holders i.e. remaining retail isn't willing to sell to you at a lower price, so you can never close. If anyone else attempts to short at the rebounded prices, you can close your position, but this becomes a perpetual game of hot potato. For this play to you work, you need to assume the retail will paper hand, but if WSB is any indication, WSB can, as they put it, stay retarded longer than you can stay solvent and if they don't paper hand at those prices, they won't give it to you that easy.
The alternative play, is to make a deal with other firms where you rotate who owes the shares and you share the profits from shorting the top, but I suppose that constitutes market manipulation. If we were to assume that the market moves up and the profits can be reinvested and profit more than the interest, this play makes the most sense.
These two plays assume that all the floating shares are held by WSB, and if that is true; the bag holders will be people willing to let the prices literally moon. Then the only solution would be to wait for GME to issue more shares. The most plausible case is that WSB will be the ones holding the shares when it eventually squeezes and the shorts need to cover since all others in retail would have already sold.
This isn't a particularly good position for anyone to be in because no institution will be selling and nobody will be buying, so you will end up with a staring contest between you and WSB, and if the past few days are any indication, your only bet is your profits outweigh the interest.
If you can imagine the actual play executing in a scenario where WSB doesn't hold you by the ..., please share, I am interested.
On Thursday, Citadel reported overall retail GME activity was 50.2% sellers and 49.8% buyers[1]. Assuming they aren’t lying about this, retail as a whole isn’t “diamond handing” and holding to the moon, just a few outspoken redditors who stand to gain the more others hold.
> There’s orders of magnitude more money to be made today shorting $GME at $400 than there was shorting it at $20.
There's also orders of magnitude more money to be lost, because there's just more money on the table. At the end of the day it's a bet based on assumptions. A month ago everybody that was investing in GME was told the same thing by people that wanted to short it.
The market can remain irrational longer than you can remain solvent.
> There's also orders of magnitude more money to be lost, because there's just more money on the table.
And my point is that the losing side of this is inevitably going to be the majority of people long $GME.
> The market can remain irrational longer than you can remain solvent.
Billionaires can remain solvent longer than you can remain irrational.
Again, Melvin is almost certain to lose their shirts on this. But there’s many, many more hedge funds that are sharks circling the waters. And Melvin and WSB are both going to be their prey.
> Billionaires can remain solvent longer than you can remain irrational.
Melvin Capital has a very real chance of going insolvent. Also have you heard of Lehman Brothers? Hell, just watching Cramer get upset is enough for me to realize the rich aren't happy with what's happening. It seems pretty obvious they're worried. Why else would they pay for ads claiming to have closed a position for which they supposedly no longer have an investment stake?
> And my point is that the losing side of this is inevitably going to be the majority of people long $GME.
I said the same thing about TSLA way back when. So did David Einhorn. I still believe TSLA is more than 10x overvalued, and people continue to get rich despite my "rational" obstinance.
Also you're completely missing the point. Do you not even understand most of these people aren't trying to make money? If you don't understand that, then you don't even have a basis to start the conversation.
> Hell, just watching Cramer get upset is enough for me to realize the rich aren't happy with what's happening.
The "rich" are a large group. Much larger than the few names that have been on the news recently. There have been plenty of believable reports about funds that already made crapton of money on this attempted squeeze. Now, that everyone's eyes are on $GME, many more will make fortunes riding the stock down. Believe me, they are very happy about it. That kind of predictability on the market happens rarely, and is a gift for the funds.
There's been wall-to-wall coverage of DeepF*Value and the other lucky people who are getting out early. Half the stories on here, on Reddit, in newspapers and on TV. You sound frankly delusional claiming nobody talked about them.
(Highlighting the past winners is essential for every pyramid scheme, for recruiting greater fools.)
One redditor has made (at least if he gets out now) somewhere around $50m. It’s highly likely this redditor is one of the biggest winners from the WSB crowd.
Melvin is down $5,000m.
Who do you suppose accounts for most of the remaining $4,950m in Melvin’s losses?
> Melvin Capital has a very real chance of going insolvent
I just don’t know how many more times I’m going to have to say that Melvin is going to lose everything.
Melvin and WSB are not the only two players in the market.
> Also you're completely missing the point. Do you not even understand most of these people aren't trying to make money? If you don't understand that, then you don't even have a basis to start the conversation.
That’s the meme. We’ll see how the people with tens of thousands YOLO’d feel when things turn south.
And if that’s the point, that makes this whole thing all the more depressing. They’re sticking it to the hedge funds by… blowing a bunch of money taking out one while dozens of others profit off of them?
The point I'm making is that Melvin is going under, a few Redditors will make money if they get out in time, but the eventual impact of this will be a different set of billionaires gets richer while most Redditors are going to be stuck holding the bag.
Which isn't exactly the "Reddit gets rich off of evil billionaires" narrative that's being sold. And it makes the diamond hands strategy all the more foolish when literally the only way Redditors will actually stick it to the billionaires is if they all manage to get out in time. Diamond hands as a strategy just makes WSB the eventual suckers donating their money to the funds who shorted at $400.
Again, for many people it's not about making money.
And many (most?) people are aware that billionaires will still get rich on this trade.
You keep explaining this to me as if it's something I don't already know. The part you are failing to understand is we hold fundamentally different values.
Why not go to the casino and bet your 4 digit net worth on black jack? You probably have similar or better odds of making money compared to meme stocks.
I wouldn't say so. After running some simulations and assuming a fair dealer, it makes more sense to follow r/wsb. Doing a sentiment analysis on WSB after you account for bots and spam generally outperforms the market.
> The real Robin Hood-esque company in this whole thing is Vanguard, who have almost certainly done more than most any other company in this space to return profits from the market to customers of all wealth ranges.
This is true but unfortunately it's one of those situations where you need money to make money and even then it's a slow multi-decade long process.
Culturally young people find themselves in something of a vice grip. We are a consumerism culture hell bent on producing and acquiring the next best thing. Patience and presence of mind over financials are diminishing skills, yet you need both of these if you intend on retiring through owning stocks.
4% inflation-adjusted returns aren’t going to turn a single contribution of $1,000 into $1,000,000 in anyone’s lifetime. We have a massive economic problem where the young and the economically disadvantaged face massive challenges achieving financial security. And without the spare funds to contribute non-trivial amounts regularly (and the financial education to buy-and-hold through thick and thin), even somewhere like Vanguard isn’t going to wildly change people’s fortunes.
I don’t know what the answer is (although I have some educated guesses) but what I know doesn’t really help is glorifying a gambling regime where one in millions gets filthy rich, one in tens of thousands gets kind of rich, one in hundreds does maybe a little better than the market, and everyone else is effectively donating what little they do have to the Wall Street elite.
> the financial education to buy-and-hold through thick and thin
I find this somewhat dubious. If you buy-and-hold for a lifetime, you'll face at least a once-in-a-lifetime level of shock at some point.
The possibility that this shock will happen just when you need the funds occurs fairly regularly to generations of retirees: but always seems to be forgotten by gold-standard financial advice.
Avoiding that shock is generally (though not completely) resolved by going with a "target retirement"-style fund that shifts your portfolio towards less-risky assets the closer you get to depending on them. Barring this you can also approximate it yourself by weighting further into bonds and fixed-income assets as you age. The FIRE community does something similar with the "bond tent" strategy.
That said, I'm honestly deeply confused as to what you think the alternative is It's impossible to reliably predict crashes or their extent so by selling you're generally just locking in your losses. I personally know multiple people who liquidated during the Great Recession, and... well, not only did they sell at rock bottom prices during the fire sale, but they also failed to get back in to the market during the incredible rally of the last decade.
I know multiple people who got out during the Trump administration, expecting total financial meltdown. Those people are materially worse off than if they'd simply held. I know several who panic sold when the markets took a hit at the beginning of the pandemic. Yet again, they've locked in their losses and missed out on the positive returns that have occurred since then.
So, barring access to a crystal ball, what exactly do you think is the alternative?
i was one of those that was just certain trump was going to tank the economy. my thinking was "he has no clue, and his bumbling around will ruin it".
very wrong, and missed out on a lot of gains. and not too sure of when to start dollar cost averaging back in.
- Never sell. Ever. (Until retirement). [1] The natural extension of this is... always buy. Buy now. Buy.
- Keep a pool of cash on the side (whatever you can afford) to be ready to capitalize on any "fire sale" of stocks. This should be about 10% of your portfolio as a very liquid non-volatile asset (cash).
[1] Obviously life hits you hard sometimes and you HAVE to sell to cover unexpected bills. I am obviously not suggesting in those situations that you hold your stock to the detriment of your healthy, of a family members health, etc.
If you might need the money, how is donating it to Wall Street through day trading on -EV plays somehow better?
If you might need the money, it needs to be somewhere safe like a savings account or a CD. Once you have an emergency fund, you can start saving in higer-risk/higher-reward +EV investments like index funds.
The only correct answer to this is now. Right now. No one knows if this is the top of the market and tomorrow everything will come crashing down, or if this is the very bottom of a 10 year bull market. On average you do better not trying to time the market and just contribute on an automated schedule. Set up monthly contributions and buy regardless of whatever is happening in the market and then try to forget about it for most of the year.
That's not exactly true; market value does not exist in a vacuum, it's the discounted future cash flows of the component companies. You can certainly look at the earnings of the component companies, and see how much growth is being priced in with the current valuations (and whether you think that is reasonable or not over the long term).
Now generally timing the market is not recommended; however, if the market has been going up for 5% a year for the previous 10 years versus going up for 20% a year (assuming same levels of inflation), it paints a very different picture, so at least in broad strokes you should be able to estimate where we are in a market cycle (telling the difference between 1998 and 2000 might be hard, but telling the difference between 1998 and 1994 should be fairly straightforward)
There shouldn't be an exact moment you switch to a conservative portfolio. As you get nearer to retirement, you gradually rebalance. Often this is as easy as simply placing new contributions in safer investments. Less often it just involves exchanging one set of funds for another, say once per year.
Again, Target Retirement funds handle this completely transparently for you and require literally zero hands-on involvement.
This is quite simply nowhere near as hard as you're making it out to be.
Of course! A very large proportion of my net worth is VTSAX. Target retirement funds are potentially an even better option for the average retail investor.
But the educational part comes with teaching people why this approach tends to have better outcomes than others and also to help instill the understanding of how panic-selling during a downturn is a losing strategy of "buy high, sell low".
I didn't have significant assets during the 2008 crash, but I certainly did last March. And even though I've advised others to buy and hold for years, it took a lot of self-discipline and self-reassurance to not throw that all away and exit the market when it became clear what the extent of the pandemic was likely to be.
Even today I don't think I fully understand why the market has done as well as it has. But I do know I'm glad that in the end I was able to stick with the game plan I've been preaching all this time.
> 4% inflation-adjusted returns aren’t going to turn a single contribution of $1,000 into $1,000,000 in anyone’s lifetime.
Of course it isn't and no one suggested that. A more realistic scenario is investing 1,000/month for 35 years at 5% adjusted returns IS $1,000,000, and isn't even capping the maximum 401k limits.
I agree with you that this isn't possible when you're not employed or otherwise disadvantaged though.
These are good points and the lottery analogy seems quite accurate.
I think, there may be an additional macro-aspect to this:
If you are a young person with a four-figure net worth, you should be able to leverage this to buy (non-financial) options that have a much higher expected payoff than hyped stock options. For example, being able to quit a job to apply for others, moving to another town, spending additional time and money on education or similar. These are all options that you haven't got without the four-figure net worth. The real tragedy is that these options seem to be becoming more expensive or scarcer. Many are still better than an iterated lottery, but the (perceived) decline in optionality may be worthy of some sympathy.
(Completely agree on Vanguard.)
I'm sure there are many reasons. But many boil down to: I (rightly or wrongly) think a few lottery tickets don't really matter to my ability to eat/make rent/etc., it's fun to dream, and it's the only way I'll ever have even a remote chance to be "rich."
> The bigger problem is that this is rarely just a one-time decision to gamble. And repeatedly doing this is statistically pretty certain to lose you significant amounts of money—particularly when compared to just investing in the market as a whole—over the long run. It’s just another way that the poor are trapped in poverty, even though you can of course always find individual cases where someone got lucky and made millions.
Even with negative expected value, playing a lottery could be a rational decision given the right motivations and circumstances. Suppose for some reason you expect to be living paycheck to paycheck your entire life, barely having any surplus, and that there's nothing meaningful you can do to alter that trajectory. Investing scraps every month at 10% average returns (especially if you don't start till you're 30+) might allow you to retire a month or two sooner, buy slightly newer clothes, or maybe eat out a few more times each year, but even if you just lit that cash on fire you wouldn't have a substantially different life. However a few chances at $250k+ could fundamentally alter your possibilities, giving you a freedom that you otherwise couldn't dream of.
> Your observation about young people with four-figure net worths thinking it’s rational to gamble it all on options is pretty much this week’s equivalent of those living paycheck-to-paycheck “investing” in the lottery.
It's not—the lottery is by design guaranteed to have negative expected returns. The stock market isn't.
Not sure whether it makes sense to average all returns and call it "negative expected returns" across the board. As with any game that mixes luck & skill (like poker), trading has a variety of expected returns. My guess (based on poker) is that a large part of people are small losers or break-even (in poker because of rake, in trading because of trading fees), some are big losers (in poker called whales), some are small winners (regs), and some are big winners (truly good players / traders).
It's not easy figuring out in the beginning which bucket you fall into, but if you accurately track your poker / trades over time, then with a large enough sample size (assuming proper risk management of course) you should be able to figure it out.
Sure but the comment I was replying to was referring to young people with four figure net worths gambling on options.
There are some successful traders but I strongly suspect those trading options with four figured are in lottery world. A few win big, most lose all, aggregate expected returns negative.
Alternatively: we could assume that people are capable of making their own financial decisions and don't need anyone to police what they do with their own money. Treating people like children for taking risks and assuming they are too incompetent to judge the consequences is condescending as hell.
The simple truth is Game Stop was a good trade, and I think comparing stocks to lottery tickets is very inaccurate. Stocks give you all kinds of numbers and information about the company which is just a little more transparent than staring into a random number generator. They have been called risky. But there are far more volatile positions to be holding.
> Alternatively: we could assume that people are capable of making their own financial decisions and don't need anyone to police what they do with their own money.
We have assumed that, and it's turned out to be generally a terrible assumption, with most US earners not being able to manage a $500 expense and being indebted to credit card companies
So something I've been thinking about: Living people enter the market when they make money, and they do that in a correlated way (times of high employment). And they exit the market in a correlated way to spend on retirement or college or whatever. Entering and exiting when everyone else do means you get a bad price.
Oh, I figure people will get over wildly speculating in stocks and transition to a more steady hand at it, which will be good for them and the economy.
Kind of like I got over my wild days behind the wheel and drive pretty conservatively today.
> Your observation about young people with four-figure net worths thinking it’s rational to gamble it all on options is pretty much this week’s equivalent of those living paycheck-to-paycheck “investing” in the lottery.
But when you "invest" in the lottery, you don't get to help blow up a hedge fund. I think many of the retail participants in the GME phenomenon find some entertainment value in what they're doing.
That said, I do think Robinhood makes it too easy for people to put on positions that they simply don't understand. The fiasco with "1R0NYMAN" comes to mind.
> The real Robin Hood-esque company in this whole thing is Vanguard
This.
I do worry a bit that there's something I'm missing because Vanguard is a Boomer thing that's no longer relevant, but I suspect all the research is solid and Vanguard being shareholder-owned aligns interests. Robinhood is probably just clever marketing and gamification of stock and options trading.
No you're good. I'm a career hedge-fund/market guy and all of my investable assets (outside of my company and my house) are in vanguard trackers. I'd guess most of my friends who are professional investors are the same (except they likely have some investment in their own fund).
That's not to say there aren't better investment options in the world but they aren't accessible to ordinary people (even quite rich ones).
> I'd guess most of my friends who are professional investors are the same
I'm curious about this. Hedge fund guys make enough to be accredited investors, but they mostly don't invest in them? Are the minimums too high? Are the yields not that great? I know the 2010's weren't great years for hedge funds. I also halfway wonder if the real product hedge funds sell is complex strategies to pension fund manages who think it's hard to explain their job if they're just buying index funds.
It's a good question. I can only speak for myself but I would only be interested in investing in a very small number of funds and they don't want my money (or sometimes anyone's money). Unless you are convinced a fund adds value after fees it's very hard to justify when you can construct your desired market exposure with passive products which are much cheaper and more liquid. It's painfully boring to do that so like everyone else I'm tempted to punt on sexier things every now and again but most of the time I don't.
To answer your last point, there's some of that for sure - in many parts of finance complexity is good for margins. And yes it's tough to demonstrate much value if your investing process amounts to placing buy orders for index funds. It's not all bad incentives though, hedge funds can offer uncorrelated (to the wider market) returns which are very valuable in a portfolio.
I agree with your points on trading frequency, but I still think Robinhood is good for people rather than bad.
I think the alternative destination for a lot of that Robinhood money isn’t “Vanguard VTSAX” but rather slightly positive lifestyle inflation/expenses.
To the extent that’s the case, all the gamification and reinforcement is creating a behavior that’s better than the likely alternative. (Returns are not good if your total lifetime investment trades are zero.)
I've been debating a lot in these comments, but I do want to take the time to appreciate this point of view. It's definitely one I hadn't considered.
If Robinhood is getting people who otherwise wouldn't save to invest, even if they're getting worse returns than they would at somewhere like Vanguard, then I could definitely reconsider my perspective that they're a net-evil. I'm not entirely sure I buy that story, but it's absolutely a reasonable perspective and one I'll keep in mind in the future when evaluating new information about Robinhood.
>Your observation about young people with four-figure net worths thinking it’s rational to gamble it all on options is pretty much this week’s equivalent of those living paycheck-to-paycheck “investing” in the lottery.
One difference here is the solidarity aspect of meme stocks vs lottery.
I hate to say “Bitcoin” because of its high risk, short track record, volatility, faddish aura, etc, but:
I believe it’s filling a gap beyond being a better gold-like asset. Better gold = digitally portable, 24 hr liquidity, digital literate friendly, fixed cap, transactions (even with its limits), decentralized control, etc.
But the solidly fixed cap is more profound than I think most people recognize. Potentially, once Bitcoin finds its “true” price, it will continue to grow in value in proportion to all wealth in the economy - over the long run. So it won’t just be a hedge against downturns, but eventually a semi-stable way of sharing in overall increasing wealth in the economy.
I don’t know of another instrument that anyone can easily buy that might track (over the long run) with global wealth as apposed to particular entities or particular aspects of the economy.
So in that sense, anyone can participate in overall wealth growth. A very useful new tool!
OF COURSE, this is SPECULATION on my part. But I think the idea of a total global wealth correlated asset is new and useful.
This makes it more like a collectable (say, baseball cards) than a currency. The number is capped and some will be lost. It has value as long as people are interested in it--scarcity does not imply value.
It also has a short track record and could run into issues if miners collude, there's a DDoS attack, or someone with a lot of resources reverses transactions, hurting confidence in it.
Baseball cards are valued for being distinct. Bitcoin for being fungible (despite a traceable blockchain history).
Baseball cards are not divisible.
I know of no situation in which collectibles are viable for transaction, but Bitcoin is. (Despite limitations in transaction numbers, speed of confirmation and transaction fees.)
I love how Reddit (and HN) enable fast sharing, fact checking of information and lifting ideas.
When it comes to increase luck surface I think Clubhouse maybe will become one of the most important platforms.
GME case seems to exploit the possibility for “short attack” by flipping the table into a infinite price increase, because the hedge funds accidentally created more fake shares that there is shares in existence and now have to by back.
Short attack = Using the possibility brokers have to artificial creating fake shares to drive down the price, in combination with shorting stocks for earning money.
Hedge Funds managers have infinite resources and are working with Data Firms to prevent this from getting out of control again. These firms will use AI to scout social media platforms chatter and report back in real time what stocks are gaining momentum with retail investors.
I'm actually not super bullish on clubhouse. I'm sure they'll find some success but to call it something that will become one of the most important platforms, I don't see it. And perhaps I'll be proven wrong in the next decade on this.
I've recently started using twitter again (after initially using it in 2010/2011) and I feel that there's so much self promotion all the time disguised at knowledge sharing. It also seems like everyone (most people) have a podcast, a newsletter, a youtube channel, etc. I understand that on a surface level people are doing this to increase their 'surface area' but there's just too much and while I'm sure it does a some/a lot of good for the people putting it out there, most of it just seems like noise to me. So that's my reasoning to think that clubhouse won't really become as meaningful as you - it just adds more noise. Sure I can hangout in this room or listen to some folks talk about x/y/z topic, etc. but honestly I feel that after some time people will realize that their time could be better spent.
Dang I totally feel you on the whole self promotion thing and for me, it happened with Medium.
Used to love reading essays all the time but now all the titles tend towards click bait and every essay seems to begin or end with them pitching their newsletter/podcast/etc. and that ends up coloring my whole impression of what I just read.
Not too sure about the "fact" side of things. But the Internet has created opportunities for all sorts of people to get together faster than ever for all sorts of things.
You don't need >100% short interest for a shorted stock to go to infinity. A single share can do that. If I own all the shares, and you borrowed a single share and sold it back to me... well, good luck. Also these sort of attacks aren't really new. Short squeeze has happened before and various other similar ideas (attacking someone with leveraged positions or otherwise risky positions, including currencies). The interesting bit here is IMO the way these people, at least temporarily, acted together. Also the way the hedge funds couldn't grok that like they surely would if they were under attack from a more standard player.
I think the underlying assumption, which wasn't spelled out in the parent, is that any amount of money under $super-rich is similar amounts of worthless. If you genuinely believe that, then high-risk swings at a big payday make more logical sense than a low-risk gradual growth strategy.
I've heard friends express this - if you don't have $1 million +, you're just varying degrees of poor - so there's no point at gradual growth from 20k to 50k and etc when you're just as miserable. Might as well risk it all to try to get to the big time, since they don't see a reasonable path to growing gradually to anywhere worth living.
They're wrong though. I'm not worth much at all, but slowly (and thanks mainly to YNAB) I've managed to build up 5 digits of cash (savings, not folding), rather than living paycheck to paycheck. This is a huge load of daily stress I used to have that I no longer do. My credit card is for convenience and frequent flyer points, not something I might not eat without. I bought the missus a (6-year-old, boring) car recently, and I did so with a personal loan not because I had to but because I chose to keep the money on hand, and the world is a little shaky right now. I didn't have to accept a lien on the car, and if there were a crunch on my cashflow I can make minimum payments for a while.
I don't have "fuck you money", and probably never will, but even this much peace of mind has helped my mental health significantly.
Even 25k is a huge amount of stress gone compared to 3k in the bank. With 25k I can ride out some emergencies. If I lose my job I’m not at risk of being on the street. If I total my car I can still get to work.
I’ve lived pay cheque to pay cheque, it wasn’t fun. Even though I was young and could theoretically move back with my parents if shit really hit the fan I was constantly worried about money. Soon as I paid off my student loans and had a bit of emergency fund, things were a lot better.
Only because I happen to just starting reading this 4 books [0-3] motohagiography (word-depipction-of-saints?), and until 2-3 weeks ago I am ashamed to say I didn't even know who that was:
Nassim Nicholas Taleb.
[0-3]: Antifragile, The Black Swan, Fooled By Randomness, The Bed of Procrustes
Same Taleb. I recommend reading his books back to front because he's clearly difficult to edit and starting at the end means you don't have to go through the process of listening to him sound his ideas out. Most non-fiction works that way. If you only read his "Bed of Procrustes," and a selection of his technical papers, you'd be both better off, and following most of his advice.
A hagiography is a story that exalts the life of a saint. An "autohagiography," is what some writers call a shamelessly self-aggrandizing memoir. Motohagiography was a play on writing about motorcycles in a self-aggrandizing way, but could be extended to other technology. But thank you for giving it some thought!
Would you explain a little more about what you mean by “diversified parts of it” in “you naturally orient to getting exposure to opportunity for diversified parts of it, but when you have a scarcity view, your decisions are necessarily all/nothing”?
I'm happy that the GME spectacle happened. It's made a lot of people realize they can participate in the stock market and accumulate wealth. There's no going back!
When you have wealth of any kind, you naturally orient to getting exposure to opportunity for diversified parts of it, but when you have a scarcity view, your decisions are necessarily all/nothing, and it even becomes a class culture thing. It's circumstances, but also learned attitude.
Related, I'm sympathetic to what's happening with GME and WSB, if a young persons net worth is four digits, it seems insane not to gamble it on options, as the housing bubble has cut off the last way for working people to get leverage. GME may mark the inflection point in the markets where young people realize it's their best or even only opportunity for leverage, and meme stocks are going to be the new normal because the economy doesn't provide anything better to invest in for under $50k. (that is, unless remote work makes distant property viable to live in)