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How the 0.001% invest

economist.com

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Re: How the 0.001% invest

#131

Post by jackhack »

lixue wrote: post #117
gberger wrote: post #107

Earlier quoted context omitted.

Wait, you're telling me he could have turned $1M into $3B just through investing in mutual funds?

Assuming a 10% return, which is about the max I could find for a single fund over 20 years, it'd take 84 years to turn $1M in to $3B. Conversely, plenty of funds do 15-20% in the short term. 15% only takes 57 years, and 20% brings it down to 44. So, doable, but you'd be considered a pretty amazing investor. And this all assumes the money was invested from the day he was born.

agreed -- not likely, and it assumes those gains every year which is not reasonable. More, it ignores one very important fact, the destructiveness of losses. A one-year loss can be devastating to a fund. which is why many favor "safety" over "gains".

It's not uncommon for aggressive growth funds to take a 20% tumble in a year. Downside is much, much more destructive than many understand especially when one must also account for fund management fees (typically .7%) which are collected whether the fund gains or loses!

But the simple fact is that a 50% loss requires a 100% gain just to get back to even, which is still a loss once inflation and operating costs are factored in.

Here's a simple question that most people fail: Q: A mutual fund loses 50% in a year. In order to break even the next year, your fund must earn ? 1) inflation 2) 50% + inflation 3) 50% + your income tax rate 4) 100% + inflation 5) 100% + inflation + operating costs + 'it depends'

The correct answer is 5. The correct answer is nearly 106%- One must make up for actual loss (100%) PLUS operating expenses for both years (usually 0.7% per year: 1.5%), plus inflation for both years (2%/annum: 4%). Of course there are tax implication for gains/losses taken outside of a qualified retirement plan (401k,403b,etc.) and sheltering losses can complicate substantially, but hopefully this illustrates a point about the impact of losses.

Re: How the 0.001% invest

#132

Post by jniedrauer »

dgudkov wrote: post #112

I struggle to understand the point of the article. >Rich clients have taken a closer look at private banks’ high fees and murky incentives, and balked. OK. Rich clients were not happy with the way external managers managed their funds and decided to do it themselves. I get it. >As they grow even bigger in an era of populism, family offices are destined to face uncomfortable questions about how they concentrate power…

> If the author's explanation of what family offices are is correct, they didn't create inequality. If you take your money from a deposit and decide to invest yourself you don't create inequality. You undertake higher risk and potentially receive higher award.

Inequality is a mathematical statement about the distribution of wealth. It has nothing to do with risk or fairness or "rewards". If you accumulate wealth in one place, then you very directly create inequality. That's exactly what inequality is. By definition.

Re: How the 0.001% invest

#133

Post by compiler-guy »

petra wrote: post #127
alehul wrote: post #116

Earlier quoted context omitted.

To offer a better and less political answer: the reason that an UHNWI doesn't park their entire net worth in an index fund is because there is some probability, however minute, that the markets will collapse and never recover. Additionally, we could say that success in active investing is (often) a function of how much you're willing to spend to find the right opportunities. For an UHNWI, this is likely enough to bea…

>> we could say that success in active investing is (often) a function of how much you're willing to spend to find the right opportunities Is this also true at the level of the small investor ? Say I'm willing to spend a few hours a day learning and researching about stocks. Does this mean that over time, I'll be able to significantly beat the index funds ? Or is it, more likely, a fool's errand, because that as a sm…

It's a fool's errand. There are people who spend 80 hours a week doing this kind of analysis at firms that pay millions of dollars a year for the most sophisticated data and analysis, and those folks still don't beat the market more than randomly. These firms pay hundreds of millions of dollars to improve their trading systems' latency by just a few milliseconds.

You don't have a chance unless you are doing the same amount of work with more sophisticated tools, with the same trading tools.

You might win based purely on chance, but you are extremely unlikely to.

Re: How the 0.001% invest

#134

Post by dgudkov »

jniedrauer wrote: post #132
dgudkov wrote: post #112

I struggle to understand the point of the article. >Rich clients have taken a closer look at private banks’ high fees and murky incentives, and balked. OK. Rich clients were not happy with the way external managers managed their funds and decided to do it themselves. I get it. >As they grow even bigger in an era of populism, family offices are destined to face uncomfortable questions about how they concentrate power…

> If the author's explanation of what family offices are is correct, they didn't create inequality. If you take your money from a deposit and decide to invest yourself you don't create inequality. You undertake higher risk and potentially receive higher award. Inequality is a mathematical statement about the distribution of wealth. It has nothing to do with risk or fairness or "rewards". If you accumulate wealth in o…

Money ownership didn't change when money management switched to family offices. So distribution of wealth hasn't changed. How did family offices create inequality?

Re: How the 0.001% invest

#135

Post by paulsutter »

jniedrauer wrote: post #132
dgudkov wrote: post #112

I struggle to understand the point of the article. >Rich clients have taken a closer look at private banks’ high fees and murky incentives, and balked. OK. Rich clients were not happy with the way external managers managed their funds and decided to do it themselves. I get it. >As they grow even bigger in an era of populism, family offices are destined to face uncomfortable questions about how they concentrate power…

> If the author's explanation of what family offices are is correct, they didn't create inequality. If you take your money from a deposit and decide to invest yourself you don't create inequality. You undertake higher risk and potentially receive higher award. Inequality is a mathematical statement about the distribution of wealth. It has nothing to do with risk or fairness or "rewards". If you accumulate wealth in o…

Yes but the family office didn’t cause the inequality, the inequality caused the family office.

Re: How the 0.001% invest

#136

Post by whatshisface »

jniedrauer wrote: post #132
dgudkov wrote: post #112

I struggle to understand the point of the article. >Rich clients have taken a closer look at private banks’ high fees and murky incentives, and balked. OK. Rich clients were not happy with the way external managers managed their funds and decided to do it themselves. I get it. >As they grow even bigger in an era of populism, family offices are destined to face uncomfortable questions about how they concentrate power…

> If the author's explanation of what family offices are is correct, they didn't create inequality. If you take your money from a deposit and decide to invest yourself you don't create inequality. You undertake higher risk and potentially receive higher award. Inequality is a mathematical statement about the distribution of wealth. It has nothing to do with risk or fairness or "rewards". If you accumulate wealth in o…

I think the author is suggesting that society would be better if rich people were to end up so mired in the principal-agent problem that they ended up with no more influence on the market than the average person. Of course, this appears to overlook the fact that if you don't like it when people accumulate power, then you actually want corporate executives to be beholden to an active stock market.

Re: How the 0.001% invest

#137

Post by SeanAppleby »

diminoten wrote: post #114
WhompingWindows wrote: post #92

Earlier quoted context omitted.

It's extremely interesting - you're not interested in the investments of someone who buys investigative journals and makes rocket/space exploration companies? While these may be little side-projects to you and Jeff, to the rest of us they are very very important.

Why are they very very important? Not the companies, but the fact that Jeff Bezos in particular has invested in them; what's "very very important" about that? Do you think these companies wouldn't exist or be as capable without Bezos? Why do you think that?

He doesn't mean it's particular to Bezos, but that wealthy people throwing massive (to anyone but them) amounts of money into extremely speculative bets on large issues for the long run of society is a big deal.

The government and major corporations are slow and inertial, invested in iterative improvements on existing paradigms, as low risk small improvements are baked into the foundation of the incentive structure for their entire org. If you're CEO of a major company and make the company a tiny bit more efficient your life is great, but if you bet a billion dollars on pivoting the company towards a potential major improvement and the numbers come up wrong, your business is potentially structurally compromised and your life is relatively screwed. It's just not really worth it to gamble with your main game.

These extremely speculative, niche, very capital intensive, long time horizon bets on paradigm changes couldn't exist without large amounts of funding from contrarian and extremely risk tolerant backers.

Very wealthy people being willing to play with millions to billions of dollars in a way that is very likely to crash and burn enables risky exploration of paradigm changes like "can I get a rocket to land upright and use it again?", or "can I take a major publication and profitably revert its online funding model to subscriptions to retain integrity of its journalism in the era of the attention economy?"

That kind of exploration is important and interesting.

Re: How the 0.001% invest

#138

Post by noddy1 »

fujimotos wrote: post #102
mruts wrote: post #65

Earlier quoted context omitted.

If I was a billionaire, I would be very very nervous just dumping my billions in a S&P 500 ETF. At that level of wealth, you really ought to have a portfolio manager who can slice and dice your exposure in advantageous ways. I don't think active management makes sense for the majority of folks, but billionaires are exactly the kind of people that it does make sense for. With a billion or two you can probably get your…

> I would be very very nervous just dumping my billions in a S&P 500 ETF. At that level of wealth, you really ought to have a portfolio manager who can slice and dice your exposure in advantageous ways. Why? A couple of billions should still be a tiny drop if compared to the market cap of S&P 500. What do those active portfolio managers provide to you?

80% of companies in the S&P500 over time produce zero return. 20% of companies account for ALL of the returns. In the past these would've been driven by massive growth stocks like Amazon going 1000x over a couple of decades. Now, the main reason to IPO a tech stock seems to be because the company has reached its growth potential and you want to flick it off to derisk early investors, and often it plummets as reality sets in. Meanwhile, high growth stocks are captured in pre-IPO markets and the gains are all accrued to private investors.

I think the S&P500 is an entirely different beast to what it was 20 or even 10 years ago as a result of this.

If you were a family office your goal would be to get exposure to pre-IPO growth stage stuff as well as the public market.

Re: How the 0.001% invest

#139

Post by dgudkov »

drewrv wrote: post #129
dgudkov wrote: post #112

I struggle to understand the point of the article. >Rich clients have taken a closer look at private banks’ high fees and murky incentives, and balked. OK. Rich clients were not happy with the way external managers managed their funds and decided to do it themselves. I get it. >As they grow even bigger in an era of populism, family offices are destined to face uncomfortable questions about how they concentrate power…

At a micro level, taking money out of a deposit and investing it does not create inequality. At a macro level, the fact that simply having wealth begets more wealth in a way that labor cannot accomplish is a driving force behind inequality.

>simply having wealth begets more wealth

It's not a 100% rule. Lots of wealth has been lost due to wrong investment. Many rich people lose their fortunes.

Re: How the 0.001% invest

#140

Post by cporios »

golergka wrote: post #115
dgudkov wrote: post #112

I struggle to understand the point of the article. >Rich clients have taken a closer look at private banks’ high fees and murky incentives, and balked. OK. Rich clients were not happy with the way external managers managed their funds and decided to do it themselves. I get it. >As they grow even bigger in an era of populism, family offices are destined to face uncomfortable questions about how they concentrate power…

Rich people bad.

This is neither what the article is saying or implying, nor the general view or bias of this newspaper.
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