The small cap edge is surprising.
In finance there is an ongoing discussion of whether the small-cap premium still exists. For technical discussions, look for the terms "SMB size factor".
See how a dollar would have grown over the past 94 years [pdf]
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Re: See how a dollar would have grown over the past 94 years [pdf]
#22When I was born in 1990 my grandparents spent like 5k on government bonds that my dad didn't tell me about until I was 30. It was a very nice treat, but when I did the math to see how much more it would have been if just invested in the market I gasped.
> but when I did the math to see how much more it would have been
I have a suggestion for all the many similar problems around probability: Reframe it to be more correct.
Instead of looking against the arrow of time, backwards with full knowledge ask yourself the corresponding question looking forward, from where you are right now.
And then remember that that was the position you were in back then.
Questions that deal directly or indirectly with probabilities become confusing, and frankly stupid, when you violate the arrow of time and make "backward predictions". One should just not ask that question, not even for fun. They not only make no sense, our psyche suffers when we try, even if just a little.
This is part of another kind of problems: Asking why a given answer is wrong, for example in multiple choice questions. One of the best courses I took was an audio cassette pilot license theory course. One thing the speaker said about the multiple choice part of the exam was this. DO NOT (with a lot of emphasis and repetition in the audio) try to dwell on why a point is wrong. Concentrate on the true statements alone. Reason was similar to why raising the question why person XYS is NOT a pedophile still creates the association in the brains of people exposed to statements like that repeatedly. Apart from that, the number of potential wrong statements exceeds the valid ones by many orders of magnitude.
Similarly, just do not think about problems that deal with probabilities and predictions looking backward. It's just not a valid way to think about them. If you must, reformulate to make them forward-looking.
The problem of words and thoughts is the universe checks their validity only very rarely directly and immediately. If we don't restrain ourselves, our thoughts end up not representing reality more and more. Thinking requires quite a bit of self-discipline, we have to place the missing rails ourselves.
Re: See how a dollar would have grown over the past 94 years [pdf]
#23When I was born in 1990 my grandparents spent like 5k on government bonds that my dad didn't tell me about until I was 30. It was a very nice treat, but when I did the math to see how much more it would have been if just invested in the market I gasped.
A surprising number of 401(k) plans default to a money market fund for invested assets. Imagine retiring after a decades-long career and realizing what could have been.
Re: See how a dollar would have grown over the past 94 years [pdf]
#24Earlier quoted context omitted.
Now do frequency of recessions, depressions, and panics.
You mean like the great depression which happened not long after formation, which some prominent economists have argued was exacerbated by the fed? Things did stabilize quite a bit after we bombed the rest of the industrial world into oblivion, though, creating a period of prosperity roughly equal in expansion to the period from the end of the civil war to before the creation of the fed.
To be fair, while what you say is no doubt true, the Federal Reserve didn't gain the tools that it would now use correct for that until the mid-1930s and in some ways not until the 1950s — when the Great Depression was already well on its way to being over/was ancient history. It was something quite different leading up to/during the beginnings of the Great Depression.
Re: See how a dollar would have grown over the past 94 years [pdf]
#25When I was born in 1990 my grandparents spent like 5k on government bonds that my dad didn't tell me about until I was 30. It was a very nice treat, but when I did the math to see how much more it would have been if just invested in the market I gasped.
The problem is that most people don't know how to invest, and this has been done by purposeful intent. Financial education was removed from centralized education long ago.
Bonds necessarily need to exceed the yearly inflation to retain their purchasing power. People claim these are risk free, but they aren't, even when held to maturity. You lose money from the inflation when the rate of interest is below the inflation rate which it almost surely was given the several decades of almost zero low-interest rates in that time period.
There are some general rules that anyone should know. Rule #1 is don't lose your principal investment (don't lose money). Rule #2 is don't invest in a casino, always manage your risk, and know when its unmanageable. Rule #3 invest in yourself, understand the business, limit debt, and focus on value.
People today don't realize the market has been rigged through a number of convoluted ways into that of a casino.
Price discovery is gone because most transactions happen off exchange in the dark. In 2024, over 50% of transactions occurred off-exchange in dark pools. You then also have payment for order flow, synthetic shares via options through predatory middlemen, and no real law enforcement mechanism for when those big players break the rules; and they do on the regular as they did in GME/FRC, and too many other places to count. You've also got large banks pumping the prices up through non-fractional reserve based debt backing options contracts which they use to yield farm, and profits funneled away from businesses into stock buybacks hollowing them out of any value.
No visibility, no price discovery, no economic calculation. These things fail when about 1/4 of the market is off-exchange, its been at crisis for a long time.
There is no real opportunity for investment when you allow those rules to be broken. Its not an actual investment.
Re: See how a dollar would have grown over the past 94 years [pdf]
#26Rule of 72: time for an investment to double is roughly 72 / the interest rate [0]. Annual return on small-cap stocks: ~12% Time to double: 72/12 ~= 6 years Number of doubling periods: 99/6 ~= 16 Final investment value: ~2**16 ~= $65k ~= $64,417 Math checks out. 0: https://en.wikipedia.org/wiki/Rule_of_72
I've always found it amusing that mathematically it should be the rule of 70, but it's commonly rounded to 72 because the latter has more convenient divisors. 70 is divisible by 1, 2, 5, 7, 10, 14, 35, 70 72 is divisible by 1, 2, 3, 4, 6, 8, 9, 12, 18, 24, 36, 72
It's also because in the interest rate range we're normally dealing with (5%-10% APR) the approximation of 1+x/100 as 1.01^x in the derivation of the rule is off a bit, and something like 1.0097^x works somewhat better. ln(2)/ln(1.0097) is about 71.8, thus the use of 72 and it's convenient divisors.
Re: See how a dollar would have grown over the past 94 years [pdf]
#27Astute observers will note that the $1 in stocks gets margin called shortly after the initial investment in the late 20's and so in a sense the return over 100 years is 0.
Re: See how a dollar would have grown over the past 94 years [pdf]
#28The Y axis scaling is so misleading.
It's logarithmic scaling. https://en.wikipedia.org/wiki/Logarithmic_scale It's helpful when dealing with investments because it shows percentage change more clearly than absolute: https://www.leekranefuss.com/2019/04/why-you-should-use-loga...
No one spends percentages. You spend dollars. Differences in annual compounding are tremendous.
I would even argue logarithmic scales on charts are rarely useful. They’re inappropriately used in financial charts all the time.
Re: See how a dollar would have grown over the past 94 years [pdf]
#29Classic meme. I wish I had invested $1,000 back in 1926 but I was busy in a non-material state in the hyper-realm.
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Re: See how a dollar would have grown over the past 94 years [pdf]
#30When I was born in 1990 my grandparents spent like 5k on government bonds that my dad didn't tell me about until I was 30. It was a very nice treat, but when I did the math to see how much more it would have been if just invested in the market I gasped.
> but when I did the math to see how much more it would have been I have a suggestion for all the many similar problems around probability: Reframe it to be more correct. Instead of looking against the arrow of time, backwards with full knowledge ask yourself the corresponding question looking forward , from where you are right now. And then remember that that was the position you were in back then. Questions that de…
This isn't useful or correct, and ends up being a bit circular getting into the weeds.
The focus should be that the normal math formula for bond valuation doesn't account for yearly real or projected inflation.
Almost everyone I have met doesn't know how to modify the standard formula correctly unless they've already done it at some point in the past. Its not a trivial exercise.
You have to understand the formulas well enough to modify them to account for the loss in purchasing power that compounds yearly, as a difference between the interest rate and real inflation over the bond terms.
Most years, inflation has been well above that 2% margin dramatically impacting the rate of return or real yield.