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Save like a pessimist, invest like an optimist

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Re: Save like a pessimist, invest like an optimist

#41

Post by emteycz »

yojo wrote: post #39

I’m skeptical of the closing claim that exponential growth keeps happening forever. Yes, you can grow GDP 2% for 200 years, that results in an economy 50x the start size. Expand it to 1000 years and you’re talking about an economy 400 million times as large. After 2100 years you’re up to an economy a QUINTILLION times as large. At some point the exponential curve has to go S-shaped. Maybe we’re still in the happy exp…

Consider the last 2000 years. The global market went from nothing to outlandish emperor-level luxuries available to multiple billions of humans + all the stuff that we have that even emperors didn't imagine. I think quintillion times growth in "actual value to humans" is not that off. And thinking about the next 2000 years, I don't see any hard limits there too.

Re: Save like a pessimist, invest like an optimist

#42

Post by ericmay »

yojo wrote: post #39

I’m skeptical of the closing claim that exponential growth keeps happening forever. Yes, you can grow GDP 2% for 200 years, that results in an economy 50x the start size. Expand it to 1000 years and you’re talking about an economy 400 million times as large. After 2100 years you’re up to an economy a QUINTILLION times as large. At some point the exponential curve has to go S-shaped. Maybe we’re still in the happy exp…

Well, eventually what will happen is countries will disappear, wars will destroy things, and other events will wipe out economies, savings, or entire companies. The growth model will probably always be exponential, but from time to time things will reset to 0.

Re: Save like a pessimist, invest like an optimist

#43

Post by smabie »

kd5bjo wrote: post #3
fairity wrote: post #2

One question that's been top of mind lately for me is how optimistic you should be in your investing strategy. IBK currently allows retail investors to trade on margin with an annual interest rate of only 1% (yes, really). You can borrow up to 2x your principle at this rate. If you were extremely optimistic, you would borrow 2x your principal and expect to 3x your annual return. If you were optimistic but wanted to a…

I personally don’t invest on margin. It just feels weird to take a short-term loan (whatever the interest rate) when I have the cash to cover the loan. And if I don’t have the cash to cover the margin loan, I should be working on increasing my emergency fund instead. In short, there’s no set of circumstances where my decision tree comes down on the side of taking the loan.

Leverage allows the execution of strategies that have a high Sharpe but low natural return.

I work at a small prop trading firm and we run 10x or even more leverage most of the time. Without leverage, we wouldn't be able to run the vast majority of our strategies.

Basically, leverage is immaterial: what matters is the risk of the strategy. A leveraged strategy could be less risky than an unleveraged one.

Things that you should consider when deciding leverage: beta exposure, correlation to the market, volatility of the strategy, and the risk adjusted return of the strategy.

A classic example of this is risk parity: risk parity uses high leverage but is often safer than a classic 60/40 portfolio.

Re: Save like a pessimist, invest like an optimist

#44

Post by smabie »

kd5bjo wrote: post #8
fairity wrote: post #4

Earlier quoted context omitted.

> It just feels weird to take a short-term loan (whatever the interest rate) when I have the cash to cover the loan. And if I don’t have the cash to cover the margin loan, I should be working on increasing my emergency fund instead. I see. Would your thinking change if your emergency fund was sufficiently large but much smaller than your investable cash? For example, let's say your rainy day fund was $10, and you hav…

No. If a margin call came in a down market, it would wipe out my emergency fund; that’s the exact opposite of “saving like a pessimist.” If I have $90 to invest, then I have $90 to invest; I’m not going to gamble with someone else’s money whatever the odds.

Let's say you found a strategy that had 10% return and 1% volatility. you really wouldn't leverage this? Even after 4x leverage is applied, it would still be considerably less risky than the S&P 500.

Re: Save like a pessimist, invest like an optimist

#45

Post by fairity »

smabie wrote: post #43
kd5bjo wrote: post #3

Earlier quoted context omitted.

I personally don’t invest on margin. It just feels weird to take a short-term loan (whatever the interest rate) when I have the cash to cover the loan. And if I don’t have the cash to cover the margin loan, I should be working on increasing my emergency fund instead. In short, there’s no set of circumstances where my decision tree comes down on the side of taking the loan.

Leverage allows the execution of strategies that have a high Sharpe but low natural return. I work at a small prop trading firm and we run 10x or even more leverage most of the time. Without leverage, we wouldn't be able to run the vast majority of our strategies. Basically, leverage is immaterial: what matters is the risk of the strategy. A leveraged strategy could be less risky than an unleveraged one. Things that…

To be honest, what you just said went right over my head, but I really want to learn more. Can you recommend where to start given that the strategy I'm evaluating is akin to levering up 1x and investing in index funds?

Re: Save like a pessimist, invest like an optimist

#46

Post by mjfl »

yojo wrote: post #39

I’m skeptical of the closing claim that exponential growth keeps happening forever. Yes, you can grow GDP 2% for 200 years, that results in an economy 50x the start size. Expand it to 1000 years and you’re talking about an economy 400 million times as large. After 2100 years you’re up to an economy a QUINTILLION times as large. At some point the exponential curve has to go S-shaped. Maybe we’re still in the happy exp…

Imagine a world with 1 trillion people on it. A new Einstein is born every 10 years. Better access to information, the ability to augment their minds with computers makes them 10x smarter than Einstein was. Is it so hard to imagine that the economy would be 50x bigger in that situation?

Re: Save like a pessimist, invest like an optimist

#48

Post by hanoz »

imtringued wrote: post #35
Moodles wrote: post #6

Earlier quoted context omitted.

I actually have a somewhat controversial opinion (that shouldn’t be controversial because it’s all math, but it still is regardless) that, after you save 5-6x your emergency fund, you don’t need an emergency fund at all and you’re better off investing it all in a total market index fund. The reason being that even if there is a market crash, you’ll still be able to afford the emergency since you’ve saved multiples of…

You have $100k. Put 80% of it in the stock market. The stock market drops by 40%, your investment is worth $48k and you withdraw nothing but spend your entire emergency fund. The market recovers and now your portfolio is worth $80k. You have $100k. Put all of it in the stock market. The stock market drops by 40%, your investment is worth $60k and you withdraw $20k. The market goes back to 100% and now you have $67k i…

That's all for an emergency on day one! If the stock market goes up 70% before your emergency, you'd have been better off with the all in strategy.

Re: Save like a pessimist, invest like an optimist

#49

Post by antoineMoPa »

mjfl wrote: post #46
yojo wrote: post #39

I’m skeptical of the closing claim that exponential growth keeps happening forever. Yes, you can grow GDP 2% for 200 years, that results in an economy 50x the start size. Expand it to 1000 years and you’re talking about an economy 400 million times as large. After 2100 years you’re up to an economy a QUINTILLION times as large. At some point the exponential curve has to go S-shaped. Maybe we’re still in the happy exp…

Imagine a world with 1 trillion people on it. A new Einstein is born every 10 years. Better access to information, the ability to augment their minds with computers makes them 10x smarter than Einstein was. Is it so hard to imagine that the economy would be 50x bigger in that situation?

This assumes we can really empower brilliant people all over the globe.

Re: Save like a pessimist, invest like an optimist

#50

Post by ben_w »

emteycz wrote: post #41
yojo wrote: post #39

I’m skeptical of the closing claim that exponential growth keeps happening forever. Yes, you can grow GDP 2% for 200 years, that results in an economy 50x the start size. Expand it to 1000 years and you’re talking about an economy 400 million times as large. After 2100 years you’re up to an economy a QUINTILLION times as large. At some point the exponential curve has to go S-shaped. Maybe we’re still in the happy exp…

Consider the last 2000 years. The global market went from nothing to outlandish emperor-level luxuries available to multiple billions of humans + all the stuff that we have that even emperors didn't imagine. I think quintillion times growth in "actual value to humans" is not that off. And thinking about the next 2000 years, I don't see any hard limits there too.

A quintillion is larger than the ratio of a synaptic refractory period and a human lifetime by a factor of about 1.5 million. Even with my optimism about transhumanism, I’d be very surprised if that was accurate or will ever be.
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