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Save like a pessimist, invest like an optimist

collaborativefund.com

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Re: Save like a pessimist, invest like an optimist

#51

Post by smabie »

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…

One should target volatility, not leverage. Without leverage, you can usually only take the most risky of strategies in order to get a return. If you're willing to take on leverage, you are much more likely to find a good strategy.

Source: work at a small prop firm that takes on around 10x leverage. Even at this leverage ratio, we are considerably less risky than the S&P 500. Even at 10x, our volatility is somewhere between 1/2 to 1/3 of the S&P.

If you take on very little directional risk and are doing stat arb like us, there's nothing wrong with taking on a lot of leverage. Even at 10x, we are safer than the vast majority of retail portfolios in existence.

Leverage (through futures, options, shorts, or borrowing) is the cornerstone of almost all active outperformance in the industry. Without leverage, you will be forced into high beta names that trade at a premium compared to their risk adjusted return. See the "low beta anomaly" for more information.

Re: Save like a pessimist, invest like an optimist

#52

Post by dasudasu »

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…

"In the long term we are all dead" so why would it even matter if over 2100 years your perfect 5% compounding hasn't happened as expected? No place on earth experienced nothing short of complete societal overhaul in that span -- most often multiple times at that.

Re: Save like a pessimist, invest like an optimist

#53

Post by ravi-delia »

antoineMoPa wrote: post #49
mjfl wrote: post #46

Earlier quoted context omitted.

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.

Unless more of the world falls out of economic development, the opposite of the trend we've seen for decades, the Einsteins born in areas that can empower them will increase in number proportionally. In fact, our current accounting of Einsteins is limited to the ones that were empowered, so if trends continue we should expect a larger than proportional increase.

Re: Save like a pessimist, invest like an optimist

#54

Post by smabie »

fairity wrote: post #45
smabie wrote: post #43

Earlier quoted context omitted.

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?

I have a blog post I wrote awhile ago that might be of interest:

Diversification, Risk and Leverage https://cryptm.org/posts/2019/11/28/div.html

If I was rewriting the post today, I would make some changes, but by and large, I stand by the post.

Re: Save like a pessimist, invest like an optimist

#55

Post by yojo »

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?

It is unclear if the Earth’s carrying capacity reaches a trillion, that’s certainly in the high side of forecasts. It does not look like we’re on a trajectory to hit anywhere near that.

I also question the value of genius at driving GDP growth indefinitely. Eventually you run into natural laws that are insurmountable; you can’t genius your way out of entropy.

That said, the GDP wall could well be millennia away and we still have tons of room for growth. Maybe we finally bring cheap fusion online, solve asteroid mining, and terraform anything remotely habitable around us. Or maybe we don’t, investment as a vehicle for income fails, and no one gets to retire in 50 years.

Re: Save like a pessimist, invest like an optimist

#57

Post by yojo »

dasudasu wrote: post #52
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…

"In the long term we are all dead" so why would it even matter if over 2100 years your perfect 5% compounding hasn't happened as expected? No place on earth experienced nothing short of complete societal overhaul in that span -- most often multiple times at that.

I threw out some numbers to set a baseline of “this can’t go on forever.” I don’t pretend to know when it starts to transition, or the speed of the transition.

The fact that the rate of growth will someday slow means assumptions you make about your 401k may or may not hold if we happen to be at the wrong point on the curve.

Re: Save like a pessimist, invest like an optimist

#60

Post by kd5bjo »

smabie wrote: post #44
kd5bjo wrote: post #8

Earlier quoted context omitted.

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.

Those numbers sound too good to be true. I’d stay as far away as possible, smelling a con. I certainly wouldn’t invest money I can’t afford to lose.
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