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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

#61

Post by loxs »

Moodles wrote: post #6
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.

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…

This sounds true if you only optimize for (hedge against) one risk only - stock market crash.

To me, an emergency fund is a hedge against various different risks like these (I am guilty of not being prepared for all of them):

1. A pandemic. For this I was ready even before we thought it's indeed possible - I have funds in several different banks (debit cards) that allow me to not have to visit a bank physically for several years (even if some of the cards expire in the meantime, or one bank suddenly goes bust)

2. AI glitch, identity theft, a bank holiday (this happened to me actually some years ago) that blocks you from accessing banks (and investment brokers if you have nowhere to withdraw your funds) for several weeks/months - for that you hold paper cash, physical gold and cryptocurrencies stashed at different physical locations.

3. Natural disasters - again some combination of diversified physical and virtual funds

4. Legal trouble - yes, even if you are not guilty you could get your funds blocked.

I presume you are from the US, hence the purple goggles ;) (I hope I'm not offending you)

Re: Save like a pessimist, invest like an optimist

#62

Post by sanderjd »

I'm totally philosophically aligned with this article and enjoyed reading it, but I'm just interested to hear whether anyone else has this problem: More and more stuff I read seems to be name-droppy like this. For instance, I've been reading "The Psychology of Money" recently, and I'm enjoying it, but its style is a lot like this article; an endless series of anecdotes about famous and semi-famous people, with insights from the author tying them together. Is this a new trend of some kind, or has it just become more obvious to me lately?

Edit: Ha! I did not catch the part at the end where this is the same author as that book. Ok then!

Re: Save like a pessimist, invest like an optimist

#63

Post by simonsarris »

ericmay wrote: post #42
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.

or 1% more optimistically: https://pbfcomics.com/comics/reset/

Re: Save like a pessimist, invest like an optimist

#64

Post by icedchai »

Moodles wrote: post #14
fairity wrote: post #9

Earlier quoted context omitted.

I’ve thought about this too, and came to a different conclusion. The primary reason is just because the markets haven’t collapsed more than 85% over a months long period before, doesn’t mean it won’t in the future. And, my marginal utility for money gets so high below a certain level, that it’s not worth risking this outcome when the marginal utility of more money is relatively smaller.

Yeah, it’s essentially just estimating the probability of you getting an emergency which coincides with a total market collapse so horrific it reduces your semi-liquid net worth to less than your emergency. I’m at a point where I’m ok with that risk. At some point you would be too: 85%? 90%? 99%? Clearly we agree Jeff Bezos doesn’t need 6 months cash on hand at all times. So the limit is somewhere. I think a total ma…

I keep roughly 10% of my net worth in cash... That equates to several years of expenses. It may be excessively high but it lets me sleep at night. You joke, but the past year shows something like a zombie apocalypse is a possibility.

Re: Save like a pessimist, invest like an optimist

#65

Post by sanderjd »

Moodles wrote: post #14
fairity wrote: post #9

Earlier quoted context omitted.

I’ve thought about this too, and came to a different conclusion. The primary reason is just because the markets haven’t collapsed more than 85% over a months long period before, doesn’t mean it won’t in the future. And, my marginal utility for money gets so high below a certain level, that it’s not worth risking this outcome when the marginal utility of more money is relatively smaller.

Yeah, it’s essentially just estimating the probability of you getting an emergency which coincides with a total market collapse so horrific it reduces your semi-liquid net worth to less than your emergency. I’m at a point where I’m ok with that risk. At some point you would be too: 85%? 90%? 99%? Clearly we agree Jeff Bezos doesn’t need 6 months cash on hand at all times. So the limit is somewhere. I think a total ma…

Do we all agree with that? I feel like I'd probably still keep 6 months of cash on hand if I were Jeff Bezos... But presumably that's one of the many reasons I'm not.

Re: Save like a pessimist, invest like an optimist

#66

Post by sanderjd »

Moodles wrote: post #21
fairity wrote: post #19

Earlier quoted context omitted.

Makes sense. 99% sounds about right for myself. But, how do I estimate the degree of downswing that I'm 99% confident will never happen in my lifetime? Or, is there a way to buy options to protect against this outcome that would economically make sense? Thanks!

Yeah it’s hard. There is about 200 years of stock market data so I would look at the biggest crashes to get a sense of what the biggest of them all could be. I guess that’s the German tank problem. It seems very unlikely we’ll get a crash relatively twice as bad as the Great Depression though

Why does that seem very unlikely? It seems to me that the right way to think about that is that the likelihood is simply unknowable either way.

Re: Save like a pessimist, invest like an optimist

#67

Post by smabie »

kd5bjo wrote: post #60
smabie wrote: post #44

Earlier quoted context omitted.

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.

They're not too good to be true. it's just the people making those kinds of returns aren't taking retail investment.

For example in crypto, market makers are commonly making 100% return. You haven't heard of these firms and they aren't interested in your money.

Market makers usually do quite well for themselves, but are capacity constrained: they can earn stellar returns on tens of millions of capital, but maybe not hundreds of millions or billions. You probably haven't heard of most of these firms and they would prefer to keep it that way.

of course if you want a public example, look at RenTec. They are unique in generating eye popping returns with such a large amount of capital. This is extremely uncommon. However generating comparable returns on 500-1000x less capital is significantly more common. These returns often don't compound tho, as they are severely capacity constrained.

Re: Save like a pessimist, invest like an optimist

#68

Post by irrational »

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…

With the world’s population projected to severely contract in the coming centuries, I wonder how that will effect the possibility of exponential growth.

Re: Save like a pessimist, invest like an optimist

#69

Post by lotsofpulp »

icedchai wrote: post #64
Moodles wrote: post #14

Earlier quoted context omitted.

Yeah, it’s essentially just estimating the probability of you getting an emergency which coincides with a total market collapse so horrific it reduces your semi-liquid net worth to less than your emergency. I’m at a point where I’m ok with that risk. At some point you would be too: 85%? 90%? 99%? Clearly we agree Jeff Bezos doesn’t need 6 months cash on hand at all times. So the limit is somewhere. I think a total ma…

I keep roughly 10% of my net worth in cash... That equates to several years of expenses. It may be excessively high but it lets me sleep at night. You joke, but the past year shows something like a zombie apocalypse is a possibility.

In the very worst scenario, you’re going to need guns, source of food, land, and most importantly a network of people who you can call to help defend you (or go on offense with you to acquire necessary resources).

The dollar is only useful as long as the US government continues to perform as an organization. However, as the US approaches dissolution, I would expect the value of USD to approach zero as the government increases the supply of money and prospective owners of the currency lose trust in its ability to retain value in the future.

Re: Save like a pessimist, invest like an optimist

#70

Post by pm90 »

yojo wrote: post #55
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?

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 w…

It’s been pretty clear for some time now that inability to inhabit anything besides earth is a huge failure mode for the species. It might possibly be the unifying goal for the species to put aside its petty differences and come together on a grand project.

I gotta say though, the chances seem extremely slim and it’s more likely that climate change would trigger a reduction in the production capacity of humanity triggering political changes that may make it impossible to solve these problems.

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