How to (hopefully ethically) make money off of AGI
Hey Everyone!
As part of working on dialogues over the last few weeks I’ve asked a bunch of people what kind of conversations they would be most interested in reading, and one of the most common one has been “I would really like to read a bunch of people trying to figure out how to construct a portfolio that goes well when AGI becomes a bigger deal”.
You are three people who would be reasonably high on my list to figure this out with, and so here we are. Not because you are world experts at this, but because I trust your general reasoning a bunch (I know Noah less well, but trust Will and Zvi a good amount).
I think to kick us off, maybe let’s start with a very brief 1-2 sentence intros on your background and how much you’ve thought about this thing before (and like, whether you have constructed a relevant portfolio yourself).
Also, to be clear, nothing in this post constitutes investment advice or legal advice.
Thanks for the invitation to participate Oliver! My name is Will Eden, my background is economics and finance and biotech, and most recently I have been an early stage biotech VC, though I also try to think very hard about how to manage a broad, public asset portfolio as well.
If I had a rough thesis / opening statement, it would probably be that this is extremely difficult to know in advance how most assets will perform / which parts of the chain will accumulate lots of value. On the flip side, I think we have a saving grace in that it’s likely the overall economy will be generating a ton of value, and even some very general and broad types of portfolios will likely accumulate considerable value, if not the maximum possible value that we’d of course like to achieve.
My name is Zvi Mowshowitz. I have written and thought a lot about economics, and I spent 2.5 years trading at Jane Street Capital. I spend a bunch of time thinking about these matters, but I also intentionally do my best to avoid spending too much time on portfolio optimization or trading so it doesn’t take over my entire brain.
I also wrote a post about this called On AI and Interest Rates.
(Also I know enough to say up front that nothing I say here is Investment Advice, or other advice of any kind!)
My general approach in such situations is that you want to look for investments/gambles that would not be too expensive (in EV terms) if your thesis was chosen at random, or even would be good ideas anyway, but that would then benefit greatly if your thesis turns out to be true. There is a time and place to pay a premium, but it must be chosen carefully.
Thanks for the invite! I’m flattered to be here. My name is Noah Kreutter and my background is that I have roughly 4 years of quant-y finance experience, including IMC and (soon-to-be) Bridgewater. I’ve done a mix of volatility trading and systematic multi-asset macro. I’ve also been around the LW/Rationalist/SSC ecosystem since at least 2015, but mostly at the periphery. None of what I say is financial advice, including anything that sounds like financial advice.
My basic view is that in a slow AGI takeoff—and really, it’s slow takeoffs where how you invest is likely to matter—you want to construct a portfolio that is long growth, especially stocks with idiosyncratic exposure to AI, long volatility, long rates-going-up (short bonds), and long “real estate that is cheap in 2023”. You probably want to avoid real estate that is being supported by a strong knowledge based labor market (e.g. NYC).
Also, for most readers I imagine that career capital is their most important asset. A consequence of AGI is that discount rates should be high and you can’t necessarily rely on having a long career. So people who are on the margin of e.g. attending grad school should definitely avoid it.
My current portfolio is a mix of single name equities, long dated call options on indices, long-ish dated calls on a few specific stocks (e.g. MSFT), and short long dated bonds. I also hold a lot of cash. If I could easily get a cheap mortgage in some less bougie part of the US, I probably would, but logistically its annoying.
One other general piece of advice I would offer—and this dovetails with both “hold cash” and “get some equity beta via options”—is to “preserve optionality”. The value of being nimble in a broad sense over the next decade is likely to be high.
“get some equity beta via options”
Ah, yes, I also love me some equity beta via options :P
I think I can maybe decipher what this means via some Googling, but can you elaborate a bit more?
By “getting your equity betas through call options” I mean using call options (the right but not obligation to buy a stock or index at a prespecified price) as a partial substitute for holding stocks outright. The idea is that call options have a delta—the derivative of some pricing formula with regards to the price of the underlying asset—and this tells you how much the price of an option should change given a $1 move in the underlying.
To Zvi’s point, I would not trade any short dated options based on AI theses. But in general, tax issues and transaction cost issues are less severe if you buy calls with expirations several years out, since this is long enough to receive long term capital gains tax treatment. The reasons to do this are cheap, non recourse leverage (you can get quite a lot of equity exposure for little money down), and positive expected value if you believe the options market is mispricing volatility—i.e. underestimating how much stock prices will bounce around—which I think it is.
For the future reader, some attempts at paraphrasing what Noah is saying for non-enlightened mortals:
I would not trade short dated options based on AI theses: “I think it is a bad idea to buy financial instruments that only pay out when the price of certain stocks changes in the near future. Presumably because timing price movements is quite tricky and even big changes can be hard to time in the stock market (remember the difficulty of timing the 2020 pandemic stock movements despite obviously large effects of the pandemic on stock prices), and because the high volatility of this kind of instrument means that risk-averse counter-parties often ask you to pay a high additional premium”
If you buy calls with expirations several years out, this is long enough to receive long term capital gains tax treatment: “In the U.S. you pay substantially higher taxes when you hold a financial instrument for less than one year (short term capital gains vs. long term capital gains). This means if you want to bet on price movements (via options), it’s tax beneficial to bet on price movements at least a year out.”
The reasons to do this are cheap, non recourse leverage (you can get quite a lot of equity exposure for little money down): “If you bet on long term price movements instead of just holding stock this way you can capture a lot of upside without tying up a lot of your capital in holding stock (high leverage) and without risking your unrelated assets being liquidated and possessed (non-recourse)”
Broad market effects of AGI
Under basically any AGI scenario, the economy will begin to accelerate and grow very rapidly. Several assets closely reflect the growth rate in the economy, particularly real interest rates, and others are imperfect proxies, like public equities (stocks). It’s worth noting that several leading AI companies cannot be invested in by the general public currently (eg OpenAI, Anthropic, etc) as they are privately held, so it may be difficult to invest exactly and precisely in an AI scenario. My argument is that while it will be tricky to get perfect exposure, and any portfolio will be an imperfect proxy, the rapidly accelerating growth will mean that lots of value is created in unexpected places and captured in different ways—for example one of those booming private companies being acquired by a public company, which you can now invest in—such that the boring old strategy of “invest in index funds” still might capture much/most of the value from AGI :)
As for my current portfolio, I have a mix of different things, which includes individual stocks I expect to benefit from AI (e.g. MSFT and GOOG), and various other investments including other individual stocks, and also a very favorable fixed-rate mortgage—which is an example of a trade that was good anyway, but which AI made better.
I agree with NoahK that preserving optionality is a good idea here. You should treat illiquidity as costing a larger premium than usual.
In general, I think that ‘construct a perfect portfolio’ is not worthwhile unless you value the intellectual exercise. There isn’t enough alpha in getting it exactly right, and tax considerations often dominate when considering things like rebalances. You want to be sure you are directionally right and are expressing your opinions, but not go too crazy.
I strongly agree with Will that accelerating AGI will create a lot of value in different places, so a broad range of productive assets could appreciate, or at least a portion of them, such that it is reasonable to predict that SPY (S&P 500 ETF) would do well. One worry there is that rising interest rates is not so great for stock prices, so you’d want to consider whether to cover that base.
For things like options, you pay a premium in that you have to cross a wider spread when you trade them, worry about various edge cases in market structure, and then face tax implications. It is clearly the right move in certain focused spots (think Feb 2020) but I would hesitate to use them for AI unless you expect things to escalate rather quickly.
Career capital in an AGI world
Also, for most readers I imagine that career capital is their most important asset.
This point Noah made is worth considering, though I think we need to be honest about what skills we have / which ones we can develop. In a full AGI scenario, where all humans are exceeded in all skills by AIs, it seems unlikely that even the best programmers etc will be able to make significant returns. In the lead up to that period, there’s still an open question about which jobs exactly get replaced in what order.
For example, everyone seemed very surprised when art got automated first—it was always assumed that creative tasks would be the last ones to go! (This still could be true if we place a huge premium on human-created art.) It seems reasonable that anyone working directly on improving AI could still earn a large premium for many years, and so relying on that career/human capital seems like a good strategy. But if you expect both 1) AGI soon, and 2) many/most jobs replaced, then I think people shouldn’t assume they’ll be able to earn any income in future periods. (Social implications of that are massive, expect taxation of AGI + universal basic income, mass charity, etc, etc—but the point stands.)
Completely agree with Will about most people’s careers not necessarily being worth all that much once AGI is here. I think it’s an argument for trying to grab money via your career now, instead of doing things that supposedly build human career capital but take a while to pay off. Do quant trading over consulting, don’t go to grad school, try to front-load earnings as much as possible. (EDIT: to Zvi’s point, human and career capital are different. I’m really just talking about career capital here—broader social connections and reputation are likely to be exceedingly important in many futures).
I do expect the transitional period around AGI to create a lot of high value entrepreneurial opportunities for those with that skillset. Unclear how long to expect it to take for things to reach a new equilibrium.
A point I have not seen made so far, that is worth considering, is in which worlds is the value of having money high rather than low for you?
In the extreme, in the world where doom occurs and everyone dies, dying with the most toys is still dead. Or there is a regime change or revolution or confiscatory taxation regime or other transformation where old resources stop having meaning. Or if we get into a post-scarcity utopia situation of some kind somehow, perhaps you did not need money.
Whereas there are other scenarios where having funds in the right place at the right time could be hugely impactful—which I would guess are often exactly the scenarios where interest rates are very high. Or worlds in which those without capital get left behind. So you’d want trades and investments that pay off in the worlds where wealth is valuable, and to worry less about when wealth is not so valuable.
Yeah you kind of have to assume that things will get weird but not too weird. It’s not really possible to hedge either the apocalypse or a global revolution, so you can ignore those states of the worlds when pricing assets (more or less).
This is less true if you expect your actions to actually have a meaningful impact on the state of the world. Like if you think there may come a time when if you have enough money the apocalypse can be averted vs not, you should perhaps invest differently than someone who believes he or she is only ever along for the ride.
I think insofar as you expect rates to go up in response to growth that can’t really be an argument for bearish equity. At worst, “not as bullish as you’d otherwise be given growth expectations.”.
Career capital is one form of human capital or social capital. Broadly construed, such assets are indeed a large portion of most people’s portfolios. I’d rather be ‘rich’ in the sense of having my reputation, connections, family and skills than ‘rich’ in the sense of having my investment portfolio, in every possible sense. This is one reason not to obsess too much about your exact portfolio configuration per se, and worry more about building the right human and social capital instead.
And yes, if you think timelines to transformation are relatively short, then that too should consider the impact on what is valuable. I certainly would not plan on anything like a ‘tenure track’ or other long-term plan that does not pay off for many years.
Especially I would warn against looking for the illusion of security or normality—the idea that you are set if everything stays normal should not bring too much comfort. But on the flip side, if things stay more normal for longer than you expect, you don’t want to mean you’re screwed.
A point I have not seen made so far, that is worth considering, is in which worlds is the value of having money high rather than low for you?
I agree very much with this point, and I see a couple scenarios where your wealth endowment matters. One world is where there are clear and urgent ways to spend money to directly improve outcomes, eg a huge spend on AI safety or whatnot. I suspect that’s why most EAs are considering this question.
The other is a world more like a slow takeoff Age of Ems type scenario, where there isn’t total obsolescence of all forms of humanity, and maybe there’s a minimal social safety net because it would be very cheap at that point, but if you want any meaningful large impact on humanity’s future it absolutely depends on what resources you can muster to eg gain compute power to run more copies of yourself. I definitely put non-zero odds of this being a potential future!
The other is a world more like a slow takeoff Age of Ems type scenario, where there isn’t total obsolescence of all forms of humanity, and maybe there’s a minimal social safety net because it would be very cheap at that point, but if you want any meaningful large impact on humanity’s future it absolutely depends on what resources you can muster to eg gain compute power to run more copies of yourself.
For whatever it’s worth, this is the strange future I find most personally plausible and certainly most worth thinking about/hedging.
Ultimately I still expect growth to be so large that will outweigh any drag on stocks due to rates.
Right, I do as well in these scenarios, but I wanted to point out that if a given stock/sector/etc ‘misses out’ on the explosive growth, then their value rather than staying static could drop quite a bit.
Also I have to assume that a lot of businesses are going to get disrupted, and hard. There will be losers. A lot of why I like individual stocks when investing domestically is that while I don’t know if I can reliably pick winners, I do know I can identify losers I want to avoid.
Anyone short Chegg in February? I think there will be a lot of opportunities like that over the next few years at least.
Its not really possible to hedge either the apocalypse or a global revolution, so you can ignore those states of the worlds when pricing assets (more or less).
Brief disagreement here—it’s true you can’t hedge something like a total AI takeover / x-risk, but you can certainly hedge things like a revolution or catastrophic risks. Personally I think it’s wise to consider manageable downside scenarios and allocate just a few % of your portfolio to robustness, from cheap things like “stockpile food and water” to more expensive things like “physical gold and silver coins somewhere hidden but where you can access them in an emergency”
Agree with Will on hedging some revolutions—you can do it if you want to intentionally do exactly that and pay a premium to do so, and with sufficient wealth that is a highly reasonable play. Alas AI-induced such things are less likely to play nicely with that kind of move, as Altman noted about his bunker.
Yeah I agree you can hedge revolutions historically (to a degree). I’m a bit skeptical that if AI goes badly—or simply ends up being Communist—that storing gold underground will matter much if at all. But I don’t think much hinges on this.
I wanted to point out that if a given stock/sector/etc ‘misses out’ on the explosive growth, then their value rather than staying static could drop quite a bit.
Yes, and this is why in my very first post I suggested something like “own the index fund”—that will automatically rebalance more funds into winners, and the losers get downweighted until they become zero. If you don’t have a very strong thesis about which entire industries will benefit vs not, it really seems like you shouldn’t bet on anything other than “equities in general”
I’m also happy to do some speculation here about what might out/underperform. For example, I think it’s a pretty good bet that raw materials and refining will become a huge bottleneck in the immediate term. For the run up into rapid growth, before we get huge new supply coming online (will we? what about regulations??), raw materials seem like they could really grow in value...
Debt and Interest rates effects of AGI
Let’s focus a bit on the two broadest categories of assets: debt and equity. Debt is (normally) a fixed, known in advance payment, and the yield of that asset is determined by prevailing interest rates plus uncertainty, etc. Equity is the “residual” claim after debts are paid, it allows for unlimited upside, but also it gets paid after all debts so if the business doesn’t perform well the equity side gets nothing.
High growth usually means lots of profitable investment opportunities. Debt is most useful when it’s paying for something like a fixed capital investment—you know roughly how much money you need, what you need to build, you can assign the capital as collateral for the loan (so the debt gets repaid if the project fails), you have some pretty good guess about how much this investment will pay off over time. A rapidly growing (and effectively brand new) AGI economy will need lots of such investments, and so there will both be good opportunities to invest, and it means that financial capital will become extremely scarce as limited current resources pursue the best projects. Thus we can reasonably assume that interest rates will grow very large. This increase in rates (yields) means that existing debts will lose a lot of value, so it seems risky to hold a lot of current debt/bonds going into this growth period. It also means that having cash on hand could allow your money to grow at an extremely rapid rate.
This suggests that insofar as you want a cash/bonds portion of your portfolio, you want to keep it as cash invested in extremely short term securities (money market funds, T-bills, etc)
(A perhaps less obvious implication is that this could make it a lot harder for governments to finance themselves, as they will also be facing an extremely high prevailing interest rate. Their best bet may be to raise taxes and try to balance the budget, which hopefully should be generating lots of revenue in a growing economy… but if they still are reliant on debt financing this could become very difficult.)
I like Will’s point a lot about governments potentially struggling to finance themselves under a much higher interest rate environment. Seems like this—plus widening inequality—could lead to a very large increase in taxes. Possibly this would include previously unheard of things like taxing unrealized gains or a wealth tax.
One worry there is that rising interest rates is not so great for stock prices, so you’d want to consider whether to cover that base.
It’s worth considering the channels by which interest rates hurt stock prices. Insofar as there are better fixed investments, it’s tempting to get a known large return than an uncertain return. But if I had to guess, the returns on investments will (at least initially) greatly exceed the prevailing interest rate, such that equities will grow substantially faster than bonds. Most people will see things like bonds paying 50% annually and notice the stock market more than doubling, and pile into stocks. I don’t think the opportunity cost effect will be sufficient to dissuade people here.
Another channel is the discounting of future cash flows, eg higher interest rates means that future payments are worth less than current payments. That’s true in a strict valuation sense, but again, you’re also needing to price in growth rates in addition to discount rates. Plus in a rapidly growing environment like this, just the very near term payments alone can justify a large valuation, even if you’re discounting something 10+ years into the future to basically 0.
Will: I think I am failing to properly follow the equities vs bonds tradeoff here. Let me try to summarize what I think you are saying:
When AGI happens, there might be a lot of growth, so people will want to invest a lot, which means people will want high interest rates on any loans they give out, since they want the interest on those loans to at least match the other investments in returns.
This part makes sense to me. Seems like interest rates in this sense will go up.
But then I think I am failing to understand how this will differentially affect holding stocks vs. holding bonds.
But then I think I am failing to understand how this will differentially affect holding stocks vs. holding bonds.
Don’t worry, you are not alone in being unclear how interest rates affect stock prices. It seems like there should be a mechanical relationship but it’s not at all certain. I was responding to Zvi’s point that higher rates might also impact stocks. Ultimately I still expect growth to be so large that will outweigh any drag on stocks due to rates.
Agree with Will that interest rates could rise a lot and that you therefore very much do not want to be holding debt when AI takes off, as existing debt will lose a lot of value if interest rates rise. It is fine to hold things similar to cash to maintain optionality, but you’ll want to do this with short-term instruments. This is one place I have actually put effort in—I keep having to explain I want the floating interest rate, that when I say I don’t want to take risk with my cash I mean that I am afraid interest rates will go up rather than down.
And to take it one step further, holding long term debt at fixed rates is amazing in that situation, such as a long term mortgage. As a company you would love to have issued bonds, and so on.
For governments, as was famously asked recently, is R>G? If real growth is very high, then it is fine for real interest rates to also be high. Also note that governments only refinance slowly as their bonds mature, so if things are escalating quickly, the interest rates on their debt could be well behind the growth rate even if the rate on new debt exceeds the growth rate, making there be less need to raise more revenue. And we should expect major primary surplus to happen on its own.
Concrete example portfolio
Ok, I think I want to take a bit of a step back and talk a bit more practicalities.
In this post “Investing for a World Transformed by AI” Peter McCluskey has a relatively concrete sets of companies that he thinks will perform well if the world gets transformed by AI. Extracting the most relevant recommendations:
AI companies: Google, [...] OpenAI,
[...]
My current semiconductor-related investments are (in alphabetic order): AMKR, AOSL, ASML, ASYS, KLAC, MTRN, LSE:SMSN, TRT.
[...]
AMZN, MSFT, and GOOGL are likely to get some benefit from datacenter growth. I guess I’ll expand my GOOGL holdings and buy small positions in AMZN and MSFT sometime in 2023, when I see signs that their stock’s downward momentum has dissipated.
[...]
My two biggest solar bets are CSIQ, and SCIA. I have smaller positions in JKS, DQ, SEHK:1799.
For power grid infrastructure and solar farm construction, I have positions in MTZ, MYRG, PLPC, and PRIM.
These sure are a lot of stock tickers, so I don’t think we should look into each one of those, but I am kind of curious whether you look at this portfolio and it seems vaguely sane to you.
And then I would like to go into a bit more concrete detail about what you would actually concretely do if you wanted to spend at most like 15 hours on this, but still end up with a portfolio that seems like it does the thing.
Habryka’s portfolio seems reasonable enough to me. I think omitting TSM is an impactful decision (and not one I agree with) but other than that it looks solid for a list of tickers.
If I were to make my own list of stocks worth large-ish positions, I’d say TSM, MSFT, GOOG, AMZN, ASML, NVDA are a good starting point. You can also look at energy producers and raw materials mining/refining. Though with those sorts of companies its a more competitive market and it makes sense to diversify more.
That portfolio does not include weightings, and has a bunch of [...] in it, and I don’t know what a lot of those companies are or whether they seem cheap, but does not in any way seem insane. I certainly have AMZN/MSFT/GOOGL, although I am not trying to time momentum. Solar seems like a decent place to be for other reasons as well and I have some exposure there, but I haven’t investigated the companies named.
Semiconductors seem like a good idea if one was doing the work and building from scratch. But also one does not need to hedge bets too carefully on exactly which angle of AI will end up being most profitable—it seems reasonable to aim for where you see the best profits, rather than trying to be too smooth.
And yes, NVDA seems cheap. Kind of crazy that it’s down substantially from its peak through a strong earnings beat.
I stay away from TSM due to geopolitical risk, I don’t want it even if it’s properly priced in.
To Zvi’s point about geopol risk on TSM, TSM is one of the stocks where I am almost entirely call options in my exposure. I think if you are comfortable trading options—and many people aren’t which is reasonable—a 31% implied volatility is quite cheap. And there aren’t good substitutes for TSM that I am aware of. It plays a pretty unique role in global supply chains I think.
Yeah, TSM seems like an excellent place to deploy call options if one was willing to use call options.
Ok, let’s try to dumb things down even more. Let’s say you are a 28 year old male with a few tens of k to hundreds of k to invest who does not have any kind of brokerage account set up. What is the actual concrete thing you would do that would not cause you to accidentally press the wrong button and then somehow lose all your money?
Some links in response to this also seems fine, though I do feel like this step is one where some reasonable people might get stuck.
None of what I said is financial advice but this is: be very careful before clicking any buttons in your brokerage account, and make sure you understand what they do.
More seriously, people for whom this conversation is a bit technical should avoid trading options or using excessive leverage. It is easy to mess up if you don’t really have the knowledge base and aren’t paying close attention.
And then I would like to go into a bit more concrete detail about what you would actually concretely do if you wanted to spend at most like 15 hours on this, but still end up with a portfolio that seems like it does the thing.
To a first approximation: either go 100% equities, or keep some equities and some cash, with the cash portion invested in short term rates (money market, T-bills, etc) and periodically rebalance.
The maximally agnostic thing is just the global stock index. Vanguard has an ETF with the ticker VT that’s just all stocks in the world, market cap weighted. Global equities have underperformed US equities for a long time (and we have a lot of tech here), so if you’re a growth instead of a value investor then maybe you want a US total index (VTI) or just the S&P 500 large cap index (SPY).
The next layer is to spend some time thinking about which areas are likely to outperform in the immediate term. I recommend going long-only, not trying to short any particular areas, given the likely expected increase in growth and uncertainty about where such gains might appear. I mentioned raw materials above, you can get a global raw materials ETF with MXI, or US-only raw materials with IYM. Semiconductors also seems like another clear buy, given what we’ve already observed (though it may now be overvalued and the value will be captured elsewhere after this wave!), and the ticker SMH is a broad semiconductor ETF. You can go down the list on whatever you’re bullish on and find an ETF for that subsector, almost all of them have one, eg for solar you can buy TAN. (Note that these are just common symbols, you might want some other variant on these funds, I’m not specifically recommending these)
It seems very very risky to invest in individual names, unless you’re monitoring this very closely...
@habryka I would tell such a person to be between 50-100% equities, mostly indices with a small special allocation to MSFT, and to short long dated bonds if they feel comfortable doing so. If they don’t, then hold whatever they don’t invest in cash/tbills.
And get a mortgage if they live in Wisconsin or some such place. And don’t go to grad school.
Another benefit of call options btw is that you lock in the interest rate. If you are getting your leverage by spot borrowing you need to pay attention to the rate your broker charges cuz it could go up a lot.
Yeah, let me echo NoahK: All this talk of options needs to take into account that it is VERY easy to click the wrong buttons, to size things 10x or 100x what you thought you were doing, or otherwise get into big trouble, if you wade into options or futures or other things like that. Be sure you know EXACTLY what you are doing, talk to a human to confirm as needed, and so on, and when in doubt stick to the basics.
More seriously, people for whom this conversation is a bit technical should avoid trading options or using excessive leverage.
To briefly address leverage: this could get very crazy in a high rates environment. Leverage is financed via margin loans, and those are almost always the shortest term interest rate + some premium. So if interest rates are already at 50% or something, you’re bleeding half your value every year using 2x margin. This is great of course if the stock market is soaring, but generally stocks don’t only move in one direction, and you could get fully wiped out from a combination of high rates and sidewise to suddenly sharp downwards action. For just one concrete scenario: suppose there’s a new AI-driven trading bot (or a million of them) and we get a flash crash of 75% instantly or something. Everyone doing this will not just be liquidated but also in deep debt to their brokerage. I think leverage is an excellent strategy only in “relatively normal” states of the world.
Hmm, so I feel like this advice is too conservative. Like, I at least seem to have some beliefs about how big of a deal AI will be that disagrees pretty heavily with what the market beliefs (I think, though this kind of stuff is hard to tell). I feel like I would want to make a somewhat concentrated bet on those beliefs with like 20%-40% of my portfolio or so, and I feel like I am not going to get that by just holding some very broad index funds, which really are the “defer to the market maximally” option.
I like “short bonds and make idiosyncratic investments in MSFT, GOOG, NVDA, etc”. It depends on how much risk the 28 year old wants.
I like “short bonds and make idiosyncratic investments in MSFT, GOOG, NVDA, etc”.
Short bonds is a great strategy when you’re in the state of the world where the takeoff is already occurring and everyone realizes it and both growth and rates are skyrocketing already. Personally, I would not be short bonds right now in the current environment, but of course YMMV
Ideally there would exist an AI index fund or something I could buy that balances things out for me, but I think that doesn’t exist? And I also don’t mind taking on some risk. Seems fine for that part of my portfolio to go to close to zero in like 50% of worlds, if it properly captures the upside in the other worlds.
My big difference with Will is that I’m unafraid to buy individual stocks, which also gives you additional tax-related optionality in many cases. You don’t want too much concentration into any one stock, but a 28-year-old doesn’t/shouldn’t have a level of risk aversion where e.g. being 10% GOOG seems unreasonable, and certainly 5% is fine, if you think that is where the value lies.
At minimum, if you expect major changes from AI, you’re going to want to be overweight AI-linked stuff, at some level of magnitude and obviousness. If nothing else there are sector ETFs for such things, but mostly the stocks are obvious and I’d look at those. Again, small mistakes here really are fine in expectation.
Shorting bonds is again a more advanced move. It does seem like if the premium to do it isn’t too big it would have alpha, but it can definitely backfire—interest rates dropping for a few years before they rise does not seem so unlikely to me. The worst case scenario is you lose money by being too early, then you’re right later but you have no capital to profit from being right later.
I think the yield curve right now is flat and it will be upward sloping before we’re done with everything. And I don’t think Powell can cut rates. But this gets far afield of AI.
Probably the best risk adjusted trade imo is to like long 10 year bonds and short 20 year bonds in no more than a 2:1 ratio.
Ideally there would exist an AI index fund or something I could buy that balances things out for me, but I think that doesn’t exist?
Oh they definitely exist! Don’t underestimate the marketing power of these big fund managers lol
iShares has one under ticket IRBO. Let’s see what it holds… Looks like very low concentration (all <2%) but the top names are… Faraday, Meitu, Alchip, Splunk, Microstrategy. (???)
Very quick question: What brokerage thing do you actually someone like me should use?
Interactive Brokers is the best brokerage if you know what you are doing. They have terrible UI but the best margin rates. Other brokers will rip your face off when you borrow cash.
If you don’t want to learn to use terrible UI, you can use Fidelity or Schwab or something I hear.
They have terrible UI but the best margin rates.
Lol, I feel like that is the wrong tradeoff to make when I am worried that I will lose all my money by pressing the wrong button.
My big difference with Will is that I’m unafraid to buy individual stocks
I’m open to buying individual stocks, but it’s very difficult for me to recommend specific stocks to other people under extreme uncertainty! How can an average investor with <15 hours of research as Oliver stipulated know they’re doing anything with positive expected value over buying a broad index? Anything that’s a mega-winner will in fact get captured by a broad index fund.
I do think it’s fine for younger more risk seeking people with time on their hands to give this some thought and pick individual stocks. If nothing else you will learn a lot by doing this, both about markets and about your psychology, and it can incentivize you to learn more about the companies in question once you have skin in the game. That said, I would never let your index fund exposure go to 0 in favor of individual stocks, just to avoid the risk of ruin that you captured none of the eventual winners.
To be very clear: I’m not even certain that most/all value will be captured by a single megacorporation. It could be that several thousand companies each generate a trillion dollars in value or something.
(As a quick anecdote here, a while ago I tried to figure out what would happen if you just blindly followed all stock-advice that was upvoted on LessWrong. So I set up a virtual trading portfolio on some random website I found and maintained it for a few months. One of the biggest positions I took out was to short Nikola based on some upvoted post at the time. Within a few months that position had grown to 60%+ of my portfolio as the shorting had gone quite well and had appreciated like 300% or so.
Then I stopped checking for 2 months, and then when I checked in again, suddenly that whole investment went to 0...
Turns out the virtual portfolio website didn’t execute your options automatically even if they were in the green, so they had expired and become worthless.
This is one reason why I am afraid of clicking a wrong button and losing all of my money)
Oh no that is quite unfortunate! Yes if you buy options I recommend setting an alert when you buy them that will go off like a week before expiry.
On individual stocks, I think that especially if you know the companies in question but also in general, you don’t need 15 hours on each company to know that it is likely a real company making real things with good prospects at a reasonable price or P/E, and if you bought index funds you’d be buying that stock anyway. As long as you don’t go too big on any one stock that way, it seems… fine. I’ve never spent 15 hours looking at a stock ever.
Is any of this ethical or sanity-promoting?
Ok, I think I would like to cover another topic that is related, which is something like: “Ok, but is investing in this way ethical? Also, will it mess up your ability to think sanely about this stuff and try to slow down AI when that will directly hurt your bottom line?”
Like, I’ve been trying to convince some of my friends working at AGI companies to somehow get rid of their equity position, since I do think at that level of exposure it pretty seriously messes with your ability to think clearly (not as much as the social environment of the AGI company, but I think still a good amount).
I think holding Google or Nvidia with a huge fraction of your portfolio probably has similar effects, though my guess is as you get more diffuse than that, the effects get weaker. But like, many people I know are actively advocating for pretty aggressive government interventions that does feel like the kind of thing that could seriously hurt returns, and there might be surprisingly large effects here, even at a pretty broad level.
I think for the vast majority of investors, your portfolio choices don’t impact the world in any meaningful way. (Though they may impact how you think about things and evaluate risk.)
If you are a billionaire, yes, I would encourage you to consider social welfare aspects of your AI investments. It would be good if these companies faced higher costs of capital, and buying a stock serves to lower the cost of capital of the company you purchase. But if you are a 28 year old tech worker do what you must to protect yourself, imo. The capacity to harm the world through your investments is quite limited at that level.
Ok, but is investing in this way ethical?
I agree it seems more questionable if you’re, say, giving the seed investment to a new AGI startup that’s all capabilities and disdains any idea of safety. But one thing that’s nice about my index fund approach here is that you can benefit from the downstream economic gains, without favoring any particular actor.
There is also a very loose, not zero, connection between investing in the secondary market (buying existing stocks, not companies issuing new stock to raise money) and how that flows through to advancing a corporation’s interests. If a company is regularly issuing stock to finance their activities, then yes, if you raise their stock price on the margin then they can finance themselves more than if they have a low stock price. But what about companies who haven’t issued new equity since the IPO? Does them having a high stock price make their company run better/faster towards AGI? That seems very tentative. I guess there’s a channel by which you’re making it more profitable for individual employees with lots of talent to go work there, when they’re paid largely in stock options instead of cash?
But what about companies who haven’t issued new equity since the IPO?
To play the devil’s advocate here for a second: most big tech companies working on AI do in fact issue new equity annually, not to sell to investors, but as equity compensation for employees. This can actually amount to several %/year for many of those companies, which is quite dilutive over the long run! So yes, equity price can matter when you’re at a company that’s giving you the majority of your expected comp in options.
I guess there’s a channel by which you’re making it more profitable for individual employees with lots of talent to go work there, when they’re paid largely in stock options instead of cash?
Yeah, I feel a bit confused about the relationship here. I guess I kind of feel like the cost of raising capital of any kind should be roughly tracked by the stock price?
But also, yeah, it does just make it cheaper for them to hire people. For most tech companies their stock compensation package is like 50% of their salaries, and most of their expenses are salaries, so that should pretty directly equate more capital.
Ok, but is investing in this way ethical?
It depends on the details, but typically I would say yes. There are exceptions. If you are investing in private companies or where you can impact cost of capital in a meaningful way, like OpenAI or Anthropic, then I would say investing there has ethical concerns.
But Microsoft and Google are not like that. They already have infinite war chests and are not going to be spending more or less money on AI based on your investment. Nor is Nvidia going to do anything but maximize along its capacity and scaling constraints, money isn’t a factor. I think buying such stocks is fine.
Even when they issue stock options, they are going to scale to the price, and your impact is rather minimal all around. I think you can safely ignore such factors. Assume they have infinite war chest size when it comes to hiring, and salaries and compensation are constrained only by social forces.
If you are worried, you can go case by case—when you invest in Solar companies you are plausibly helping them in a real way, which is potentially bad for AI on the margin but also good for other reasons (e.g. climate and general goodness).
The impact on your incentives is distinct. I don’t worry about this at all, because I know that it is at best a small hedge of my real exposures and it won’t change anything. For someone with big exposure to private stock in OpenAI, there could be a problem there.
How would you actually use a ton of money to help with AGI going well?
Ok, this is kind of a tangent from the core topic, but it also feels important.
So let’s say that there are a bunch of people concerned about existential risk, who invest well in the run-up to AGI, and now they have a few hundred billion dollars or so in-aggregate.
Assuming that it’s hard to use money to make more AI Alignment progress, is there any way you could use that money to slow down AGI companies or something like that? Like, I do think a major question for me in this investment situation is whether I actually have use for a giant pile of money when AGI happens.
If you can drive up the price of the factors of production, you might be able to slow progress. Maybe a consortium of bidders could make some rare earth metals more expensive? Idk about the technical details.
I would not short high growth AI stocks to drive up their cost of capital since you’ll just get blown out quickly.
Assuming that it’s hard to use money to make more AI Alignment progress, is there any way you could use that money to slow down AGI companies or something like that?
One strategy that has been discussed is to pay top talent to not make AGI. If you’ve truly outperformed the market, you should be able to pay above-market rates to researchers and developers.
That said, I expect the motivations of folks working on this stuff to be only partly monetary, and if they’re already individually wealthy and have satisficed on the major life stuff, they might just keep working on it for glory or whatever other motivation, so I suspect this will be less successful than people presume.
Thinking about it more, the best strategy might be to donate to politicians who are already sympathetic. The government has guns and stuff and is good at stopping people from doing things. And donations can make a difference to policy.
If you can drive up the price of the factors of production, you might be able to slow progress.
Yes this is the generalization of my suggestion about buying up the top talent. Anywhere a resource constraint exists, you could in theory pay extra in order to sequester that resource.
Of course, once you do that, and the price rises, you’ve incentivized the market to find new and cheaper ways to bring more supply online. So I think that this strategy at best slows things down in the short term, and possibly speeds them up in the long term. But if you think the only thing that matters/exists is the short term, then it’s certainly one tool in the toolkit...
Lobbying the government, backing candidates, public advocacy or other things in such categories are obvious options where you could spend quite a lot. That would be where my first move would be. Politics always feels icky but ultimately is not something one can ignore.
Buying up top talent also seems like a great move if you can target it well, and presumably you can also put that talent to some good use (alignment, or if not then something else, top talent is almost always cheap even when it’s expensive).
Yeah, I do feel kind of icky about the lobbying point. It feels pretty symmetric in that it’s been a way in which historically people have prevented tons of good stuff from happening in a way that didn’t really expose them to accountability (regulatory capture being the more common path, but also all kinds of dumb safety regulations).
I just want to point out that we didn’t even mention crypto once :)
Please diversify your crypto portfolio
Talking about crypto, via historical circumstance I sure have a lot of friends who are holding a really quite substantial fraction of their portfolio in cryptocurrency. I am actually interested in a quick digression on what you expect to happen to crypto prices if AGI takes off (at least in parts because I often wish my surrounding ecosystem was betting making a less concentrated bet on crypto and this particular domain might sway some people who otherwise have been pretty steadfast in their hodling).
Just to make the briefest possible case: does cryptocurrency/blockchains solve a specific problem that future AGIs are likely to have? I think there’s actually a good chance that AIs can utilize these features way better/more easily than humans can. Digital representation of scarcity could be highly valuable. Also automatically-enforceable smart contracts might end up as a primary means of coordination between AIs. :)
Note that the strongest case against cryptocurrency here (other than that it has no value or use at all) is that holding non-yielding or low-yielding assets suffers extreme opportunity cost in a world of very high real rates. For example, gold tends to trade inversely to real interest rates (higher rate → lower price). So bitcoin in particular could have major issues in that regard. Ethereum or another more flexible system could potentially do something like raise the staking yield or something to try to keep up with interest rates (though of course that’s dilutive to current holders). Basically you’re relying on use cases providing major value at the point of AGI takeoff...
So my basic take is that anyone holding a lot of crypto as a % of their wealth, but not so much that they’d face liquidity issues in selling, is doing something very wrong. This is not to say people shouldn’t own BTC or ETH or whatever. Some crypto is fine.
But basic portfolio theory suggests that if you have an extremely large % of your portfolio in an asset with extremely high idiosyncratic volatility, you can get better returns by diversifying (and then using more leverage if you want).
I’m not against owning crypto but 50%+ allocation to ETH—which I think you mentioned—would be very suboptimal for almost anyone.
Thanks Oliver for having me in the dialogue! I need to drop off now, but I’m honored to have been asked to participate, and this was a lot of fun and very thought provoking! Great talking to you Zvi and Noah, and I’m looking forward to future dialogues!
Thank you Will! Really appreciated your thoughts here!
I’ve got to run now as well but thank you for inviting me! It was great chatting with everyone.
Thank your joining Noah!
Should you buy private equity into AI companies?
So, as we’ve noted it’s pretty hard to buy stock that’s actually loaded on AGI companies, since most companies working directly on this stuff are either private (OpenAI, Anthropic) or are part of a giant tech company that mostly does non-AI stuff (Microsoft, Google).
So a thing one might try to do is to get access to the private equity. For example, by buying it off of employees who have been there for a while.
Does this seem like a good idea from a financial perspective? Also, the incentives question here does seem more pronounced than for the other things we’ve been talking about.
It seems likely that private equity in e.g. OpenAI or Anthropic would trade cheap to the extent that it traded privately, so the concern here is ethical rather than financial. At which point, it depends who you buy it from, what incentives you are changing in what places, and whether or not you can serve a ‘dead on the cap table’ purpose without too much driving up the price. I don’t know enough to know the answers for sure, but until I had a better idea I would try and stay away.
Yeah, that does also feel right to me. I have been thinking about setting up some fund that maybe buys up a bunch of the equity that’s held by safety researchers, so that the safety researchers don’t have to also blow up their financial portfolio when they press the stop button or do some whistleblowing or whatever, and that does seem pretty incentive wise.
I do think sadly companies often have explicit agreements with employees that prevent them from hedging their equity positions, so this might be hard.
Summarizing takeaways
Ok, I feel like after participating in this, I feel like I at least have a decent handle on constructing some kind of portfolio here.
I will think about this for a few days, but I feel like if I was implementing the advice here, I would roughly:
Go and make a brokerage account with Schwab or Fidelity (whichever seems less annoying to set up)
Invest like 50% of my portfolio into pretty broad index funds with really no particular specialization
Take like 20% of my portfolio and throw it into some more tech/AI focused index fund. Maybe look around for something that covers some of the companies listed here on the brokerage interface that is presented to me (probably do a bit more research here)
Invest like 3-5% of my portfolio into each of Nvidia, TSMC, Microsoft, Google, ASML and Amazon
Take like 2-5% of my portfolio and use it to buy some options (probably some long-term call options on some of the stocks above), making really sure I buy ones that have limited downside, and see whether I can successfully not blow up that part of my portfolio for like 2 years before I do any more here
And then I probably wouldn’t bother much with rebalancing and basically forget about it unless I feel like paying much extra attention.
(Zvi, Noah, and Will each seemed to think was a non-crazy plan when I said the above on the call we were on while writing this dialogue)
“This is strategically relevant because I’m imagining AGI strategies playing out in a world where everything is already going crazy, while other people are imagining AGI strategies playing out in a world that looks kind of like 2018 except that someone is about to get a decisive strategic advantage.” -Christiano
This is a tangent but I don’t know when else I would comment on this otherwise. I think one of the biggest potential effects in an acceleration timeline is that things get really memetically weird and unstable. This point was harder to make before covid but imagine the incoherence of institutional responses getting much worse than that. I think a world in which memetic conflict ramps up, local ability to do sense making with your peers gets worse as a side effect. People randomly yelling at you that you need to be paying attention to X. The best thing I know how to do (which may be wholly inadequate) is deciding to invest in high trust connections and joint meaning making. This seems especially likely to be undervalued in a community of high-decouplers. Spending time in peacetime practicing convergence on things that don’t have high stakes, like working through each other’s emotional processing back logs, practices some of the same moves that become critical in wartime, when it seems like lots of people are losing touch with any sort of consensus reality as there are now polarized competing consensus realities. To tie it back to the portfolio question, I do expect to see worse instability in peer groups when some people are making huge sums and others are getting wiped out by a high variance economy.
This is another reason to take /u/trevor1′s advice and limit your mass media diet today. If you think propaganda is going to keep slowly ramping up in terms of effectiveness, then you want to avoid boiling the frog by becoming slightly crazier each year. Ideally you should really try to find some peers who prefer not to mindkill themselves either.
I’m interested in helping with making this happen.
Did you hear back here?
No, but I also didn’t reach out (mostly because I’m lazy/busy)
My current allocation to AI is split something like this:
Obviously this is up a fuckton
Do you have a rough estimate of how much it went up in the last 3 months?
This looked really reasonable until I saw that there was no NVDA in there; why’s that? (You might say high PE, but note that Forward PE is much lower.)
How did you get SMSN exposure?
You can buy GDR common shares via LSE on Interactive Brokers.
You are implying that it is hard to get Samsung expose. Why? On their website [1] they list several ISINs. Some of them I can buy in through my usual broker. They aren’t special.
[1] https://www.samsung.com/global/ir/stock-information/listing-Info/
https://www.investopedia.com/articles/investing/082714/how-invest-samsung.asp
Very interesting conversation!
I’m surprised by the strong emphasis of shorting long-dated bonds. Surely there’s a big risk of nominal interest rates coming apart from real interest rates, i.e. lots of money getting printed? I feel like it’s going to be very hard to predict what the Fed will do in light of 50% real interest rates, and Fed interventions could plausibly hurt your profits a lot here.
(You might suggest shorting long-dated TIPS, but those markets have less volume and higher borrow fees.)
Err… just so I’m clear lots of money being printed will devalue those long dated bonds even more, making the bond short an even better trade? (Or are you talking about some kind of YCC scenario?)
I meant something like the Fed intervening to buy lots of bonds (including long-dated ones), without particularly thinking of YCC, though perhaps that’s the main regime under which they might do it?
Are there strong reasons to believe that the Fed wouldn’t buy lots of (long-dated) bonds if interest rates increased a lot?
Yes? 1/ it’s not in their mandate 2/ they’ve never done it before (I guess you could argue the UK did for in 2022, but I’m not sure this is quite the same) 3/ it’s not clear that this form of QE would have the effect you’re expecting on long end yields
They have bought longer term treasury bonds.
I think ‘go to grad school’ may be treated too harshly here. In particular
but then,
(which point gets broadly acknowledged in the conversation.)
I think ‘grad school’ is getting treated as ‘place to get skills which will pay off financially later’, where the above analysis makes sense (skills-derived-income-later should be discounted somewhat). This also makes sense in the context of this conversation, which is mostly about wealth stuff. But grad school is also
place to meet talented, motivated, well-connected people (‘human capital’ lol!)
time period to do potentially-impactful research
affiliation to gain immediate and future credibility (‘career capital’?)
...?
On these grounds it plays pretty nicely for the right sort of person and place. (Having joined Oxford ~1yr ago I can already speak positively about these three factors.)
Grad school presumably also has a somewhat funding-dependent analysis, like, it’s probably bad to go into a bunch of debt to go to grad school. In my case, I’m ‘funded’ but since I came from a very high tech salary, it’s effectively a quite obscene paycut (and one which I may yet regret on a personal level).
if AGI goes well, economics won’t matter much. helping slow down AI progress is probably the best way to purchase shares of the LDT utility function handshake: in winning timelines, whoever did end up solving alignment will have done that thanks to having the time to pay the alignment tax on their research.
My best guess as to what you mean by “economics won’t matter much” is that (absent catastrophe) AGI will usher in an age of abundance. But abundance can’t be unlimited, and even if you’re satisfied with limited abundance, that era won’t last forever.
It’s critical to enter the post-AGI era with either wealth or wealthy connections, because labor will no longer be available as an opportunity to bootstrap your personal net worth.
what i mean is that despite the foundamental scarcity of negentropy-until-heat-death, aligned superintelligent AI will be able to better allocate resources than any human-designed system. i expect that people will still be able to “play at money” if they want, but pre-singularity allocations of wealth/connections are unlikely to be relevant what maximizes nice-things utility.
it’s entirely useless to enter the post-AGI era with either wealth or wealthy connections. in fact, it’s a waste to not have spent it on increasing-the-probability-that-AGI-goes-well while money was still meaningful.
Sure, but allocate to what end? Somebody gets to decide the goal, and you get more say if you have money than if you don’t. Same as in all of history, really.
As a concrete example, if you want to do something with the GPT-4 API, it costs money. When someday there’s an AGI API, it’ll cost money too.
the GPT-4 API has not taken over the world. there is a singular-point-in-time at which some AI will take over everything with a particular utility function and, if AI goes well, create utopia.
whatever utility function it’s been launched with. which is particularly representative of who currently has money. it’s not somebody who decides resource-allocation-in-the-post-singularity-future, it’s some-utility-function, and the utility function is picked by whoever built the thing, and they’re unlikely to type a utility function saying “people should have control over the future proportional to their current allocation of wealth”. they’re a lot more likely to type something like “make a world that people would describe as good under CEV”.
It’s true that if the transition to the AGI era involves some sort of 1917-Russian-revolution-esque teardown of existing forms of social organization to impose a utopian ideology, pre-existing property isn’t going to help much.
Unless you’re all-in on such a scenario, though, it’s still worth preparing for other scenarios too. And I don’t think it makes sense to be all-in on a scenario that many people (including me) would consider to be a bad outcome.
That’s not how LDT works
Isn’t it? It doesn’t seem clearly ruled out by my understanding of LDT(but not certain to happen either)
LDT does not say that if you invoke the LDT god while doing something nice for someone, they ought to compensate you for it later. Tamsin Leake does not have the kind of info on who/what will control the lightcone that would allow them to cooperate in PDs.
the point i was trying to make is that if you expect someone to reliably implement LDT, then you can expect to be rewarded for help them (actually helping them) solve alignment because they’d be the kind of agent who, if they solve alignment is solved, will retroactively allocate some of their utility function handshake to you.
LDT-ers reliably one-box, and LDT-ers reliably retroactively-reward people who help them, including in ways that they can’t percieve before alignment is solved.
it’s not about “doing something nice”, it’s about LDT agents who end do well, retroactively repaying the agents who helped them get there, because being the kind of agent who reliably does that causes them to more often do well.
Yes, and the point I am making is that this is not what LDT is or how it works. LDT agents perform prudentbot, not fairbot. An AGI will only reward you with cooperation if you conditionally cooperate, on something you’re unable to “condition” on because it would mean looking at the AGI’s code and analyzing it beyond what anyone is capable of at present.
i have read that post before and i do not think that it applies here? can you please expand on your disagreement?
you don’t need to know this to probabilistically-help whoever will control the lightcone, right? if you take actions that help them-whoever-they-are, then you’re getting some of that share from them-whoever-they-are. (i think?)
My point is not that you can’t affect the outcome of the future. That may also be impossible, but regardless, any intervention you make will be independent of whether or not the person you’re rewarding gives you a share of the lightcone. You can’t actually tell in advance whether or not that AI/person is going to give you that share, in the sense that would incentivize someone to give it to you after they’ve already seized control.
you don’t think there are humans whom i can expect to reliably reward-me-as-per-LDT after-the-fact? it doesn’t have to be a certainty, i can merely have some confidence that some person will give me that share, and weigh the action based on that confidence.
That might happen, but they wouldn’t be doing it because they’re maximizing their utility via acausal trade, they’d be doing it because they value reciprocity.
why wouldn’t it be because they’re maximizing their utility via acausal trade?
do you also think people who don’t-intrinsically-value-reciprocity are doomed to never get picked up by rational agents in parfit’s hitchhiker? or doomed to two-box in newcomb?
to take an example: i would expect that even if he didn’t value reciprocity at all, yudkowsky would reliably cooperate as the hitchhiker in parfit’s hitchhiker, or one-box in newcomb, or retroactively-give-utility-function-shares-to-people-who-helped-if-he-grabbed-the-lightcone. he seems like the-kind-of-person-who-tries-to-reliably-implement-LDT.
Any good candidates for “AI index fund” people know of?
You mean an AI ETF? My answer is no; I think making your own portfolio (based on advice in this post and elsewhere) will be a lot better.
Disclaimer: I’m not your investment advisor.
But hypothetically:
SOXL maybe? It’s 3x leveraged exposure to semiconductor manufacturers.
FNGU is another 3x leveraged one to consider, tracking the FANG+ index, which includes META, TSLA, NVDA, AMD, NFLX, AAPL, AMZN, SNOW, MSFT, and GOOGL.
The intrinsic daily compounding of 3x ETFs will drag on gains in a sideways market (which is why leveraged funds are often discouraged for long-term investment) but will actually accelerate returns in a bull market. And (of course) leverage is double edged and will hurt more in a bear market. OTM put options can protect against the left tail without dragging on gains too much, but they’re not for free. (FNGU currently has no options, but FNGS, which tracks the same index without the leverage, does.) If rates go up too much it could do weird things to leveraged funds.
You can also just do the unlevered versions of this, like SMH / SOXX / SOXQ, plus tech companies with AI exposure (MSFT, GOOGL, META, AMZN—or a tech ETF like QQQ).
A leverage + put options combo means you’ll end up paying lots of money to market makers.
I spent a couple hours looking at different methods to efficiently short long term bonds:
UB Treasury Bond Futures − 30 year bonds but you have to roll every quarter on the roll date which is both a hassle and you pay the spread each time you roll. Also, the expected return if the world stays normal is significantly negative, it should be the 30 year rate minus the risk free rate, for which the average since 1977 has been 2% per year.
SOFR Futures—pays out based on the average interest rate in a specific 3 month time period up to 10 years out, though liquidity looks poor past 5 years out. A SOFR Futures strip will have the same returns as the equivalent treasury future, except there’s no need to roll them, and you have more control over the time frame you want to target. (Edit: This paper finds the returns are the same as bond futures but they find them to be around 0.5%, rather than the 2% I estimated above)
Eris SOFR Swap Futures—you pay/get paid the difference between the fixed rate when you bought it and the current floating rate, for up to 30 years. This sounds EV neutral, plus you wouldn’t need to roll them.
The Eris SOFR Swap Futures sound promising but I would need to do a lot more research before investing, I’m wondering if anyone else has thoughts on this first. I might try and create a model to estimate the expected returns of each type of instrument in a normal world and a slow takeoff 50% rate world.
Edit: According to this thread, all three are functionally identical, so any significant difference in returns should get arbitraged away. If that’s the case, then the Eris Swap Futures seem to have very poor liquidity so I would not recommend them.
However, since they’re architected differently, it’s possible that they are arbitraged to have very similar expected return profiles in normal times, but offer very different returns if interest rates go way out of distribution.
Very helpful, thanks. And interesting about the Eris SOFR Swap Futures.
Interest rate swaptions might also be worth looking into, though they may only be available to large institutional investors.
Why not just short-sell treasuries (e.g. TLT)?
Yeah swaptions would be nice but it seems like the minimum size is $1mm.
Futures and options give you a lot more leverage than short selling. A $100k short position on TLT would be $30k of maintenance margin, compared to $7,400 for UB.
And banks and hedge funds arbitrage futures prices against the underlying asset, so trading futures basically gives you access to institutional interest rates instead of retail margin rates. Right now the rate difference for short selling on IBKR is ~5% for accounts <$100k and 1.25% for accounts between $100k and $1mm. Plus the borrow fee which is currently only 0.3% for TLT but would go up if lots of people start shorting it.
Buying TLT puts is worth looking into though.
For the LEAPS call options, are you buying them in-the-money, at-the-money, or out-of-the-money? Do you roll them vertically or just horizontally?
I bought calls with approximately 30 delta since that is a region with relatively low IVs and also where volga—positive convexity with respect to implied volatility—is maximized.
My intention is to rebalance the calls when they have either 3 months to expiry, or when the cash delta drifts too far from the target cash delta. (Defining “too far” to be a high bar here).
There’s some evidence from 2013 suggesting that long-dated, out-of-the-money call options have strongly negative EV; common explanations are that some buyers like gambling and drive up prices. See this article. I also heard that over the last decade, some hedge funds therefore adopted the strategy of writing OTM calls on stocks they hold to boost their returns, and also heard that some of these hedge funds disappeared a couple years ago.
Has anyone looked into whether 1) this has replicated more recently, 2) how much worse it makes some of the suggested strategies (if at all)?
I modified part of my portfolio to resemble the summarized takeaway. I’m up 30(!?!) % in less than 4 months.
Does it make sense to put any money into a pension given your outlook on AGI?
Also curious how this changes people’s outlooks on putting money into 401k/IRA’s/etc
I’m maxing those out. There are a few ways to withdraw from them early, for example, you can pay a 10% penalty to do so. This is probably worth it to avoid taxes on growth in the meantime, assuming it grows enough.
I think having some personal retirement savings is still useful in a broad range of possible AGI outcome scenarios, so I personally still do some retirement saving.
Regarding 401k/IRA, anything that preserves your ability to make speculative investments based on an information advantage (as outlined in this post) seems especially good; anything that limits you to a narrow selection of index funds seems potentially suboptimal to me.
Why do rates hit 50%? Shouldn’t AGI be very deflationary by default?
Since the multiple upvotes seem indicate multiple people looking for an explanation: a link
High growth rates means there is a higher opportunity cost in lending money, since you could invest it elsewhere and get a higher return, reducing the supply of loans, and more demand for loans, since if interests are low, people will borrow to buy assets that appreciate more than the interest rate.
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I usually interpret this sort of statement as an invocation to the gods of law, something along the lines of “please don’t smite me”, and certainly not intended literally. Indeed, it seems incongruous to interpret it literally here: the whole point of the discussion, as I’m understanding it, is to provide potentially useful ideas about investing strategies. Am I supposed to pretend that it’s just, like, an interesting thought experiment? Or is there some other interpretation of your disclaimer I’m not seeing?
I think you should view “investment advice” here as a term of art for the kind of thing that investment advisors do, that comes with some of the legal guarantees that investment advisors are bound to.
I agree that in a colloquial sense this post of course contains advice pertaining to making investments.
I do feel pretty confused about the legal situation here and what liability one incurs for talking about things that are kind of related to financial portfolios and making investments.
Amusingly, searching for articles on whether offering unlicensed investment advice is illegal (and whether disclaiming it as “not investment advice” matters) brings me to pages offering “not legal advice” ;p
How would you recommend shorting long-dated bonds? My understanding is that both short selling and individual bond trading have pretty high fees for retail investors.
I absolutely do not recommend shorting long-dated bonds. However, if I did want to do so a a retail investor, I would maintain a rolling short in CME treasury futures. Longest future is UB. You’d need to roll your short once every 3 months, and you’d also want to adjust the size each time, given that the changing CTD means that the same number of contracts doesn’t necessarily mean the same amount of risk each expiry.
I often see this phrase in online posts related to investment, legal, medical advice. Why is it there? These posts obviously contain investment/legal/medical advice. Why are they claiming they don’t?
I guess that the answer is related to some technical meaning of the word “advice”, which is different from its normal language meaning. I guess there is some law that forbids you from giving “advice”. I would like to know more details.
Edit: This question was answered in a previous comment.
I recommend sgov for getting safe interest. It effectively just invests in short term treasuries for you. very simple and straightforward. Easier than buying bonds yourself. I do not think 100 percent or more equities is a good idea right now given that we might get more rate increases. Obviously do not buy long term bonds. Im not a prophet just saying how I am handling things
Fidelity allows users to purchase call options on the S&P 500 that are dated to more than 5 years out. Buying those seems like a very agnostic way to make a leveraged bet on higher growth/volatility, without having to rely on margin. Though do note that they may require a lot of liquidity, depending on your choice of strike price.
They also have very low trading volume, with a large gap between bids and asks. Buying them at a good price may be difficult.
I have some of those in my portfolio. It’s worth slowly walking GTC orders up the bid-ask spread, you’ll get better pricing that way.
(This is a typo that reverses the meaning, right? Should be “owing” long term debt, you want to owe a mortgage rather than to have issued a mortgage.)
Most cryptocurrencies have slow transactions. For AI, who think and react much faster than humans the latency would be more of a problem, so I would expect AIs to find a better solution than current cryptocurrencies.
Current cryptocurrencies are useful because they might be the only vaguely legal way to make the financial agreements that the AI wants, and AIs might have an easier time extending and using them than humans. It’s not about it being a good information platform, it’s about it avoiding the use of institutional intermediaries that the government pretends are illegal.
Assuming AIs don’t soon come up with even better crypto/decentralization solutions: I hadn’t considered that the smart contracts being too complicated (and thus unsecure) might not hold true anymore once AI-assistants and cyberprotection scale up. Especially the ZK, a natural language for AIs.
The LessWrong Review runs every year to select the posts that have most stood the test of time. This post is not yet eligible for review, but will be at the end of 2024. The top fifty or so posts are featured prominently on the site throughout the year. Will this post make the top fifty?
Should Meta be in the list? Are the big Chinese tech companies considered out of the race?
I personally would not put Meta on the list
Why’s that? They seem to be going for AGI, can afford to invest billions if Zuckerberg chooses, their effort is led by one of the top AI researchers and they have produced some systems that seem impressive (at least to me). If you wanted to cover your bases, wouldn’t it make sense to include them? Though 3-5% may be a bit much (but I also think it’s a bit much for the listed companies besides MS and Google). Or can a strong argument be made for why, if AGI were attained in the near term, they wouldn’t be the ones to profit from it?
Not a great advice. Options are a very expensive way to express a discretionary view due to the variance risk premium. It is better to just buy the stocks directly and to use margin for capital efficiency.
Yes, but if they’re far out of the money, they are a more capital-efficient way to make a very concentrated bet on outlier growth scenarios.
Unless depending on what you invest in those states of the world become more or less likely.
So this all makes sense and I appreciate you all writing it! Just a couple notes:
(1) I think it makes sense to put a sum of money into hedging against disaster e.g. with either short term treasuries, commodities, or gold. Futures in which AGI is delayed by a big war or similar disaster are futures where your tech investments will perform poorly (and depending on your p(doom) + views on anthropics, they are disproportionately futures you can expect to experience as a living human).
(2) I would caution against either shorting or investing in cryptocurrency as a long-term AI play; as patio11 in his Bits About Money has discussed (most recently in A review of Number Go Up, on crypto shenanigans (bitsaboutmoney.com) ), cryptocurrency is absolutely rife with market manipulation and other skullduggery; shorting it can therefore easily result in losing your shirt even in a situation where cryptocurrencies otherwise ought to be cratering.
Personally I use Wealthfront because the UI is gorgeous. I say this after having used Vanguard. I haven’t used the others though. Referral link.