# bluefalcon

Karma: 30
• Haha. I didn’t really know what was a reasonable amount to save when I started because I had just gotten my first real job and really had no idea how expensive a lifestyle I might want in the future. But I knew I didn’t want to be poor ever again. So I set a fairly arbitrary goal, spent a few more years living on the poverty-level income I had had before getting a good job so that I could save while it still had lots and lots of time to grow, and now it’s done.

And from a stress/​flexibility standpoint I think it was the right decision. I probably don’t have to think about saving ever again, except for fun, so if I want to take a job that is funner but pays less, I have absolute freedom to do that.

And it turns out even having money I can live pretty cheap. There were only a few material things I hated about being poor. The constant stress over money was the real problem most of the time. I don’t enjoy cooking and the food was boring when I couldn’t afford restaurants, so I eat more takeout. And walking 5 miles bc the bus doesn’t go where you want kinda sucks, so I take more cabs/​ubers/​lyfts.

• I am far away from retirement so not at 30x yet. But assuming 7% real returns, my projected nest egg is about 108x my current living expenses around the age I want to retire. If something goes wrong before then I can always put more in. Compounding is fucking magic if you start it in your early 20s.

• The concept of leverage is not complicated. How it affects volatility drag is, or at least seems so to me when I hear ppl explain it. There is a disconnect between how my bran conceptualizes the abstract percentages vs actually holding an asset.

So, the basic idea for an unleveraged investment is your geometric returns are lower than arithmetic returns because of volatility. E.g. if you have \$100, gain 10% one period and lose 5% the next, the arithmetic average return is 2.5% per period, calculated as (10+(-5)/​2 but you actually only have \$104.5, a return of 2.25% per period, because you are losing 5% of a bigger number than you are gaining 10% on. Easy enough.

But let’s say you leverage 2x. Assume no interest to keep it simple. Then this is 20% gain and 10% loss. You have \$108. A bigger gain than in the above example, but not 2x as big. Or at least that’s what I see articles online saying. But this doesn’t make sense to me when I try to conceptualize it as actually holding an asset. Let’s say I buy one share of the stock using my own money and one share using a loan. I hold exactly the two shares for the two periods regardless of what the price does, then sell them at the end and pay off the loan. My portfolio is 200, goes to 220 (10% gain), then goes to 209 (5% loss). Then I sell, pay off the loan, and I have \$109, not \$108. The problem comes if I am not allowed to have a loan too large compared to my assets and have to sell at a bad time. So if the 5% drop happens first, I have \$190, of which 100 is borrowed. Have to sell \$10 of stock to bring my loan to parity with my own investment. Then I have \$180, of which 90 is borrowed, and can only make \$18 when the market moves 10% up, instead of the 19 I’d have if I held on to everything. So then my return really is only 8% instead of 9%, because I was forced to maintain constant leverage ratio.

So among ETFs, investing on margin, and futures, which allows me to remain closest to the buy and hold strategy? Or do I face roughly the same constraint no matter what?

• Increasing labor income vs investing is not 100% fungible but there are some tradeoffs, especially being self-employed. Any time I spend to learn or manage finance stuff is time I could have spent working. And at least in principle there should be opportunities to spend money to increase my income, but it’s a lot more unpredictable—I could advertise, in a non-pandemic environment I could join associations or go to events where I might meet lucrative clients, I could hire lower paid staff and take on clients who it is not worthwhile for me personally to perform services for due to opportunity cost, I could perhaps trade current income for prestige in some aspects of work hoping it will raise my stature and bring more money later, etc.

• My sense with leverage is it’s more complicated than it looks. My naive intuition was you could match an underlying asset any time futures are available, by holding a total portfolio equal to the value of X shares of the asset, consisting of X futures on the asset and then the balance in cash. Which implies you could beat the asset without additional risk by investing that balance in treasuries.

But there are a few things I don’t understand here.

1. I assume treasury futures are more volatile than treasuries, to a sufficient extent that you could not use them to implement this and juice the returns even further. Is that correct?

2. I don’t know how futures pricing works. If people know it’s possible to do what I am suggesting, will futures prices already be bid up compared to the underlying, erasing the potential gains?

3. Futures don’t pay dividends. Am I correct in assuming this is reflected in the price somehow, or is this just a net loss in carrying futures compared to the underlying?

4. I get the basic idea that volatility decay exists and I think I understand it for unleveraged investments but don’t really understand how it works with leverage.

Does it happen because people are rebalancing or is it inherent in the use of leverage? If you could let your leverage ratio float a bit instead of selling in response to margin calls, would you then have long run compound returns of (leverage ratio * compound returns of the underlying)? Why or why not? And does maintaining a balance in treasuries or treasury futures actually allow you to avoid margin calls in practice, or are there brokerage restrictions that would prevent it?

• The one advantage I do have over the market is more risk tolerance. I don’t assume I can beat it on a risk-adjusted basis, but since I disvalue risk less than normal ppl do, beating it in absolute expected value terms is fine, and even EMH says there should be opportunity to get higher returns that way. Will take a look at the alpha architect paper.

• I’m interested in the possibility but it doesn’t have enough of a history for me to be able to think about it usefully. What is the broader reference class I should be looking at, and what is the evidence on historical returns for that class?

# [Question] Best em­piri­cal ev­i­dence on bet­ter than SP500 in­vest­ment re­turns?

25 Apr 2021 5:13 UTC
10 points
• Easily worth it for me. Margin is probably a better deal and should be taken advantage of first. But the idea of being so attached to a particular house that you’d give up a chance to be significantly wealthier just to avoid the risk of foreclosure sounds nuts to me.

The market may go down for 10 years but you’re not gonna stay unemployed for 10 years. If you lose your job in a developed country for reasons that are correlated with the market (i.e. not quitting or misconduct) you get unemployment, which is more than enough to live on.

• Given the difference between mortgage rates and average market returns, you probably should mortgage your house to invest in the stock market even today.

• I think most or all of these rituals are still functional even if participants can’t see it. If you want to see that up close, look at how you get the rules waived. If a dispute over a document goes to court, a judge can waive almost any formal defect. But they won’t always do it, and someone else, like the clerk, can’t. The formalities take the place of human judgment because only a few people are trusted to exercise the appropriate level of judgment and getting it in front of such a person is expensive and time-consuming.

• Industrialization clearly doesn’t change everything here. British political reform cleanly precedes the industrial revolution; US and French revolutions are post-British IR and may have been affected by it some, but before those countries really industrialized.

• I predicted 80% on this particular set of reforms being good but I would have put 60 on the opposite if he had disguised the identity of the revolutionaries. Democracy and freedom are good and the French revolution/​Napoleon were generally better at those than the pre-existing institutions. But most revolutions (and wars, and natural disasters) don’t budge it either way. The average is a short burst of bloodshed followed by more of what came before.

I highly doubt that wars or disasters are net good on average. Being defeated in WWII was probably good for the axis powers’ economies because they replaced totalitarian states with democracies. But I doubt that’s the default outcome. Losing a war with Spain, for example, seems to have been very bad for most countries’ long-term prospects.

• Is it actually uncorrelated? Seems like default would be significantly more likely at the same times that a stock market crash would be, because that’s when ppl lose their jobs. Can you do P2P loans to ppl in other countries? That would reduce correlation somewhat.

• IIRC studies have found IQ is more strongly correlated with job performance than most other things people use. BUT there is one exception—tests that mirror the actual work. Which of course is more legally defensible, in addition to being a genuinely better measure. If I were hiring people, I would probably do interviews just to not seem weird to applicants, but all the real selection would be based on performance testing.

• A bettor who can make an infinite number of expected profitable bets is going to outperform one who can only make a finite number of bets.

(any number between 1 and 0 exclusive)^infinity=0, i.e. for an infinite series of bets, the probability of ruin with naive EV maximization is 1. So, expected value is actually −1x your bet size.