This is an interesting post — you’re covering a lot of ground in a wide-ranging fashion. I think it’s a virtual certainty that you’ll come with some interesting and very useful points, but a quick word of caution — I think this is an area where “mostly correct” theory can be a little dangerous.
Specifically:
>If you earn 4% per year, then you need the aforementioned $2.25 million for the $90,000 half-happiness income. If you earn 10% per year, you only need $900,000. If you earn 15% per year, you only need $600,000. At 18% you need $500,000; at 24% you need $375,000. And of course, you can acquire that nest egg a lot faster if you’re earning a good return on your smaller investments. [...] I’m oversimplifying a bit here. While I do think 24% returns (or more!) are achievable, they would be volatile.
You’re half correct here, but you might be making a subtle mistake — specifically, you might be using ensemble probability in a non-ergodic space.
Recommended reading (all of these can be Googled): safe withdrawal rate, expected value, variance, ergodicity, ensemble probability, Kelly criterion.
Specifically, naive expected value (EV) in investing tends to implicitly assume ergodicity; financial returns are non-ergodic; it’s very possible to wind up broke with near certainty even with high returns if your amount of capital deployed is too low for the strategy you’re operating.
Yes, there’s valid counter-counterarguments here but you didn’t make any of them! The words/phrases safety, margin of safety, bankroll, ergodicity, etc etc didn’t show up.
The best counterargument is probably low-capital-required arbitrage such as what Zvi described here; indeed, I followed his line of thinking and personally recently got pure arbitrage on this question — just for the hell of it, on nominal money. It’s, like, a hobby thing. [Edit: btw, thanks Zvi.] This is more-or-less only possible because some odd rules they’ve adopted for regulatory reasons and for UI/UX simplicity that result in some odd behavior.
Anyway, I digress; I like the general area of exploration you’re embarking on a lot, but “almost correct” in finance is super dangerous and I wanted to flag one instance of that. Consistent high returns on a small amount of capital does not seem like a good strategy to me; further, if you can get 24%+ a year on any substantial volume, you should probably just stack up some millions for a few years and then you could rely on passive returns after that without the intense amount of discipline needed to keep getting those returns (even setting aside ergodicity/bankroll issues).
Lynch’s One Up on Wall Street is an excellent take by someone who actually managed to make those type of returns for multiple decades; it’s not exactly something you do casually...
(Disclaimer: certainly not an expert, potentially some mistakes here, not comprehensive, etc etc etc.)
I like this comment. This is the kind of discussion I was hoping for. Yes, I’m oversimplifying, but we have to start somewhere and it takes too long to say everything at once. Some of the things you’re bringing up are planned for later posts in the sequence [EDIT: see part 3]. Anything left over means I will have learned something, which I consider a win.
This is an interesting post — you’re covering a lot of ground in a wide-ranging fashion. I think it’s a virtual certainty that you’ll come with some interesting and very useful points, but a quick word of caution — I think this is an area where “mostly correct” theory can be a little dangerous.
Specifically:
>If you earn 4% per year, then you need the aforementioned $2.25 million for the $90,000 half-happiness income. If you earn 10% per year, you only need $900,000. If you earn 15% per year, you only need $600,000. At 18% you need $500,000; at 24% you need $375,000. And of course, you can acquire that nest egg a lot faster if you’re earning a good return on your smaller investments. [...] I’m oversimplifying a bit here. While I do think 24% returns (or more!) are achievable, they would be volatile.
You’re half correct here, but you might be making a subtle mistake — specifically, you might be using ensemble probability in a non-ergodic space.
Recommended reading (all of these can be Googled): safe withdrawal rate, expected value, variance, ergodicity, ensemble probability, Kelly criterion.
Specifically, naive expected value (EV) in investing tends to implicitly assume ergodicity; financial returns are non-ergodic; it’s very possible to wind up broke with near certainty even with high returns if your amount of capital deployed is too low for the strategy you’re operating.
Yes, there’s valid counter-counterarguments here but you didn’t make any of them! The words/phrases safety, margin of safety, bankroll, ergodicity, etc etc didn’t show up.
The best counterargument is probably low-capital-required arbitrage such as what Zvi described here; indeed, I followed his line of thinking and personally recently got pure arbitrage on this question — just for the hell of it, on nominal money. It’s, like, a hobby thing. [Edit: btw, thanks Zvi.] This is more-or-less only possible because some odd rules they’ve adopted for regulatory reasons and for UI/UX simplicity that result in some odd behavior.
Anyway, I digress; I like the general area of exploration you’re embarking on a lot, but “almost correct” in finance is super dangerous and I wanted to flag one instance of that. Consistent high returns on a small amount of capital does not seem like a good strategy to me; further, if you can get 24%+ a year on any substantial volume, you should probably just stack up some millions for a few years and then you could rely on passive returns after that without the intense amount of discipline needed to keep getting those returns (even setting aside ergodicity/bankroll issues).
Lynch’s One Up on Wall Street is an excellent take by someone who actually managed to make those type of returns for multiple decades; it’s not exactly something you do casually...
(Disclaimer: certainly not an expert, potentially some mistakes here, not comprehensive, etc etc etc.)
Part 3, How to Lose a Fair Game, is up now, which addresses some of these concerns.
I like this comment. This is the kind of discussion I was hoping for. Yes, I’m oversimplifying, but we have to start somewhere and it takes too long to say everything at once. Some of the things you’re bringing up are planned for later posts in the sequence [EDIT: see part 3]. Anything left over means I will have learned something, which I consider a win.