Hacker News Reader

Comment by mises | Hacker News Reader

Retail is left with "the scraps" because it is much riskier to invest early on. Companies that fail early aren't heard about as much, because Joe Average's pension plan hasn't invested in them, but are still plentiful. And maybe Joe Average's pension plan shouldn't be investing in what are effectively PE-stage firms.

I don't know if I'm right about this, but it seems such an exchange might contribute to something like 2008. Then, it was the common man investing in over-heated real estate; now, it could become the common man investing in over-heated tech.

I feel like those who work in tech often forget that it can fail, have cycles of boom and bust, etc. like any other industry.

Of course, I do think it can serve a useful purpose, but there is reason early-stage, private investment is restricted to qualified investors.

View on HN

A Joe Average is legally allowed to walk into a casino and lose all his money, pretty much guaranteed over long term.

A Joe Average is legally allowed to play all kinds of lotteries, pretty much guaranteed loss over long term.

A Joe Average is legally allowed to invest his 401k in the riskiest penny stock one can find.

This has nothing to do with risk, it's 100% gate keeping.

Yep, penny stocks, options and margin trading are all available to a retail investor. But hey, I want to invest in a new business? I want to buy Bitcoin? I want to participate in an ICO? Sorry. It's all about gatekeeping and not letting me do what I want with my money.

I don't like the gate keeping either but so called "entrepreneurs" would just go around washing people. The point is that you have enough money so no-one cares that the space mining company you invested in only hires website designers. Pumping penny stocks is illegal, but when it wasn't, salespeople were washing people.

It could also merely be convenience - as a startup you want to raise a few millions or whatever, and you want it all to come from a few sources, not too many. If you opened this up to an average investor, it will be a headache consolidating all of them. Also, there are offerings by banks for wealthy clients who can invest in the banks' PE or VC arm, this allows access to the clients, and since it's one bank providing liquidity the people obtaining it don't have to manage anything.

The reason investing is treated with greater scrutiny than gambling is because of the psychological factor. When you gamble, you're under no illusion that you're guaranteed to win. But it's easy to be fooled into thinking there's a way to hedge risk without putting in the time and effort to learn how.

Every single time I see democratized access to riskier financial markets actually make it to the public, I can hold my breath and wait for the news reports to come out about the scams and grifters that come out of the woodwork to take advantage of little old grandmas, who wouldn't ever think of pulling the cash out from under the mattress that she's saving for little Penny's college fund and going to Vegas, but can easily be talked into "investing" it in the brand new wave of "tech" sweeping the nation.

It's not Joe Average these laws protect. It's Joe Average's less cognitively-blessed parents. It's so easy to fool old people that if we don't take positive steps to stop it from happening, it becomes an industry.

You can't get rid of all of it, but you can at least push the wolves out to the periphery.

> A Joe Average is legally allowed to invest his 401k in the riskiest penny stock one can find.

Most 401ks do not allow individual stocks. Some do, but often with only a small % of total account value.

IRAs typically act more like a general equity account, but by that point I would argue a person is already a bit more financially savvy. If they have taken the time to either open an additional retirement account or roll a 401k over from a prior job, then they have some idea about penny stock risk.

> Of course, I do think it can serve a useful purpose, but there is reason early-stage, private investment is restricted to qualified investors.

The expected value of early stage investing is certainly higher than lotteries in the US. Every poor Joe can spend thousands on lottery tickets that expire worthless, but cannot invest thousands in real companies that Joe believes will do very well in the future. Shouldn't Joe have access to companies earlier, if he currently can access lottery games?

Yes, and he can become an accredited investor which has regulations tied around it. Safeguards are needed so your Average Joe doesn't squander his family's $500k retirement and become dependent on the govt's teat.

Wouldn't those safeguards be at least as necessary for lottery tickets?

Only degenerates throw $500k away at lottery tix, while significant amounts of the population invest their entire $500k in funds as found in 401k's or IRAs (or whatever). So yeah, I'd rather shield most of the country from the volatility of early stage shitfests, and make that bar high to climb if they really truly want to invest in early-stage.

Then make them take some tests to get accredited rather than an arbitrary income barrier, or net worth gatekeeping. According to that logic, someone with $2M net worth is just as likely to lose their shirt as someone with $50k net worth if they put their entire worth into a losing fund.

It’s not about knowledge, it’s about the amount of risk and the amount at risk.

Two equally skilled investors each looking to invest $10,000 in the same company. Investor A is worth $10,000,000 while Investor B is worth $100,000.

Those two investments look the same on paper but the risk for each investor is wildly different. A test won’t solve for that.

I don't think you have a good sense of who's buying how many lottery tickets. By your measure here, amount invested as percentage of net worth, the lottery should definitely be illegal.

If lottery tickets were intended to be investments instead of a tax on poor people who can’t do math, yes.

Then you can do marginal accredidation based on income and/or net worth rather than nothing or anything at 200k income/2MM net worth.

It would be easy to regulate for anyone that makes, or is worth, less than "accredited" levels can only put in X% of their net worth. Doesn't need to have this arbitrary cutoff. I'd wager there are quite a few dumb people making over 200k.

An aside: Income as a method of determining "accredited"-ness is quite arbitrary. Many SWE in the valley easily qualify, where an equivalent SWE in Midwest US would not qualify, just because cost of living/wages are lower.

Most mutual funds available at retail are borderline scams as-is. It is highly unlikely you will find one that has a true ROI / Sharpe Ratio above investing in basic Vanguard Index Fund ETFs, yet the public is still allowed to throw away 2% per year in management funds + loads + fees for buying garbage mutual funds and ETFs from enormous companies that sell at retail.

There is still a significant difference between earning less than you could in your retirement savings and wiping half of them because you put them in a bad investment though.

Not if you aggregate the amounts stolen. Im sure that 2% is a staggering amount of money, maybe more than all the cash robberies that are reported to the police yearly.

But the revenue from Joe would then go to early-stage companies, not the government.

I think what you'd find is that Joe's money would go to shysters who are today turned off by the prospect by forfeiting their money and sitting the rest of their lives in federal prison (so they become telemarkets, roofing repair dudes that follow hurricanes around, or late-night TV hucksters).

> The expected value of early stage investing is certainly higher than lotteries in the US.

That’s arguable.

State lotteries are highly regulated and transparent and typically return 50% of their capital to participants.

That’s fair. For the overall game you can expect to lose 50% though, with a handful of outsized windfalls going to 1/1000000 people.

In principle it’s more about why a poor person can access lotteries but not private investments, not the exact math on E[X]

2008 wasn't about the common man making poor investment choices. It was about banks extending credit to people who weren't credit worthy, but pretending to their investment customers that they were.

Reply on news.ycombinator.com