Stock Market Returns Are Anything but Average | Hacker News Reader

Stock Market Returns Are Anything but Average

awealthofcommonsense.com

222 pointsRickJWagner413 comments

There are all sorts of interesting facts you can pull out of this, like how if you missed the top 10 best days in the market from 1999-2019, your return was cut in half. If you missed the top 20 best days, you actually lost money: https://www.fool.com/investing/2019/04/11/what-happens-when-...

Basically never mistake annualized return over a long period of time for your expected return in a given year (or day, etc). There will be some really really good years, and a few really really bad years. If something grows consistently with low variance over a long period of time, that's a red flag! It's likely to be a "picking up pennies in front of a steamroller" type trade.

> It's likely to be a "picking up pennies in front of a steamroller" type trade.

What does that mean?

I think it means doing something high risk for low reward.

It means doing something high risk but the risk has low probability, and for low reward.

No rational mind would do anything high risk low reward, unless the risk has low probability. Then it's just like selling insurance.

Think of a slowly advancing steamroller, with pennies scattered before it. You can run around picking up these pennies, for small but consistent gain over a long period of time. Just don't take your eye off the steamroller!

The canonical example in recent times is the XIV blowup of 2018, which inversed VIX (a security tracking market volatility). So if you held XIV you basically bet that large market moves wouldn't happen - you're shorting volatility. Take a look at the graph to see how that ended up; the steamroller caught up to them! https://www.rcmalternatives.com/2018/02/why-did-xiv-implode/

If there's a highway made of pennies that is being maintained by a steamroller, you can make a very consistent but small profit by picking up pennies every day. Except for that one day that you get run over by a steamroller.

A better example is imagine that every day you bet on coin flips. Every day you go home after you're up $1. You start off with a $1 bet, and double the bet every time you lose. So for example one day, you might lose $1, then lose $2, then win $4 for a total profit of $1.

It's a foolproof strategy! You win $1 every day and you can't lose. But of course it assumes that both you and the house have an infinite stake. But if not, one day the house flips 16 heads in a row and you don't have $65536 to bet a 17th time so you go home down $65535. Kind of makes your $1 daily wins look pretty stupid now, doesn't it?

There are tons of options plays available on the stock market that have a risk profile similar to the coin flip example.

This is called a martingale bet (https://en.m.wikipedia.org/wiki/Martingale_(betting_system)). Doubling down on losses would be an example of a martingale bet.

I think this is also a reason why tables generally have set limits.

I don't think so. If you as the player make bets a series of bets, each with a negative expected value then your total expected value will also be negative. It doesn't matter if you double after every loss.

The limits are mostly because the casino can't afford to take on a 20 billion dollar bet from someone like Bezos. Even if it has a positive expected value, they will still go broke the 49% of the time they lose it.

The martingale strategy works because this theoretical gambler has infinitely deep pockets to withstand the losses.

Setting bet limits can reduce the effectiveness of the martingale strategy.

I don't think it matters, even with infinite pockets. Let's say 3 is the max number of losses we will accept. 50-50 coin flip, start of betting a dollar. 7 out of 8 times we win a dollar. 1 out of 8 time we lose a dollar, double lose 2 dollars, double, lose 4 dollars quit.

(7/8)(1) + (1/8)(-7) = 0

Generally: n = number of losses before quit.

E(x) = (1-.5^n)(1) + (.5^n)(-2^n+1)

     = (1) - (1/2^n) - (2^n-1)/(2^n)
     

     = (2^n)/(2^n) - 1/(2^n) - (2^n+1) / (2^n)
     
     = (2^n -1 - 2^n + 1) / (2^n)
     
     = 0

So with a 50-50 our expected value is 0 even with an infinite bankroll. Which makes sense, there is no way to transform a series of neutral or negative expected value bets into a positive expected bet by combining them.

With an infinite bankroll there is no reason to stop at three losses. In an infinite series of fair coin flips there will be deviations in the distribution around the mean. A gambler can simply choose to stop at any point of excess “wins” as long as he isn’t stopped out due to exceeding his bankroll.

The crazy thing about infinite pockets is that the strategy will favour the gambler even if the odds are 1-99 (or any nonzero probability of winning).

Using expected value for assess winning strategies don’t work with infinite bankroll.

it's like shoplifitng. big penalty if caught, small reward if you get away with it, which most do until too late. asymetical payoff.

It means doing something very risky for little overall gain.

A good example is selling options for premium.

You can sell a put option against a stock.

Say the stock is $100 right now, and you sell a put option one month out for a strike price of $90.

The seller of this put option essentially bets that the stock will still be above $90 in a month.

The buyer of this put option is betting that the stock will be below $90 in a month.

For executing this trade, you, the put seller, receive premium, say $1. The buyer pays you $1.

You have a sold a very high likelihood bet and received $1 for taking on the risk. The buyer has bought a very low likelihood bet and spent $1 for the chance to win.

This sounds great! In the long run, stocks tend to go up so you should win this bet the vast majority of the time, collect your $1, and make the same bet again.

This is the "picking up pennies" stage.

Now what is the steamroller? The steamroller is the low likelihood but very high loss scenario that this stock or ETF absolutely crashes while you are on the selling side of this open put option bet.

If it crashes to $N where $N < $90, the put option buyer has the option or right to sell you the stock at $90, even if it is worth hardly anything. So you have now paid $90 for a stock worth less than $90. It could be $0, the company could be bankrupt. Your loss is -($90-N)+$1. (Note that because of your $1 premium, your breakeven on this trade is when the stock is at $89, not $90.)

If you put up the collateral (the money needed to buy the stock at $90) for the bet with your own money, you are out that money. If you put up collateral on margin (borrowed money) you can be mega screwed.

This is the steamroller. You picked up $1 here and and there but then you got hit with a -$20 or -$50 or -$90 steamroller when you may have not even had the money to cover it.

Yes the steamroller is very low likelihood, but you have to hit pick up a LOT of pennies in a row to still come out on top after getting hit by the steamroller.

It is important to note that there is a ton more nuance that can go into running this kind of strategy, but in general for the average person, buy and hold will always outperform a strategy like this for several reasons, not least of them being that the income received for premium is taxed at income rates, where gains from buy and hold will be taxed at capital gains rates.

Very sophisticated investors do run this strategy with many ways to handle the tail risk, and their sophisticated strategies do not necessarily stop them from getting absolutely screwed when things go bad like during the flash crash at the beginning of coronavirus. Modeling and mitigating tail risk is hard, because terrible events are not as common as normal events and when things go terribly, they usually go terribly in a way no one has ever seen before.

Just a quick note here, selling puts is actually the worse of the examples you could have mentioned, because you can simply use it as a way to maintain an open order for the stock at a given price while getting paid for it.

Selling calls would be a better example, since in that case losses are potentially limitless.

True, but a casual investor is less likely to sell naked calls with infinite loss.

When they sell covered calls and lose the bet, the only loss is missing out on the run up of the stock.

I mostly just used the put example because it maps better to compare to a buy and hold strategy - good if market is up, bad if market is down.

It's also a well-known pennies-in-front-of-steamroller strategy that hedge funds have gotten very publicly burned on before, so anyone interested could research more.

Your trades have a near-zero (probably positive) mean but very negative skewness.

There are trades where you can make a small profit regularly, but on bad days you take huge losses. The huge losses outweigh all the potential profits by a large margin. Just like picking up pennies is a small gain while risking death to do so

Traders who engage in such behavior are also humorously said to "eat like chickens, shit like elephants"

And if you avoided the worst 10 days, your earnings double. If you avoided 20 worst days, your earning doubled again.

What is the point of such trivia? That most of the profit or loss happens during the days of high volatility?

This "trivia" points out the flaw in the "long term average" argument: The stock market is occasionally so volatile that 40 days out of 34,675 have an inordinate effect on returns over those 34,675 days.

Over 95 years of trading, 0.12% of days account for far, far, far, far more than 0.12% of market impacts.

Yeah so what are you going to do about it?

What kind of argumentative nonsense comment is this?

I think it's a legitimate question: we all have a large chunk of savings stuck in this game because of perverse incentives set by corrupt/inept US gov. Now what?

The point is that of course there are the outlier days that disproportionately affect gains/losses, that doesn't invalidate the long-term average argument though unless you have some way of identifying those periods in advance. If you could do that then you A) would not tell anyone until B) the SEC came knocking at your door to explain how you turned $1k into $1B over a very short time span.

Hedge with options. You can even out the highs and lows, make your returns predictable with in a tight window and act accordingly.

The point of the trivia is arguing against trying to time the market. Lots of people predict crashes are coming, so shift money from equities to cash or bonds. Unless you can time it perfectly (you can't), it is better to hold because you don't know when the best or worst days are.

But the analysis assumes you timed the market "perfectly" and sat out only on the 10 best days.

I agree that timing the market usually doesn't work. But it doesn't work in both ways. You are equally likely to miss or hit both good and bad days, with the same or similar impact on total return.

The good and bad days are not equally likely to be equally good/bad, though. Long-term, the market tends to rise; the good days will outnumber the bad in either quantity or quality.

The author's colleague had a blog post on the topic, reasoning that missing either the best or worst was not a particularly interesting "what-if" since the best and worst days are both associated with the same bouts of higher volatility. He used the 200 day moving average to try and model the effect of 'missing' both. It honestly didn't turn out so bad, but one takeaway is that backtesting (aside from not being a necessarily great projection) does not model personalities.

https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-...

If one is equally likely to miss both good and bad days, but overall the market is up 10%+ in a year (repeated over decades), then money left in the market will double every 7 years or so (Rule of 72 [1]). In that way it is almost always preferable to invest and hold in index funds.

The S&P 500 has returned about 13.6% return per year from 2010-2020 [2], or doubling your money about every 5.5 years. If that rate continues or increases then of course it makes no sense to try and time the good or bad days.

Of course, some will argue that a pure index fund market won't be priced correctly as it is active/day traders who continually buy and sell to set a proper market rate. If everyone buys and holds like Bitcoin then there is no true reflection of the companies value in the stock. Those that would go under otherwise may be buoyed or bought out just for their stock value. There are many opinion articles out there on the topic, but so far it hasn't been observed at scale (I think).

[1] https://en.wikipedia.org/wiki/Rule_of_72

[2] https://www.businessinsider.com/personal-finance/average-sto...

This is a guess based on anecdotes on recent volatile periods, the general scenario could be this:

1. Market falls sharply.

2. General public panic and sell, while market timers double down.

3. Market falls further, market timers panic and sell.

4. Markets rebound sharply, with the above-mentioned people missing those good days.

The key assumption is that at least some really good days usually follow really bad days.

50% of the time it works all the time

I can attest. Beginning of covid: stocks are crashing, going down 10% every day, I read the paper from that uni in London that says we are going to be alternating light and heavy lockdowns for the next 12-18months. More than a year of lockdown? How can the economy survive this? I’m like: sell, sell, sell. Right when I sold the market went up like crazy and has more than recovered now.

Right and you probably do not follow the market very closely. Which is fine, that is most people. If you start watching it closely though (and I mean over several months to years) there are many patterns that emerge. I knew a lot of people that bought the dip last year. They weren't worried about how long it would take the economy to recover, or if it would go down further because they knew things were VERY cheap and it would eventually come up unless there was a global economic collapse at which point it wouldn't matter anyways.

Most I knew dollar cost averaged down. It paid off very well.

That assumes you have the time to make up for bad market years like that. If you're retired and you see the market tank like that, its hard to fight the urge to not panic sell

Usually I'd say your correct. Like if I hadn't been laid off and decided to go back to school I would have had no problem buying the dip during the recession in 2008.

But last year could have gone very differently. The US (and the world in general) was tested in all sorts of ways last year in ways the people and the government are really not used to, and things probably should have gone a lot worse than it ended up going, but somehow the country made it through intact, although unfortunately with a lot of dead people and failed businesses.

It went well (for the stock market, at least) this time. Next time, maybe not, especially with climate change continuously getting worse with almost nothing being done about it.

For myself, I didn't bother selling any of my 401k (and kept putting money into it), so I didn't lose anything, but I did start putting spare money into other assets.

“Buying the dip” sounds brilliant in theory but it fundamentally requires holding on to cash outside of the market waiting for that dip to happen. An order of magnitude more gains have been lost waiting for dips that never come than have been made holding onto cash waiting for those dips.

I have a friend who sold it all in 2017 expecting the crash to come any day now. He’s still holding on to cash waiting for that dip. I’m sure in early 2020 he felt prescient and that this gamble would pay off. Only it didn’t, and he likely missed the one opportunity he had to minimize those lost gains. Not only does buying the dip require correctly guessing the bottom, but by definition you have to have the constitution to put it all in at the peak of bad market news.

Yes and no. There's buying the dip when you actually have the time and money to do a lot of this.

And then there's buying the Covid kind of dip. Personally I didn't sell early enough and I didn't buy back in early enough either. However I also never held onto lots of cash to buy the dip. I simply sold stock I had been holding for a very very long time already anyway, so yes I lost some opportunities but still made enough for it to be worthwhile.

Made up numbers for simplicity but if you have been holding for a long time and your return is 100%, if you sell when it say dips to 90% or 75% or whatever doesn't really matter as long as it then goes down further. That's why big dips like Covid are great for casual investors if you ask me.

Let's say it then goes down to 25% and then goes back up. You don't look every day, you don't trust it yet, because it's been going up and down in between but ultimately dropping down to 25%. But at some point it's been going 2 steps up, one step down for some time and you decide to buy back in at 50% of what your previous holdings had been worth at the peak. You still made a ton of extra money by selling and buying back into the dip.

The part about timing it perfectly is not true. You can time it, for example predict that the market will crash, shift your money to bonds now, the market goes up for another year and then dips below the level you exited at. At that point, you can shift back and you'd have made less money than someone who timed it perfectly but more money than someone who stayed.

It’s such a fundamental contradiction you see it everywhere. The quote “buy low, sell high” says we should time the market. Even the classic “percentage of bonds to stocks should be your age” requires us to time the market. And if you just buy stock when you happen to have spare cash, that too is “timing the market.”

I would argue that the percentage of bonds should be your age is not timing the market in any meaningful sense of that phrase. (I also think that's too conservative an asset-allocation, but in any case "make a periodic rebalancing trade according to this preset formula" is the opposite of "time the market".)

I would argue that the distinction between periodic rebalancing and timing the market is subjective. Even if you aren’t trying to rebalance based on market conditions, ie selling at a high, the downsides of market timing are still there just the same. Just because you don’t care about the timing of your trades doesn’t mean the timing doesn’t matter.

By that logic, the initial investment timing matters as well, which is technically true of course but practically not particularly useful. If you want exposure to equities, you have to buy equities at some time.

> What is the point of such trivia? That most of the profit or loss happens during the days of high volatility?

Simply that you shouldn't try and time the market, but continue to "buy and hold". The likelihood of picking these exact 10 or 20 days is near 0, so it's an irrational thing to do.

I'd politely disagree. The massive fall and recovery around March 2020 was easy to predict, so I did and made a handsome amount of money. I mean, if a small asteroid fell on an important trade route or if another serious pandemic began, would you seriously suggest to just hold the stocks?

I did too, but I think that's besides the point.

Curious to learn more, if you don't mind sharing. I wrongly assumed things would get quite a bit worse than they were at the point when sp500 turned back up. How did you know that was the bottom? Fundamental analysis? Or were you buying continuously on the way down?

Well, I can't speak for the person you are replying to, but think about a company like this (in general) - has something changed such that the new price (usually a drop) makes sense?

Take Amazon - down 15% or something. The virus is there yet, but is Amazon really worth 15% less? Won't people shop online? There's no way Amazon is going bankrupt, and there's no way that the U.S. would let companies like this fail over the virus, so is it really worth 15% less?

You don't have to time the exact moment of the bottom, you just find it once you see double digit loses in extremely good and valuable companies who are pulled down with the market. Airlines? Yea probably wouldn't have been an ideal buy, though if you waited long enough you've rebounded on them. But it seemed pretty safe to buy the big tech companies, Berkshire, etc. when they were experiencing double-digit percentage market losses over a likely temporary phenomenon.

Now, was it possible that things would have gotten much, much worse? Yea. So OP and myself could have been wrong, but instances like this are a bit of informed gambling, if you will.

the point is to remind folks that if you want to invest in the market safely, use index funds...otherwise, enjoy gambling

>> And if you avoided the worst 10 days, your earnings double. If you avoided 20 worst days, your earning doubled again. >> What is the point of such trivia?

The point is -- it is hard to avoid/miss the 10 worst days since you dont know which ones they will be. It is easy to capture the 10 best days because the easiest thing to do is be invested all the time.

Isn’t it easy to miss the bad days because after it happens, you can buy stocks?

I understood it as: HODL

Except it is much easier to participate in best days than avoid worst ones.

Participating in best days requires you to just have your money invested all the time.

If you know how to avoid worst ones, let me know. We are managing risk for one of the biggest banks in the world and would like to buy this intel for a bunch of billions of dollars.

I think the way you should think about the stock market is similar to beating the Casino in blackjack & card counting. When you know the deck is rich ins face cards make more aggressive bets, when its low in face cards be frugal. I.e. don't put lots of money into the market when its hot & put more money in when its cold. That way you statistically have a better chance on getting a good return.

How do you know any of that though? Nobody really does. The fancy hedge funds and the skittish retail investor are all just guessing. Buy and hold seems to be the only sane strategy.

It is like driving down the street by looking out the back window. You are confident there isn't a dump truck parked in the middle of the street, because you didn't see one in the last 3 blocks.

I don't know, clearly - no one knows. I do know that investing in equity during the hot years is not a winning strategy at any point in time, unless you sell before it goes cool. At least from an index based fund perspective. If you stock pick (i.e. Amazon at peak 99 prices you would still have performed exceptionally well)

The stock markets are cyclical - it's tough to see how we can continue to buy into a market that is considered overbought by many financial talking heads. Once returns materialize elsewhere + cap gains tax changes materialize I expect froth will come out of markets...

> I.e. don't put lots of money into the market when its hot & put more money in when its cold. That way you statistically have a better chance on getting a good return

Was the market hot in 2017, 2018, 2019?

With the caveat, historical returns do not predicate future returns. If you invested in the S&P 500 from 97-99 and didn't sell before the large sell off of 2000 you would have to wait until 2010 before you saw positive inflation adjusted returns.

Please let us know, on a percentage basis of you earnings, how much is allocated to personally managed stock portfolio?

How is that relevant?

Weren’t you pontificating on stock investment strategies? I’m going to need bonafides.

You are making the classic mistake of confusing domains exhibiting a normal distribution of outcomes (casino games) with domains exhibiting an exponential distribution of outcomes (the market). This is the sort of thinking that traps people into believing "it went up a lot, therefore it has to revert to the mean and go down" or vice versa - there is no basis for such a belief in exponential domains.

There is also no basis for such a belief in the casino games.

Certainly not in the sense of the gambler's fallacy, but you can be sure that someone's fortunes from playing casino games will exhibit mean reversion in the sense that the next game is always more likely to bring their cumulative winnings closer to the house edge rather than further from it. Not so with the stock market. The stuff about card counting is basically impossible to do these days but can alter the house edge, and also doesn't apply to the market.

Actually there is a basis for it in blackjack and how to card count. That said I'm not sure what casino's are doing these days ever since the card counting was figured out.

They use a decent size shoe of several decks and reshuffle more than just in between rounds. Furthermore, the dealer only deals from a subset of the shoe IIRC.

I figured they had a way to break up the benefits of card counting - thanks for informing me!

That is a very astute point. I say it more as a broad model. And to the point of casino games - I speak to blackjack only which has a finite set of cards in a deck.

I would argue, broadly, that there is a finite value in the stock market we just don't know what it is (and it changes significantly) but I do agree with you that there are some very significant differences and is a potential flaw in the analogy.

The market appears to be subexponential, which is a worse class of distributions than the exponential. Just as a technical note.

Could you define what metrics you would use to see if the market is "hot" or "cold"? Could you let us know what each of those metrics would change in terms of contributions?

It's easy to say "hot and cold", but those things aren't easily definable, but it would be easy enough to backtest any theory you have. I'm pretty skeptical it's going to be valuable without getting into PhD level math coupled with an experts understanding of global politics and trade.

Time in the market vs timing the market. The former is easier to do but you need to be patient, the second could give more gains but the chance of you timing the market right is basically zero

>f something grows consistently with low variance over a long period of time

but that is what compounded interest is, no?

But I agree that this why market timing does not work, at least not for the vast majority of ppl and funds. If you miss those good days, you are screwed.

Yes, and you can expect relatively steady compounding returns at the risk-free rate (the clue is in the name.)

When you see return rates higher than the risk-free rates that still seem like they exhibit low variance, then one of two things are true:

1. Either you have found something that produces way too much reward for its level of risk. This is for anything publicly traded somewhat unlikely.

2. Or you have found something that's prone to rare, but incredibly big swings. The fatter the tails, the more likely it is you'll get a long, good run followed by something that completely wipes you out.

How do you "miss" 10 days?

Unless you are a day trader (aka gambler), "normal person investing" is about trickling cash into an account slowly over time into low-cost funds/etfs, covering the grid, and pretty much never selling until retirement. Maybe a rebalance here or there over the decades, but you're never "out" unless you're paranoid and liquidate into a cash position, but refer to point A.

This is the strategy myself and many of my college friends took when we graduated in the late 80's. And we're all pretty comfy right now. We had a few buds that went all day-trader and they lost their shirts, with one and only one exception.

When the 2008 crashed happened the office I worked in had lots of people take their money out of their 401ks, IRAs, or brokerages for years. In hindsight it may have been irrational but from what I remember, people were scared. Some people lost their job for years (remember the various news stories about 99-week unemployment people?), you needed whatever money you could get. If that meant cashing out everything you had, so be it.

There were other people that weren't fazed by it and obviously had the chance to not miss the "days."

Guessing this type of anecdote may be more common than people think.

Not only more common -- that is effectively what crashes are: demand for liquidity exceeds the supply, and the way markets are set up, this condition causes an even greater demand for liquidity, in a feedback loop.

Most of the time, you can get liquidity, but only at a price that really hurts. Sometimes you can't get it at all.

That makes sense, growing up my parents never contributed or had a 401k and I myself didn't start taking investing or contributing to anything until last year.

I agree with this except I think if you know a stock or two is good, diversification is unnecessary. I’ve only had two stocks in my portfolio for the last ten years.

I am happy for you that your 2 picks have been good. But most likely you have been lucky (maybe you picked AMZN, TSLA). Modern portfolio theory states that diversification gets you closer to better returns on average with lower risk. [1]

https://en.wikipedia.org/wiki/Modern_portfolio_theory#Divers...

Methinks 'johnwheeler' is full of it and probably just discovered reddit, WSB, and stonks

I would say people who picked amzn and Tesla are lucky. The jury is out on amzn. Bezos did something no public company ever did to the extent he did. He put customers before profits in an extreme way. Then, he built another multi billion dollar unit from scratch with AWS. So far, it’s worked out but the PE makes it speculative nonetheless. But the gap is quickly closing making it an investment grade issue. I don’t know so I leave it alone knowing I’ll regret it one day. That’s fine. I stay away unless I’m 95% sure. I would say s&p 500 represents 100% certainty overtime, because if it wasn’t, life as we know it wouldn’t be the same anyway we’d have bigger problems. Tesla is just a dumb gamble. There’s no justification at all for its price and history shows us what can happen with auto stocks.

Same for the lottery, if you just know which numbers are good then you only have to buy one or two tickets ever and you're set for life.

You cannot study about lottery numbers however. Whereas studying business isn't impossible.

All of the available evidence demonstrates that even experienced fund managers with access to extensive, expensive, and focused research on the companies they invest in perform no better on average than VTSAX.

Further, there’s no strategy to find the winning fund managers. The distribution of winners and losers over time seems to be exactly what you’d expect from random chance, and even fund managers who’ve been successful for years have the exact same odds of having their next year be awful as anyone else.

This is a bad analogy. The stock market is not a lottery. It’s a place to buy and sell shares of a company. Most people treat it like a lottery and that can serve you rather than hurt you if you know what you’re doing.

For all the DD you do, there is no predicting the future.

Plus there is a very real incentive for companies to do shady things, e.g. Volkswagon or Enron.

Are you sure those companies you're holding aren't lying out of their ass? Can you prove that? Like, unless you're in the accounting dept. at those firms -- or someone who can otherwise get those numbers -- you can't.

At that point it's gambling. It may be akin to counting cards, where you can make probabilistic guesses, but best case is still uncertain.

Otherwise you're rocking a very special secret, or are manipulating the market. But for the rest of the us stock plebs, is effectively gambling.

Yes.

https://longbets.org/362/

Ultimately it's about risk (permanent loss) control, and if you've done the research into those couple of companies, have high confidence in their continued success, and are diligent in continuing to update your views, then it sounds like you're managing risk well. There's always the chance of unknown, idiosyncratic, and potentially disruptive factors though--from a financial planning and risk management perspective, even founders are urged to diversify away from their own company's equity eventually, regardless of how successful they are.

Yes there’s a bigger chance of a black swan event. You have to answer for yourself if the extra point or two of cagr is worth it.

> This is the strategy myself and many of my college friends took when we graduated in the late 80's. And we're all pretty comfy right now.

I wonder if your Japanese peers in a Nikkei 225 fund over the same time period would agree with your strategy. Buy-and-hold for them is still down 50% over the last few decades.

Not if they were slowly and continuously trickling in as the gp suggested. Still Japan is a cautionary counter example to the stock market always goes up.

Why would expect the Nikkei 225 to provide similar returns to the S&P 500? Company quality varies greatly between these indexes.

Japan has a population of 125 million people and is one of the largest economies in the world (3rd / 4th largest depending on if you're using GDP or PPP).

Why wouldn't they have similar companies?

Lots of well known global brands in Glorious Nippon, too.

> Why would expect the Nikkei 225 to provide similar returns to the S&P 500?

Why would you expect them to be different?

> Company quality varies greatly between these indexes.

Can you elaborate on that? Has the "company quality" differed between the two indexes 30 years ago and was the market mispricing it? Is the market pricing these indexes correctly now? Do you think the S&P 500 is going to provide better results than Nikkei 225 going forward?

Lot of people bring up the Nikkei but averaging in money in was still better than holding cash over a long enough time period. I highly doubt anyone bought at the peak and then never bought again afterwards.

This is a common misconception. It's so common that I feel it merits a decent explanation -why- it is incorrect. Not to pick on your comment - it was just the first one I saw that mentioned the Nikkei :)

You can't simply look at the price graph of an index or a stock and make judgments. Aside from dividends, companies can do all kinds of wacky things such as special distributions, perform buybacks, issue new stock, pay out class action settlements etc. Oftentimes stock holders can make extra money through stock yield enhancement programs: if I hold a share of Google in my account at Interactive Brokers, and it has a borrow fee of 5%, IB will automatically lend my share out to people who want it, giving me some decent cash on the side. They split this 50/50 between you and them, so if I had 1 share worth $1000 of Google, that'd be 5% * 1 * 1000 = $50/year lending cost, of which I'd get half, or $25 profit. (Worth noting: My share remains mine to do what I want with at all times - the lending doesn't affect me at all.)

Unfortunately it doesn't even stop there. Even the total profit is not a good enough indicator. Imagine a stock market that craters from 2020 to 2030, going from $50 to $20. With dividend reinvestment and other things added, your total account value is $25 in 2030, or half of what you put in. However, in the same time, the cost of living halved. Your investment would buy exactly as much bread, eggs, housing, Netflix etc as it would when you put it in. Was your investment a good one? You still can't know: you'd also want to take a look at things such as other foreign markets, exchange rates, risk, volatility, and alternative types of investments (bonds, housing, land, etc.) I'll ignore those factors for the rest of my comment, but if you want to see data on the Nikkei and CPI, this is great: https://dqydj.com/nikkei-return-calculator-dividend-reinvest...

Anyway, back to Japan. Buying the Nikkei at its absolute peak in 1989 and simply holding it (with dividend reinvestment), never adding a penny to your account, would have produced total returns of 54% in US dollars or 13% in Yen. Still poor returns on an annual basis, yes, but this is with two rather unusual assumptions - 1) buying at the absolute all-time peak way back in the eighties after a to-this-day unprecedented growth spurt, and 2) investing on that one unfortunate day and never putting in another penny. Most people put money in gradually over many years.

Specifically, what the gp comment said was "trickling cash in slowly over time". Assuming you put money in for the decade preceding the 1989 crash, your total returns today would be (by year, investing in December, US dollars):

1989 54%, 1988 71%, 1987 134%, 1986 261%, 1985 558%, 1984 821%, 1983 956%, 1982 1237%, 1981 1172%, 1980 1241%, 1979 1603%. Average 737.1%.

For the decade after the crash, and later:

1989 54%, 1990 130%, 1991 133%, 1992 187%, 1993 154%, 1994 106%, 1995 106%, 1996 120%, 1997 216%, 1998 215%, 1999 112%. Average 139.4%.

1999 112%, 2000 208%, 2001 356%, 2002 432%, 2003 272%, 2004 230%, 2005 163%, 2006 141%, 2007 157%, 2008 257%, 2009 189%. Average 228.8%.

If you had contributed $1000 per month from '79 to '89 you would have $1.1 million today; if you did the same from '89 to '99 you would have $316k; if you did that from '99 to '09 you'd have $434k.

Over any span of time, if you contributed a few hundred dollars per month to the Nikkei during the length of a typical career, you would be a US dollar millionaire today. I would say his Japanese peers are doing just fine.

My old job 401K was shifting into the new job 401K, so for a week or so my $ was in a check in the mail between companies, and I think I missed like 2% gain. It's semi real $. It's annoying.

The investment horizon for the average American is 45 years, 2 weeks doesn't mean diddlysquat.

Except that the grandparent comment was showing how missing the best 2 weeks of days over 45 years really does wipe out a significant amount of gain.

This is one reason why paying for a wire transfer, ACATS transfer or other ways to move money faster can make sense: like the top comment said, you lose the top 10 days and you lose half your return.

Unfortunately for a 401k transfer there's no wire or ACATS (or even ACH) options, so you're basically screwed there. As far as I know you're basically forced to wait around for the money to move by check. However, you can insure yourself against the "risk" that the market jumps while you're out of it by using a smaller, separate account and options.

Pat of most modern economic theory around the stock market is slow and steady, sustainable growth. It's a fairly 'liberal' policy choice as you can't, say, tweet something to spike or drop a stock price and benefit (or have those in the know benefit). For example, several economists say that stagnation in the market is not necessarily a bad thing and shooting for the moon in stock pricing by chasing continual growth can lead to companies overreaching or expanding then crashing hard, hurting consumers and their employees worse than the gains created short term.

https://www.wbur.org/onpoint/2020/02/12/economists-slow-econ...

This is in addition to noting the stock market is not a representation of the economy or its health. slow, continual, predictable growth is critical for planning economic and fiscal policy along with preparing for rough times, like when a pandemic shuts down global production.

I often refer back to the stock market or simply inflation rate before the US went off the gold standard and instituted massive reform and regulation of markets. Some years the US would bounce back and forth between extreme negative then positive inflation rates, ex:

https://tradingeconomics.com/united-states/inflation-cpi

Set the chart range to MAX for effect, or see a table of data here:

https://inflationdata.com/Inflation/Inflation_Rate/Historica...

In 1920 inflation was close to 22% in the spring but a year later was about -15%. No way that was helpful for preparing for an economic downturn like we see in the general accepted 10 year business cycle today. Image starting a company and all your initial costs are 20% higher than you planned, then once you get production up and running your goods are worth 15% less! Market stability breeds stability but not high return brokerage accounts.

Ah yes, real estate, the classic example of something "growing consistently with low variance over a long period of time", is akin to "picking up pennies in front of a steamroller".

Nah, actually, I think that growing consistently with low variance over a long period of time means that the asset is objectively a good buy...

very true but we have no other advice that works for the upwards mobility of a large population

The stock market is an odd duck.

What to make of it now? There's both colors of swans at work in terms of the plague, excessive money printing, per Peter Turchin (cliodynamics) a peaking cycle in civic unrest, a potential loss of reserve currency status, big changes in tech that still haven't been digested, low cost of transactions. Lotsa opportunities for froth.

I'm still uncomfortable with it as a store of value. Not many people even owned stocks in the past, which makes historical comparisons a little problematic. It took things like the government heavily encouraging parking money there (401k, IRA, tax law changes, corporate tax law) and greater ease of transaction to put us where we are. You could argue that the entire market is a mania.

edit: Just to indulge my logorrhea for a minute, I wonder to what extent we are seeing an organic change in stock markets, a form of evolution really, that takes advantage of human nature. In the last 40 years or so, it was bound to gather up all the accoutrements of video poker. Marketing and blinkenlights, random payoffs, a house percentage getting scraped off, the fiction of player skill. The payoff is greater than 100% due to it riding the back of GDP growth (and the growth of large companies at the expense of the small) but the science of the casino is built deeply in the human psyche. The stock market has to act the way it does simply to remain attractive to all the primates.

> You could argue that the entire market is a mania.

Objectively, the big publicly listed companies are growing and have stellar financials. I can think of no better place for someone to invest, other than maybe diversifying into real estate with high demand, if they already have a significant amount invested in public equity markets.

Public equity market prices are also backed by the federal government, at least on a 5+ year (maybe even 3+ year) timeframe per events over the last few decades.

It's worth considering that what you are buying is a dividend stream and/or the possibility of a company being bought, which simply gives you more stock. When you essentially lend money to GOOGL or AMZN, what are you actually getting back besides a story?

Don't get me wrong, in the timespan of an individual's life it may well make sense to heavily buy into this system. I'm just making the point that it's current form is rather new and appears loosely connected to the real world and is subject to change.

To me, the current stock market seems like a fiat currency without the threat of physical force. Maybe the temptation will be to increasingly merge government with large companies in order to keep the plates spinning.

Just because a company isn't distributing dividends doesn't mean you're only buying a story. AMZN still has lots of room to grow. If I'm an investor in AMZN I would much rather them reinvest profits into a data center that will produce even more future profits than distribute the money to me. Once these growth companies top out in terms of their market share they'll pivot to distributing dividends, same as large established companies like Coca Cola

CocaCola currently has a P/E of 32

You own the stock in perpetuity, not just for a year. As long as you don't expect the company to go bust any time soon that's not a bad PE ratio.

As recently as 2011, KO had a P/E of 9.

https://www.macrotrends.net/stocks/charts/KO/cocacola/pe-rat...

There are two ways that a P/E can return to a quasi-normal value. Either the price can go down or the earnings can increase.

The mean and median values, since 1880, are about 15.

"This time, it's different" https://www.multpl.com/s-p-500-pe-ratio

So if earnings increase 3x the P/E goes back down to ~10.

KO has excellent margins - last time I looked they were around 60%. That means prices * sales only has to increase by 5x to bump earnings up 3x. Food prices have been inflating at 10-15% recently; 15% inflation over 11 years will get you there, and that doesn't include any growth in sales at all. These aren't unreasonable assumptions, given the macro environment: another 1970s inflationary episode would do it. (Indeed, Warren Buffett made a lot of his money investing in Coca-Cola and See's Candies during the 1970s.)

> margins - last time I looked they were around 60%. That means prices * sales only has to increase by 5x to bump earnings up 3x.

I am not sure about the logic (are you assuming marging expansion?) but probably you are trying to say something else than revenue has to increse "only" five-fold for earnings to triple.

> Food prices have been inflating at 10-15% recently;

Sure.

I'm not sure I follow all the arithmetic here (I'm pretty sure that, at fixed margin, revenue would only need to increase by 3x to increase earnings by 3x), but I did follow up to see what Berkshire had paid for Coca-Cola.

This thoughtful Quora post claims that Buffett made his first purchase of KO at a P/E of 29.

https://www.quora.com/What-was-the-P-E-Buffett-paid-for-Coca...

Stock prices are absolutely inflated, and as a small-scale investor I'm scared.

However, I'm not pulling out because realistically, there's no other asset that's safer in the long run. Interest rates are close to zero so returns in bonds are low, inflation will eat away money held in cash deposits and don't even get me started on cryptocurrency, rare sneakers or other "alternative investments". I started investing in stocks in 2017, even then people were warning that we were in a bubble that was bound to burst at some point. Not investing would have missed me several years of above-average returns.

But today, there seems to be a bubble on everything after all the money printing. So I'll keep investing in good, underhyped and stable companies and try to weather whatever storm, good or bad, will come in the next years.

>So I'll keep investing in good, underhyped and stable companies and try to weather whatever storm, good or bad, will come in the next years.

This is the obvious strategy, reduce your risk tolerance and go with proven companies. Put your money (fresh from your bank account, not from your portfolio) into moonshots when you can afford to lose them, after that put the moonshot money back into your boring but relatively safe investments. There are low volatility or stable dividends ETFs that specialize in this.

Personally, I'm not smart enough to pick individual stocks.

At some point (perhaps now) Amazon growth is predicated on cannibalizing other companies. After all, the broad market can't exceed the GDP generally for the long term.

My primary point here is not to argue about investment concepts, merely to state a concern about the artificiality of it all. Financialization is real and rather spooky.

The thing is there's a FRACTION of a percentage of people who are "good at picking stocks".

Most PROFESSIONAL stock pickers don't beat the market. And those that do, a tiny fraction can do it consistently over a 5-10 year time frame.

This is backed up by decades of data. But we still have millions of people who apparently think they are smarter than the thousands of professional stock-pickers who have MAs, PhDs and years of experience and do it full-time and still don't beat the market.

And sure, many average joes were wildly successful with GME or whatever the latest meme stock is. Just as many people made a ton of money in the last tech bubble. Check back in 5-10 years...

Exactly. Just like if you get 1000 people in a room, odds are one of them will get a coin toss right 10 times in a row. Doesn't mean that guy is good at predicting coin tosses.

It has nothing to do with me thinking I'm smarter than all those guys. The market is irrational.

I'm counting on being luckier than those guys more than anything.

That's a certainly more rational position than believing your are smarter than the thousands of people with PhDs in finance or CS who pick stocks full time.

Any yes, what people on WallStreetBets are doing is gambling. Which is perfectly fine, I just wish more would acknowledge it.

I agree with this, picking individual stocks is effectively a full time job. Most people looking for a moonshot only want to invest based on a "theme". E.g. you bet on the entire EV market.

Amazon growth has been predicated on cannibalizing other companies since 1995. Bezos was very specific about that in the business plan he presented to investors: he wanted to own all of retail, and has largely succeeded in that.

From a valuation perspective, what's so wrong about that? You want to be on the side taking over the world. Otherwise you're on the side that's getting taken over, and the value of your equity logically trends toward zero.

> he wanted to own all of retail, and has largely succeeded in that.

They have a decent position in online retail, but they are very far from owning all of retail.

> When you essentially lend money to GOOGL or AMZN, what are you actually getting back besides a story

Buying a stock is not lending money to a company. It's purchasing an ownership claim on future earnings realized by the company.

For AMZN, the expectation of its investors is that it should not realize substantial (relative to revenue) earnings now so that it can grow further and thereby increase the long-tail earnings to which shareholders are entitled.

GOOG, on the other hand, is returning money to shareholders now. In fact, they just authorized a program to return another $50B to shareholders. Our tax regime skews payout preferences, so that instead of paying dividends, some companies opt for share buybacks. But the net result is that cash is transferred from the company to its shareholders. You can see GOOGL's buybacks over time here, looks like they returned ~$31 billion to shareholders in 2020: https://ycharts.com/companies/GOOG/stock_buyback .

Where does Amazon get all of the stock for employee compensation? Do they just have a large pool of outstanding stock in reserve?

I'm not sure about Amazon in particular, but generally companies (especially tech companies) hold some percentage of stock in reserve for employee compensation. However, the company can also buy back stock on the open market either to take it out of circulation (and thus increase the value of outstanding shares) or use it for employee compensation. Finally, if the board (as a proxy for individual owners) permits it, a company can issue new shares for any purpose including selling to raise cash for operations, or giving to employees as compensation. This isn't free money, however. New shares tend to dilute the value of existing shares. So owners often prefer to raise money other ways, like debt that doesn't convert to an ownership claim in the way stock does.

I don't know Amazon's specifics, but I believe that's how it's typically done.

It doesn't have to be that large a pool as percentage of the company.

Essentially they create them as they go.

Total shares outstanding plus outstanding stock awards:

    Dec 2011 : 468 million
    Dec 2012 : 470 million
    Dec 2013 : 476 million
    Dec 2014 : 483 million
    Dec 2015 : 490 million
    Dec 2016 : 497 million
    Dec 2017 : 504 million
    Dec 2018 : 507 million
    Dec 2019 : 512 million
    Dec 2020 : 518 million

Existing shareholders lose 1% per year.

> It's purchasing an ownership claim on future earnings realized by the company.

Which, as I said, can be realized via dividends or the sale of the company.

I looked up their dividend returns. It ain't much.

Keep in mind that tax law highly incentivizes the avoidance of dividends.

We'll see (or maybe not). This business of involving the general public in stock ownership is a new thing, it really is new ground to cover.

> Keep in mind that tax law highly incentivizes the avoidance of dividends.

Combining Biden's capital gains tax, Federal estate tax, Biden's stepped up basis for estates, Washington state's estate tax, and Washington state's new capital gains tax, the top estate tax rate is now 70%.

This ensures that tax planning will dominate investment strategies, which usually results in suboptimal investing and subsequently a lower performing economy.

Whatever changes you think investors might react to need to be discounted by the likelihood of them being in a bill passed by Congress.

It’s not something I know a lot about, but it seems likely that Congress will make substantial changes to Biden’s proposals?

Changes depend on time. Biden is past the early magic 100 days and now members of the house (and 1/3rd the senate) are realizing that they need to prepare for their re-election campaign in less than a year. The longer things go on the more concerned they will be.

The democrats have the government today. The most democrat heavy handed set of bills will ensure that republicans take a veto-proof majority of both houses. Different levels of watered down will have different effects. There is a reasonable chance that no matter what they do they will lose the house next election (even passing bills that the republicans would like to author but wouldn't dare!), but the exact set of laws they pass will have a big effect on both who shows up, and how voters change their votes.

Or can be realized in a share buyback program, which are massive. Dividends and buybacks are just slightly differently structured ways to return profit to investors.

> can be realized via dividends or the sale of the company.

Keep reading my comment. Share buybacks are another way of returning cash to shareholders.

> involving the general public in stock ownership is a new thing, it really is new ground to cover.

There have been discount brokerages for 50 years now. I guess that's "new" as compared to how long there has been money, but I don't know that it's "new" in the sense that we can't determine whether buybacks do have the effect of returning cash to shareholders (they do). Share buybacks have been allowed since 1934.

I think a lot of newcomers to stock investing in the past year have been given the wrong ideas about the stock market.

When all of the headlines are about GameStop and Nokia and AMC and some kid who made it lost a lot of money on RobinHood, the stock market can feel like a place for gambling. Now that cryptocurrency prices are listed right next to stock prices, many people don’t even understand that stocks are ownership shares in real businesses instead of just another ticker symbol to gamble on.

Several times a week there are conversations on HN where commenters can’t understand how crypto currencies are different than stocks or how stocks are any different than gambling or why stocks can have any value without paying dividends.

I suspect many of those newcomers will be shaken out of the market during the next protracted drawdown. It’s unfortunate, because they stand to lose a lot over the course of a lifetime of investing.

> the next protracted drawdown

We should have seen this drawdown last year.

The longer the bubble builds the bigger the bust. We’ve chosen growth over stability, fundamentals, and robustness. Once the U.S. struggles to stimulate its economy through deficit spending it’ll hit a wall. It’ll be fine for people but there will be a massive dislocation in the economy.

I understand this. I'd much rather deal with the bad decisions of yesterday today than tomorrow. I guess for people that won't be alive in twenty years this is immaterial..

Check out the ages of elected officials, most are in the "won't be alive in twenty years" camp so the lack of foresight is unsurprising.

That is part of my reasoning behind my statement. The other part is the desires and concerns of the largest demographics electing these same people.

As long as people are still unemployed there should be no reason for the US with its sovereign currency to struggle stimulating the economy.

Even if you guys would overshoot full employment your current president doesn't seem too frightened by the idea of taxing coins out of existence again.

This is an argument in favor of pushing up inflation as soon as possible. Ideally inflation should be 2% and interest rates should be between 3-4% and it should stay that way forever.

If there is a discrepancy from that ideal then it means that something is going wrong, and the longer that discrepancy lasts, the more things are going wrong. Those wrong things will be discovered as soon as interest rates are back to their normal level.

Why those magic numbers?

> Now that cryptocurrency prices are listed right next to stock prices, many people don’t even understand that stocks are ownership shares in real businesses instead of just another ticker symbol to gamble on.

This distinction is practically useless, unless you own enough shares to have even tiny sway at shareholder meetings. Owning 1/1000000000th of a company doesn't mean any extra value or power to you. The big difference between crypto coins and stock is that (some) stocks pay dividends. The ones that don't pay dividends are just speculative ticker symbols that go up and down in value--no difference from crypto names that go up and down.

There's a large difference, one of those is based on a pyramid scheme with no inherent value, and one is based on a company delivering value to customers.

With the state of the stock market companies can and do go under, but generally those doing something for people dont magically disappear overnight (like any crypto certainly can.)

That's it; that's the difference.

Sure, but this is already priced in. Most equity doesn't go completely down the toilet overnight, but it also doesn't give you spectacular overnight returns.

So it's still a game, only for lower stakes in both directions.

> There's a large difference, one of those is based on a pyramid scheme with no inherent value, and one is based on a company delivering value to customers.

Crypto is mostly a store of wealth, similar to a currency. It's inherit value is that it is fungible, transferrable and scarce. Unlike other currencies, the supply is not at the whims of fed officials and politicians. The difference is that you can't pay taxes directly in crypto. I like it as a hedge.

Do you believe all currencies are pyramid schemes with no inherent value as they're based on nothing?

Currency is transactional, not a store of wealth. I'd say it's a bad idea to store your wealth in currency, absolutely, and I'd cite it's lack of inherent value as the reason why.

Currencies are not based on nothing. They're based on taxation. As long as a huge group of people need a currency to stay out of jail, that currency has value. (And pretty much all currencies in history have had their value imbued in them by threat of violence.)

It's surprising to me how ignorant people commenting here know about cryptocurrencies. I would have thought this group would be immune to being so confidently incorrect but once in a while a topic comes up that I know a bit more about than average and I suddenly realize the Hacker News commenters are no different than any average bunch on a Facebook group but perhaps because they are experts in their narrow field they feel it makes them an expert in any field perhaps. All the better for those of us in the know though I guess: Keep calm and HODL on!

>Crypto is mostly a store of wealth, similar to a currency.

Currencies are not meant to store wealth. They are the exact opposite, a medium of exchange. From a macroeconomic perspective wealth can only exist in the real world. E.g. you own a house, a car or a factory. When you deposit money into a bank account, you are effectively delegating wealth and letting other people use your money to obtain wealth in your place. These people net a return because of their wealth and let you have a share of their returns.

When you hoard currencies like Scrooge McDuck then you are neither spending your money, nor delegating wealth management to other people. The money has been taken out of circulation.

Then there is the other side of money/currency, money is a claim to another person's labor, meaning if you fail to act on that claim the portion of labor that this claim represents has perished because of unemployment. The solution to this problem is inflation. If labor perishes, make the claim to that labor perish as well. If you do not want to lose purchasing power you will have to invest your money. Banks let you deposit and make your money available to those who are interested in investing on your behalf. You can also put your money into financial assets that directly represent physical wealth such as ownership of a company. If banks and financial assets fail, you can still invest your money yourself.

>Unlike other currencies, the supply is not at the whims of fed officials and politicians.

Considering the vast majority of cryptocurrencies meet their demise at the hands of their creators I'm not exactly sure where the difference is. A lot of cryptocurrency people talk about how the background of the team behind the cryptocurrency is very important.

it's funny you think crypto is a hedge when it is highly correlated with sp500. doesn't bitcoin have a beta of like 2 or something?

If anything I would view it as a leveraged bet on the broader market.

I think the stock market has to a large extent (but not entirely) divorced itself from having much to do with the underlying value of companies or companies' business fundamentals. I can't otherwise explain astronomical P/E ratios and meme stocks.

Cryptocurrencies are basically stocks in nothing.

Until you can use them for payments writ large, they aren't even currencies, just speculation bubbles.

Proof-of-work crypto prices are based on 1) mind-share 2) sentiment/momentum 3) institutional backing (hedge funds and companies legitimizing them) 4) price of electricity 5) cost per hash 6) hardware supply 7) legality/illegality/regulation. Proof-of-stake currencies only lack #5, cost per hash. What I'm trying to say is that there's components to the price that can drive purchase/sell decisions.

No, proof-of-work crypto prices are based on supply and demand. Simple as that.

Yes, but supply and demand can be further broken down into these and other factors.

Cryptocurrencies are currencies whose value lies in their technology and adoption. Neither the tech nor its users are 'nothing', they are in fact quite tangible.

Edit: (Some) Stocks that don’t pay dividends still pay you. Most stocks now don’t pay dividends. Either they reinvest in the business (growing the stock’s value) or buyback shares with extra cash, (alternative method to dividends as they’re returning value to you the shareholder.)

I'd preface that first sentence with "Some".

Some stocks that don't pay dividends (or buybacks, or reinvest) straight-up consume investor's capital.

Ethereum will effectively do share buybacks starting in July. They're switching to a system that burns the majority of transaction fees. If share buybacks are equivalent to dividends, then arguably this is equivalent to paying dividends to ETH holders, funded by the fee revenue paid by users.

Yes, this is fine because the person paying for it is aware where the money ends up and the people who receive it know exactly who is giving it to them.

With pump and dumps it is often not known who the beneficiaries are.

Cryptocurrency staking is effectively the same as dividends for investors, though staking rewards are often more predictable.

>why stocks can have any value without paying dividends.

Well, if a company was never going to issue dividends at any time in the future, or do dividend-alternatives like buybacks or a liquidation at the end of its life (not a normal option), or anything else, its shares would be worthless. I could actually imagine a tech company going out of business before its first dividend.

Many have gone bankrupt without any form of dividend. Many others have gone on for years reinvesting in the business before doing a dividend. (I'm counting as buy-back as a dividend - with modern tax code it is currently a better way to do them)

Yes, but everyone is aware of this. Nobody talks about cryptocurrencies "going out of business", even though this is a thing that happens all the time.

> It’s unfortunate, because they stand to lose a lot over the course of a lifetime of investing.

On the other hand, it's worth gambling in stocks because if you don't your going to lose your shirt in the upcoming inflation, so you might as well roll the dice and shot your shit at not winding up poor.

Especially since there are tax increases targeted at the rich coming down the pike that are going to absolutely destroy you if you are middle class or poor, when a mcdouble costs $20 instead of $2 and the minimum wage is $100/hr instead of $15

The problem is options/derivatives trading. That is straight up gambling. There’s a meta market where you bet on the behavior of the market...

While that is a large part of it, it also seems like an unfair simplification, for two reasons:

1. You can construct portfolios of derivatives that are almost equivalent to holding the underlying except at a smaller initial cost. This gives you nothing but flexibility in ownership.

2. Remember that fire insurance is also straight up gambling that your house will burn down. Gambling counter to your interests is what we call insurance, and the proper mix of underlying and derivative is a hedged, lower risk portfolio than just the underlying.

It is ALL gambling, options are just another instrument, they can make your gamble more risky or less risky depending on how you use them.

Except in very rare cases stocks are entirely based on what investors think someone else is willing to pay in the future.

When I buy TSLA stock I’m not gambling on the future of Tesla. I’m investing in electric vehicles. So it’s “value investing” insofar as that’s my motive for investing. Sure I could gamble with plain stocks in the market, but thats not my motive or goal. Others, sure.

Of course stocks are based on what investors think they’re worth. Thats the whole point. It’s not gambling. Tesla is worth a lot of money because people think it is. If you’re susceptible to fomo hype trains and looking for a quick buck, you’re looking at the market as a slot machine, no doubt.

Stocks pay owners other than their value in the market, too. Capitalists look to make money off the market. It doesn't mean it’s all gambling. That’s a little reductive.

When gambling, the house "always wins" over time. With options trading, that's not always the case. Anyone with a gambling addiction would be far better off doing options trading - their chances are much better.

I agree completely.

Downturns are events where many participants learn how the market really works.

It’s an ugly reality check, but thankfully we have them frequently. Otherwise you get really overbought and then events like the tulip mania/bubble happen.

Also, this isn't limited to stocks - back when whale oil was a thing, there were all sorts of booms and busts, depending mostly if a ship came in with or without a whale.

Instead of Wall Street analysts, there were people with telescopes to view the incoming ships as far from port as possible to gain an information advantage.

All of my research in this suggests this behavior is hardwired into human DNA and won’t ever change.

There’s a big difference between saying that a company is growing and has stellar financials, and saying that it is a great stock to invest in. Surely the current price is relevant.

Everyone can agree that Amazon is worth A Lot Of Money. The question is: is it worth $2T? or $3T? or $1T?

But what are you investing in? The probability to sell (dump) <something> to someone in the future for a better price?

> Objectively, the big publicly listed companies are growing and have stellar financials.

If you don't invest for dividends then it doesn't give intrinsic value to the stock you own, it's just a proxy to the odds of your bet to dump it for a profit in the future.

>You could argue that the entire market is a mania.

You could also argue that the entire market is simply a reflection of society and humanity in general. As an American, I don't really see the market we've built as any more maniacal than the society we've built. They seem to go hand in hand to me.

What defines how logical/maniacal our society is if not our social institutions?

At the very least it reflects the movement in the US economy from manufacturing to financial services (FIRE) to surveillance-based advertising.

Perhaps the thing to do is to cut to the chase and declare leaves as money (h/t to Douglas Adams).

I remember the banking crisis and the money printing after that, it was absolutely assumed inflation would follow, how much was debatable, but there wasn't much debate about the impending inflation.

Didn't happen... for <insert reasons that are now thought to be obvious but nobody knew before hand>.

Who knows what to make of the rules these days.

>"Didn't happen... for <insert reasons that are now thought to be obvious but nobody knew before hand>."

That's not exactly true, MMT was right about that beforehand, this is from 2009:

"There are also those that claim that quantitative easing will expose the economy to uncontrollable inflation. This is just harking back to the old and flawed Monetarist doctrine based on the so-called Quantity Theory of Money. "

From: http://bilbo.economicoutlook.net/blog/?p=661

I feel like saying it won't be 'uncontrollable' isn't the same as calling that there won't be inflation and getting the reason right.

I think you feel that way because you can't appreciate the argument from only a small quote. They get it right.

The reason QE was (is) not inflationary is because that money it's not being spent in the economy, it's only adding bank reserves. Bank reserves make the interest rate go lower, but, it will not go lower than zero, after that you can create all the reserves you want.

Lower interest rates make credit more cheaper, but cheaper credit doesn't influence the economy if nobody is borrowing.

Also, bank lending is not constrained by reserves. Lowering the interest rate will make borrowing more attractive for borrowers, but that doesn't make easier for banks to lend, because they are not constrained by reserves. They are constrained by the number of borrowers to whom makes business sense to lend.

So, the quantity theory of money is wrong and the fractional reserves model is a fallacy. That should be obvious by now. The Modern Monetary Theory guys were saying that, way before 2008.

Only because housing cost usually isn’t included in the definition of inflation for some crazy reason. Housing costs are out of control.

Housing costs is included, I'm not sure where you got the impression it wasn't. And considering you thought its exclusion was "crazy," why didn't hearing that fact prompt you to investigate?

https://www.bls.gov/cpi/questions-and-answers.htm#Question_1...

https://www.bls.gov/opub/hom/cpi/calculation.htm#estimation-...

Some say that inflation did happen, but it ended up in real estate prices, which aren't counted in the formal inflation definition.

I'm not smart enough to tell how true that is.

Yeah, I don't know how someone can look at housing prices say, 1990-2020 and say there wasn't inflation after the housing crisis. House prices dropped, but not as much as they "should" have to eradicate the evident bubble of '00-'08, despite the very public beating housing & banking took. And 2-3 years on they were shooting up again!

Is it really inflation if the cost of a house doubles but the cost of servicing a mortgage halves because interest rates are so low?

This reads to me like "is it really inflation if money just got cheaper?" Which... I think the answer is "yes, that's exactly what it is"?

No, that's just a single overlevered market with, well, the banks laughing all the way to the bank? Because apparently they can get away with it.

Individual markets have crazy price increases all the time. It's happened to gold, oil, wheat, and virtually every tradeable thing ever, including housing. That it happens in one place is no reason to cry inflation.

Evil landlord owns an apartment, he jacks up prices to the maximum possible that people can afford. Fed happens and the value of the apartment goes up. The landlord jacks up prices to maintain a stable price to rent ratio. Yet nobody can afford to rent the apartment.

It's not really inflation, it's something different. The cost of financing has gone down. If financing dries up, real estate prices will go up again.

we have high inflation, CPI is just not a good measurement.

https://twitter.com/LynAldenContact/status/13875210431207587...

https://tradingeconomics.com/commodities

In the meltdown of 2008, about $4 trillion disappeared. The Feds pumped $4 trillion into the economy. Net result: close to zero. That was good, because the result of $4 trillion disappearing was going to be quite a deflationary crash.

The trick was going to be removing that $4 trillion that they injected at the right rate. And what actually happened is that they didn't remove it. Is it showing up now, years later, in asset inflation, because they failed to remove it all this time? I could see that.

The store of value is the infrastructure, edifices, and monuments of intellectual capital. Geez man, how much more parroting can you do? Would your comment history reveal talk of “NFTs wtf amirite!!!”

Recurring ,reliable revenues especially in large cap tech and payment processing (such as Visa, PayPal, MasterCard) is the main driver of the stock market and is why the market has done so well even though the economy feels weak otherwise and there is unrest. If companies can keep generating profit margins of 10-30%/a year, that is $ that must go to shareholders in the form of buybacks, dividends, or share price appreciation. This is what a lot of people get wrong about the stock market. Big companies, in tech, especial, are more profitable and dominant than ever. Never before have such companies generated so much cash.

This is my sentiment too. People seems to give the market far more importance than what it is in reality: an exchange for second-hand stocks, with money just circling that can never touch the company and the economy. And they also forget that if they don't invest for dividends they are just betting that they'll be able to dump the bag for a higher price in the future.

Owning a stock is more than just dividends. You own part of the company, if it is liquidated you are paid based on the assets of the company.

My point is that market participants seems to not care about what a stock intrinsically is when they choose one to buy (like also voting and governance), they just care about the price of that stock.

The market can be pretty irrational but the 401k system means it can't fail. That system ensures it'll always have new dumb money poured into it. We'll bail it out one way or another because the middle class is tied to it.

What an odd system, indeed.

Just be glad the US has a relatively strong saving scheme like the 401k, without it everybody puts their money into real-estate. It has been happening in my country and has been going on for decades, causing house costs vs income to be way out of whack compared to US.

I mean, just look at last year, when the S&P 500 index plunged over 30%, then proceeded to nearly double from then until now, in the midst of a global pandemic that froze big chunks of the world economy. Stock market returns make no sense.

I’ve made 15% on an 80/20 VWRA/IGLA split since September 2020. It scares me. It feels like too much. Like it’s going to pop.

It's been a long, long run. If you ignore the drop from last March that was recouped within months, it's been a strong ramp ever since the second half of the Obama presidency. Vanguard tells me I've done better than 16% over that period, just invested in the boring VTSAX index fund.

I might agree that general stock market prices are quite high, but arguing that "they went up 15% in 6 months" doesn't seem particularly strong. That has occurred historically, and doesn't automatically mean it's overpriced.

I’m quite new to it, so that’s reassuring to hear. September was when I made my first purchase.

just forget about it and never take the money out

The jump was probably caused by the 2.3 trillion in MBSes and treasuries bought by the fed.

Instead of seeing as high returns, you can also look at it as money losing value due to excessive printing of last year.

Exactly. Same with housing. They are not more valuable, the dollar is less valuable relative to them and likely will only get worse as equities and real estate are the good hedges against inflation, causing a positive feedback loop.

Higher interest rates would create an incentive for traditional savings, but would destroy companies (and gov) holding big debts.

I'm not sure where you are but housing over the last year is a real supply/demand market condition. They aren't arbitrarily being overbid 10%+ because the dollar is worth less suddenly.

Sure, but supply is limited in part because of the wealthy folks buying properties they will not use as a residence to hedge against inflation.

That real-estate is the least risky manner to protect wealth is a result of low interests rates and inflationary monetary policy. Printing as many dollars in the last year as there were in existence before, has perturbed a "normal" real-estate market. More dollars flying around means overbidding 10% is possible, especially since the additional interest is relatively negligible (wealthy folks will still take a loan in such conditions since rates are at rock-bottom).

Supply is mostly limited because demand is up among millennials and material shortages have increased costs and delayed construction.

I'll agree there is natural price pressure upward, but the recent acceleration is concerning, both in equities and real estate values.

Millennials were buying houses before all this too (I am and have) without this level of inflated prices (depending on where you are and how "free" the market is).

Well that's exactly it. In my area, inventory is scarce because of an influx of people who are used to paying an arm and a leg to live. In certain counties, prices are up 20-30% simply due to demand. Speaking with my own realtor, competition bidding is very common now. Rarely do you see a house go for asking or below asking.

Except measuring the value of money as something other than the ability to provide consumption (the ability to buy things you consume, rather than investments) doesn't make sense, regardless of how fashionable it is on this site to throw around the term "asset inflation".

Actually, measuring the value of money as something other than the measuring stick to compare capital assets doesn’t make sense, regardless of how fashionable it is to defend money printing by verysmart internet economists.

See what I did there? It’s not an argument.

Okay, let's phrase this another way.

If your ability to consume food, water, shelter, and entertainment has not been impaired but you are complaining about "asset inflation" because you learned economics from message boards perhaps you are being haunted by nonexistent boogeymen and need to chill out?

If you’re not being hurt by the fire alarm, maybe you should stop spreading conspiracy theories about there being a fire?

I wouldn't call some random person howling at the moon a fire alarm.

Never mind that online people have been predicting super inflation since at least 2009. I remember a Youtuber in 2009 that knew economics more than President Obama's advisors because Duck Tales did an episode on inflation.

But I guess by defining inflation as "stocks going up" the Duck Tales expert could have made it categorically impossible to be proven wrong since stocks tend to go up, further removing Duck Tales guy from the mainstream.

Ok you’ve convinced me, I’m going to consume products instead of holding capital assets /s

Take a look at ag futures my dude.

When you need to pony up an extra $100k for a down payment and your monthly payment goes up $300 for the next 30 years because real estate prices rise, is that not impairing your ability to consume other things?

It stinks that housing prices have gone up, but fortunately you can rent instead, which is accounted for in CPI measures of inflation.

I would think we could discuss the affordabity or unaffordability of homeownership without making up terms like "asset inflation" and falling into alternative fact rabbit holes about the collapse of U.S. currency.

Renting is not owning, and I question the utility of CPI’s method of measuring it that way.

My contention is increased real estate prices are affecting people’s lives in various ways, such as delaying families, not having families, moving people away from their networks, and at least allowing for a smaller portion of spending on other things in life due to a larger portion going into real estate.

Personally, I would label this asset inflation, but I don't know about the whole currency collapse thing.

I don't disagree with your main points but we have terms like Housing Affordability Index we can use to discuss this. We don't need to use imprecise terms like "asset inflation" which can mean different things to different people.

It's a problem in a lot of developed countries.

I don't know how to describe it, it's almost as if they have stopped "developing".

There has been a big leap in technology over my lifetime. "Not impaired" isn't the target, if all the wealth gains weren't being directed to asset owners by asset price inflation then the people who were working to create them would be getting a bigger share.

I've done the obvious thing and bought assets, but it keeps getting harder and at some point maybe all the people who are working hard might notice that they are doing all the work and people with assets are getting all the benefits. The government should be more neutral on whether asset owners or workers get the benefits of work - the market is naturally slanted enough without it being further tipped towards asset owners.

You might be happy in stasis. But this is an age of wonders and the people who do the work to bring it about should be compensated roughly in line with their contribution. As would be happening if the government didn't keep leaning in with monetary policy to prop up asset prices relative to wages.

As a bonus, if the government did leave the market alone, people would probably work harder and there'd be more stuff to go around, even ignoring the fact that more of it would be distributed to the sort of people who work hard.

65.8 percent of americans own a home according to an internet search. (An asset). If you want to discuss wealth inequality, I don't think a term like "asset inflation" is necessarily the right way to go about it. Can't we just use terms like home affordability?

I just think reinventing the term inflation encourages sloppy fringe conspiracy thinking.

It's my understanding if the government didn't intervene in markets we'd get events like the great depression returning periodically, which probably are in nobody's interest.

We should really be discussing the right government policies or the wrong one, but I doubt the answer to the problems of our time is zero policy.

What is your explanation for the explosion in asset prices over the last year, if not inflation? Do you think the assets have become fundamentally more valuable?

Tell-tales are all over the place. From explosion in asset prices world wide and cross-industry to micro-signals, such as goods coming in smaller packaging (for the same price) or slightly increasing grocery prices[0].

In my bubble, its mostly tinfoil-hat-wearing crypto-enthusiasts pointing at examples of how toiletpaper comes in smaller packages-for-the-same-price, so my view is skewed.

But its safe to consider all these as datapoints that indicate possible worldwide inflation is building up.

[0]: https://politicalcalculations.blogspot.com/2020/01/the-price...

Slow inflation is the norm. Because if you have whole generations working and aren't experiencing growth things are deeply wrong. Not just "corporate lobbyists or those connected to officals have disproportionate influence" wrong but "masses of people working cannot improve their skills, processes, or products at all".

That is a very hard state to get even as a paranoid police state or literal aristocracy which views a minority of small farmer able to sustain their own plot as an existential threat. It is deeply unnatural in the "low probability" sense like your cat walking back and forth across a keyboard or swatting at it and writing passages of famous authors low.

My guess is:

1) Bonds and bank accounts are paying less than inflation, so to not lose money you need to invest in stock. That doesn't mean inflation is high rather bank accounts stink.

2) People figured out based on recent fed action that the U.S. has a policy of privatizing the gains and socializing the losses. Therefore stocks appear to not be risky, so people bought them up. The only reason you'd put money in a bank account rather than stock is stock can go down, but if you think the government will intervene to prevent stock going down, you might hold a greater amount of assets in stock, bidding up the price.

> What is your explanation for the explosion in asset prices over the last year, if not inflation?

Well, a few ideas immediately spring to mind:

a) Historically low interest rates are causing people to chase gains elsewhere. Again, people end up looking to the markets. This has been an ongoing trend exacerbated by...

b) For folks not on the margins, discretionary spending was severely curtailed last year. They had to do something with that extra cash. Many people, during a time of tumult, chose to save. This is only exacerbated a trend that started way back in 2008 due to similar post-disaster psychological scarring. Where did people put the money? Into the markets.

c) Wealth concentration means a huge amount of the cash floating around has landed in the coffers of the largest institutions and individuals. Those institutions aren't using that cash to buy chips at the 7/11. They're either i) saving it, which means putting it into the market, or ii) using it to buy up assets (e.g. acquisitions) which itself bids up prices.

In short: What's going on the market probably has absolutely nothing to do with what's going on on mainstreet.

Of course, that's been true for the last 10 years as folks on the fringes continued to predict hyperinflation post-2008. But, the great thing about disaster predictions is you can always just move the goalposts out...

There is a big difference between

"things are getting more expensive"

and

"things (that I already own) are getting more expensive"

Apologies for the snark; I've been around the "what is inflation really measuring" debate one time too many.

One explanation is to look at the wood market. COVID restrictions have severely constrained supply and the wood suppliers are unable to keep up with demand.

Consider that the Fed increases the money supply through debt. This means that for the money supply to increase, there needs to be an increasing amount of debt because eventually people pay back their debts and most of the money the Fed introduced into the economy disappears.

they totally make sense. The money supply increased from 12T to 20 trillion under trump. The money supply under biden is about to increase another 5T.

We are seeing the effects of the increase in money supply as inflation in the price of equities.

It starts to when you ask yourself: Where else are people meant to store money? Since interest rates and bond rates were at historical lows. So you have people who are looking at 10% YOY returns on one hand and 0.2%/2% on the other and making the rational decision.

Does this make stocks overinflated? Yes. Is it going to suddenly pop? Unlikely, since the conditions that caused it won't suddenly change (e.g. certain bonds have ticked up 1%~ but taken months).

> Is it going to suddenly pop? Unlikely..

This is not financial advise, but an investor myself, I'm on the other end of the spectrum. "Is it going to suddenly pop? Certainly! We just don't know when, how much and for how long. It could be june 2021, it could be 10 years after the Great Sino-Russian war of 2038".

the markets can remain irrational longer than you can remain solvent.

That isn't sudden in the usual meaning. What is meant by the question "Are you going to suddenly die?"? If a safe falls on you death will be sudden but there isn't any reason to believe you will be around falling safes historically. You may have some hidden defect. Sure you will die eventually even if you were unaging, but what is usually meant is "Do you have any known fragility like say a weak heart, high risk of stroke, or a habit of using something volatile in dosage like speedballs or carfentanil? "

Something a lot worse will happen in 2038. I'll be keeping my system programming skills up to date for sure.

The saying is that "As Long as the Music Is Playing, You've Got to Get Up and Dance." You can't -not- invest because it doesn't make sense and the valuations are insane because you could miss the dance or the encore.

We get articles on HN about once a week arguing that massive inflation is coming soon. I think all of these articles are misguided. With such low interest rates, the Fed can and will raise those rates to prevent inflation.

That interest rate rise will likely pop the bubble.

Prices are on the rise throughout the economy, so I'm starting to think the inflation has arrived.

Covid has disrupted many things in the economy. That alone means some prices will go up. But it might be temporary.

And the Fed is starting to walk back their prediction that an interest rate rise before 2023 is unlikely.

10% return investing into a company doesn't even sound as crazy as 10% return on a savings account.

> Where else are people meant to store money?

Money isn't stored in other assets. It's transferred from the buyer of an asset to the seller. It doesn't cease to exist simply because you traded it for stocks (or gold or anything else). Now the seller has to deal with the consequences of holding the money you previously held. A rational trader factors in the costs of money when they price assets, therefore one doesn't avoid those costs by trading money for other assets.

This is always what I think of when I think of cryptocurrencies.

You're not parking your money somewhere, you're giving it to someone else. Every time you buy BTC someone else is getting paid. Money goes in circles.

Two economists are sitting at a bar, one pulls out a checkbook and writes a check for $100,000,000 then hands it to the other economist. The second economist looks at the check, smiles, then hands it back.

The first economist calls the bartender over and orders a bottle of champagne. The bartender asks what the celebration is about, and the economist responds, "we just grew GDP by $200 million dollars."

Sure, fraudulent transactions exist. The difficulty is figuring out how much it matters.

Right, and so the seller then has to put that money back in the market in some other asset at marginally higher prices, lest they lose money to inflation holding it in cash (or fixed-denomination assets).

This is the natural consequence of negative real interest rates. With positive rates the infinite series representing the "discounted value of all future cash flows" converges to a single dollar value. With negative rates the series diverges: the "discounted value" of future cash flows is greater than their nominal value, simply because you're losing money with competing investments. The rational value of any investment that generates positive and predictable cash flows becomes infinite.

Right now the only thing holding a lid on equity valuations is the expectation that the Fed will eventually raise rates, and so cash flows from time periods > 2023 need to be discounted at positive rates. If that doesn't happen, or if they don't raise rates by more than the inflation rate at the time, things will go boom.

Not only this, but with the near zero interest rates and perceived impending hyperinflation, people are taking out massive margin loans to bet on assets. Archegos isn’t the only one, they just happened to get caught with a dumb position. When the interest rates kick up, we’ll likely see a dual effect here(stocks react, high rates mean it’s harder to service debt for speculators and actual companies) and a 2008-like scenario except our bad bet is on stocks instead of mortgages

> Is it going to suddenly pop? Unlikely,

I disagree.

https://www.currentmarketvaluation.com/models/buffett-indica...

Unless you mean will it pop tomorrow, then yes that is unlikely. But the chances it pops “soon” seem quite likely. And it will be very ugly. I don’t know if we have ever seen a spring coiled this tight from money printing.

https://fred.stlouisfed.org/series/M1SL

but what is a 'pop'? maybe ordinary swings in both directions due to various minor panics and manias and profit-takings that average out to a decade of nominal gains but depressed real returns?

'Pop' can also take the form of increasing inflation, making people take bigger risks for returns, leading to a bigger pop that is not coming soon. People saying this market can't sustain need to think about the inverse: what needs to happen for this market cycle to last 5-10+ years?

"The market can stay irrational longer than you can stay solvent."

2003 and 2009 style drawbacks but much worse. The SP500 has had 12 years of straight bull market, it's like an earthquake fault line that hasn't slipped in a long long time.

You don't have to choose one thing. A portfolio of two assets that are sufficiently uncorrelated can provide substantial returns over either one alone. They don't even have to be cointegrated. One of them could even have net negative returns, and it still works.

A split between equity and bonds still seems prudent, I think.

Stocks market returns only represent the return of the companies that are listed on stock exchange. If the economy stagnates overall but the small (unlisted) companies suffer while the big (listed) ones boom, then the stock market returns increase in a stagnating economy but it makes sense.

The problem here would be the belief that stock market is a mirror of the main economy. Personally, I believe the stock market represents very well the interest of the richest capitalists.

More like the value of the dollar has roughly halved due to record money-printing and this is reflected in capital assets firsts.

https://fred.stlouisfed.org/graph/fredgraph.png?width=880&he...

MMT apologists are the modern day petit bourgeois. Trust the experts!

The value of the dollar has not halved....

Against a basket of currencies, the US dollar index is approximately 10% lower than it was from the start of the pandemic. Pointing to the fed money supply chart as evidence is woefully misleading.

Dollar index historical: https://tradingeconomics.com/united-states/currency

> Against a basket of currencies,

Counterpoint would be that against "a basket of assets" it is decreasing in value rapidly.

The EUR is probably tanking just as fast. What you are doing is like saying "shipping prices for steel have not increased, because the price to get a kilogram of steel across the ocean is hardly more than the price to get a kilogram of coal across the ocean".

Much of the increase was just banks relabeling their M2 money as M1. This happened when banks stopped penalizing people from withdrawing from their savings account more 6 times a month.

Yeah, it's annoying, it ruins the usefulness of the charts but it has no short term or long term significance.

Stock market returns make sense only when you realize the currency is actually just losing value. All currency is being devalued so you don't see it in currency pairs but scarce assets go up quickly.

I think that given how vast is USD influence, currencies all over the world will lose their value with dollar. But not every currency, economies that rely on mining natural resources more should have their currencies better against USD.

This is not the case, as far as I can see.

Why would mining help? Resource extraction is the low end of earning potential. You mostly need the terrain and a willingness to pollute to break into it. It isn't that scarce. Industry makes much more than resource extraction and advanced services make more than industry.

Actually CAD is trending up against USD

A Pandemic and multiple conflict zones were no more than a pot hole. The markets have pushed higher with no end in sight. The Fed and Treasury are making sure that if there is no one to buy stocks they will. There is no end to the support the Federal Reserve will shoulder for the markets.

With Governments around the world determined to never let the Economy fall or stay down even if it means directly sending money to the population and spending trillions at a moments notice to support Wall St there is no chance that over the long term the market will ever fall and stay down again.

Not even a WW or a natural disaster of the like we have never seen would keep the markets down. We would be naked, homeless and hungry and the market will continue to march higher. History is a perfect example of that.

i've been thinking the same thing for a couple years now. lots of people keep harping on doomsday scenarios, but it seems too many people have too much invested in the market for it to fail

That type of intervention prolongs the inevitable, but certainly won’t stop a collapse.

The stock market is about future expectations. As soon as you know that, the last year makes perfect sense. Oh no, a plague = crash. Oh wait, it will be shitty for 6 to 24 months but actually not that bad and people are still buying stuff just as much as before = Boom.

When S&P plunges more than 10%, buybuybuy. 30%? Shit go full margin and back up the truck. I’m sitting on 2x since Dec.

Protips. Saas is the thesis. Long term solar is a 100x-1000x easy-ish bet. Capture is “good enough”, we are going to solve storage. Transmission will significantly collapse into storage. Game will change. The entire energy game.

> Long term solar is a 100x-1000x easy-ish bet.

This is WSB-level nonsense.

Reminiscent of the dot com boom. People said "this internet thing really looks like it's on the up and up" and they were right. What they didn't understand is that investing in 'pets.com' didn't mean they were investing in the internet.

Yes the solar industry could probably go up 100x. No, the companies we're investing in today won't track that.

Ok, please put all your savings into shorting an index of all current solar companies

100x? I think that is at the edge of what the EV market can accomplish.

I can never coalesce the whole pandemic and stock returns thing with the actual "fundamentals" of these companies. Yes - there was a pandemic, but the 5 largest companies in the index, Apple, Amazon, Microsoft, Facebook and Google, which make up nearly 20% of the index all had insane revenue growth. Amazon nearly doubled it's profits, Google growing as much as 30%.

When every other investment vehicle, except maybe housing is cratering you have a one-two where stocks looks great to invest in, and are much better than everything else. If it were to ever pop it would be because other investment products started to get much healthier - which to me isn't a bad thing.

A really interesting thing happened in March 2020. The market crashed and we all remember how gloomy everything looked. Needless to say, some businesses were going to be directly affected by Covid (eg: travel, hospitality) and their stocks went down as much as 80%. But it also became clear that many stocks were just collateral damage (eg: most of the tech stocks), and that they were going to recover more quickly than others. I bought all the tech stocks I could and things worked out great. If anything, I gave myself too much time to execute on this strategy - as a way to protect against the market tanking even further, I decided to dollar-cost average and make my investments over a 6-week period between mid March and end of April. As is obvious in hindsight, the mid-March cohort outperformed the late April cohort by a wide margin. Writing about this in April 2021 doesn't seem so surprising, but I can tell you that in April 2020 I was shocked how fast the market was improving even though the global news only kept getting worse and worse. I am close with many people who run their own businesses, and many of them had their worst weeks in April. I guess the market was recovering following the same rationale that I used, so I shouldn't be too surprised about its behavior, but it was still interesting considering how my risk profile is so different from the majority of other people.

Would I recommend timing the market? Most of the time, no. But a lot of people talk about the impact of the 10 best or worst days in the last 20 years, and I would say those "insane periods" do exhibit somewhat recognizable patterns that makes it possible to identify them and take advantage of.

This has nothing to do with your company thesis and everything to do with the Fed.

I get the gist of your response and it certainly has some merit. But I would push back on the black or white presentation of your point - stock allocations certainly do matter, as you can easily confirm by playing with a few what-if scenarios in the past 12 months.

The high-level point of my parent comment was to not run away from market crashes, and instead to buy stocks that are a part of the collateral damage as opposed to those that are directly connected to the root cause of the sell-off. I think this strategy will work regardless of Fed's actions, within reason (eg: the financial system doesn't collapse altogether).

It is also very easy to talk about all of this in hindsight.

Prior to April 2020 I had 100% of my 401K in cash/equivalents.

In April 2020 I put half of that cash into stocks.

Now, of course, I kick myself and say I should have put most/all of it into stocks back then.

But that kind of "of course!" and "that was such a recognizable pattern!" talk is a lot easier in hindsight.

It's easy to forget what it was like at the time, and that it could have easily gone down even further. At the time, the cat was both dead and alive (market recovers vs. market falls further).

> Prior to April 2020 I had 100% of my 401K in cash/equivalents.

I am not a financial advisor, but that sounds like an unusual strategy regardless of your age.

> It's easy to forget what it was like at the time, and that it could have easily gone down even further.

The only thing that matters is where it will come back, and when. Eg, once Facebook dipped below 50%, you were quite likely to make a profit on that buy in the next 2 years no matter how much further it was going to go in that time frame.

The author falls for the "past equals future" fallacy.

    The only way to truly take the randomness
    out of the stock market is to have a
    multi-decade time horizon.

He says so after looking at the data of a few decades. That makes no sense. It is like looking at 3 people and saying "People come in groups no larger than 3".

The whole article is based on that premise. He has something like 90 data points and assumes the next 90 data points will be alike.

Is it possible the next 10 years will have a negative return? This is a very interesting question. But I doubt we can answer it by looking at historical returns. We need to look at the actual situation. What would have to happen in the world so we see negative returns? War? A natural desaster? Who says war and natural desasters cannot throw us back 100 years? 1000? 10000?

I mean yes, past performance doesn't guarantee future results. But it does waggle its eyebrows suggestively at it, when you have a phenomenon that's gone unchallenged for probably a hundred years now. It isn't guaranteed. But nobody's lost their shirt betting it'll continue yet.

People always bring up Japan in these discussions, of course. The Nikkei 225 peaked on 29 December 1989, still only at half that value over 30 years later.

Or the German stock market of 1914. An 1914 investor would have had to have held for 100 years to get his investment back.

The major point is that only looking at 90 years of American stock market returns is very serious cherry picking. We can get a lot more data by including non-American stock markets. The last century was a century of American ascendance. 100 years from now America still might be at the top, but I wouldn't take that bet. Even if it is, we won't get the gains we got from rising to the top.

The ultimate point of these discussions is coming to a conclusion about "what should we do?". I can give you quite a few reasons why dumping all your money in market index funds could end in disaster. I'm not under the illusion these gains are guaranteed. But what the hell else am I going to do?

This is going to be a silly response, but how silly is it really? You asked what you would do with your money, to grow it...

This is related to the Keynsian Beauty Contest for following fads actively instead of passively taking long positions for years:

https://en.wikipedia.org/wiki/Keynesian_beauty_contest

How about hiring a person to research and buy the latest shitcoins on Uniswap and Pancakeswap? I can name several in the last month that have each been up 500% in 24 hours. For example, see these:

SAFEMOON (weeks ago)

https://coinmarketcap.com/currencies/safemoon/

SPORE finance

https://coinmarketcap.com/currencies/spore-finance/

PROMETEUS token

https://coinmarketcap.com/currencies/prometeus/

By the time you hit these links, you may be astonished to see that the assets have risen in one day nearly half of the 900% the guy says the stock market would do in 30 years.

I mean, isn’t the goal of growth investing to get the biggest returns? This seems to be that, massively accelerated.

Then retire LOL.

But seriously... the smallest cap projects in the newest industries — especially now that trading is available to anyone with no intemediaries — presents massive opportunities for huge crowds to descend on one thing or another, and if you are early to the party you make a lot. I find it a very strange aspect of capitalism, that seems to reward meme marketing and attracting crowds to fads, rather than actual value for society.

Great! Now you have your retirement stash. You'll have to protect it for decades to come. How? Which brings you to the beginning: how do you invest your money?

The point is that your retirement stash can at that point just be kept in regular assets for decades because you have made a ton of gains through a fast sprint. Or you can take some of that to hire various money managers to repeat this strategy for years whenever the opportunities present themselves.

Invest globally instead of throwing it all in the S&P500, and add some other asset classes.

Do you think the globe as a whole will outperform the US market?

I don't think our collective future as a planet is any better than the US outlook, personally. If anything, the United States is probably better situated to win future dystopian contests than most, too.

If international stocks are undervalued because U.S. stock are in a bubble or overvalued international will outperform, in theory it has little to do with who is "better".

Do you just buy stock X because you think it will do well, or do you buy a broad ETF because you believe in passive investing and diversification?

If the latter, well, the same applies to countries and asset classes. You can take your best guess on who the winners will be, or you can just buy the market. It doesn't mean you think "the globe will outperform the US," any more than buying VTSAX means you think VTSAX will outperform Apple.

And it also bears mentioning that if you're buying a market cap weighted fund then you aren't really missing out too much on US equity dominance, since for example VTWAX holds ~60% US stocks.

As long as you realize that you're choosing the least bad of a bunch of bad options. Far too many people are claiming that stocks are safe.

You're right: stock picking, index funds, bonds, crypto, cash, real estate, collectibles -- they're all bad options in 2021. Myself I would recommend holding a sizable portion in cash. Unlike many, I'm not overly worried about cash holdings getting destroyed by inflation, but I do believe that coming interest rate hikes will make stocks cheaper soon.

It’s not that stocks are safe

It’s that the options could be convex !

In other words putting 10% in the riskiest things with highest potential returns (shitcoins on DEXes for example) and 90% in the safest things would be strictly better than putting ANY money in the middle between the extremes.

Cash is being decimated by asset inflation before our very eyes.

It depends what assets you want to spend your cash on.

Will home prices go up after this crisis? Will there be demand once small companies start firing people and close down and we run out of government incentives?

Sure, big companies have more money, but that is likely to be hoarded or invested (and I doubt it will be in real estate, given it's a hassle to manage) - it won't go back in the economy.

It went into real estate the last time around so why not again?

>Cash is being decimated by asset inflation before our very eyes.

Not really - 10% change in 5 years is expected.

https://fred.stlouisfed.org/series/CPILFESL

I'm not sure what relevance that has to my assertion? If a/the market goes up 50% you'd be poorly advised to hold cash rather than put it in the market.

No one should ever hold cash long term as an investment, but the graph shows pretty clearly there is nothing at the moment that has not been the trend for literally 50+ years.

Calling that "Cash is being decimated by asset inflation before our very eyes" seems to be undue hysteria.

Put your money in real estate.

Our political system is unable/unwilling to address housing needs. Home owners vote for whatever it takes to increase prices. Renters and young people looking to buy their first homes don't have as much political clout. The reality of the situation is sad but the results are clear!

Real estate is one of the worst asset classes right now. If anything is due for a crash it’s real estate prices. And the amount of protection that tenants have been getting during the pandemic doesn’t inspire confidence in being a landlord. On top of that, people seem to get so leveraged in real estate, it’s a recipe for bankruptcy. I never hear about people investing in stocks going bankrupt unless they do something extraordinarily stupid, but I hear about real estate investors going bankrupt all the time despite simply following best practices.

There were some interesting books written about some bankruptcies associated with stocks.

Which doesn't subtract from you main point, yes, real estate is much riskier than it might look.

For example-- what happens when municipalities realized their pension funds are broke, and they decide to raise property tax to cover the shortfall?

This warrants some disclaimers.

We might very well be in a housing-bubble. So put your money only in there if you can miss it and if it is safe for you. And always consider spreading your money.

E.g. consider paying off mortgage, which could be seen as a safe version of "investing in real estate". As well as putting aside some cash, and buying in on some ETFs.

I should have mentioned that I was thinking of a long term scenario. 20-30 years. The covid real estate market is... interesting.

Could be demographics driving the housing demand, also. The large millennial generation are now in the housing market, and the baby boomers haven't sold yet. In 20-30 years the baby boomers will not be around. That will change the demand for housing. Could be quite a difference.

> But what the hell else am I going to do?

Personally I'm taking some money that could go into the stock market and investing in increasing the energy efficiency of my home to reduce my future costs, buying items I'll need in bulk (things like 200 pairs of socks so I'm set for life) and other things that will improve my QOL without ongoing costs.

How can I start investing in the sock market?

I'm going to take your awesome joke seriously. You can invest in the "consumer staples" index which is relatively counter-cyclical. People buy a similar number of socks every year whether they're doing well or badly.

This is possibly the best post in this thread

No they would not have had to wait 100 years. Makes for a spicy headline, but no one just throws a lump sum of money into the market once and hopes for the best.

If you continue to invest regularly, your returns eventually cover your previous losses and your back to making profits sooner than later. Your portfolio balance over time is the only thing that matters, not the returns of individual investments.

It’s why you shouldn’t be scared of a big crash. Do you plan to continue investing afterward? Yes? Then you’ll be fine.

Lots of people do something very similar. They throw money into the stock market regularly for years, and then on a single day they retire and start slowly taking it out instead.

I feel reasonably confident that we will probably continue to see decent gains over the medium term of the next few decades, barring major wars. But what is always in the back of my mind is just how long can human civilization continue this incredible rate of exponential growth. If you assume that economic growth requires any amount of increase in energy consumption, then there are physical limits to how much growth can occur over the long term and we are rapidly approaching them[1]. Eventually growth will need to slow and it looks like this is already starting to happen [2]. Japan may be the endgame for most of us. Eventually there could be zero growth and then things become zero-sum which may encourage conflict.

If we are able to colonize other parts of the solar system and export industry off the planet that will allow for several more decades and probably centuries (millenia?) of growth. Hopefully civilization will survive conflict long enough to make this transition.

[1] https://arxiv.org/abs/2005.05244 [2] https://www.economist.com/graphic-detail/2021/03/15/young-pe...

The world has changed now though. Betting against America is essentially betting against human progress.

The stock market is nothing more then a claim on a future stream of dividends over a roughly 50 year time horizon. The longer the investment horizon the greater the uncertainty and the greater the volatility.

To compensate for that investors typically demand higher returns. Yields on 30 year bonds are typically higher then 10 year bonds.

Long term returns on the stock market can be broken down into two categories:

- Increase in corporate earnings - Increase in the price that investors are willing to pay for those earnings

Increases in long term corporate earnings are constrained by long term growth in GDP unless earnings as a percentage of GDP increases. GDP is a function of demographics and productivity increases.

Assuming that future returns will match historical returns is a bet that GDP growth rates will be close to historical trends along with earnings as a percentage of GDP will continue to increase. Demographics are long term trends that can be mostly predicted 20+ years into the future (you can’t go back in time and make a baby) and are mostly unfavorable compared to historical norms (lower percentage population in prime working age). There is also a limit on corporate earnings as a percentage of GDP unless taxes and wages go to zero.

So a bet on future returns matching historical trends is essentially a bet on a massive productivity growth across all sectors of the economy over the next 50 years. In addition the bulk of that productivity growth will need to fall into corporate coffers rather then tax revenues or wages. And it will need to sustain that over a 50 year time horizon.

Future-discounted series of dividends is one theory of stock market valuation. It isn't the only one. Keynesian beauty contest is another.

The nikkei 225 peaked at 38k in 1989. It is 29k now, 76% of the old value.

That’s without dividend reinvestment though no?

> the data of a few decades.

1926-2020 is 95 years. Calling that "a few decades" is downplaying it. I'd say it is safe to take 95 years and from that extrapolate a 30 year future with wide margins. In your analogy: looking at 95 people and saying "the average group size is between 2 and 5".

> ... 90 data points and assumes the next 90 data points will be alike.

Are we reading the same article? I don't see it predicting anything 90-points forward. Even the predictions for 30 points forward are very much on the safe side: merely a caution and establishment of a (well-known) generalism. A conclusion in that article:

> don’t know if the next 30 years will be this kind to investors in U.S. stocks. You could make the case investors should reduce their expectations going forward.

> But if those lower expectations turn out to be correct this makes thinking and acting for the long-term even more important than ever.

The author makes clear that the next 30 years may very well not follow this trend, given the entire dataset contains only 95 data points.

> The author falls for the "past equals future" fallacy.

Isn't this more about random events? The stock market is not random, it merely fluctuates a lot.

A war? A natural disaster? That is the point! If this happens, it doesn’t matter what you invested in, money is worthless. So outside of that, it is now safe to say invest and hold is a safe strategy for guaranteeing returns over a long time horizon (30 years).

WW2 didn't make money worthless, COVID-19 didn't make money worthless. A limited nuclear war won't make money worthless. Climate change won't happen fast enough to make money worthless.

I'd say crypto have the bigger chance. Good or bad, leave that up to the reader.

This is a very tiresome argument that I have to continuously have with friends & family.

These days I just sit on the sidelines and watch people I care about throw money into raging infernos because they genuinely believe that a historical time series has some notion of inertia/momentum/hocus pocus/etc behind it.

After a certain point you have to stop trying to save other people from shitty ideas or you will drive yourself mad.

Reminds me of the nose and bean principle from consulting: https://archive.uie.com/brainsparks/2011/07/08/beans-and-nos...

For that 2nd graph, he chose buckets that are uniquely poorly suited to evaluating his statement about whether returns tend toward 10%.

It looks to me like, if he had instead made them (5%)-5%, 5%-15%, 15%-25%, etc., then the mode would indeed have been the 5-15% bracket.

Agreed. I’ve seen that figure before (or some variation) and it is a bad way to try to argue his statement.

That range is covered in the article:

> Just 18% of returns have been between 5% to 15% in any given year.

The mode is already in the 10-20% bucket in the graph, changing the buckets would not affect the argument that follows, which does mention the 8-12% and 10-15% ranges:

> If we look at the calendar year returns plus or minus 2% from the 10% average (so 8% to 12%) this has happened in just 5 calendar years

> Just 18% of returns have been between 5% to 15% in any given year.

The main point being that the odds of you seeing any returns near the 10% number are quite low (18/100). It's just a lot more spiky than most people realize and not a safe way to get 10% returns unless you're looking at 30+ year periods.

Yes, that's all true, but none of it changes the point that it's a poorly constructed visualization that is ill-suited to how the author is trying to frame their story. Edward Tufte would weep.

The first graph establishes that there is no clear trend or clustering in the data points. The second one lets you visualize just how many years are around the 10% average or not, and then the argument is expanded from there.

They seem to serve their purpose pretty well. There's probably a nicer way to display that, and maybe combine them as one of Tufte's principles would suggest, but I don't see anything that would make him weep here :) What do you have in mind?

I'm going to add that I did a rudimentary an analysis of the S&P 500 because everyone seems to be throwing their money into passive S&P500 low vehicle investments. I looked at every hold period since inception from 1 year holds / returns up to 40 year hold and returns.

Timing is crucial for good returns - depending on when you put in and take out your money the returns can be negative (even in cases where you hold up to 15 years) and in other cases quite good (best cases inflation adjusted annualized returns of 12% over 40 years).

I did it because I didn't buy the commentary that you should just put it in S&P 500 and that it will almost guarantee returns.

> depending on when you put in and take out your money the returns can be negative (even in cases where you hold up to 15 years)

Sorry, but unless you're talking about truly black swan circumstances like the Great Depression or the 2008 crash, I don't believe for a second that, over a 15 year timespan, holding the S&P will result in negative returns frequently enough that a typical investor has to concern themselves with market timing.

You need to prove your work for a statement that strong.

For anyone interested in this topic, https://dqydj.com/sp-500-historical-return-calculator/ is a good place to start.

As a starting point, accept the defaults and hit "Calculate Historical Returns." The minimum return and standard deviation are most relevant.

(Note that it defaults to adjusting for inflation, but that's really the only metric that makes sense when comparing long periods, particularly those including the 1970s and 1980s, so that's probably what you want.)

The New York Times published the same sort of analysis in 2011: http://archive.nytimes.com/www.nytimes.com/interactive/2011/...

Be sure to carefully read the description of the graph. Every time I link this, someone assumes that the green & red indicates are the yearly returns, but the entire point of this graph is that it is cumulative. If it is red 20-30 years into the line, that means that money put it at the beginning had a negative cumulative return after 20-30 years, not that the 20th or 30th year was negative. Also observe the graph is inflation adjusted.

Yes, it's true. The idea that you can just stick your money in the stock market and see 7% returns every year is somewhere between "mistaken" and "a lie". It is not a coincidence that this idea has arisen during a time of loose monetary policy and a stock market that is being inflated by it over the course of a couple of decades. In the 1970s and 1980s, for instance, this would have been considered risible, and indeed, people did not generally value stock equities. (See the chart for why they may have felt that way.)

It is not an even remotely accurate model of the stock market to think of it as a 7% return that you can casually compound over time. Anyone who speaks of that model or uses that model doesn't know what they are doing. Your debt certainly compounds over time, but your assets can't be modeled as doing that.

A couple of further observations:

Part of the reason why the stock market can offer 7-10% gains in a year, when the economy does not offer such gains in general, is precisely that "room" is made for those gains by the years in which it loses big.

This is also part of why we have a pension fund crises, because even in the relatively friendly stock market of the past couple of decades, even these so-called professionals would blindly use a high-single-digit return estimate per year, and even in the past few years, that has been an inadequate model. The bailout they're going to need if the stock market actually crashes (popping the "Everything Bubble"?) will be literally unaffordable. (Not paying in sufficiently is also a problem, but that is also itself a consequence of absurdly optimistic models being generally accepted.)

Great visual!

So I'll just note a few things:

1) You can clearly see the Great Depression and 2008 in here, so I'm just going to ignore those.

2) The other really nasty period for market returns was during the 70s oil crisis and subsequent high inflation period.

It also notably marks areas "slightly above inflation" as red, which are not periods where loses would occur (though, yes, the gains would be basically flat). This strikes me as an odd choice and a misleading one that makes the historical analysis look worse than it actually is.

Yet despite that, the majority of that chart shows returns moderately above inflation, sitting in at around the 4% safe withdrawal rate.

I personally don't view this as justifying the claim that individual investors need to worry about market timing. If anything it reinforces my view that they shouldn't because no one could apriori predict the kinds of events that led to the red areas of that chart.

I will also agree that if you just erase all the risk from the market due to the downturns, that the market becomes a great investment.

But what's the relevance of that? When the next bubble pops, whether it be in two weeks, two years, or a decade, you and your investments are going to experience it. Some of those red splotches go on for twenty years.

As for why doing "just barely better than inflation" is marked as red, the chart accounts for inflation, but it doesn't account for a time value of money. Putting $1 dollar in the market to get $1.04 back out 30 years later is not a positive investement.

"Yet despite that, the majority of that chart shows returns moderately above inflation, sitting in at around the 4% safe withdrawal rate."

Which is why it is generally not a terrible idea to invest in the stock market.

But this is basically a goal-post move relative to the "common wisdom", which presents it as a done-deal that the stock market is always a good investment that produces a ~7% return every year. It won't matter to you that it tends to generally produce a relatively decent return over 50 years if you are currently, unbeknownst to you, at the beginning of one of those big red areas that may stretch down for decades.

Look at the stock market as it stands today. I will not tell you 100% that we are in such an area; internet commentators have predicted one million of the past 3 recessions. But I will tell you that it's an awfully plausible story.

The problem is that there's not a clearly viable alternative. Even if we're in a period where the market is going to underperform (likely), will it still underperform cash? Bond yields are so low that they're a questionable inflation hedge as well.

This is the thing that people don't want to hear. There is no guaranteed, long-term store of value. Period. End of story. The closest is precious metals, especially the "monetary" precious metals, but even they are valued based on their usage (if society collapses, platinum & palladium will probably have their values go "poof", for instance) and fluctuate over time. They're one of the few goods that you can literally physically hold on to for decades and they at least won't tank to zero, but they still may not be worth "as much" as what you spent to get them.

> Putting $1 dollar in the market to get $1.04 back out 30 years later is not a positive investement.

This is not how annual returns work. If you put a $1 an average return was 4%, you will get $3.25. And if you put it in a tax deferred account or did not withdraw a lump sum after 30 years, the effect of taxes would be less dramatic.

What other investment performed better over the long time? For instance, housing did not grow much until 30 years ago.[1]

[1] https://dqydj.com/historical-home-prices/

This is a good visualization, I think. Interesting that they include taxes here, though, as that can vary quite a bit by individual circumstance, and most long-term retail investing is probably done in tax-advantaged accounts like 401ks. Also, it's important to note that this appears to be in real terms, and so the period in the 70s to 80s is somewhat extraordinary. -2% annual return vs ~10% inflation isn't great, but also far better than cash.

All that said, it does show that the longer you hold, the more likely you are to achieve an average positive return. Note that the only negative return (again in real terms) is the darkest red.

Again, just to drive the point home, the neutral color 3%-7% return is after inflation. If the long-run average inflation is 2%, then this is 5%-9% average annual return which almost exactly tracks the common assumptions surrounding long-term buy & hold.

Really interesting and somewhat surprising chart.

That said I think there's some important drawbacks to point out.

First, that 7% figure that's often quoted is usually meant to mean nominal return. At least, that's the way it works relative to the commonly cited 4% SWR.

Second, buying and selling exactly once will greatly increase the variability of returns and also the likelihood of negative returns. It's important though to realize that this isn't actually how almost anyone invests, so just counting periods of negative returns under that assumption isn't particularly meaningful.

Kind of wish they re-ran the code to bring in the 2010s-2020s! Really appreciate that visual - my code is just from 70s until now .. I should build it as a heat map like this one.

One big grain of salt to take with that NYT graphic is that they took taxes into account. If you are investing in a retirement vehicle (401k, IRA or Roth IRA), your tax obligations are going to be very different. Not to mention that tax laws have changed greatly over time.

Another think to remember is that if you are saving for retirement, you are very likely doing dollar cost averaging, i.e. making deposits on a regular basis. So you aren't buying all your stocks in one year, you are buying them across a multitude of years. That greatly mitigates the risk of starting at the wrong time.

For example, I started saving for retirement in 1999. It was ugly for a while but I was positive for good as of 2009, despite all the red in that graph.

> If it is red 20-30 years into the line, that means that money put it at the beginning had a negative cumulative return

No, this is only true if its dark red.

The way you present the data of the graph does not represent how people invest. The average person works for ~40 years, so there are 40 individual years you could track on this graph. However, that isn't useful because compounding interest is a huge factor in returns. Another variable is people dont invest the same amount every year (typically people make more money as they age, however in most cases, compounding returns beat out income gains over the long term).

Consider if year one someone places $10,000 into the stock market. 40 years later, it grows into $48,000 (real value after inflation).

If you extend the diagonal boxes to 25, 30, 40, or 50 years, which makes more sense given how long people work and how long they live after retiring, the cumulative growth is _always_ above inflation.

This is an interesting visualization, but if I'm understanding it correctly it does oversimplify in a big (and potentially misleading) way:

This is what happens if you do all your investing in one big lump sum, e.g. putting one dollar in the market in 1970 and getting out less than a dollar (after inflation) in 1985.

Outside of getting a major windfall (and not dollar-cost averaging), this isn't how investing is done. Investments are typically made as income allows, over the course of decades. Yes, that means some of the dollars you put in are going to be massive losers in the long run. Others are going to be massive winners. What's important is the average over 30-year period of investing followed by a period of withdrawals spread out over another couple decades.

I'd be very curious to see a similar visualization which illustrates the same point for spans of time rather than lump-sum-in and lump-sum-out.

Actually the modeling I did assume that you invest the same amount every year - its rudimentary but does account for this.

I was talking about the NYT analysis linked in the comment I was replying to, but I'd be curious to see your numbers as well if this is something you've worked out!

go look at the investments into the market 98 early 2000s in the market and how they underperformed for about a decade. (look at the NYT visualization you were commenting on). Adjust it for inflation.

My point is that investing at the peak of the market will not generate returns unless you unload before the market goes down. Now who knows if the equity markets are going to get clipped (or rather when) ... timing is fickle.

Also, selling on good years makes your performance exceptionally good.

I guess TL; DR. Either sell in the good years around nowish if you've generated a return as equity markets are frothy or be prepared to hold a long time to generate a return [statement for S&P index not individual stocks] assuming the future follows some of the past patterns (sample size is small though to be fair).

the problem is just that you don't know when it's a good or bad timing, that's why you shouldn't bother and just put your money in. If your money is long enough in the market it doesn't matter anymore that much as it averages out. It also sounds that you think 15yrs is a long time, but for ETF you should consider more like 20yrs and up

I understand the theory behind it and the uncertainty of timing is an impossible problem to solve.

My point is that holding S&P 500 generally gives you a positive return but if you buy during good years/months and end up having to sell in bad years/months you actually can have a negative return up to a about 15 years (if you really eff the timing up) or get marginal returns (1-2% per year).

Even over 40 years - you probably wouldn't be supper happy with a 100% return - yes things go positive but your returns are much lower if you time the market poorly (obvious statement).

For example buying in 98/99/00 your returns are much worse then buying before or after. Likewise selling in those years gave much higher returns.

Stating the obvious - but worth thinking about. Sell when the market is rich, buy when its soft (like blackjack).

I've run similar calculations in an attempt to convince an acquaintance not to pull out their money when they "had a bad feeling" about something.

To me the takeaway isn't that "timing is critical for good returns" but that "you can't time good returns, so don't move all your money at once". You'll be investing over the years of your career and withdrawing over years of your retirement. Historically, it ends up working out.

General consensus is to invest using dollar cost averaging so you don't rely on timing.

Invest the same amount of money each pay cycle. If stock is expensive, you'll be able to afford less stock, if stock is cheap, you'll afford more stock.

The same principle can be applied for taking your money out. Instead of a single big cash-out, take $X per month.

It's not exact that straight-forward. From Vanguard:

> Our research indicates that it's prudent to invest a lump sum immediately.

Article: https://investor.vanguard.com/investing/online-trading/inves...

PDF: https://static.twentyoverten.com/5980d16bbfb1c93238ad9c24/rJ...

I don't think anyone is claiming that throwing your money into SPY for a year or even 5 will guarantee returns.

But the claim is often made that throwing it in for 10 or 20 years will guarantee returns.

Well obviously nothing is guaranteed, but something like 90% of 20 year windows in the last 100 years would in fact result in positive real returns.

http://archive.nytimes.com/www.nytimes.com/interactive/2011/...

Note that the light red color is actually still indicating a positive real return, this is particularly relevant in the 70s and early 80s when a 2% real return would be a much higher nominal return.

Agreed that some people expect returns for time horizons as short as 10 years though, which is clearly a mistake.

The last 100 years is only a weak predictor of the future.

If you find a stronger one I'll be all ears

Interesting: I did my own analysis[1] and did not show a loss for any 20 year period:

http://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-in...

Must be some differences in the data they have vs what I could find. I did include inflation and dividends, but not taxes - wondering if that brought it to the negative.

The S&P had one 22-year drawdown in its history, the Great Depression. Second place was 4 years.

If people planned to contribute once in their life, the risk of buying the top before a long drawdown would be relevant.

Most people spend decades of their life buying investments. Even folks with bad luck seldom buy the absolute top -- positions acquired a couple months before are out of the drawdown that much sooner.

No backtest of typical investment patterns is going to see any 15-year net losses in the S&P's history.

> Second place was 4 years.

What about mid-2000 to late-2006?

And that's in nominal terms, because it underperformed cash from mid-2000 to mid-2013 (and quite longer against bonds).

Ugh, I looked at the wrong column in https://static.seekingalpha.com/uploads/2020/5/20/saupload_d... and didn't sanity check the results. Sorry for my sloppiness and misinformation.

> the returns can be negative (even in cases where you hold up to 15 years)

Are you certain? Are you taking into account potential deflation or other factors during that time?

There are some analyses that say that even if you bought at the height in 1929, you would actually still make you money back within 10 years. Here is an article from 2009 [1] suggesting that the very longest true downturn of the stock market was 8 years, during the recession of the 1970s.

1. https://www.nytimes.com/2009/04/26/your-money/stocks-and-bon...

This is true, but it's easy to look back at historical data and draw conclusions from perfect information. When actually making an investment decision facing an unknown future, index funds are relatively low risk. This is why people actually buy them. Making the pool of companies smaller will only increase the volatility.

I would argue that psychologicaly the S&P offers the least optimistic promise of return for an investment a person would realistically make, since it is supposed to represent the market as a whole. People don't like to make an investment if they believe its quality is below-average, so expectation of average returns is really the minimum.

> Timing is crucial for good returns - depending on when you put in and take out your money the returns can be negative (even in cases where you hold up to 15 years) and in other cases quite good (best cases inflation adjusted annualized returns of 12% over 40 years).

Yes, timing is crucial. In your analysis, how much did timing change if you change the "sell date" into a 6 month window?

> Timing is crucial for good returns - depending on when you put in and take out your money the returns can be negative (even in cases where you hold up to 15 years)

This is well captured in this guy's drawdown charts:

https://portfoliocharts.com/portfolio/drawdowns/

This is slick.

I did the same analysis. There's no 20+ year period where it lost money.

http://blog.nawaz.org/posts/2015/Dec/pay-down-mortgage-or-in...

Somewhat related question: where/how did you acquire that data? I have been meaning to run some simulations on the S&P 500 historical daily closing data, but I can't seem to find a place that provides the data covering for the last 40-50 years.

Thanks in advance for your answer!

Adding some further comments since there were a lot of questions: I did a portfolio approach in which you invested the same amount each year. I determined the final returns from very outcome (i.e purchase and hold and sell every year combination) of investment over the last 40 years and did both nominal and inflation adjusted dollars.

Taleb in his Black Swan book makes exactly the counter-point for this type of article that uses statistics and curves to predict and explain something that doesn't fit laws of averages and bell curves. Interesting read. The statistics of the article are just observational without any kind of predictive power or meaning.

I think the way to phrase it is something like: We don't know what the heck is happening, actually. We call this "randomness." But it is not randomness in the sense of truly, fundamentally unpredictable, nonsensical things happening. It is randomness only in the sense that almost everybody fail to see important things coming. But usually you could, in principle, see important things coming. And often a handful of people do, but nobody listens to them.

You use bell curves when you radically doubt your ability to see important things coming, and just assume that a sort of vaguely similar distribution of types of things will keep happening.

Taleb argues, correctly, that this is actually a pretty stupid assumption because new, weird, statistically unpredictable important things happen all the time.

I like Taleb's critique but I'm not satisfied with his answer. Radical skepticism in your ability to see important things coming ... probably shouldn't stop you from trying anyway, using whatever tools you decide, using your reason, are the most useful. You can't predict black swans but you have to try. One of the tools here would be leveraging statistical regularities in past performance. Another would be having some kind of thesis about how solar power, or crypto, is gonna be big, for Reasons, which violates past statistical behavior.

It definitely seems suggestive that hedge funds don't seem to outperform index funds, over almost any timescale you care to choose. Everybody is doing the best they can; Taleb points out that this still isn't very good; he's right, but what else are you gonna do?

The author is doing a lot of work to explain that the statistical average takes a long time to converge to the expected return because the distribution is volatile (high stdv, skewness, kurtosis, etc).

Do note however that his analysis only concerns itself with the US. Including other countries would show that US is one of the few countries where stock markets were never interupted for a long period of time because of its political stability. If you dont beliveve it will keep going this way in the future, invest in other countries.

US market should NOT be used as any scientific benchmark for anything - as it does not represent "all" typical possible scenarios for the stock market.

Look for example(one of many) at Japanese NIKKEI index - it was going DOWN for like 20 years! So this theory does not work!

Many people in Europe also quote multiple studies based on US market - but they are usually worthless on other markets(both bonds and stocks). If you add inflation and CPI - this theory is even more worthless.

US market is special - as US is one of very few superpowers on Earth.

> US market is special - as US is one of very few superpowers on Earth.

For now. Look how rapidly the USSR lost its superpower status.

What if the Capitol insurrection were successful?

Not even a relevant comparison, sorry. Russia was a competitor but didn't have the same built in advantages.

US will remain a super power for the remainder of everyones lives on hacker news. It will diminish, but it will remain in power until we're all in the ground. Mainly stemming from its economic roots for the global financial system.

The NIKKEI would've given you a positive return if you bought and held and reinvested dividends. And picking the worst point in one of the worst indices does not mean much - most investors are not investing a lump sum (they're usually putting into a pension over the course of decades) and they shouldn't be investing in just index/asset class (all-world diversification and having bonds as part of your portfolio is recommended).

Isn't this kind of... stupid?

> So around 5% of all years since 1926 have seen average returns. In fact, there have been just as many yearly returns above 40% as returns in the 8% to 12% range.

Well yeah sure but 3 of the 5 years that saw those >40% returns were 3 consecutive years 100 years ago.

I think all we can take from this article is that there are a multitude of factors that drive the value of the stock market and if you don't think about any of them in any detail then you're going to spot lots of statistical patterns that don't mean anything.

This article suffers from hindsight bias by virtue of focusing on the US stock market, for which this has been an exceptionally good century. If you were to include the markets of Britain, the Netherlands, Japan, Germany, France, Poland, China, Argentina, and Switzerland, the picture doesn't look so rosy. Anything you invested in the Giełda Pieniężna w Warszawie in 01926, for example, would have evaporated in 01939; despite the "liberation" of Poland in 01945, no stock exchange would reopen there for 50 years.

Poland is an extreme case, but so is the US—I don't think any other country's stocks did so well during the 20th century. If someone were to write an article about how well Esso/ExxonMobil stock has done from 01926 to 02021 (11.9% I think), it would be easy to understand that this wasn't a recommendation to hold ExxonMobil for the next century, much less some other arbitrary stock; obviously the investors 95 years ago in the F.W. Woolworth Company and the Kennecott Mines Company didn't do quite as well, which is precisely why nobody would write an article today about buying and holding Woolworth's stock.

Will the US do so well over the next century? The spectacular bungling of the covid pandemic suggests that it may not.

OT: why do you prefix the year with a 0?

The 5-place date is meant to draw attention to a longer view of time, a position advocated for by the Long Now Foundation.[0]

[0] https://blog.longnow.org/02013/12/31/long-now-years-five-dig...

Thanks, interesting. I will of course now 1-up and use a double 00 prefix on any publicly posted dates.

> obviously the investors 95 years ago in the F.W. Woolworth Company and the Kennecott Mines Company didn't do quite as well, which is precisely why nobody would write an article today about buying and holding Woolworth's stock.

I don’t know about Kennecott Mines, but Woolworth’s never missed a quarterly dividend payment from 1926 until 1995, and they resumed again in 2003 (they are now named Foot Locker, FYI). Nobody who bought Woolworth stock in 1926 lost money if they just HODL and passed it on to their kids.

What would their annualized return be? Kennecott's not out of business either. But these two were among the 12 stocks in the DJIA in 01926—the most blue-chip of the blue-chip.

The stock market has more or less monopolized the global fiat monetary system. Politicians can decide what the returns will be in any given year because they control the currency.

The returns are only meaningful in the short term while everyone is in a trance thinking that fiat currency is worth the same as it was before... The longer everyone can stay in this trance, the more 'real' the numbers are.

However, it's my opinion that the real value creators of our economy (the backbone of all economic value) don't have much incentive to believe in the fiat numbers anymore. That's why they're moving towards Bitcoin and crypto.

The next decade is going to be interesting; we're going to find out if all the hype about 'automation' and 'big data' was genuine or if it was just moral cover for the elite to justify their monopolization of everything.

If the corporate elite have managed to automate the economy to a degree that people and non-corporate entities cannot compete with their machines, then fiat will continue to thrive. If it turns out that non-corporate entities still have the competitive upper hand, then fiat will deteriorate and Bitcoin will take over.

My PoV as a developer who has worked for many big tech companies is that the corporate sphere has been deteriorating for years and most advancements have been vaporware. I believe that apparent growth in profits and market cap are a trick of the money printers and the numbers are not grounded in real economic value; they are extremely fragile and the only reason that the stock market doesn't collapse along with fiat is because of extreme herd mentality among investors who have been primed to believe in the supremacy of fiat currencies for their entire lives.

I cannot understand the thinking behind your 2nd and 3rd from last paragraphs

The narrative about automation is used to justify Big Tech monopolies. I.e. there are huge tech monopolies nowadays because big tech is automating everything and driving all local brick-and-mortar shops out of business and people are going out of work because of automation.

The narrative about big data is used to justify Big Tech's (e.g. Facebook) high profits. I.e. Advertising wasn't lucrative before but now thanks to big data (targeted advertising), it's very lucrative.

What if an alternative explanation to the first narrative is not that Big Tech is automating everything, but instead, that their monopolies are simply a result of them having preferential access to large amounts of newly created capital (e.g. at lower interest rates or via shell company revenue laundering schemes); their access to the money printers creates an asymmetric playing field which allows them to beat all the competition in spite of their inefficiencies.

What if an alternative explanation to the second narrative is that the real reason why advertising has become so profitable is not because of Big Data, but simply because businesses are desperate to protect their wealth from inflation and for lack of a better alternative, they decide that consumer mindshare is the most valuable asset... So companies which monopolize consumer attention/mindshare (social media companies) end up flooded with money from all sectors of the economy.

If most of the Big Tech growth we've seen is artificial, then what will happen to inflation when large numbers of investors start selling shares and spending their money to buy real productive businesses instead (I.e. if they all give up on the false automation and big data narratives)?

I decided to play with these numbers myself because I had some questions. I believe the data is the same as I found here[0]

The average single-year return over that period was about 7.5%, not 10%- though in half of years, the market did better than 11%. But what happens if we bucketize by a larger period, like 5-year? My method was to take $1, multiply by the return for 5 years in a row, and then take the 5th root of the result, then convert to a percentage return per year by 5-year bucket. Overlapping 5-year buckets.

The end result is as you'd expect. There are bad years, and there are good years, but the storm is pretty tame when smoothed out. In more than 75% of 5-year periods, the average return was positive. Only 69% of 1-year periods were positive.

As a fun aside, if you invested in an S&P500 index fund the day Clinton was elected and sold it all the day Bush was elected, you'd have made close to 25% annual return on average.

[0]https://www.macrotrends.net/2526/sp-500-historical-annual-re...

Did you add in the dividends?

https://www.multpl.com/s-p-500-dividend-yield/table/by-year

~7% is after adjusting for inflation. I suspect OP did not adjust.

The linked data isn't adjusted, though - it's just raw open/close values for each year. The mistake here is ignoring dividends, which push returns up by 2-3% per year.

This is hand-wavy feel-good stuff, and it isn't terribly wrong but saying true things about long term returns is very difficult. Adjustments for inflation, interest rates, dividends, corporate tax rates, individual tax rates, index/portfolio construction, selection bias, etc. all need to be considered if you want to try to draw serious economic conclusions.

Rather than looking at returns in isolation it might be more interesting to look at returns vs. P/E or vs. some other parameters like interest rates. e.g.: https://www.alger.com/AlgerDocuments/AOM_singleGreatestPredi...

This is only a 20 year period which is pretty short, but hey, doesn't look as random any more.

Each data point covers 10 years, and there's only 20 years of data. There should be only two points on the graph. The other points are just blends of the two independent time periods.

The implied decision is whether to invest over the next ten years, and the chart implies that you can make this decision every month.

The question is whether the current P/E impacts (long term) future returns. I think it does. Robert Shiller thinks it does (or at least the cyclically adjusted P/E).

Having a data point per month is not unreasonable. Prices and earnings move. The 20 year period for a 10 year return horizon is clearly too short. I'd like to see the same data over longer periods.

Prices move, but the move from month 0 to month 12 is highly dependent on the move from month 1 to month 13. It's statistical nonsense to treat them as independent variables in a regression model. You could use any biased random walk as your price series with this approach and get a correlation p value of 0.00001.

If month 1 was the crash then 0 to 12 and 1 to 13 look very different. No?

Aren't you basically saying your precise entry point to a 10 year period doesn't matter, e.g. if you enter at year zero or year 2, or January vs May in year zero? But clearly it matters a lot because the market can make huge moves in short periods.

In other words, you're saying to look at 10 year returns we should just take each decade on its own with no overlap? Clearly if I pick 1970-1980, 1980-1990, 1990-2000, or pick 1975-1985, 1985-1995, 1995-2005 I'm gonna end up with very very different results? And sure, at some point the overlap becomes too fine. But saying that 2 decades is just 2 data points doesn't sound right either?

I definitely would like to see an analysis over a much longer horizon, that'd be a more significant result.

EDIT: Totally agree the points are not independent. But it feels like there's still residual value (which I can't quite put in mathematical terms) from this "moving window".

Isn’t it the case that for *any* arbitrary 30 year period of S&P, the worst you could do is 2x, and the best 1000x? And the mode something like 10x

For 20 years it reduces where I think some periods could actually produce flat or slightly negative, but the best and mode are still up in that range.

Hey, yeah. Investing is “risky”. Keep “working on your career”, and squirrel away into 401ks then.

Stocks are backstopped by the fact that companies are highly highly incentivized to keep the prices high. If suddenly the bubble pops and stocks fall 90%, every CEO suddenly has a very real fiduciary incentive to get the stock back up. Cut cost to yield dividends, buybacks, whatever it takes.

Based on the bell curve centering around 10%-20% average returns, I'd say that returns from the stock market are pretty average.

He’s not taking inflation into account, which makes the whole exercise rather suspect.

In many situations, few or none of the observations will have the average value.

It’s been discussed here before — search for the “When U.S. air force discovered the flaw of averages” story

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