Hacker News Reader

Comment by ahelwer | Hacker News Reader

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.

View on HN

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.

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?

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

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.

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.

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...

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.

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

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

That’s without dividend reinvestment though no?

Reply on news.ycombinator.com