Money, money, money (and investing) (2015)
philip.greenspun.com
philip.greenspun.com
The best personal finance advice I know of comes from the Bogleheads community (basically, total-market index investing with low expense ratios and allocated for risk tolerance and tax efficiency, and misc. forum advice like recognizing your salary probably has bigger impact than any investing details): https://www.bogleheads.org/wiki/Main_Page
> gave Ferraris to employees who recruited 10 programmers,
I might be misremembering from when that was first promoted, but I though it was a year's use of a Ferrari (a Spider or similar).
> Greenspun defends those expenditures as inexpensive ways to retain and attract talent. He also writes that it created the impression of a wildly successful company.
At the time, it seemed a little indulgent. Like all the fresh startups that would buy Aeron chairs for everyone, and have expensive launch parties.
But in hindsight... How else were you going to get MIT grads to feel like they were in on the dotcom boom, when they were working as TCL programmers in gloomy Cambridge? (Rather than move to the sunny SF Bay Area, where most of the action seemed to be happening, and where most of their friends were moving.)
(OTOH, "homies on lock / for insider trading" https://www.youtube.com/watch?v=JaXZI81gRvk
fwiw my spouse doesn't interpret this ad as parody: "for once you send me a video with normal people in it")
If you want to become wealthy without learning a ton about finances then read the total money makeover by Dave Ramsey or spend a few months listening to his podcast (go back a couple years before some of the new personalities who will be replacing him have started to come on).
Then, if you get curious enough to learn more advanced topics (don’t look to Dave for these) then head over to boggleheads.
The path to wealth is boring consistency. But it’s a much shorter path than most people think with the right discipline.
People who follow his plan pay tens of thousands of dollars in debt off in 1-2 years on modest incomes.
if you focus on saving money, you skip $5k vacations
what’s a number in an account worth if you never use it?
There’s a balance of course, but I know a few people who go too far into the “save everything” category. They are slaving away in their 20s and 30s, prime time for exploration and fun, for a retirement when they are older and have other responsibilities.
I have a family member who had a serious health scare when she was younger, and still lurks over her head. It’s really a different perspective: why have no fun now saving for a day that might never come?
Of course, you do need to save something, because retirement will hopefully come. Balance is everything.
Like when you are in your 20s, living with roommates (even if you can afford not to) is fine and could be fun, and you can just enjoy friends coming over for beers vs more expensive outings etc.
And if you save enough, you have the "dry powder" to buy that house or whatever when time comes.
On the flip side, if you don't save when you are young, and you can't afford shit when you are older - it gets not cute really fast. Like being 40 and not having a house because you never got your shit together for a down payment (because you lived it up the prior 2 decades) is pathetic.
> Like when you are in your 20s, living with roommates (even if you can afford not to) is fine and could be fun, and you can just enjoy friends coming over for beers vs more expensive outings etc.
Fair. I’ll just say we have different definitions of fun :) (nothing against what you said, people enjoy different things. I am actually jealous of people who find that stuff fun).
If people want to live different they can. Plenty of people die in their 50s and 60s. Some earlier.
The fact is I see much more people who are too poor relative to their age living miserable lives because of that.
I realized I lived through a peculiar hell when I was young, so I definitely made up for it buy working hard, playin' hard.
It's good that you'll be fine if you go back to nothing, but it very much isn't a reason to spend all the money.
Reasons to spend all the money could be eg that it makes you happier (I very much doubt that) or that it makes the world a better place (you didn't say how you spend the money, so perhaps?).
I know people who are basically close to burnout all the time, and a week here and there of no-responsibility vacation would do wonders for their mental health. It’s not necessarily always about fulfilling a dream, but it can be about doing a little self care.
Those weeks don't have to cost anything. You could stay at home, go camping, etc.
(They don’t necessarily need to be expensive vacations, though.)
Some people must have nerves of steel, I couldn't sleep living life like that. A stiff breeze takes most people out financially and the feel comfortable going on vacations!
If you want to live in a society of relaxed, happy well-off people then you're going to have to do some work for someone else that you never collect on. That is literally the only way to achieve good outcomes. We call it "savings" and it is a great idea.
Live below your means is good advice. It says nothing about not taking a vacation.
If you understand an industry or market segment deeply, you can indeed do much better than the index within that segment. It’s a fact born out by my own experience - you can separate a MongoDB from an AWS if you know a bit about technology and don’t look simply at press releases and Gartner reports.
Like, if Mongo is mispriced relative to Amazon, and you confidently see it, you will trade accordingly and erase the price difference.
In what I recall from my CFA studies, research shows that only genuine insider information can consistent outperform the assumption that all information is already priced in.
And for example, let's say you perceive Amazon and Mongo as mispriced, but what if that's because some even bigger expert than you saw something you didn't and traded accordingly?
(For what it's worth, I used to work for one of the world's most significant hedge funds. Our win/loss rate on trades was something like 52/48. So even as literally the worlds top investors who spent more effort, brainpower and money to gain insight, we were right just a bit over half the time. It really drew the point home that a random non-insider individual who thinks can do that over decades is likely delusional)
Writing off any ability to beat the market is defeatist because it happens all the time. Someone has to buy the mis-priced stock and it isn’t high frequency firms who exit positions every night.
Some of the big players have moves like that which work well given the right market conditions. My guess is that they have many, many patterns like that to trade on or models which are right more often than not. I don't know anything though since I'm a 101 retail investor... Positional options trading and volatility stuff makes my brain hurt :(
Have you seen strategies like that before? It's really interesting to dig into but seems to require a lot of knowledge to know how to trade on.
[0] https://en.wikipedia.org/wiki/Post%E2%80%93earnings-announce...
[1] Positional Options Trading: An Advanced Guide, pg. 90
It ignores the fact that participants within the system are only efficient with respect to the basic incentive structure created by the monetary system which itself is highly inefficient and wasteful.
The government could essentially just print money to incentivize people to push a boulder up and down a mountain for no reason... You can be sure that those who will get paid the most will the the fittest ones who can push the boulders up faster than anyone else; the most efficient boulder pushers if you like... But can it be said that these people are efficient at all in the grand scheme of things?
Is it an efficient market if the monetary environment within which those markets exists is itself artificial and inefficient?
The EMH says nothing about efficiency of producing value, only about price discovery.
“The EMH only applies to an idealized analytical fiction and is not applicable to the real world” would also be a problem with the EMH.
Efficient markets take into account everything from politics to corruption to the odds of natural disasters. I'm not sure where you read otherwise.
You think investors don't price in the political risk of dealing with, say the Chinese government? You think bond investors aren't paying attention to the fed?
It is inefficient because it requires a constant injection of money because of growing inequality. People think the newly injected money is causing inequality but the reality is that the inequality is growing regardless of whether you inject money or not and injecting more money acts as a temporary pain killer.
A wealth tax deallocates money from the rich to the poor. You might call this redistribution but who is to say that the wealth hasn't been artificially redistributed to the rich?
Currently, all the newly printed money only serves to subsidize the operations of the rich; allowing them to reduce their margins down to 0 which creates insane anti-competitive moats.
The efficient market hypothesis has nothing to do with the monetary system or with getting money out of the economy, whatever that is supposed to mean.
Even if you assume there are no information inequalities outside of inside information (there are), markets are myopic. Expectations focus around one scenario which is why you see slow adjustments to trends.
Btw, it is actually worse than people think: I have countless anecdotes from execs who run companies, who were "experts", who had substantial inside information and were still unable to predict industry trends better than me. There is a social, cultural, institutional context...you see vastly different investor behaviour even between countries that are very similar (i.e. US/UK). This focus on information above all is a conceit to assist the construction of economic theories, not a distinction that is useful in practice.
Also, you may or may not have worked for a very impressive hedge fund but win rate tells you nothing about profitability. I know a fund that made one decision in 1992, made poor decisions constantly after, almost everyone who works there is worth $100m+, and they manage $100bn. You can go 10 years with only one good idea and outperform everyone else. Win rate means nothing.
You are, of course, correct, and it has been proven time and time again. People think that just because we had a few years of 0% rates that they are somehow geniuses who can do 15% CAGR for 50 years without a problem.
In reality, almost nobody can beat the S&P500 low-cost index fund, after all expenses. People still dream, though.
Large companies are often able to generate low-quality growth that keeps things going for a few more years. The trick is distinguishing between high and low quality growth.
Tech companies can add more sales people, that is easy, it can keep things going whilst equity markets are open. Quality growth can't be bought like a salesperson. MDB was always seemed anomalous to me, I am not surprised they are down 65% because competition is only increasing. But, either way, the real money is on the long side (predicting which companies are going to fail is a lot easier than predicting success, the problem is funding that position and what happens in the middle because companies have so many ways to fake success until the next bear market).
The evidence is that even the Harvard-trained finance grads, best of their class, making 1 million a year, heading the very best funds, with 2nd degrees in mathematics etc., cannot do this.
I almost feel like the discussion at this point should proceed straight to "no anecdotes please, show your work" (evidence, data, the more the better).
The evidence is extremely strong that the index fund strategy vs. human fund managers contest is really just another form of the computer chess strategy vs. human chess player one (or Go, if you prefer that). Just think of it as 'computer game players vs. human game players,' as a category. It really isn't much of a contest in the long term.
The computers have been winning, and will continue to win, as history is ever more on their side.
Yet I have made investments in so many things over the years, so I don’t know how to square it other than, “I personally read the evidence, investigated the tech, thought about it logically, ignored the experts (and HN might I add!)”.
According to the efficient market hypothesis such things should be impossible.
As another recent example I went hard into oil and gas via ETFs back in May. Why I did this is for various reasons but my conclusion was that demand would surge and supply was constrained. Almost a 2x and that’s in liquid positions. I have taken some profits but still gonna wait a bit.
According to EMH I shouldn’t be able to do this, yet here I am sitting on tons of gains.
My experience shows that more risk = more reward, and if you are careful and a student of history, you can take risk properly without blowing up.
For anyone reading this thread, just follow the path of EMH to it conclusion - trying to make an investment in a single asset is for fools. Clearly this is wrong!!!
I think it's a bit fool to live in the WSB life style, but I know plenty of people who do. They make a lot of money and lose a lot of money. They're usually more worried about retirement than I am and we make the same amount of money... this folks usually like gambling too... To each their own.
you got it the wrong way around. More reward = more risk, but the inverse might not be true.
Imagine you took crazy risk - you jump off a building, and hope that a gust of wind keeps you from dying. What is the reward?
> trying to make an investment in a single asset is for fools. Clearly this is wrong!!!
you've misunderstood the instructions for index investing and EMH. It's not saying you shouldn't concentrate and be active in choosing - it's saying that if you do, you better be someone who is more informed, and capable of pricing an investment than the market. So do you really think the average person is in that position? If not, they're better off following the market index.
For last 15 years it was about making gains at all, but now that inflation is 10% it’s how you prevent losing your money.
So much of the future depends on a tiny, unelected body that controls the global economy (the Federal Reserve) that you need to think about interest rates a lot. I come from the Austrian perspective but I understand mainstream economic reasoning so I can put myself into that mental framework when thinking about the future. However fundamentally I am a classical economic liberal, free market, Austrian.
I think inflation is here to stay for a while. I don’t think Biden and society in general can stomach a massive recession. Putting cash into short term treasuries can get you a guaranteed 5% which could be safe play given how crazy the markets are.
I am cold on AI. Everyone and their mother has been predicting self driving cars, massive job losses to automation, and so on for years. Never happens and not going to. I would avoid this industry as an investor. As labor it can be advantageous as talent is over-compensated.
I’m skeptical of electric cars. Renewables make sense in places but also a skeptic on the time frame. Would avoid electric car and ESG equities.
Residential real estate in places without strong rent control vibes is a good bet. If you can do it yourself even better - the government subsidizes your mortgage and small time landlords avoid a lot of the political intrigue. If you can get an investment property or a small multi family, I would consider swapping equities for that and let rent follow inflation each year.
Short Europe and China. Long Africa and India.
A bunch of opinions here but hopefully this fills in some pieces.
That may be the only thing I "like" about WSB: "positions or ban". Otherwise everybody would pretend that they are a genius investor doing 50% yearly easily, etc.
Anyway, it's not impossible to beat the market, but I don't know a lot of people that beat it consistently over long periods of time. Really, a few names come to mind. That's all out of millions and millions of investors. That's hard data.
Can you share a source for that? As far as I remember, the odds are around 1 in 300 (this is from memory, but that information is from Bogle's books directly). I think that research was done since 1970, but I am not sure.
The actual stat they provide is:
> And over a full 20-year period ending last December, fewer than 10 percent of active U.S. stock funds managed to beat their benchmarks.
Still, if it was 1 in 300 I think they would say “fewer than 1% or fewer than 0.5%”. So I’m assume between 9 and 10 percent beat the S&P.
I suggest reading the linked article with the mindset that nearly all of the content comes from S&P directly. It’s basically a market piece. For instance, when they say the mutual funds don’t perform consistently, they use a crazy metric of picking the top 25% performers from one year and seeing how many are in the top 25% next year. Basically their point is that mutual funds won’t beat the S&P every single year, and therefore the S&P is better. But if course, unless you’re only investing for a single year, you should care more about the expected total return. Just my two cents.
Not a lot of funds even continuously exist for 50 years - most of them closed.
wallstreetbets figured it out: "positions or ban" :) It's a rule there.
Despite having domain knowledge, there are too many factors still out of your control.
For example, the science could look great, big addressable market, then some safety issue pops up and the drug is pulled.
Or the government changes the rules.
Or the FDA does.
So while domain knowledge gives you a leg up, you go from 1/100 like an average Joe to like 5/100, in terms of accurately predicting outcomes.
Two economics professors walk down a campus street, discussing the efficient markets hypothesis. One of them exclaims:
— Look, there's something green down there on the pavement; looks very much like a $20 bill!
— Nope, — answers the other, — it can't be. If that were indeed a $20 bill, somebody would have picked it up already!
The efficient market hypothesis postulates some kind of a static equilibrium. The reality is not static, and the processes that lead to a new equilibrium are neither instant nor independent of subject area knowledge. Due to this, during that last year's bull market, I made a ton of upside on stocks where I understood the business and could make sense of obscure tech news, and nearly nothing on stocks that otherwise seemed like winners and were recommended by likes of fool.com.
The rest of us can keep heads down on a W2 and argue about compounding interest, day trading vs long term investing, IRA's and getting faster promotions via interviewing often.
which, if they weren't bankrolled by family or inherited money, they would've had to keep their heads down on a W2, and save enough capital to start investing.
For me and my brother we were immigrants, divorced household, single mom as some bread winner, didn’t attend Ivy League schools, paid for college through debt, and started a business with savings from working full time at system administration, which was self taught, while being in college.
Fast forward 20 years, DigitalOcean IPO’d.
Our mother did provide a roof over our heads but we had no inheritance, and no friends and family round.
We built a service oriented business doing web hosting first. Service businesses are traditionally much cheaper to start because there is no product development cost to front with zero revenue.
Then after a decade of that we built digitalocean as a product business which was financed from the cash flow of our original business.
By the time we closed our series Seed in Digitalocean we were already well past $1MM ARR and in one year went from $100k ARR to $18MM ARR.
Having less resources does force you to be more scrappy and figure things out that other people who have a safety net often give up on.
Point is it can be done either way.
Your story is the correct attitude and the reality of creating real wealth. Unfortunately many will denigrate your story.
it is indeed much safer to min/max wage & work-life balance, and spend that time improving yourself. Then, use the capital to invest. But you will not reach billionaire status doing this - but you can make enough to be comfortable.
Likewise there are also so many great mentors out there now, and many of them are happy to give a helping hand, expecting nothing in return, because they recognize how much others have helped them, that if you aren't reaching out to those folks and finding them, then you are doing yourself a disservice.
Don't build in a vacuum. And by that I don't mean simply get customer/user feedback, but I mean have mentors, both active, and inactive - that are constantly reviewing your ideas with you. The inactive ones come from reading books like innovators dilemma, and the active ones, you need to find and reach out to and get them on-board, just like you would reach out to VCs and pitch for funding.
1. If you don't have the funds to start a business directly, you may have to acquire them indirectly. In our case building a service business was much faster and you could literally setup a single server at a datacenter and call yourself a web host. So the startup capital was small and something that you could certainly acquire by saving while working a high paying job like System administration back in the day.
2. Be in the right place at the right time - this one is key for pretty much everyone everywhere and is one the of the main factors in success and failure. By itself it isn't everything but it is a huge component. We started doing web hosting before AWS existed and when the largest player in the space was Rackspace. There was plenty of room for small up-start individual providers and the internet was still rapidly expanding and also very much still catering to the early adopters.
3. Learn Business - You hear the stories of people like Mark Zuckerburg starting something in college and then building one of the largest companies in the world, but those are ideas that require a special time and place in history. Where the product is the key driver to it's success in many ways, and many non-consumer startups don't get as much attention, but I would certainly recommend learning business. That doesn't mean get an MBA, but read business books. That's what we did between our first company and then starting DigitalOcean. We definitely made a ton of mistakes with the first business and the books helped to elucidate what we did wrong, while also showing us what are the right questions to ask to avoid those same mistakes in the future. I think of business lessons like laws of physics, it's better to know them if you are going to be building around them and certainly the results speak for themselves. The first business peaked at around $5MM in revenue and $DOCN will do over $500MM this year.
Another DO? Definitely not. It was a time and place that allowed us to be successful. Plus if DO exists competing with it head on wouldn't make sense. Also if it didn't exist, I imagine someone would make a similar company that would succeed. You can see this clearly with all of the different versions of Heroku that people tried to build. DigitalOcean's success means that there is a market for the service that it provides and so, someone would have come along and created something to fill that void.
Lastly, I think that a lot of great businesses have to sound a bit stupid at the beginning. If they didn't sound stupid then someone would have built it already. Occasionally you can have a good sounding business idea, but then literally, nothing compelling should exist in the space as a competitor. Otherwise, it would already be done. So in a sense the fact that it sounds "stupid" means that it's different. Now is it good different, or bad different, that's a question that you have to figure out. But often that difference is the crux of what is the key driver for your success.
For us it was creating a simple version of AWS and competing directly (though in our case we felt it was indirect enough) with them. For Airbnb it was the crazy idea that people would pay money to stay in a strangers house. Occasionally an idea actually makes sense from the start. If you use a data warehouse and tried to do analytics before Looker it was a bit of a pain in the butt so Looker does seem straight forward. And certainly DataDog already existed in many different flavors, such as Nagios, but repackaging something and then riding another wave (AWS) can create massive success if the "wave" is large enough.
I think to truly count yourself as "fantastic" at the game of startups you would need to create 3 successful businesses. Because so much of it is chance, timing, luck, that can't be ignored. But if you can do it 3 times, I think that definitely speaks to a person's ability to spot the intersection of so many critical factors.
Also this whole journey started a decade ago. There are many more avenues for liquidity and for raising capital. However it is a bit gated.
However if you have good advisors and ensure you retain control with board structure and dual class voting shares you shouldn’t look at as a negative
Through introspection I learned why the market premium exists for passive investors. In the early 2010s I was lucky to have started working and somehow invested in real estate at their all time lows. Did pretty ok (coulda done better but can't complain). Only recently did I get into index investing, and boy, it's psychologically difficult . As Cat Stevens says, "it's not easy to be calm when you've found something going on."
I kept noticing how I wanted to make moves based on news and data and charts and "intuition." But the market does not move intuitively. People will overvalue and undervalue securities, and I believe this plus behavioral mistakes is where the market premium comes from for the people who just sit tight.
For those who have a 401k and don't look at it much, it's easier than for people like me who never invested through tax-advantaged vehicles.
The book, first of all, does a good job of laying out the complete case for why index funds beat human managers, starting out by telling the story of an investor who made that very bet (literally), who ironically most people would put on the other side of that: Warren Buffett. Buffett bet a fund manager that an index fund would beat the best of any funds his opponent would select. A decade or so later, Buffett was proved right and declared the winner.
https://www.advisorperspectives.com/articles/2017/11/13/ted-....
If even Warren Buffett is betting on index funds as beating active investors, why are most people so reluctant to?
But besides that... why are index funds - which you can also think of as 'fully automated/computerized investing' - so effective?
There's a few reasons, but a really simple explanation is: over time, a bunch of fund managers are just going to recapitulate the market, and the advantage computers have is, they can duplicate that functionality but their fees are zero (or 0.001% per year, whatever is the tiny amount it costs to run the servers). Human fees are not zero. Therefore, the computers win.
Another one is just that the whole market, diversified, ends up being the best hedge against... everything. Is Elon Musk a genius one day, and now getting pilloried as an idiot as the head of Twitter? If he's a big part of your portfolio, and you bought in a year ago, that really hurts. When you hold the whole market following impersonal computer rules, you are insulated from this.
And it turns out, when you look at the full impartial record of active investor picks, it's pretty poor really.
A final thought that book suggested to me: if you have over 10 million dollars, you probably can't beat what the market can do. Wave the white flag and throw it all in an index fund. The computers have won, and just as we acknowledge that with chess and Go (art's probably next), index funds are an extension of same.
Close to what I'd do. I'd first consult an expert about asset protection, then get a modest house and a different-city apartment, and then put everything remaining in three index funds (ITOT, IXUS, and a little AGG, or equivalents).
none of the bogglehead investment advice claim that it's not possible to beat the market - the claim is that it's hard, and if you're average person (and face it, most people are average people), the best advice is to do what is more likely to succeed, rather than the small chance thing that might succeed beyond your wildest dreams.
Therefore, the best advice for the average person is to buy index funds, rather than follow the path of Buffet.
Since 2008, BRK is just keeping up with SP500, and even that seems to be due to outsized bets on Apple, which offset earlier mistakes of not investing in Apple, Microsoft, Alphabet, Amazon…and instead going with IBM/Heinz.
That is a lot of risk for no gain over 15 years. Obviously, Buffett is playing with money he can afford to lose, but he is smart enough to advise others who cannot afford to lose to invest differently.
https://dqydj.com/sp-500-return-calculator/
https://dqydj.com/stock-return-calculator/
Dec 2007 to Dec 2022 is 8.86% for SP500 vs 7.99% for BRK-B.
Dec 1997 is 7.7% for SP500 vs 10.57% for BRK-B.
BRK even provides this information by year in their annual report on page 2, and the all time record is BRK at 20% versus SP500 at 10%:
https://www.berkshirehathaway.com/letters/2021ltr.pdf?mod=ar...
Of course, I should not debate that it is possible to beat the market, but the question for an individual is, is the potential return over the relatively risk-less SP500 worth the risk? And the data for the past 14 years or so indicates that BRK’s edge may have decreased.
I write “relatively risk-less SP500” because on a sufficiently long timeline, I assume US federal government is bailing out SP500, or the US federal government has big problems (such as does not exist in the form it is in now).
(You can also apply this strategy to not just "money," but e.g. jobs and projects)
Lets say a few hundred means $200. After 10 years of 200% returns you'd have $11.8mil. I could live with that.
The oft-cited 4% depends on US data and studied 30-year time horizons.
As I mentioned in my other post - even top hedge funds are "wrong" nearly half the time, despite having the best insight and resources.
I learned a long time ago to visualize "Goldman Sach's industry X special fund" as the counterparty to any trade I do. Give me a bit of humility.