At some point the exponential curve has to go S-shaped. Maybe we’re still in the happy exponential looking part of the curve. There are also signs we might be transitioning. Population growth has slowed, productivity growth has slowed, and the marginal return on capital seems to be somewhere around zero given modern interest rates.
https://dothemath.ucsd.edu/2012/04/economist-meets-physicist...
Additionally, California has exported much of it's energy use to other states and countries.
"The material footprint of nations", Thomas O. Wiedmann, Heinz Schandl, Manfred Lenzen, Daniel Moran, Sangwon Suh, James West, and Keiichiro Kanemoto
PNAS first published September 3, 2013; https://doi.org/10.1073/pnas.1220362110
https://www.pnas.org/content/early/2013/08/28/1220362110
https://web.archive.org/web/20130906063246/https://newsroom....
> Economic growth measures the number of ways resources (material and non-material) are used hence resources are like the universe; "finite but unbounded." Tom Murphy is a typical Newtonian in his mindset and this imperial reasoning is so pre-Planck.
> Even in a so-called steady state any substitution from one material to another would seen as a kind of economic growth simply because markets the place more value on the newer item.
> Second. He assume that exponential economic growth is tied to some physical exponential. It is not. What is the basis for the recent exponential growth of physical consumption. It is growing population. It has been shown that energy growth of consumption doesn't increase much beyond 150k dollars. So once population stabilizes the physical growth model switches from exponential to linear. Tom Murphy never makes a linear growth model and thus his short-term peakerism.
http://mikenormaneconomics.blogspot.com/2012/04/tom-murphy-e...
Economic growth may not be able to continue indefinitely, it’s inconclusive, your computers can create more economic value with declining watts even if you can’t. However accounting value, which is what a stock market is, can definitely grow indefinitely.
The stock market isn't backward looking, or even short term future looking. Note that someone only watching the S&P 500 would know that the coronavirus broke out in early March but probably think the situation had been completely resolved by August. We can't be sure what the stock market thinks it is seeing (or if it is right for that matter).
And if energy bets didn't turn out well, notice that that correlates to the US losing its position as the world's largest economy. China invested a bunch in energy and now have a noticeably bigger economy [0].
> Economic growth may not be able to continue indefinitely, it’s inconclusive, your computers can create more economic value with declining watts even if you can’t.
This growth isn't going to involve more people because they need food and isn't going to involve more stuff because that needs energy. It'll be a very abstract form of growth.
[0] https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)
(Though the two are very often confused.)
Stock markets occasionally move in directions other than up.
Impractically, that buys you surprisingly little.
"Galactic-Scale Energy"
In 2450 years, we use as much as all hundred-billion stars in the Milky Way galaxy.
As did all the others that can before the current one.
In principle yes, of course.
In practice, you are imagining a world in which we never expand our civilization into space and across the galaxy, because otherwise you would be looking at the S curve and thinking "wow, this thing has only just gotten started" and marveling at what lies ahead.
Not if they decide to use nuclear power. Humanity has at least one more dramatic jump in power-use/person that has been ready since the 1960's.
For example Peter Higgs says that what he accomplished would no longer be possible today with how modern academia works: https://www.theguardian.com/science/2013/dec/06/peter-higgs-...
Overall I’m pessimistic that another Einstein is possible in the timeframe that we need them and that they would have the motivations to solve the problems that we need solved.
My cynical view is that realistically another Einstein would probably just get sucked into figuring out how to use big data analytics to get users to click on ads all so they could buy a $2M three bedroom house in the Bay Area.
I also question the value of genius at driving GDP growth indefinitely. Eventually you run into natural laws that are insurmountable; you can’t genius your way out of entropy.
That said, the GDP wall could well be millennia away and we still have tons of room for growth. Maybe we finally bring cheap fusion online, solve asteroid mining, and terraform anything remotely habitable around us. Or maybe we don’t, investment as a vehicle for income fails, and no one gets to retire in 50 years.
I gotta say though, the chances seem extremely slim and it’s more likely that climate change would trigger a reduction in the production capacity of humanity triggering political changes that may make it impossible to solve these problems.
The fact that the rate of growth will someday slow means assumptions you make about your 401k may or may not hold if we happen to be at the wrong point on the curve.
https://www.learnastronomyhq.com/articles/how-long-would-it-...
Plenty of room for a very large economy. The next galaxy would take some doing though since it is 2.5 million ly away.
So it still needs to slow down growth, although growth can still occur indefinitely. Well, billions of years until stars naturally start burning out, in which case you get a slowing of growth and degrowth until you're huddled around red dwarfs for a trillion or so years and then harvesting energy from black holes until like a quadrillion years.
Anyone who thinks we will run out of things to create just lacks imagination. There's so much stuff we'd really, really like to have but haven't been able to economically create yet. Medicine, body modifications, automation of all that's boring, cheaper manufacturing of everything, entertainment, recreation, transport, space habitats and almost anything else you can imagine.
An as an aside, GDP is only a proxy for how prolific an economy/country is. The country's output can continue to grow without generating more dollars.
Why would you even need forever growth? Is it good enough that old companies die and new companies replace the old? In that process, there's always growth to find and invest in?
Having an emergency fund can benefit everyone but beyond that your portfolio should ideally be driven by your goals and their timeline. If you have no goals and you're just trying to make as much money as possible in the stock market like a lot of new retail investors, this definitely should be given some thought.
I think most could be better served by learning and applying goal-based investing and modern portfolio theory to achieve what this article is clumsily trying to suggest.
Edit: Ha! I did not catch the part at the end where this is the same author as that book. Ok then!
It is a classic trend. Anyone writing a book or trying to reach a wide audience has to cater for the fact that the audience has none of the skills required to assess complex claims. Most of the readers aren't going to be good at maths, are not going to have a grasp on the nuances of human behaviour and incentives, struggle with science, don't read history, etc, etc.
What most people are good at is copying successful people. So it is extremely common for people with large audiences to converge to a "Here is an example of a famous person, here is what they did. Here is another famous person, they did the same thing" style.
Whenever this happens, I take care to pay special attention, because often the point is banal, or flawed, or too inconsequential to stand on its own. (I happen to know this because I’ve used this technique a few times on this very blog, and I know from reader feedback how effective it is)."
IBK currently allows retail investors to trade on margin with an annual interest rate of only 1% (yes, really). You can borrow up to 2x your principle at this rate.
If you were extremely optimistic, you would borrow 2x your principal and expect to 3x your annual return.
If you were optimistic but wanted to avoid risk of ruin, you would borrow between 0-1x of your principal.
Curious if anyone here has considered this or has a strong opinion on it.
Side-note: I'm assuming my "principle" in the above scenarios is the remaining cash I have on hand after my rainy day fund (i.e. the saving like a pessimist part).
Source: work at a small prop firm that takes on around 10x leverage. Even at this leverage ratio, we are considerably less risky than the S&P 500. Even at 10x, our volatility is somewhere between 1/2 to 1/3 of the S&P.
If you take on very little directional risk and are doing stat arb like us, there's nothing wrong with taking on a lot of leverage. Even at 10x, we are safer than the vast majority of retail portfolios in existence.
Leverage (through futures, options, shorts, or borrowing) is the cornerstone of almost all active outperformance in the industry. Without leverage, you will be forced into high beta names that trade at a premium compared to their risk adjusted return. See the "low beta anomaly" for more information.
It's impossible to eliminate all risk, regardless of the leverage ratio. I'm just saying that leverage isn't a reasonable proxy for risk. You have to dig deeper.
But leverage necessarily decreases your risk adjusted return assuming non zero volatility of the strategy. This is called "volatility drag."
The calculations in the book use much more pessimistic annual interest rates than the 1% you quote, too.
I'm too risk averse to actually do this, even though I believe their arguments. However, it has convinced me that at least 100% stocks, 0% bonds is optimal, if we avoid margin (for a young person expecting a good job).
In short, there’s no set of circumstances where my decision tree comes down on the side of taking the loan.
Perhaps investing on margin is the same. I have personally taken the leap and got rid of my emergency fund. But I haven’t looked at investing long-term on margin yet. I did see a test from HEDGEFUNDFIE on bogleheads forums about this. But I haven’t looked into it. I definitely think taking out a margin loan while simultaneously having an EF in cash makes no sense though.
You have $100k. Put all of it in the stock market. The stock market drops by 40%, your investment is worth $60k and you withdraw $20k. The market goes back to 100% and now you have $67k in your portfolio.
If the market dropped by 80% your portfolio would be gone entirely. Meanwhile if you had enough emergency funds you would have kept everything.
The worse the emergency, the higher the ROI of the emergency fund. Since there is no upper bound for how bad an emergency can be the theoretical ROI of an emergency fund is also unbounded.
In this comment the definition of an emergency is a stock market drop combined with unexpected unemployment.
To me, an emergency fund is a hedge against various different risks like these (I am guilty of not being prepared for all of them):
1. A pandemic. For this I was ready even before we thought it's indeed possible - I have funds in several different banks (debit cards) that allow me to not have to visit a bank physically for several years (even if some of the cards expire in the meantime, or one bank suddenly goes bust)
2. AI glitch, identity theft, a bank holiday (this happened to me actually some years ago) that blocks you from accessing banks (and investment brokers if you have nowhere to withdraw your funds) for several weeks/months - for that you hold paper cash, physical gold and cryptocurrencies stashed at different physical locations.
3. Natural disasters - again some combination of diversified physical and virtual funds
4. Legal trouble - yes, even if you are not guilty you could get your funds blocked.
I presume you are from the US, hence the purple goggles ;) (I hope I'm not offending you)
I work at a small prop trading firm and we run 10x or even more leverage most of the time. Without leverage, we wouldn't be able to run the vast majority of our strategies.
Basically, leverage is immaterial: what matters is the risk of the strategy. A leveraged strategy could be less risky than an unleveraged one.
Things that you should consider when deciding leverage: beta exposure, correlation to the market, volatility of the strategy, and the risk adjusted return of the strategy.
A classic example of this is risk parity: risk parity uses high leverage but is often safer than a classic 60/40 portfolio.
I see. Would your thinking change if your emergency fund was sufficiently large but much smaller than your investable cash?
For example, let's say your rainy day fund was $10, and you have $100. You have $90 to invest. In this case, the short-term loan you're taking out could range from $0-270 (the majority of cases would not be covered by your rainy day fund).
In my opinion, and practice, emergency funds should not be used for investments ever, this includes covering the losses from investing. Yes it can feel like you are not maximizing your returns on that amount of money but its job isn't to generate returns, it is your help smooth out the bumps in the road of life for you. In my experience life can punch hard and it never throws just one punch, it is usually a 1,2,3 combo. That emergency fund is merely there to help raise the chances of you standing on your feet after the vicious flurry.
If you want leverage and you are in the US or have a US based brokerage account use options. By using options your all in is basically the cost of the option and this ensures you will not ever lose more than you paid. PLEASE note the previous sentence is predicated on the golden rule of NEVER WRITE an uncovered/naked option, seriously do not do it!!!! I also use the 5% rule, which no one trade is more than 5% of my portfolio so no one trade will destroy me.
I am personally too risk adverse to go taking loans all the time. But I can imagine it being a good option.
I looked up IBK and was surprised to st Industrial Bank of Korea
My american f&f (outside of silicon valley) think of wealth in terms of "saving for retirement." 401ks, tax strategies, etfs, stocks etc. It's very passive, probably "correct", and very unambitious.
The foreign side is totally different. They have very little interest in saving for retirement--they think in terms of investing in businesses. They don't buy etfs or stocks. They buy (small, then larger) businesses. It's very active and after age 40 or so takes up most of their time. The goal is to never retire, but rather to build a series of cash producing entities for ever.
Part of this is certainly cultural. In lots of the world, being a boss is higher status that being an *employee", regardless of the actual income each activity generates. The owner of a business with 200k in revenue is higher status than a McKinsey employee with a 500k salary.
This cultural difference is reflected in a desire to escape "wages" as soon as possible, not necessarily "save for retirement".
I don't think it has to do with that necessarily (at least in my cohort), it's just that many immigrants come from nations who haven't had stability in their financial systems, if they even had one to begin with. A business has tangible roots in a community and can generate revenue when there's a monetary collapse, which is much easier for someone to trust if they haven't grown up in a stable economy. My old country doesn't even have 30 year mortgages, for example. If it did, mortgages expiring now would have been signed right as the iron curtain was coming down, which drastically changed the Eastern bloc's financial systems almost over night.
Similarly, your potential investments for retirement savings can be quite limited. We're quite spoiled in the west to have massive stock markets with tens of thousands of stable, profitable companies. And a regulatory framework which means the chance you buy a stock and find out the entire company is a fraud is relatively low. I've heard from folks in some developing countries that they'd never put money in their own stock market - the chance of losing everything is way too high.
For developing countries, you often have a young, expanding population, and 7% GDP growth in one year wouldn't be seen as abnormal. Small businesses become a great way to get in on the growth (the market is often highly fragmented, so competition isn't that fierce) and businesses are a much more accessible way to wealth than any corporate job. The other avenue I've seen is real estate. In the SE Asian countries I've been in (the ones growing quickly), real estate is even more of a ticket to wealth than in the US. Seems like they can never build enough and in the big cities, prices aren't that different than non-coastal US ($100k+ USD), which is shocking considering the median salary is 1/10th that of the US.
What makes you say that?
Edit: The note I think about it, the more I'm inclined to disagree after all. A $500K McKinsey employee is not an entry level consultant. They are likely leading a large team and working regularly with C-level executives at enterprise businesses. They are going to have presence and gravitas because credibility is a huge part of their job.
What kind of business does $200K in revenue per year? It's very likely to be a sole proprietorship, maybe 1-2 employees at most.
I realize that there may be cultures and subcultures that truly believe the independence of the business owner makes them more respectable (although I personally believe that independence is a bit of an illusion), but I think more people would subconsciously assign a higher status to the first person and that it probably wouldn't be close.
>Compounding is easy to underestimate because it’s not intuitive, even for smart people. Michael Batnick once explained it. If I ask you to calculate 8+8+8+8+8+8+8+8+8 in your head, you can do it in a few seconds (it’s 72). If I ask you to calculate 8x8x8x8x8x8x8x8x8, your head will explode (it’s 134,217,728).
what does this have to do with anything. no kidding that multiplication is harder than addition (it requires many additions).
Using Microsoft and Bill Gates as an examples is major example of survivorship bias. What about the hundreds or thousands of other companies and founders that tried such an approach and still failed. Yeah, in hindsight anything Microsoft does will look like genius given how successful Bill Gates and Microsoft are. if Bill gates had policy of tying his shoes at work instead of at home, people would probably read into that as part of his success.
I am not sure this is all the story, the specific way in which you bet matters too.
Consider investing in daily leveraged ETFs in contrast with non-leveraged ones, for example.
Of course he was also a lier (vapor ware). And a cut throat business man.
You might like nowadays Bill Gates philanthropist, but there is a reason people hated him for decades. I don’t understand why retrospectives on him ignore this side.
You could say the same thing about any business person. And the bigger the business the bigger are the qualities you mentioned (or should I say they just cause bigger effect). It is obvious. Also it is not reserved specifically for business person.
Applying this to real world business concepts is interesting too - corona was a great example, and for all we know next year could be unrelated total world war, past has some indication of future trends but only when the sample size is substantially large (in the case of geopolitics and disasters, all known global history is an insignificant sample)
Dow also dropped >50% in GFC, so 2x leverage would've ended you.
Taking ultra risky bets when you are young is sensible because it isn't actually risky. This is because for a 30yo with good career prospects, your future career is probably worth an amortized $5 million dollars. If you have $200k in savings, that is only 4% of your true net worth. If you lose it, you still really have $5 million dollars. Therefore playing loose with it is pretty reasonable.
If you're 63 and will retire in 2 years, your amortized future career earnings are probably $200k and your assets $5million, and then you should be conservative.
