Tag Archives: finance

Stocks vs. Real Estate Debate, Part 3 (answering objections)

It’s amazing how much discussion there is about personal finance…a thread about finance on Reddit’s Slate Star Codex thread got over 80 replies.

In parts 1 & 2, I make an argument for owning real estate over stocks. I assume that someone, hypothetically, has a sum of money saved up (such as $40,000) or as a gift or inheritance, and is deciding whether to rent and invest the $40k in stocks–or–put the $40k on a down payment.

Part 1: The Advantages of Real Estate over Stocks

Part 2: Real Estate vs. Stocks, Part 2 (why homes win, and why rent sucks)

I updated Part 2 to include simulations of how, over the long-run, real estate and no stocks is better than a combination of stocks and renting.

Some objections:

1. Costs of maintenance:

This is correlated with the size, initial condition, and age of the home. Small new homes tend to have less maintenance than big old homes. Maintenance costs are more of an issue if you rent the property out instead of using it as a main residence. In my simulations, I assume the property is a main residence.

2. Inflation going up:

In my simulations, I assume a 30-yr fixed-rate mortgage. The fixed rate is a hedge against higher inflation, although 30-year fixed-rate mortgages may not be available in all countries, such as Canada.

3. Property taxes:

Property taxes are offset by mortgage interest deduction, which is an adequate approximation.

Using a property tax calculator, I obtain a yearly cost of around $4,500:

Using the Bankrate mortgage interest deduction calculator, I obtain a yearly savings of around $4500-6000, depending on state tax rates and income tax:

4. Capital gains taxes:

Long-term capital gains for the sale of real estate is 20%. A roth IRA has the advantage of being untaxed.

5. Capital losses:

An objection:

You aren’t risk-adjusting your estimate. What if the city turns into Detroit? What if your home gets hit by an uninsured disaster? What if you get toxic mould in the brickwork and have to replace the walls?

Real-estate might provide better average returns but for most people it’s going to be a huge percentage of their capital. That means there’s a huge downside – they could lose everything if disaster strikes on that one investment. That’s something the stock market protects against. It allows diversification to mitigate those kinds of scenarios.

You are also making a false comparison – you’re comparing the whole property market to the stock market, when you should be comparing average volatility per property. If I own a single house, the volatility on its price is going to be way higher than the general market and there are a lot more lose-everything scenarios.

Real estate has higher risk-adjusted returns than stocks (a higher sharpe ratio):

Stocks also have risks: fraud, bankruptcy, loss of market share, recession, disaster, crisis, etc. Because a home has tangible value, it can’t go to zero, unlike individual stocks. The worst I have seen is a home fall 50%, which was in certain areas in 2008-2011 (but the typical decline was more like 25-30%), but individual stocks fall 50-90% very often, and sometimes never recover. The S&P 500 lost 50% of its value in 2000-2003 and again in 2007-2009. It lost 20% of its value in 2011 and 15% in early 2016, although it quickly recovered in both instances.

But, yes, the leverage of real estate can magnify losses, but being able to pay the mortgage is what matters. Often, many will ‘walk away’ (strategic default) if the home becomes too far underwater, although this will hurt credit score. When stocks go underwater, however, there are far fewer options than when homes go underwater. The use of long-duration mortgages and small down-payments lessens risk, because less initial capital is at risk.

Home insurance is much cheaper than ‘stock insurance’ (put options).

6. Real estate has poor liquidity:

Obviously, it takes longer to sell a home than to sell a stock, but some real estate markets can close pretty quickly. In the Bay Area, for example, there is often a long list of waiting buyers. Sales can be competed in weeks.

7. Lack of diversity:

As shown in #5, although the S&P 500 is diversified it can still sustain large losses during bear markets and recessions. My simulations assume excess wages are invested in the S&P 500, boosting diversity.

Why the Customers Don’t Have Yachts, and Why it Doesn’t Matter

The oft-repeated phrase ‘Where Are the Customer’s Yachts?’, the the title of Fred Schwed’s 1940 classic book on investing, has become something of a cultural refrain for greed and self-interest in the financial industry (but also in other industries), of how brokers allegedly intentionally enrich themselves at the expense of their clients.

The origin of the phrase is described by the anecdote:

Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. He said,

“Look, those are the bankers’ and brokers’ yachts.”

“Where are the customers’ yachts?” asked the naïve visitor.

So the question, more tersely is, why are the customers/clients not as rich as their brokers/advisers?

That is a pretty nonsensical question…what if it were rephrased, but with different examples: why are people who buy Nike shoes not a rich as Phil Knight or Michael Jordan? I bought golf clubs…why am I not as rich as Tiger Woods? That is literally the same logic. Brokers provide a service to clients by managing money. Some do a better job than others. Whether or not such services are worth the fees is a matter of debate though (I generally believe they are not, but that is another story). But expecting the recipients of a service to be as wealthy as whoever is providing them betrays common logic.

Someone who is entrusting their money to billionaire hedge fund manager Ray Dalio or billionaire bond trader Bill Gross, does not reasonably expect to become as wealthy as either.

Whether or not the manger does a good job, such as by beating a certain benchmark or preserving capital during a recession or crisis, matters most to the client.

Consider a money manger who is really successful, returning 15% a year (13% after fees), and he collects $10 billion in capital total from 10,000 clients (each putting in $1 million). Each client makes $130,000/year, which is not nearly enough to buy a yacht, but the clients are happy anyway because they are beating the benchmark. Now if the fund manager collects 2% off the top, he earns $200,000,000/year, enough to buy a yacht, but he’s helping his 10,000 clients too, who would have made less had they invested on their own. The more people the manger helps, the more money he makes…what’s wrong with that? Why should the broker’s compensation not be proportional to the number of clients he has, just as Nike’s revenue is proportional to the number of shoes it sells?

But what if the manager does a poor job…the capitalistic system stipulates that he should still get paid, because he is still rendering a service (but not doing a very good job at it), but clients have the power to manage their own money (to vote their with wallets), and if enough do so, mangers will either charge smaller fees or possibly even cease to exist.

Make The Stock Market Great Again

Stock market hits new highs The ‘Teflon market’: Why stocks keep setting new highs despite Trump drama

The S&P 500 has gained 10% since Trump’s victory.

However, thank free markets, profits & earnings growth, exports, consumer spending, web 2.0, technology, and innovation by America’s best and brightest, not Obama.

Glad I ignored all those people who said to sell stocks if Trump won…Bitcoin will also keep going up. Same for home prices in Bay Area. My favorite picks, Google, Facebook, and Amazon, keep doing well too. the Snapchat IPO will also likely be a success and I’ll buy some of that (but not much). These companies have become an inseparable part of everyone’s lives…people using Google for search, and there are Google Adsense ads everywhere (all major sites have them…Bloomberg, NY Times, WSJ, Forbes, etc). Everyone shops on Amazon, which is overtaking offline retail. Over a billion people login to Facebook every day and also click the Facebook ads, which advertisers spend billions of dollars every year on. Also, there is Instagram and WhatsApp, both owned by Facebook are are seeing huge growth and ad spending.

Barry Ritholz, who despite being on the ‘left’ provides a sober and rational outlook on political and economic matters, has a list of all the pros and cons stock market under Trump The Investing Pros and Cons of Trump:

No. 1. Tax Reform: This is the big one, and it includes tax cuts, cleaning up the corporate tax code and repatriation of trillions of dollars of corporate profits parked overseas to avoid onerous taxation. As noted before, it would be hard to beat the economic impact of tax cuts, tax reform and the return of all that overseas money. Add this to No. 3 on our list, and you get Keynesian stimulus at its finest.

No. 2. Deregulation: Hope comes not only from the financial sector, which has enjoyed a bigly post-election market rally, but from lots of other industries. The wishful thinking is that the cost of doing business declines.

No. 3. Infrastructure: Trump seemed at one point to be gung-ho on a plan to spend as much as $1 trillion on refurbishing and expanding America’s bridges, roads, tunnels, ports and water systems. As we pointed out yesterday, it is long past due.

No. 4. Sentiment: All of the above have combined to make business people and investors more optimistic, which of course feeds into what we’ve seen going on in markets.

Barry also lists the potential negatives, which in my opinion are vague and vastly outweighed by the positives. Should Trump get his way, which given the GOP-controlled house is almost certain, we can expect a couple trillion dollars of more spending on top of existing spending projections. Much of that spending is going to flow into the economy, housing market, and stock market. Even if tax cuts do not pay for themselves, because the USA can borrow at such a low rate, the spending adds to top-line growth at almost no immediate cost.

I don’t like Zuck’s politics, but Facebook has been and will continue to be a great investment, and Zuck seems to know how to please the people who matter most, the shareholders. Same for Google and Amazon, which despite censorship from the former (by deleting YouTube videos and accounts that post ‘controversial’ stuff and then making up lame excuses such as ‘copyright violations’ for a mini soundtrack from 25 years ago or some other BS) and crappy politics from the CEO of the latter, continue to be good investments. Sometimes you can’t agree or have everything. Zerohedge, although they tacitly support Trump, has been wrong about the economy and stock market since 2009. I don’t take my politics and investment advice from the same source: Facebook has crappy politics but it has been a great investment; I agree with the alt-right on things like anti-democracy, Trump, anti-feminism, anti-SJW, Nietzsche philosophy, HBD, etc., but not on the doom and gloom economic stuff.

Gab is gaining momentum as an alternative to Twitter, but alternatives to You Tube are more elusive.

I tend to be more of an empiricist when it comes to certain issues. It’s empirically obvious to myself (and others) that SJW-liberalism is as much of a mental illness as it is a failed ideology, that the alleged ‘college rape epidemic’ is a combination of hoaxes and false memories, that biological differences between men and women and races exist and such differences manifest in socioeconomic outcomes and IQ scores, that capitalism > communism, that ‘rape culture’ is a also myth, that the mainstream media is rapidly losing credibility, and that democracy as a system of government is deeply flawed. Yet at the same time, the empirical evidence also shows that that US economy is not dying, but is doing quite well as measured by data such as consumer spending, technological innovation, exports, and profits & earnings growth. Although there is some some civil unrest and angst in America, the empirical evidence again shows it’s not abnormally high relative to earlier decades.

However, there is significantly more unrest in counties such as Turkey, France, and Brazil (so much so that it threatens their economies), but I would never invest there nor recommend anyone else do so. I have been bearish on emerging markets and Europe since 2013. Emerging markets and Europe have significantly lagged the S&P 500 since 2011, as another example of a correct prediction by this blog. Low-IQ countries tend to have a lot of unrest, graft, inflation, and corruption and make bad investments. Italy and Greece are much closer to being an ‘idiocracy’ than America. In America, the Tea Pot Dome scandal and Watergate are still a big deal, to give an idea of how rare corruption in America is compared to quotidian corruption in Brazil, Argentina, Venezuela, and Turkey, which fills volumes and is a part of everyday life for those countries.

I am ‘short’ Europe and emerging markets while ‘long’ US stocks and treasury bonds. If there is global civil and economic collapse, Europe will most certainly go down the drain first and the deepest and furthest down the drain. I will profit from the differential (America minus ex-America), so even if there is collapse I will come out ahead.

Another reason I’m optimistic is because the neocons in Congress, even if they aren’t crazy about Trump, will gladly accept lower taxes, deregulation, more military sending, which is what Trump wants and what the stock market wants. Trump may cave on some issues to get his other policy passed. If Congress stonewalls Trump, then fears of Trump upsetting the economy through ‘rash policy’ will be abated, which is an undue fear to begin with.

Overall, the fact so many pundits were wrong about Trump and the stock market is further reason why they (and the rest of Fake News media) are losing credibility. Let them fail…their absence won’t be missed.

No paradigm shifts or changes to status quo

From David Brooks: Does Decision-Making Matter?

It’s not a coincidence one of the world’s most overrated authors, Michael Lewis, is writing about two of the most overrated Nobel Prize recipients, Daniel Kahneman and Amos Tversky. Behavior psychology is not the equal of a ‘hard science’, and Michael Lewis’ books all have a leftist slant to them, such as The Big Short, in which he blames Wall St. greed and banks for the crisis, not politicians such as Clinton. Between 2006-2012, in the years before, during and shortly after the financial crisis, many ‘pop psychology’ authors and ‘business gurus’ rose to fame by arguing that the financial crisis was evidence of a permanent ‘paradigm’ and ‘status quo’ shift, and that systems and beliefs (such rational/efficient markets) taken for granted before the crisis had suddenly all failed, and that these business authors and gurus had the answers. Examples of such books include Daniel Kahneman’s Thinking Fast and Slow, Dan Ariely’s Irrational Rational, Nassim Taleb’s Black Swan (and others), Richard H. Thaler’s Nudge, Charles Duhigg’s The Power of Habit, Malcom Gladwell’s Outliers, and many more. To list them all would be subjecting myself and the reader to more pain than is humanly allowable.

Yes, certain elements of the economy have changed in the aftermath of the crisis. For example, the US economy becoming more efficient and the job market becoming more competitive and difficult, but markets and behaviors have not changed. In retrospect, the 2008 crisis, despite all the headlines and predictions of doom and gloom and the ‘demise of capitalism’, was more like a blip or a speed bump. The US stock market has continued to make new highs year after year. The post-2009 S&P 500 and Nasdaq bull market and economic expansion is the longest ever, and the gains are among the biggest.

And same for America’s economic and foreign policy hegemony, which has only become stronger as of 2008, and a far cry from the ‘post-America’ era many on the left in 2008-2009 had hoped for. As more evidence of the strengthening of the American hegemony, the entire world is transfixed on Trump. You go anywhere in the world and all the newspapers and TVs are taking about Trump…that just goes to show important American politics and policy still are. When Trump was elected, it wasn’t just a national event, but it was the biggest international event, too.

While most economics models assumed people were basically rational, Kahneman and Tversky demonstrated that human decision-making is biased in systematic, predictable ways. Many of the biases they described have now become famous — loss aversion, endowment effect, hindsight bias, the anchoring effect, and were described in Kahneman’s brilliant book, “Thinking, Fast and Slow.” They are true giants who have revolutionized how we think about decision-making. Lewis makes academic life seem gripping, which believe it or not, is not easy to do.

‘Rational markets’ work because to try to create a financial model that assumes irrationality would not agree with the empirical evidence. Irrational models imply the existence risk-free arbitrage, but no such arbitrage exists. Evidence of market efficiency is further bolstered by the lousy post-2008 performance of active management relative to the S&P 500. If markets were as inefficient as the left says they are, active management would be able to exploit these inefficiencies to consistently beat the S&P 500, but they haven’t been able to so so, suggesting more market efficiency, not inefficiency.

As you can tell I’m not a fan of cognitive behavioral therapy, behavior/social psychology, behavior economics, business ‘leadership’ books, and stuff like that. The entire field was recently dealt a blow by the inability to replicate results that sounded nice in print but couldn’t be reliably reproduced. A lot of post-hoc analysis and data mining. It’s like saying, ‘we want a study that shows people behave irrationally or are subconsciously racist, so lets keep testing until we get the desired results to sufficiency high significance’. Case studies are also rife with selection biases, survivorship bias, cherry picking, and confirmation biases.

For example, Malcolm Gladwell, in 2010, wrote that his ‘greatest triumph’ was winning a 1500-meter race. He’s being too modest. His greatest triumph was convincing millions of people that the ’10,000 hour rule’ is a ‘science’. The book I’m referring to is Malcolm Gladwell’s Outliers, as well as Geoffrey Colvin’s Talent is Overrated, both published in 2008 and introduced to the public the delusion, inspired by the methodologically flawed work of K. Anders Ericsson in 1993, that ‘deliberate practice’ can overcome biological or innate limitations. Five to six years later, thanks to numerous studies that tried and failed to replicate Anders’ hypothesis, the 10,000 ‘rule’ has been dealt a serious blow, if not outright debunked. Practice only explains a small amount of the variation in individual ability. Genes matter a lot too. The evidence suggests all top performers have certain biological ‘gifts’ (such a superior eyesight or a high level of working memory) that enable them to acquire high levels of mastery quickly, that most people don’t have. The rule could be salvaged, perhaps, by rephrasing it as, ’10,000 hours is the minimum amount of practice someone who is already genetically gifted needs to compete with others who have equal gifts’. Of course, such phrasing won’t be as popular, but it’s more truthful.

But back to the main point, trying to explain why some systems are sustainable and keep getting stronger (such as China and America) and others weaker (almost everywhere else), is difficult. Rather then keep trying to predict paradigm shifts to no avail, maybe it’s more productive to try to understand why trends persist.

Wealth Creation as the New American Religion

On sites such as Hacker News, Quora, Medium, and Reddit, posts, threads, and discussions about wealth creation always go viral. Everyone is obsessed with wealth, economics, finance, and money, but why?

In the past, society was more collective, and family, civic participation, and organized religion were the bedrock of American society, but in recent decades, and especially since 2013, society has become more individualistic, as families have become smaller, church attendance and religious affiliation has declined, and culture celebrates individualism and quantifiable individual merit as embodied by the likes of Bill Gates, Warren Buffett, Steve Jobs, and Bill Gates. The celebration of wealth and individualism has become the new ‘religion’ in America. A religion, that unlike theistic ones, is objective and quantifiable (as in measured wealth, social media followers, and status), not abstract things like God, morality, virtue, and heaven. To get an idea of how pervasive this trend has become, just do a Google search for any semi-famous person and very often the two most common ‘search prompts’ are the net worth and house of said individual. Yes, apparently more people interested in Richard Dawkins’ ‘net worth’ and the size of his home than his writings on evolution.

Salvation in America’s new religion is through quantifiable exceptional individual achievement and results, not in the collectivist belief in a deity or being an unexceptional ordinary person of good moral character. We aspire to be like Mr. Money Mustache, the pseudonym of a blogger whose rugged individualism and self- determination has made him a millionaire and whose writings on personal finance and wealth creation has made him something of an internet celerity and sensation, read by millions. Or like James Harris Simons, a physicist and the billionaire founder of Renaissance Technologies, one of the most successful hedge funds ever, combining the two things most prized in post-2013 society: wealth and intellectualism. Or Jack Boggle, the inventor of the Vanguard index fund, and beloved by the millions of people who adhere to indexing with a zeal and commitment of a religion.

America’s new religion is hard. Whereas organized religion and politics are inherently collectivist and thus, by definition, have low barriers to entry and don’t highlight the individual, our new religion exalts financial independence (such as Mr. Money Mustache) as well as the accomplishment of difficult individual intellectual feats (such as physics, mathematics, and coding) that bring respect and prestige to the individual. And instead of being ‘holier than thou’, now it’s who has the most followers on social media, the most money in his or her bank account, the most academic citations, the most Vine loops, the most YouTube subscribers, or the most Twitter followers – again, all highlighting the individual and generally being difficult things to accomplish, versus going to church, supporting a political cause, or being a decent, moral person, all of which, comparatively speaking, are easy.

And instead of going to mass every Sunday or reading the Bible before bed – now everyday we check our computer to see how much our stock accounts have risen or fallen. And instead of revering saints, we turn to the Forbes 400 list for inspiration, displayed on smartphones that have become as ubiquitous and indispensable as Bibles a century ago.

Holiness and virtue were once inseparable, and people sought to become closer to God through personal sacrifice such as going to church often, charity, community service, or raising a family. But nowadays virtue is measured by wealth and achivement, and millennials are living a similar monastic, minimalist lifestyle – but not to serve God or to become closer to God, but to enrich themselves and become financially independent at an early age by saving money and investing instead frittering away money on material possessions or on family. An example of a modern, secular ‘monk’ is the popular blog Early Retirement Extreme, run by a retired 40-year-old physicist who for the past decade has been able to live on a meager $7,000 a year, and thanks to his investments and minimalist lifestyle, never has to work again.

The American obsession with wealth is not new, going as far back as the Gold Rush, and later, popular game shows such as Who Wants to Be a Millionaire, but what makes the recent obsession different is how wealth is seen as an ends in and of itself, not a means or a stepping stone to something else – be it raising a family, going on vacation, buying a car, donating to a cause, or just good ol’ fashioned hedonistic debauchery. In the case of debauchery, money is still being used to achieve an end rather then being accumulated for the sake of accumulating money – that’s the distinction. This probably has to with with economic uncertainty, and young people specially are stockpiling money for a future of fewer social safety nets as both the US population and national debt continues to swell. Trump’s proposals for defense sending, stimulus, and tax cuts will increase the national debt and make funding social security more difficult.

Karl Marx wrote that economics, not religion or culture, is what drives society – and now – whether it’s online debates about wealth inequality to the obsession with wealth creation, his words ring true. The stock market perpetually making new highs, as well as headlines about multi-billion dollar web 2.0 valuations, has made everyone acutely aware of their position in the financial and social pecking order. In the past, people had FOMO over not going to heaven. Now it’s FOMO over missing out on the housing or stock market boom, or fear over not having enough money for retirement. We fear falling behind of our peers who are richer and more successful in quantifiable terms. The poor aspire to be like the middle class, who aspire to be like the upper-middle class, who aspire to be like the wealthy, who aspire to be like the ultra-wealthy, who aspire to become immortal through life-extension technologies rather than through God. We’ve become slaves to numbers, such as the number of dollars in the bank account, the number of followers on our social media accounts, or the amount of money in our stock accounts, or as victims of wealth inequality or stratification, where people are reduced to numbers that fall somewhere on a wealth distribution. The alt-right could be seen as an secular revival or insurgency to return or restore America to a more theistic, holistic, or idealist worldview where hard-to-quantify things like ‘identity’ and ‘nationalism’ replace what is easily quantifiable. It’s not just about taking back America but also about taking back our identities.

Advice to Ignore

The worst types of people are those who pretend to have your best interests and then spread bad advice either unintentionally or mistakenly, but usually for their own profit and or self-aggrandizement.

1. “Sell your stocks! The US economy is doomed!”

Every single doom and gloom prediction since 2008 has been wrong:

-predictions of double dip recession
-predictions of bear market
-predictions of economic contagion (from Greece, Portugal, and Spain crisis)
-predictions of avian, swine, SARS, and pig flu crisis
-predictions of Ebola crisis
-predictions of Trump victory causing economic crisis (experts predicted stocks would crash if Trump won. Trump won, and stocks have surged.)
-predictions of a second housing crash
-predictions of post-Breix economic crisis
-predictions of a second financial crisis in America
-predictions of hyperinflation
-predictions of dollar collapse
-predictions of student loan crisis

All wrong

Had you listed to the doom and gloom losers, you would have missed out on the longest bull market in the history of the US stock market. Yes, although the bull market can end at any time (but I predict it has much much further to go), keep this in mind: going as far back as 100 years, even accounting for the 2008 and 1929 bear markets, stocks have historically posted 10% average annual returns (including dividends). Had you bought the S&P 500 in 2005 and not sold, you would be up 86% right now (and that includes the entire 2008 financial crisis).

The S&P 500 keeps making new highs, enriching myself and others who ignored the media and didn’t sell:

I predict the post-2009 bull market has much further to go.

Yes, QE and easy monetary policy plays a role, but not as big as many believe, as I discuss here.

Peter Schiff has been wrong about everything since 2008, whether about gold rising (gold has crashed), the dollar crashing (the US dollar has been the best performing currency since 2009), US recession (8 strait years of GDP expansion), bear market (S&P 500 at new highs, longest bull market ever), or about hyperinflation (CPI around 2%, although healthcare, rent, and tuition has far exceeded the CPI). All of his predictions, market forecasts, and investments have failed, enriching himself in the process through fees but making all his clients poorer. What a loser! SAD!!! (as Trump would say)

The whole doom and gloom business is about selling overpriced [1] gold and other bad investments to unsuspecting buyers. As everyone knows, Alex Jones ignores topics that threaten his income stream and ‘respectability’.

2. “Never go to college!”

These people are annoying. Here’s an example: Ivy League Schools Are Overrated. Send Your Kids Elsewhere, by William Deresiewicz.

When I speak of elite education, I mean prestigious institutions like Harvard or Stanford or Williams as well as the larger universe of second-tier selective schools, but I also mean everything that leads up to and away from them—the private and affluent public high schools; the ever-growing industry of tutors and consultants and test-prep courses;

It’s not like parents have to mull over sending their kids to Harvard or No-Name U. The decision is already made after the rejection letter, which 95% of Harvard applicants will receive.

If Ivy League schools are worthless, why so much demand? All those applicants must be wrong – how foolish of them for seeking the high wages and connections those schools bestow. But this author, who owes his own success to going to going to Columbia and Yale, knows the answer. Do as he says, not as he does.

I counter the anti-college folks and their arguments in more detail here. Pretty much all of these people who say to not go to college became successful due to going to college, and now are are telling young people to not go to college. Again, do as I say, not as I do.

Many of these people who say to never go to college are either retired or already successful, but what about people in their 20′s and 30′s who don’t yet have a nest egg or a good-paying job. Yes, college is full of SJW-scum and indoctrination, but the anti-college folks don’t offer much in the way of viable, realistic alternatives. For people of above-average intelligence, a degree in a STEM subject is still the best path to prosperity and entering the ‘middle class’. Even majoring in philosophy or economics is better than not going to college. Or you can install shitty WordPress templates, competing with $2/hour Bangladeshis, which is what some anti-college folk recommend as a way to make money without a degree. A $60-200k/year STEM job sounds a lot better, IMHO.

Ignoring all the alarmist student-loan-bubble-media-sensationalism, you can go on Reddit and easily find dozens of success stories of college graduates in their 20′s and 30′s making a solid income, buying a home, and paying their student loans. The truth is on Reddit and 4chan, not the doom and gloom sensationalist media that creates the narrative that college is always a scam and that every graduate is drowning in debt and unemployed. Yes, some are, but many aren’t, and your odds of success improve if you major in STEM. The media always overgeneralizes.

Also, there is tons of student load aid available, and although it adds to the total national student loan debt, it’s something to take advantage of if you’re going to major in a high-ROI field such as STEM or accounting. And also, there are tons of payment and deferral plans.

There are some other alternatives to college: Uber driving, auto repair, HVAC, and IT certification, and many people make good money with those professions. The problem is absolutism (college is always bad/good). It depends a lot on the individual.

3. “You must always rent!”

Even after accounting for the 2006 housing bubble and burst, over the long-run, buying is still better renting. Home prices in some regions, such as the Bay Area, have doubled since 2010:

Between 2013-2015, on this blog, I correctly predicted that home prices would keep rising due to scarcity, foreign demand, private equity, the somewhat improving economy, and other factors, and I keep being right as home prices make new highs month after month. Home builders suffered the most from the bursting of the housing bubble, creating a situation of too much supply, to now, of there not being enough.

US home prices hit new peak, up 5.5% in September: S&P CoreLogic Case-Shiller

…average home price for September was 0.1% above the July 2006 peak in nominal terms. The National index reported a 5.5% annual gain in September, up from 5.1% last month. The 10-City Composite posted a 4.3% annual increase, up from 4.2% the previous month. The 20-City Composite reported a year-over-year gain of 5.1%, unchanged from August.

Building long-term wealth through real estate seems better than pissing away your money every month to landlords who will keep jacking your rent at a rate that far exceeds inflation.

Here is an excellent info-graphic about why buying is better than renting. After 1-2 years, buying becomes cheaper than renting. If you look at Reddit, there are hundreds of examples of people making a lot of money with real estate either by renting-out properties and or from the price appreciation.

4. “Check your privilege!”

The only proper response is ‘Fuck You’ unless you’re are in some sort of professional setting where your paycheck or diploma is dependent upon your cooperation, in which case you unfortunately have no choice…which is also why self-sufficiency, investing, and minimalism are so important, even it if means ‘downgrading’ your lifestyle, in order to minimize’s one’s exposure to corporate-culture-PC-bullshit.

5. “You Must Self-Publish a Book!”

I have long been a critic of self-publishing. In short, it sucks as a way to make money. Success at Amazon self-publishing is primarily a function of personal branding, not literary merit. The average book sells zero copies and the average author makes little to no money. Traditionally-published books, on average, sell more copies than self-punished ones. It’s also expensive and time consuming writing, editing, designing, and formatting the book on your own. Yeah, if you just want to publish a book for the sake of having a book, go for it, but don’t expect to make much money from it unless you already have a large brand.

6. “Quit Your Job!”

Every few months, James Altucher writes the same article on why you should quit your job, and every time it’s still bad advice. 85-95% of small businesses fail within 10 years. Despite stock prices at record highs, the labor market still sucks for most people, so if you quit your job, you may find it nearly impossible to get re-hired. It’s much easier to get rich by keeping your job, living a minimalist lifestyle, and investing the saved moeny in the S&P 500 and or in real estate. That’s how wealth is created.

[1] Dealers who advertise on sites such as Info Wars typically sell gold at a huge markup. If the gold spot price is, for example, $1,300 an ounce, they may charge $1,600 to the unwitting buyer. Usually it’s in the form of a ‘collector coin’ to justify the huge markup. After including shipping and handling, it gets even worse.

Whether it’s bid/ask spreads, exorbitant mutual fund fees for piss-poor performance, or overpriced precious metals sold by unscrupulous dealers, much of the financial service industry exists because of ‘asymmetric information’ in which unsuspecting buyers overpay and firms pocket the difference between the actual price and the executed price (what the customer pays). That’s why low-cost index funds and liquid ETFs like SPY (a proxy for the S&P 500), GLD (a gold ETF), are ideal, because this ‘difference’ is tiny.

SJW Narrative Collapse, Part Infinity

This is pretty funny… going on Reddit (I recommend logging out to see which default threads are on the front page, not subscribed ones), and it looks like the left, to quote the title of a Charles Murray book, is losing ground. A story on /r/news about “Leaflets calling for death of those who insult Islam ‘handed out at London mosque’”, was up-voted to the front page, much to the anger of the left, that wishes that this story would disappear and not be promoted to the ‘front page of the internet’ for the world to see the truth about the ‘religion of peace’:

Pretty much everything I write on this blog is true or will eventually be true, whether it’s about economics, the stock market, the media, Bay Area real estate, internet journalism, intellectualism, web 2.0 valuations, or the post-2013 demise of the SJW narrative.

The truth always prevails, but sometimes it takes a little while to break free from the web of misinformation and false narratives that are so appealing but also wrong. We’re seeing this with the post-2013 SJW backlash, in addition to the ‘alt right’, Red Pill, MGTOW, NRx and the ‘Dark Enlightenment’, Gamergate HBD, ‘frog Twitter’, and the election of Trump. And through this blog – which began in 2014 as these politically incorrect ideologies and movements were beginning to burst through like a battering ram against the fortress of leftism – I am proud to be a part of it, too.

By unleashing the frog that lies within us all, we can make America great again.

Who else is feeling deplorable today?

Leftist assumptions about economics and finance are being repudiated by the internet’s army of fact checkers.

For example, through the writings of Robert Shiller (a Noble Prize economist who shills for the left) and Michael Lewis (another liberal, who wrote The Big Short and Flash Boys), the left conveyed a narrative that high frequency trading was an unalloyed evil – an assumption that for many years went unchallenged by the ‘general public’ until only recently, as millennials on Reddit (as part off the post-2013 SJW backlash) eventually learned that high frequency trading actually helps traders by lowering transaction costs and speeding order executions.

A New York Times column If War Can Have Ethics, Wall Street Can, Too made it to the top of Reddit a couple days ago, but commenters attacked the leftist premise of the article, particularity as it pertains to high frequency trading:

Working at an investment bank conveys authenticity and authority in the eyes of other ‘redditors’, who up-voted the post in agreement. In many ways, finance and economics could be considered ‘STEM’, as it’s considered intellectually rigorous and involves empirical evidence, math, and number-crunching, and that’s why it ranks high in the hierarchy of degrees in terms of respect, along with philosophy, physics, and mathematics.

This was from /r/philosophy, not a ‘right wing’ sub, so it’s not like I cherry picked a sub that agrees with my view, and I could easily find more examples beyond the ones in the screenshot. But the reality is, there are a lot of misconceptions promoted by the left about algorithmic trading that are are easy to refute, and I have done so here. It’s nice to see so many people coming around to reality, rejecting the ‘blame the rich/banks’ mentality that was so pervasive in 2008-2012.

The same goes for the much maligned 2008 bank bailouts, which many people, in agreement with posts I wrote in 2011-2015, realize were necessary from a utilitarian standpoint, and helped the economy by stemming the bleeding from the ailing banking housing sectors so that the healthier sectors such as web 2.0, payment processing, information technology, and retail could thrive. The bailouts may have created moral hazard but indirectly created trillions of dollars of wealth in the form of rising asset prices, economic growth, and improved confidence – all at nearly no cost (as the bailout was funded with near-zero yielding debt).

The fact that the story went so viral, making it to the front page of Reddit, but also the intense, impassioned discussion in the comments, is further evidence of how finance is so important to millennials, who would rather debate regulation and high frequency trading than waste time on mind-numbing, disposable pop culture entertainment. This is more evidence of how intellectualism has become so important, contrary to pronouncements of how America is ‘dumbing down’. There is a huge demand for intellectualism that the internet and communities like Reddit, Hacker News and 4Chan are satisfying.

This is just one of many examples of how the truth always prevails. A reality-based worldview based on rationalism and logic always prevails. Leftists, who have to use misinformation and emotion to convert the uninformed to their causes, are losing.

Amazon, Google, and Facebook: Bigger is Better

Why giants thrive
The power of technology, globalisation and regulation

This is why a simple investing strategy that goes ‘long’ equal weight the three biggest, fastest growing, and most successful tech companies (AMZN FB and GOOG) has done so well. Is past performance indicative of future results? No, but as far as strategies go, it’s hard to beat.

If someone says an investment strategy is ‘fail safe’ usually that’s an indication that it’s time to run to the exits, but Facebook, Amazon, and Google are exceptions, just by virtue of their immensely strong fundamentals and the fact that after a decade or longer no one has been able to come up with viable alternatives to compete with them. I remember in 2004 during the Google IPO, pundits said that anyone could come up with a ‘Google alternative’…lol 12 years later and we’re still waiting. Or in 2008-2012, predictions of a ‘Facebook alternative’, which of course has yet to happen and likely never will.

In capitalism 2.0, Bigger is better.

Just because Myspace lost to Facebook doesn’t mean Facebook will suffer a similar fate.

Airbnb, Uber, and Snapchat…all more valuable than ever, with no viable competitors on the horizon, and their valuations and market growth just keep rising, year after year, to no end, despite endless predictions by pundits of a bubble.

Contrary to popular belief, predictions of collapse are actually as common, if not more so, than predictions of a continuation of a trend. During the 80′s – 2000′s housing boom, predictions of a housing bubble were commonplace. Predicting the 2006 housing crash does not make one a contrarian, because such bearish predictions were actually as common as predictions of the housing market rising. If that seems backward, it’s because the media as of 2008 has given more attention those those who predicted a bubble. For example, Michael Lewis’ bestseller The Big Short, about how some canny traders made a fortune betting against the mortgage market. But the media also ignores all the forecasters were wrong all the way up, only to be right purely by chance in 2008. Likewise, during the 90′s dotcom bubble the media gave more attention to those who were predicting higher prices, but there were still roughly the same number of people who were predicting lower prices, but it’s just that they were mostly ignored, creating a false consensus that everyone was euphoric.

From a market perspective, the number of sellers (pessimists) has to roughly equal the number of buyers (optimists). For prices to keep rising, you need people to sell to the buyers.

These huge tech companies companies don’t need to innovate that much, rather they have market dominance and effortlessly print money through their ad platforms and other services. As the Economist article mentions, they tend to be very well insulated from global economic events (unlike the energy sector or financial sector), and these huge tech companies are also especially well suited to take advantage of global markets. Google, Facebook, and Amazon derive a significant chunk of their revenue overseas. And they can use foreign markets, loopholes, and other accounting schemes to dodge regulations and taxes that are unavoidable for smaller companies.

Up until the late 2000′s, major tech companies seem to have a about a decade of solid growth and stock price appreciation, before tapering and contracting or even collapsing (Cisco, Oracle, Sega, Sony, Atari, 3com, Research in Motion, etc.), but nowadays, as of 2004 or so, major tech companies seem to do a much better job at retaining their growth, market share, and share price appreciation.

Also, the stock market has done a much better job of quickly punishing losers (gopro, fitbit, etc.) but also rewarding winners. The investing landscape is much more choosy and selective, which could explain why active management is having such a hard time in an otherwise very strong bull market. It’s not like the late 90′s when all tech stocks were indiscriminately bid higher. You have the pick the cream of the crop or you will fail. You have all these experts who manage millions or even billions of dollars and they are just as clueless as average investors.

James Altucher’s Top 1% Advisory Report (Analysis and Review)

There has been some recent discussion about ‘James Altucher’s Top 1% Advisory Report’, which purportedly grants its subscribers access to the same lucrative investments ‘elite’ investors use.

Top 1% Advisory, a hugely
popular new research letter

Each month, multimillionaire investor James Altucher shows you how to make 100% to 500% gains… on the best ideas in the hedge fund and venture capital world.

Dear Reader,

The Top 1% Advisory – is a first-of-its-kind release by Stansberry colleague James Altucher, a multimillionaire entrepreneur.

My name is Jared Kelly, by the way. I’m a Director at Stansberry Research.

Normally – the Top 1% Advisory costs $2,500 for one year. Demand for this new letter has skyrocketed since its release last month… and has caused a major ripple throughout our industry.

I don’t need to part with $2,500 to know it’s bunkum. These sales gimmicks prey on the unsophisticated who have no clue about investing or how private markets work.

If demand is skyrocketing, that would make the investments in the letter overcrowded and hence less profitable for future investors. If these investments are so wonderful, why tell anyone? If a single startup or stock pick can make 10-100x your money, just do that over and over until you have a billion dollars or something. Even $25,000 is not enough if these purported returns are feasible. Thus it would seem more money is made selling newsletters than than actually investing.

Investing in start-ups has a lot of risk, and the top start-ups like Uber and Snapchat, which have yielded huge returns for venture capitalists, are inaccessible to the general public to invest. Only a handful of start-ups are successful (as in completing an ‘exit’ strategy), and you need a lot of money to bankroll the many companies that don’t exit and or shut-down, in the hope of finding a few diamonds in the rough. According to data compiled on Ycombinator companies, the success rate is only 12%:

Excluding startups who have only received funding and have not yet exited, as per Paul’s strict definition, we are left with a rate of success between roughly 56/468 ≈ 0.12 and 56/404 ≈ 0.14 or 12-14%.

“Success for a startup approximately equals getting bought. You need some kind of exit strategy, because you can’t get the smartest people to work for you without giving them options likely to be worth something. Which means you either have to get bought or go public, and the number of startups that go public is very small.”

Unless the company exists, your cash will remain tied up. Venture capital is a profitable endeavor but out of reach of anyone doesn’t have millions of of dollars. Investing in private markets require special accreditation that is only obtainable for the top 1% of income earners, and carries a high risk.

On the website he lists stocks that he invested in using his ‘system’, all of which have risen a lot, but fails to disclose the stock picks which have done poorly, and most importantly, these picks were purchased at the beginning of the current bull market, which is now in its 7th year and counting, and there is no guarantee the next seven years will be as prosperous as the prior seven.

Like James Altucher, I am bullish on the stock market and the economy, but his approach is wrong, particularity because some James’ stock picks (which he has disclosed to the public, not his newslettew) have tended to not do well. Two notable examples that come to mind are Vringo (VRNG), which he recommended in 2012 and has since lost some 95% of its value as of 9/13/2016 (it did a 10-1 reverse split though), and, in 2013, Corporate Resources (CRRS), which is effectively bankrupt due to accounting fraud. This is despite the S&P 500 rising 40%, so if you had invested in those two companies you would have lost all your money…pretty bad for a bull market. I know there are some picks that may have done better, but the overall average is strongly negative, which underscores the inherent difficulty of stock picking.

Besides my favorite stocks – Google (GOOG), Amazon (AMZN), Tesla (TSLA), Microsoft (MSFT), and Facebook (FB) – I recommend large cap tech (QQQ), retail (XLY), and healthcare (XLV), all which have outperformed the market on a risk adjusted basis.

…Which brings me to a yet-to-be-disclosed service James Altucher is offering, which for the aforementioned reasons I am highly skeptical of.

Here is a link to the sales pitch, and while the story of his dad is a nice sentimental touch, the premise is inherently flawed. And here is the video, which I have embedded below:

Essentially, what James is offering is some sort of ‘insider’ system, based on James’ connections within the financial industry, that will allow you to trade stocks like the ‘pros’ do.

From the sales pitch:

look at a site like U.S. Securities and Exchange Commission and I look every month at all of my favorite investors and see what stocks they are quietly beginning to buy.

They don’t go on CNBC talking about these stocks. They don’t go to the newspapers. But they have to report their holdings to the SEC in obscure filings labeled “13-D” or “13-G” or sometimes “13-F”.

They don’t talk to anyone.

Well, that’s not true. They all talk to each other. They talk to me. The information and analysis gets passed from one to the other and that’s how ultimately the stocks go up.

The major problem here is two fold: First, if the information is publicly accessible, such as on the SEC’s website, then in accordance with the EMH (efficient market hypothesis) the information will be instantly priced into the stock. Thus, the stock will likely rise of fall based on the disclosed information before you can react. James makes it sound like the ‘Securities and Exchange Commission’ website is some clandestine organization – that someone how he has stumbled upon something new, when, in reality, hedge funds have algorithms that automatically scan these databases for updates.

Second, and probably more importantly, active management has actually done quite poorly, as indicated by falling ‘alpha’. Fund mangers, especially in recent years, have failed to beat their benchmarks. It’s incontrovertible: everyone, including the experts, sucks at picking stocks:

Why Active Management Fell Off a Cliff – Perhaps Permanently

Whack-a-mole fund managers can’t beat index funds

‘Scale and Skill’: Why It’s Hard for Managed Funds to Beat the Indexers

Poor performance catching up with active stock fund managers

Investment: Loser’s game

86% of investment managers stunk in 2014

To say active management is bad is an understatement – it’s downright awful.

It’s hard enough picking the right sectors in this schizophrenic bull market, but picking individuals stocks is many magnitudes harder. Even Warren Buffett is having some difficulty, with major holdings such as Coke, IBM, and American Express lagging the S&P 500 since 2012. The main reason why Berkshire Hathaway stock (BRK) has done so well in spite of mediocre stock picks is because of its large private holdings like Geico. Emerging market have done poorly since 2011, and small and medium caps have also lagged since 2014. As part of the winner-take-all theme, the stock market and economy has become much more myopic, with lots of losers and fewer winners.

To exploit the tendency of overcrowded investments to lag the broader indexes, a good strategy could be to find which stocks and sectors are the most widely held by funds and then short these stocks, with 50% allocation also going long the S&P 500.

So even if these experts are feeding James information, very little, if any, will be of any good. Essentially, the data shows that the funds are as clueless at stock picking as retail investors – the only difference being they collect commission fees, which is really how the money is made, not stock picking. I believe there are some individuals and firms that do have genuine stock picking and market timing ability, but they seldom accept outside money, and they sure as hell will never disclose their secrets to James, or anyone else for that matter.

Does algorithmic trading work?

There has been a lot of discussion (such as on Reddit, Quora, Hacker News, and other communities) about quantitative/algorithmic trading:

Does algorithmic trading really work for individual traders? Isn’t it just another seemingly sophisticated method like technical analysis?

Does algorithmic trading really work? What are the potential gains and limitations?

What kind of return can an average algorithmic trading firm achieve today?

Algorithmic Trading: The Play-at-Home Version

Algorithmic Trading: A Brief Introduction

Does algorithmic trading work? I don’t know for sure, but I think a lot money is made in market making (Citadel Capital comes to mind), which tends to full under the umbrella of algorithmic trading – the two are closely related.

Algorithmic trading is often a full-time job. It involves a lot of trading and paying constant attention to order books, as well as tons of backtesting and data analysis. Because your competitors are constantly evolving, so must you, and staying ahead of the competition is very time consuming. Just because something is automated or algorithmic doesn’t mean you can be complacent.

Major firms such as Goldman will have vastly more resources (computing power, access to top talent) than a typical DIY quant trader. However a major advantage for small traders is that they don’t have the same liquidity constraints as large traders. Large traders move the market (and this may be undesirable and must be taken into account when placing trades), but smaller traders can slip through without having to worry about complications such as ‘market impact‘.

Being bigger comes with many perks. People believe that Warren Buffett, for example, trades the same stocks everyone else does (except he is really good at it), but this wrong to some degree. Buffett has access to special deals (such as preferred shares on Bank of America and Goldman Sachs that pay large dividends) that ordinary investors would never have access to.

Slippage and commission fees can adversely effect performance. It isn’t too uncommon for a system that is profitable without fees and slippage to be rendered unprofitable ones those two factors are taken into account.

Then there are a plethora of statistical biases that plague traders: look-ahead bias, data dredging/snooping biases, curve fitting, and so on.

Here is an example of how slippage can negatively affect the equity curve of a strategy:

Success may still be elusive. The literature shows that most (about 90-95%) traders fail. Although Renaissance (James Simons), Citadel (Kenneth C. Griffin), and Quantum (Soros) have had huge success, they are outliers and have access to special propitiatory ‘tools’ and markets that ordinary traders don’t have access to. It’s not like these quant firms are using a mom and pop discount brokerage firm as everyone else does – rather they are the firms, meaning that they often make money from ‘making markets’, not trading them with a directional bias (long or short) as most people do. By making markets and using direction-neutral trades, these firms can make money in pretty much all market conditions.

Most quant firms and traders use leverage, which is necessary to generate large returns from small underlying movements, but this can backfire in a big way as the 1998 implosion of Long Term Capital Management showed.

Overall, I don’t think quantitative trading is as glamorous as many think it is, and I’m not sure if the returns are worth the effort. The historical returns for the S&P 500 average about 7-8% a year (exuding dividends), which many funds, despite access to top talent and top trading tools, fail to beat. There are simpler methods, based on mathematics such as the ETF decay, that an also generate very good returns and don’t require full-time trading. A lot of caution must be taken in any strategy, and risk management is crucial.