Discussion on Generic Financial Advice
The crux of financial discussion is “we want to swap our cash to assets, but we don’t know which assets, and it can be easy to lose money in assets”
Consensus advice for where to invest your money is in an index, specifically an American index. And if the average person looks into investments themselves they are likely generally wasting their time.
It’s hard to argue against that but It’s worth keeping in mind general advice is designed for the aggregate of humanity not an individual person. So general advice will of course be varying shades off base for every individual.
General advice is useful and necessary but I wanted to start with that disclaimer as people often get confused “if the generally agreed upon advice is this!! You can’t deviate!!”
This consensus also doesn’t offer super satisfying explanations on why it is the case that I want to go into.
The Metagame of Money
I think the core of general finance is figuring out what premium assets have over cash.
Let’s say Coca Cola trades at 30x earnings (if Coke is worth 300B, and they make 10B profit a year, if you could buy them for 300B and they keep making 10B every you will make all your money back in 30 years and own Coke on top of that)
Why should they trade at 30x earnings rather than 15, or 50x?
People could say relative to other things, like Pepsi trades at 25x earnings, or Walgreens/Apple trade at this and that, but what if Pepsi went to 20x or 40x, relative analysis isn’t telling you from first principles why something is worth what it’s worth.
It’s also worth noting the biggest risk of any asset is if it goes to zero (or suffers a MASSIVE drawdown similar to going to zero), which is kind of odd to say but basically there’s tons of companies that if they keep just making the same amount of money they currently do forever it it would be a no brainer to buy the fuck out of their stock. The problem is just if over time their business fades away it’s such a bad situation for shareholders. And 30+ years starts becoming quite difficult to forecast.
It’s not really that easy to forecast businesses 10+ year time periods, or what random event might really hurt them, yet it’s important hence the sort of culture of fear and anxiety in financial analysis. Basically always fears of how shit can go south.
Combine that with history of economic instability and it’s not hard to tell why people are anxious about finance. My proposed solution to this is diversity I’ll go over later.
We live at a time in history where there is a deafening pitch of reasons to value Assets > Cash (though it may have always been like this, and the pitch might even be too quiet now) but there are also tons of permadoomers preaching the end times and imminent great collapses. (Though they have always been there)
One is that fiat money (how it’s currently handled) loses value over time, so people already want to swap their money for any asset. If your cash is worth 40% less in 10 years why the fuck would you hold onto it?
Two is that historically, like since the dawn of time, markets have performed very well (just think about human innovation, civilization isn’t stagnant, our world keeps improving so markets reflect that) . There is actually a lot to say here about exceptions and alladat (like there are also collapses/stagnant periods in history (you know like empires collapsing and all of that), economic collapses are actually pretty common I could elaborate here if people are interested. But I’ll try to keep this article brief.
But for Americans, if you look since 2008 the stock market has been on fire, with 10%+ yearly gains in the 2010s, making people feel like dummies for not swapping all their cash into assets.
But if everyone knows Assets > Cash, where do you draw the line? If everyone knows cash is trash and wants to swap it all into assets, can the assets go into a bubble? Should it be priced in? Btw I fucking hate the word priced in, like, this must be used wrong 99% of the time (tho maybe that’s cuz language is already used wrong 99% of the time) idk maybe I’m larping I’m getting off track anyway..
Another way to put it is basically everyone thinks assets will increase in price in the future (except the times they go to 0) but how do you price that in the present?
Worth noting some indexes don’t always perform as well as the American one, but generally humanity is up only. Tho that won’t help you much if you live through a collapse ok anyway..
This is basically the core question at the heart of generalfinance when figuring out if assets are over/undervalued.
The proposition I put forth is that cash is an untenable position (my view is based on debt levels and historic performance of cash and general disregard policy makers have about inflation). and we should swap cash money to assets. But one can easily lose money in assets when they go south which is also very bad. There are many ways to lose money in assets and we always fear different crises. So diversity helps against that.
I definitely think it’s reasonable to have cash in your portfolio (I’m not talking about emergency savings which I don’t have a good grasp of because I’m a zoomer). I think you should view cash as something that’s like, paying a 2% fee a year for stability. (or maybe tax related reasons, like you want easy access to cash without having to cause taxable events) but as I said, the best way to make money is to not lose it, and it’s totally reasonable to not feel comfortable going all into assets and wanting some cash.
I think diversity is what protects oneself from downfalls. Imagine a wealthy European family from the middle ages, and how their wealth transitioned over the years. There were so many opportunities to lose fortunes, whether it was government/economic collapses, new regimes coming in power (like Nazis confiscating Jewish wealth), entire industries going extinct.
But if they diversified their wealth across different reasonable asset classes it would be pretty hard for a family fortune to be wiped out.
Now many people might say “diversifying is for losers! It’s not optimal! Stick to your best ideas!” And these people have a point if they are trying to be hyper competitive and run up their accounts but this is general advice, for the average person, you fucking degenerate gambler. Just imagine a wealthy magnate handing his fortune down to his family, would he be like “y’all should find the best opportunities to invest in, diversification is for loeers” or “y’all should diversify it cuz you probably won’t be a fucking savant like I was”
Again there is context. There is a difference between protecting and creating wealth. But I think it’s reasonable to say most people should be much more focused on protecting their wealth as opposed to trying to run up their portfolio as baby venture capitalists.
Jordi Alexander who’s a very strong mind in the world of finance wrote a thread about diversifying assets.
https://twitter.com/gametheorizing/status/1505553255706730498
This is also a cute post by evann about portfolio construction.
https://evanss6.substack.com/p/coinviction
I do think we live in scary times. But also complex times. The US is 30 trillion in debt that seems to keep expanding . There’s an environmental crisis on the horizon. Both symptoms of overconsumption.
There are potential things that can help us, being more energy efficient (not just as individuals but in our energy sources like using more nuclear energy potentially, more public transport, less wars) unknown factors like the impact of AI on our civilization.
For broad macro commentary I’ve really enjoyed Arthur Hayes blog, but he also sounds fucking crazy half the time, but how could you not because interconnectedness of our entire financial system is a complicated subject.
About fomoing into higher returns.
Sometimes you see how someone made 10x their money or some stock that went up 100 times. And think wow am I doing something wrong. Personally I am just happy for any returns I get, I think if you double your money on a stock you should be very happy and its retarded to be like but i saw little billy made even more. I try to make reasonable decisions. Be at peace. Think about what you know, articulate abstract things in the back of your head. Eternal sunshine of the spotless mind.
Some random topics
Liquidity
The amount of money you have impacts your ability to invest and all that.
People say shit like OMG the best investors in the world barely make 12% a year.
Yeah cause they are managing like 300 billion dollars you fucking retard. It’s not really easy to manage a 300 billion dollar position, imagine if you had todeploy that much into the markets lol. It’s almost a challenge to even buy shares of shit because your size is so big.
If I have 10$ I can easily double my money to 20$ by like, making a lemonade stand, the amount of money matters lmfao.
An advantage smaller investors have is they are more able to sneak into investment opportunities where you can’t get a lot of size (cash deployed) in. For example investing in a local restaurant, investing in your own local business ideas) anyway that doesn’t super matter but it’s just worth keeping in mind.
Cryptocurrency
I don’t love using the word invest in Crypto. I prefer to use Speculate. Your basically buying art and hoping it will be culturally relevant. Otherwise it’s basically a pet rock. Despite that I actually do think crypto will do well because I do think it will be culturally relevant, because of all that shit I wrote about preferring assets to cash, the fact it’s hard to find assets to invest in but everyone wants them etc. Also I’m copying the GCR/Jordi/Hayes trifecta who wrote about this basically.
Position sizing
How much you buy of something matters. If you put half your networth into Bitcoin and it goes down 50%, that’s very different than putting 10% of your NW in and it going down 50%. The same is true on the opposite side to though.
Overall I have the view we are mostly all retards so think it’s generally good to diversify so you don’t as easily get rekt or psychologically tormented by positions. Position sizing is very difficult tho and it sucks if you have a great idea and tried to over diversify so the higher conviction you are on something the more you should buy of course. It’s all very contextual on a bunch of stuff obviously.
Skepticism
Most people are stupid so listening to random people is obviously dangerous. Ok that’s kinda mean (it’s also good to shed your ego and just focus on robot like analysis) but just try to understand for yourself what they are saying. Don’t assume they know some shit you don’t. Understand understand understand. Simple simple simple. Everything makes sense and is ran by incentives.
Overcomplefixiation is a phenomenon that comes up when people don’t want to admit they don’t/can’t understand something so they try to make it sound so complex nobody can grasp it.
Links and quotes
Peter Lynch lecture on common misconceptions about the market
Buffet clip