In reply to Daal: there are some potential extra returns from housing - firstly, it provides yield (or eliminates the need to pay rent) in addition to nominal capital gains. At the moment, places like Las Vegas and Dublin have properties available at 10%+ gross rental yields, far above most conventional assets with similar risk. Second, the ability to borrow large sums at fixed interest rates can give a positive real return from a nominal gain, as inflation erodes the size of the mortgage in real terms (yes this backfires in deflations, but it's a favourable odds play given political incentives to inflate somewhat). Third, using tax write-offs or offset mortgages allows you to enjoy a considerable positive risk-free return e.g. buy a 500k house, with a 400k mortgage, deposit 200k into the offset mortgage account, and you earn the mortgage rate of interest, totally tax free, whilst preserving almost immediate liquidity. So, if you are out of trading ideas, you can reduce some of your interest overhead from (say) 5% to zero, without any tax levied on it. This equates to a risk-free gross return of 6-10% depending on your tax bracket, an amazing free lunch. Or, in the USA, you just write off your mortgage payments against income. I agree picking an index is still picking to some extent, and carries some risk. But it carries far less risk than picking 5-20 individual stocks year in, year out. Also, I did not say pick one index (e.g. S&P). Proper diversification would require picking several indices e.g. S&P, small/mid-cap, some price-weighted index, along with the foreign portion (which should ideally be split between say G7 big cap, emerging markets, and so on). There is a trade-off between transactions costs + hassle factor versus diversification and simplicity. In any case, it is irrefutable that picking individual stocks is far harder and riskier for most people (including pros) than choosing a few stock index funds with low costs and some diversification and then just rebalancing each year. So, any stockpicking bets should be classed under active speculation/investment and not considered index investing. The homework required to pick the 1-6 best-suited index funds is far far less, and carries far less underperformance risk, than the homework required to pick the best 5-20 stocks year in, year out. About risk vs return - if you can earn good alpha, then you get 'paid' far more each year for taking risk via high quality trading bets, than taking the same level of risk via passive index investing. E.g. in passive investing, you risk say 10-30% more drawdown to get 1-3% more per year, a ratio of 0.1 (e.g. most stock markets have lost 75-90% at some point in history, few returned >10%). Whereas in profitable trading, how much do you need to risk to earn an extra 1-3% per year? Skilled traders can usually achieve risk/reward ratios of 0.5 at least, implying that 1% extra a year can be earned by risking 2% drawdowns. Why would you then take investment risk for 1% extra, at a cost of 10% extra drawdown? The rational response is to minimise investment risk, and earn your extra return via the far better R/R of profitable trading. If your trading consistently has worse R/R than your passive portfolio, then you have bigger problems and are probably better off moving into a different career. I agree about mental accounting etc, however there is risk of permanent loss of capital (e.g. in major recessions/depressings, economic breakdown like hyperinflation). Secondly, even temporarily reduced portfolio value reduces how much you can risk and therefore earn on your trading bets (100k portfolio falling to 70k in a bear market means you can only put up 70% of the margin compared to before). Third, if you have come value investing ability, having lower drawdowns means you can deploy more capital in the aftermath of crashes/bear markets, which should boost long term returns. Fourth, life risks can be high and you never know when you might be out of work, hospitalised, face some crisis etc. These are more likely to come during recessions and other socio-economic disruptions. It is rare that people with equity exposure look back in hindsight and say "I took too little risk in my investments", relative to the opposite. This is especially true for someone who can earn 10%+ per annum from trading. Much better to earn 15% per year with 15% drawdowns than 18% per year with 30% drawdowns IMO.
I would argue it is far more rational to chase higher returns by boosting trading bet size somewhat. If your trading delivers superior R/R to portfolio investing (which should be the case - otherwise better to stop trading and invest 100% in the index portfolio), then allocating more capital/risk to the trading will achieve same returns for lower risk, or greater returns for the same risk. For someone who cannot trade, then I would agree with chasing 7% rather than 4%, in exchange for sometimes losing 30% (hopefully temporarily). For someone who can make 3% extra a year by boosting drawdown risk +6% (or even +15%) then it makes little sense to take such large portfolio risk for such relatively meagre extra return. I agree about holding gold, it is crucial in stagflations and depressions (1930s or 1970s, for example). I also accept that someone's individual situation can make it rational to go for the extra 2-3% a year e.g. someone whose savings are low relative to income, someone in a very steady job in a country with a welfare state, someone in the 20-35 age bracket with no dependents, etc. But in my experience, most people overestimate, not underestimate, their risk tolerance. I'd guess that the average person who thinks they can handle a 30% drawdown can only handle a 15% drawdown before freaking out and making irrational decisions.
It's just as competitive, if not more, in Europe/USA. I would say though that a bigger downside is having to work in the finance sector - many institutions and employees are rather greedy, philistine, unethical and so on. Personally I don't really like being an employee either, although I would do it in some circumstances (small firm with good management etc). The 2 mill I was referring to would be for doing it in somewhere like London/NYC. 10% gross return per annum would deliver about 100k after taxes. However, there is some path dependency, you need a buffer in case you drop 20-30% one year. I'd say 60-75k is what it costs to live comfortably in those cities whilst contributing to investments/pension etc to provide for future spouse, kids, dependents, and old age. If reasonable living costs 20k a year then say 600k should be enough, still a lot of money for Brazil. 3rd option is probably best for work/life balance. It really is well suited to occasional macro bets, or other low frequency, high probability bets (e.g. deep value in late-stage bear markets). The one problem is lack of experience, it may take 2 whole market cycles (10 years or so) to gain enough experience as a part-timer, whereas a market pro or full-time solo operator could follow 100+ markets/asset classes, or 5k+ stocks, and see many boom bust cycles each year.
Basically my theory is that being in a professional, competitive environment leads to superior training, experience, feedback, and thus performance. Take two athletes with equal high talent at age 18, then put one of them in the best team, with the best coaches, doctors, nutritionists etc, and leave one to train by himself. In most cases the well-supported one in a good environment will steadily pull away from the lone wolf in terms of ability and performance. That is my own experience and seems to be borne out by results in most/all competitive fields, from what I see. Humans are social animals for a reason - it gets better results than going solo.
There is no way around having access to tremendous capital or enormous potential returns (50-100% per year with minimal drawdowns), or both. When you start talking about three or four million USD you're talking about someone who's already rich, where the question of how much you need to make it as a solo operator is academic. Of course it depends on the strategy - but talking about going it alone to make 10% or 20% per year on even 2 mil, with meaningful risk not only of a full-year loss but a one-third loss of capital, strikes me as crazy. When your observed variance is several multiples of the observed annual average return I'd be wary of making any predictions whatsoever about actual realized long-term returns or actual drawdown risk. All the more so since anyone making this kind of decision is unlikely to have a track record longer than a few years, almost certainly less than ten. Even at that 2mil level I doubt I'd bother to try unless I thought I could average 50-100%+ per year with no meaningful possibility of a losing year, and then I'd put 750k in rental properties (emphasis on safe consistency rather than aiming for a speculative 10% yield in Vegas), 250k in cash and gold bars and trade with the remaining million. With worse return figures or lower capital I'd be looking to go the managed funds route (or prop if we are talking a daytrading type of edge). That strikes me as eminently more plausible than getting a serious trading job. Swing or position trading on the side in a part-time or hobbyist capacity also seems like a fine compromise for most people.
The main issue that I have with owning real estate as opposed to REITs is a similar issue that I have with opening a business. Most of the time it is just a gigantic bet that is completely oversized according to the Kelly Criterion/Optimal F and we all know those risk metrics underestimate risk so that makes the bet even more oversized. Someone with a $10M networth is probably fine buying a $300K house. Someone with $200K is just making a massive gamble that will significantly affect his welfare without doing much research in his local housing market (or his research involves extrapolating recent trends into infinity). This gamble could be financially smart depending on bankruptcy laws but most of the time it won't be given that these sorts of arbs tend to be close by people with low ethical standards Similar with opening a business, heck I'd bet that most people in the Fortune 500 completely violated Kelly type risk metrics several times during their lifetime making huge bets and simply got lucky that they were not hit by tail events otherwise we would never heard about them. --- "I agree picking an index is still picking to some extent, and carries some risk. But it carries far less risk than picking 5-20 individual stocks year in, year out. Also, I did not say pick one index (e.g. S&P). Proper diversification would require picking several indices e.g. S&P, small/mid-cap, some price-weighted index, along with the foreign portion (which should ideally be split between say G7 big cap, emerging markets, and so on). There is a trade-off between transactions costs + hassle factor versus diversification and simplicity. In any case, it is irrefutable that picking individual stocks is far harder and riskier for most people (including pros) than choosing a few stock index funds with low costs and some diversification and then just rebalancing each year. So, any stockpicking bets should be classed under active speculation/investment and not considered index investing. The homework required to pick the 1-6 best-suited index funds is far far less, and carries far less underperformance risk, than the homework required to pick the best 5-20 stocks year in, year out." There is no disagreement here, most people shouldn't be trying to pick a few stocks but IMO they SHOULD try to pick the right indexes and they should study market cap vs fundamentally weighted indexes vs something else. Even if it takes time they will carry that benefit for the rest of their lives ---- "About risk vs return - if you can earn good alpha, then you get 'paid' far more each year for taking risk via high quality trading bets, than taking the same level of risk via passive index investing. E.g. in passive investing, you risk say 10-30% more drawdown to get 1-3% more per year, a ratio of 0.1 (e.g. most stock markets have lost 75-90% at some point in history, few returned >10%). Whereas in profitable trading, how much do you need to risk to earn an extra 1-3% per year? Skilled traders can usually achieve risk/reward ratios of 0.5 at least, implying that 1% extra a year can be earned by risking 2% drawdowns. Why would you then take investment risk for 1% extra, at a cost of 10% extra drawdown? The rational response is to minimise investment risk, and earn your extra return via the far better R/R of profitable trading. If your trading consistently has worse R/R than your passive portfolio, then you have bigger problems and are probably better off moving into a different career." I think that is an unfair comparison because you took the max historical drawdown for passive investing and compared to the alpha generated but compared profitable trading taking an average of drawdowns and compared with the average alpha. Most of the drawdowns generated by those All-Whether portfolios will be severely limited and you collect that 1-3% every year. That eBalanced study I linked shows that the worst year the portfolio faced was -7% in 2008 (removing the 30's due the gold issue), lets say that with gold in the 30's it would have lost -15% in the worst year. This compares with a 8% expected annual return a 0.53 reward to risk ratio. Again I say that I can't justify giving up 1-3% a year o insure against such an unlikely event, 1% or less I could give up but more than that it is just a very overpriced insurance premium ------------ "I agree about mental accounting etc, however there is risk of permanent loss of capital (e.g. in major recessions/depressings, economic breakdown like hyperinflation). Secondly, even temporarily reduced portfolio value reduces how much you can risk and therefore earn on your trading bets (100k portfolio falling to 70k in a bear market means you can only put up 70% of the margin compared to before)." But this has to be more than offset by the fact that in most years and situations you will get an additional margin and wealth generation by that 1-3%. You can in effect compound it twice due additional passive income returns and additional trading returns "Third, if you have come value investing ability, having lower drawdowns means you can deploy more capital in the aftermath of crashes/bear markets, which should boost long term returns. Fourth, life risks can be high and you never know when you might be out of work, hospitalised, face some crisis etc. These are more likely to come during recessions and other socio-economic disruptions. It is rare that people with equity exposure look back in hindsight and say "I took too little risk in my investments", relative to the opposite. This is especially true for someone who can earn 10%+ per annum from trading. Much better to earn 15% per year with 15% drawdowns than 18% per year with 30% drawdowns IMO. [/B][/QUOTE] If that drawdown came every 10 years I could perhaps agree. But since it happens much less frequently than that (especially with global diversification) I can't justify paying that kind of insurance but I can understand that some people might have other risk preferences
Dan Loeb just put the squeeze on Ackman and Tilson re: HLF. I present a chart of HLF since Tilson announced his own short in the stock and called Ackman's presentation on HLF the greatest piece of analysis he's ever seen. http://www.google.com/finance?chdnp...Line&q=NYSE:HLF&ntsp=0&ei=p4ftUMnPMbOI0QG2oQE Tilsoning. Indeed. BTW, any longs in HLF - this would be a good time to cover.