Since a lot of us here have expressed interest in not starving to death in a gutter, I figured I'd start a weekly thread to discuss financial matters.
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Notes -
This stock market rally has been insane. I think this is the greatest increase in a 1-month period ever, a 180 degree reversal of sentiment from panic 1.5 months ago over Iran to now euphoria even as oil prices remain high.
There is a possibility that the market pricing in AGi/takoff...in other words, this is really it. To invoke the meme, "it's happening". What will happen is the stock market will go vertical, something like 50-100% gains in a year for 3-5 years in anticipation of massive gains in productivity and earnings due to AI, which will be reflected in earnings reports later. So stocks will temporarily be wildly overvalued until the productivity wave hits.
One way to play this, which I am running now, is a two-pronged strategy: invest in something like a mix of leveraged S&P 500/nasdaq indexes funds (e.g. QLD, SSO) and then a small fraction out-of-money SPY call options.
So I may buy SPY call options that expire at $860 in 5 months at $100/contract. This is 17% out of money. If the S&P 500 continues its current trajectory for the next 5 months, this is a target of $1062 .This works out to a profit of $20,000 per contract. It's like a lottery ticket , but with much better odds. I think most people would agree, even AI skeptics, that AGI is much more probable than winning the lottery.
Many industry experts agree that there will be some AI phase or paradigm shift, if it hasn't already happened. If this means GDP and earnings forecasts have to be ratcheted upward for the next decade or longer, of course this will be reflected in stock prices. Even going from only 3% to 6% real GDP growth or 10% to 20% margins , when compounded over decades, implies a huge revaluation of stock prices that will be nearly instant.
IMO higher productivity doesn’t always lead to higher profits. Depends on pricing power. Shale oil has always been my favorite example for this.
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That's a bold theory, and it will be interesting to see if your strategy pays off.
I'm of a somewhat different mindset. My personal experience is that we're not seeing the automation gains we expected, the friction involved in scaling is eating into the capability gains, and the hype may have been premature.
Current market behavior looks more like a melt-up to me than anything predictive, and practically speaking, where else would people put their money right now? The federal funds rate has been in the shitter more often than not for a quarter century, so treasuries aren't a great option. Commercial debt took an absolute ass-pounding in 2022, and this year's refinancing cliff could hit it just as things were recovering. Preferred stock is all over the place. Dividends have been kind of shit because of the tax treatment compared to capital gains. All that's really left is capital appreciation on equities, and that needs a pretty significant growth story to justify the risk. Luckily, AI is a great story.
Given all that, I've been tilting into value funds lately. Avantis has one that I rather like.
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That would just be trying market-timing/trying to outguess the market. No need to get fancy when you can just HODL the market.
The SPY return from the recent bottom on March 30th was about 16.7%, which is a solid haul for 29 trading days (from me manually counting). However, the historical annual volatility of the S&P500 is about 19% which means a 29-day has an expected SD of about 6.5%. Thus, a 16.7% return would be expected for about 1 in 200 independent randomly selected 29-day periods. Rare, but not unthinkably so—one could expect to see 2 or 3 of them over their investment lifetimes. Plus, stock returns tend to be thick-tailed and I selected this 16.7%, 29-day period retrospectively with the benefit of hindsight, so this is already a rigged experiment.
A less cherry-picked selection of March ME to April ME already drops the SPY return to a still impressive but-much-less-so 10.51%. You'd expect to see such a result or higher about every 1 in 20 months.
I myself have a sizeable allocation to leveraged ETFs, but I've long held leveraged ETFs as it was part of my planned investment glidepath. I'm trying to reduce my LETF exposure, as they've well-exceeded my planned allocation given the market run-up. My net worth to income ratio is making this rather difficult, though, as I've already cleaned them out from my tax-advantaged accounts and I refuse to sell positions with large capital gains from non-tax-advantaged.
Yeah it's a long shot, but if the AGI narrative is true, then I think it's possible. Imagine the S&P 500 goes up 20-30% in 3 months. I would be beating myself up for not buying those contracts for $100. I have already acted by putting $ in 5-month contracts and more in 900+ day SPY contracts in anticipation of either rapid or slower "takeoff". This is only 1% of my total account value, but the upside is 300x or more, so I see it as a positive EV. I can easily hedge out the 1% with selling index puts or bonds.
The rest of the $ is in the usual index fund mix, but then there is the lottery play of OTM calls when AI AGI FOMO takes over. If AI is once in a lifetime technology, we could see a once in a lifetime or ever rally.
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