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birb_cromble  9d ago (text post)   783 thread views

Weekly Finance Thread - 2027-07-04

A weekly thread to discuss financial matters - from personal all the way up to global.

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Last Thursday I finalized an almost total de-risking of the money I received / inherited when I was 18 from my parents. I had done similarly with my own modest investments / savings a few months ago (shortly before the Iran War) but resisted moving this, by far the actual majority of my wealth, out of US equities due to having to deal with a bunch of legal and other admin stuff I resisted doing for a decade because it seemed boring, tiresome and I’m low agency when I don’t immediately fear extreme loss.

Taking stock, in 12 years, more or less in diversified primarily-US and some global equities, with reinvestment, I made 400%. This is average for the last decade but an extremely outsized return compared to most periods in the history of capital markets. Few run-ups in mature, developed markets (and I am obviously counting from five years into the 2010-present cycle) have yielded better returns, ever.

I have my doubts about the memory melt up. Semiconductors are cyclical, investment is flooding in, prices will fall, and a full KOSPI and Micron collapse, which the current extreme yo-yoing portends, can cascade quickly into rapid deflation in parts of the component market for the data center bubble as the market re-assesses the real impact of extreme capacity increases coming online to produce chips (where the majority of the hundreds of billions raised has been pledged to hardware bought at bubble prices and tied to absurdly optimistic depreciation schedules), which is in turn tied into a huge amount of private equity and debt that was itself provided extensive back-leverage by banks and insurers (including those owned by some of the same PE firms).

The thing about really big bubbles, and I’m not in any sense calling the top, is that the final run-up is the true test of the investor - the last few months or years can see another doubling or more of asset prices because earnings boom (as they are now) and so markets boom, and so earnings boom etc in a very rapid quarterly feedback loop. Extreme pricing power is sustainable in some sectors, some of the time. Not in every sector, indefinitely. The S&P 500 might hit ten thousand points before a big crash. But I’m happy with my 400%, I’m a neurotic, and it seems to me that greed for / FOMO on money I don’t really need is needless risk at this stage. Still, it felt nice to write the above out.

I will re-assess early next year, I think.

12% per year over 12 years is quite good actually, that's how much Madoff pretended to make at the time, coincidentally.

I am horrible with market timing, so I won't say anything about that. Just relay one story that I find fascinating. One of the first bubbles in history was the South Sea Company bubble. And Isaac Newton (yes, that one), who was by then doing quite well, invested in it too. Since he was smart, he knew it's going to go down some day, so he made a reasonable profit (about 100% on investment) and exited. But the stock kept going up. And up. And up. And finally Newton couldn't bear it anymore and got in again. And promptly lost 20K pounds (a real lot of money). Biographers say he was salty about it for the rest of his life.

That's why I don't feel bad about being horrible at timing the markets. If one of the smartest people who ever lived couldn't do it, what chance do I have anyway? I'll stick to indexes.

How did you arrive at 12%? I get around 14.34%. Which is decent. It's inbetween the SP500 (ca 12% cagr 2014-2026) and the Nasdaq (ca 16% cagr). Not fantastic though.

Ugh you are right, I misread 400% as 4x.

I am not a math person at all but I believe you could interpret 2rafa's wording in two different ways. She said:

Taking stock, in 12 years, more or less in diversified primarily-US and some global equities, with reinvestment, I made 400%

This either means that you went from, say, $100 and ended up with $400 (a four hundred percent return) or you started with $100 and ended up with $500 (a total return of 400% on top of your original principal).

The first gives you 12% the second gives you 14.34%.

$100 and ended up with $400 (a four hundred percent return)

That is not a 400% return or +400% at all. It is +300%.

There is only one correct usage and interpretation. A return is what you end up with on top of your principal.

A 100% return is the baseline "doubled your money" case. I think you understand that a "1x", ending up at the same principal you started with, is not at all a "100% return". It is 0% return (gain).

Count upwards:

+0% is 1x. +100% is 2x. +200% is 3x. +300% is 4x. +400% is 5x.

Can't blame you, I'd do something similar if I could afford to.

What are you moving into? Global equities? Farmland? Gold seems to have acquired risk asset characteristics this past year.

Medium maturity diversified first world treasuries, money market funds, and a smaller proportion in developed world ex-US low PE, value equities with very little debt and what I judge to be very limited exposure to financials or tech. Some in IG credit funds that are again have limited or no exposure to finance, tech or media (the latter because I think it’s one of the first things to fall to AI disruption). If my work didn’t restrict me I’d probably keep a few high conviction emerging markets bets, but that’s only because I know what I’m looking for.

The thing about really big bubbles, and I’m not in any sense calling the top, is that the final run-up is the true test of the investor

I read a biography of Isaac Newton a few years ago, and this is pretty much how he financially destroyed himself. He invested during a bubble, exited his positions at a tidy profit, then watched in envy as his friends with a higher risk tolerance made bank as prices kept going up. He eventually bought back in and things almost immediately collapsed. It really drove home the value of pre-committing to a strategy.

Heh, I didn't read this comment and remembered the same story :)

But I don't think he destroyed himself by that - he lost a lot of money, but he had quite some left as far as I remember. He died still a man of considerable means. But he surely wasn't happy about losing so much money.

I feel obligated to point out that this is the second finance thread in a row incorrectly labeled 2027 rather than 2026.

The future is already here – it's just not evenly distributed.

That might soon be truer than it already is. A lot of the coming decades' tech will probably be amazing + expensive, so that the top 1% are running life version 2040 and others are stuck in 2020.

Goddamnit. This is what I get for posting before I'm fully awake

Is making consistent money on Kalshi/polymarket plausible for mottizens? I'm up about 40% on Kalshi/polymarket after 9 worldcup games and I want to know if I can make this a decent side hustle or if I'm going to lose all my money and be made fun of for thinking I could gamble in income. After worldcup will it work on other sports? What about crypto?

The betting market on top tier Soccer games is very very very efficient. The sheer liquidity sunk into Kalshi/Polymarket has provided some EV spots this tournament where weight of public money has adjusted things past expectations, but if you're actively taking prices on Soccer based on your own opinions and not arbitrage you are probably gonna blow up in the medium-term at the latest.

I'm profitable on top tier soccer betting over a decade or so. Only slightly though. But around +25% ROI during this world cup. The trick is to just do nothing in all the cases where you don't have your edge.

How is the volatility and total return compared to just investing it in some broad market fund like VT? Is it worth the effort, or is this more of a "hobby that makes money" thing?

Not an investment at all. It's just for fun + testing my instincts. It adds some spice to the games I watch. Sometimes you just 'know', if you've watched the team(s) many times. It has some transfer value to stock picking. There are never any 100% things there either, but the edge in either field consists of identifying when there's a higher chance of A happening than B. And trusting yourself enough to follow that signal by placing enough money on it. In sports betting you can use an implied odds calculator to see whether the probability implied by the odds is higher or lower than the probability you think you've identified. Positive expected value = green light.

This world cup has been pretty brutal for bookmakers with lots of high-profile favorite wins + highest profile player scores goals kinda outcomes. Potentially you've found an edge but having had relationships with some of the biggest dick syndicates in the world who are scraping out 1-2% over time with immense swings I'd probably lean that you're lucky moreso than good.

Did you read the part where I said a decade?

No, he's FUDing. I think it's in good faith, but based on an idle belief in faulty neoclassical economic dogma. The Efficiency concept assumes the blank slate. It says the median market trader has all available information, but it does not say if they use that information correctly. Likewise, the way he uses the word edge assumes insider trading, a secret information source, but with uniformly obvious analysis of that information. So in other words trader quality doesn't vary, just sources of external information. Obviously this is wrong per HBD.

My intuition is that, for a long time in politics, I have beat the market not with secret information, but superior analysis skills. But in politics there is no competition like Hanson wants allowed, so you just get ignored with superior ideas. In theory, though, these superior analysis skills should transfer to trading, including sports odds, because not only is it better than the median sports fan, it's also better than the vast majority of Ivy league grads and Jane street traders (median IQ 120), who are picked not for skill but for the willingness to cheat and lie and grind. Most of their edge in other markets comes from cheating (buying secret data) and grinding (trading all the time and trading with more capital than they deserve, because it was handed to them). My analysis should be superior to them in a live sports game where they can't pull these dirty tricks. And it seems to be. I made 16% yesterday, main reason it wasn't more is the Mexico game had weird stuff happen, I believe their behavior at the end of the second half was low probability and I lost on that.

Most of their edge in other markets comes from cheating (buying secret data) and grinding (trading all the time and trading with more capital than they deserve, because it was handed to them). My analysis should be superior to them in a live sports game where they can't pull these dirty tricks.

You should just cheat yourself. Scale up. Way way way up. Start your own sports betting ETF. Or possibly recognize that if betting on sports with capital that was handed to them, more than they deserve, is cheating, then some folks are about to start cheating against you in sports betting, too.

You're betting into large holds inplay, I'd be very surprised if you had any unique insights on stuff that actually impacts lategame pricing like rotations or quality of substitutes moreso than vibe-betting and the 'secret data' thing is literally just applied intelligence. Big syndicates will literally rewatch all games played and regrade them according to their own particular talent evaluation matrices, plus pay for the absolute fastest feeds (If you're watching on TV you are verymuch behind) and they barely eke out tiny margins over time.

The Median Sports Fan's IQ for these things is essentially 20 in terms of betting ability, there is a gigantic gap between 'smarter than the average punter' and 'capable of swinging profitably on gut feel on the most liquid sporting markets in the world without particular price sensitivty'. You'd be better off just punting random stocks since atleast that's a positive sum market.

Equity markets are positive sum. Sports markets are negative sum. The Kalshi markets are being pushed off fairs against 'public' teams a bit due to weight of retard money but if I check back again in 1000 bets you will have lost your ass most likely in whatever strategy you think you've found.

Most Jane Street traders aren’t cheating or doing anything interesting. They’re exploiting tiny quirks in foreign derivatives markets or the repo market / basis trade or creating ever more complex ways to eke out margin when ETFs rebalance all with huge leverage so that 1bp becomes a moderately large figure.

There are definitely still hedge fund types who engage in the traditional shadier kind of business, but they’re not quants, they’re big global/regional macro or sector/theme funds run by guys in their sixties whose claim to fame was correctly calling one big crash in the last 35 years.

Yeah most macro guys have one or two big bets that work out and otherwise get their asses beat over time. Market making is just a gigantic ticket clipping operation which is why it's relatively sustainable and scales well

It’s a ticket clipping operation but in certain cases with insane leverage which in a real crisis where crazy things happen for short periods in the repo market (like they did in 2008) could blow up in an interesting way.

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Most Jane Street traders aren’t cheating or doing anything interesting. They’re exploiting tiny quirks in foreign derivatives markets or the repo market / basis trade or creating ever more complex ways to eke out margin when ETFs rebalance all with huge leverage so that 1bp becomes a moderately large figure.

That's cheating if a 140 IQ person can't do it from home. The world exists for smart individuals, not grinding ekers.

I mean 140 IQ guys are setting the parameters then it's a combination of top tier bots, accumulated subject matter expertise and negotiating super low fees in exchange for super high turnover.

How many bets is that? Thousands? The same edge has held through massive swings in how odds are calculated in that period?

In any market, consistent excess returns are the product of superior information, superior analysis, or both. So whatever you’re betting on, do you earnestly believe you have either?

I think probably I have near the maximum amount of information since insider trading is implausible unless the game is rigged, and I have superior than median analysis since I am more intelligent than most people trading the market.

Please pursue responsible gambling tools available to you prior to wrecking yourself.

Given relatively high mortgage interest rates over the last several years, my partner and I have been been delaying purchasing a shared home and have spent the time building up a stronger financial position instead.

Watching the behavior of the 10 year Treasury, it looks like we're going to be stuck between six and seven percent for the foreseeable future, so I should probably start planning. Are there any good rules of thumb for choosing between a 15 and 30 year mortgage these days? I hate debt, so I gravitate to the 15 in all cases, but I also know that's a preference, and not based on anything rational.

I agree with others that the 15 year terms are not favorable enough to incentivize it. Something I would consider if I were you is an ARM, which will offer lower rates than fixed. Interest rates are already high, so there is less to lose with an ARM and a greater chance for a refinance to become worth if they descend.

I am somewhat nervous about the 10 year fixed and thereafter ARM I took in 2021, but I have a few more years to still hope for better policy (from the political branches; I think the Fed is currently pretty darn close to correct).

Every time I hear somebody recommend an ARM, I reflexively think of the 2022 rate spike, and the Volcker shock. How did you get over that? Interest rate risk is scary.

I'm fully exposed to the 2022 rate shock (which is to say I took an ARM at 2021 rates), but there are lots of ARM products that lock for 7-10 years, so I have about 5 years left. My presumption as a buyer is that I will either be able to refi at attractive rates or make enough career progress to blast the principal down if it comes to that. 10 years is a long time to not get a downward rate cycle, though yes I may end up burned.

But as a current buyer, the rate shock is already like 90% in place. I seriously doubt anyone at all doing a 30 year today will not refinance long before its time is up... in general it is worth it to refinance when rates move 1.5%.

I also did the 30-year + aggressive payoff schedule (trending to 15 years and maybe less if family members die and I receive expected inheritance).

Keep in mind you do get to deduct mortgage interest paid, so if you are able to itemize deductions (should be more likely with SALT cap increasing to 40k) it works out to something more like 3-4% effective interest paid. Not bad if you want the flexibility and lower mandatory payments.

I share your hatred of debt, but I ended up going with a 30 year mortgage anyway, for the reasons that Amadan laid out below. I calculated that getting a 30 year mortgage but paying it off as if it were a 15 year mortgage would see the house paid off in 16 years. That extra year of payments is not an insignificant amount of money, but I figured the flexibility was worth it in case I should lose my job, get hit by a bus, etc., and find myself short on cash at some point in the next 15 years.

I ended up paying the mortgage down pretty aggressively in the first two years, leaving me with only 15 years of payments to go by last summer. At the time, I debated refinancing to a 15 year mortgage, and I kind of regret not doing it since mortgage rates went back up again. But if I keep paying it off at the same rate, I should be mortgage-free in less than five years anyway, so I’m not sure it matters.

Back when interest rates were 2%-3%, a 30-year mortgage was practically free money, but today, if you can afford the house you want with a 15-year mortgage, it will save you a large amount in total payouts. Most people take 30-year mortgages so they can afford more house.

Some people will say take the 30-year mortgage and make double payments when you can afford them, which saves you almost as much but allows flexibility should your finances become strained. That works, but requires financial discipline, and if you can comfortably afford the 15-year rate, it's still a better deal.

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