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This trope gets repeated over and over but it just makes no sense. Volatility is risk. What rational investor says "interest rates are too low, I MUST deploy
by danhak 6y ago
This trope gets repeated over and over but it just makes no sense. Volatility is risk. What rational investor says "interest rates are too low, I MUST deploy my capital into a market that is seeing wild 30% gyrations from month to month instead of parking it safely while this global crisis plays out."
- beamatronic 6y agoAn investor who fears missing out on 30% gains.
- HenryKissinger 6y agoKendall found that prices followed a random walk model, i.e., past stock prices have no bearing on future prices.
- beamatronic 6y agoI wonder if a BTFD strategy would still work
- danhak 6y agoThen you concur that the market is being driven by FOMO and not low interest rates?
- toomuchtodo 6y agoIf you have a mandate to generate returns (institutional, pension funds), you have no choice but to participate. You can't sit in cash forever as returns race towards zero [1]. You may flail and fail looking for that Alpha (perhaps even making wild private equity bets), but that's what you're getting paid to suss out as an investment manager. “As long as the music is playing, you’ve got to get up and dance.” For equities heavy strategies, there is even an acronym to describe this: TINA ("There Is No Alternative") [2] [1] https://www.visualcapitalist.com/700-year-decline-of-interest-rates/ https://www.visualcapitalist.com/700-year-decline-of-interes... [2] https://www.investopedia.com/terms/t/tina-there-no-alternative.asp https://www.investopedia.com/terms/t/tina-there-no-alternati... ("On the other hand, if bonds offer low yields. and illiquid assets such as private equity or real estate are also unattractive, investors may hold stocks despite their concerns rather than revert to cash. If enough participants are of the same mind, the market can experience a "Tina Effect," rising gradually despite an apparent lack of drivers since there are no other options for capital increase.")
- erentz 6y agoA very large percentage of the market is required to achieve a certain return. Think insurance companies. Giant pension plans. Etc. They have all been forced further and further out the risk curve over the past decade due to low interest rates.
- ianai 6y agoI wonder how long those pension plans may make their obligations if they start paying short term obligations with their long term principals. I could see something from them triggering a correction.
- cool_dude85 6y agoThe current model of having a very large fund that needs to show to an actuary that it's "fully funded" is relatively new. Defined benefit pensions existed for quite a while before "fully funded" pension funds, using a pay-as-you-go system, and could probably survive indefinitely that way if designed right.
- bpt3 6y ago> Defined benefit pensions existed for quite a while before "fully funded" pension funds, using a pay-as-you-go system, and could probably survive indefinitely that way if designed right. The PBGC was created because this isn't the case. The issues with Social Security are another example of how pay as you go isn't completely sustainable.
- cool_dude85 6y agoThe PBGC is an insurance system. Of course, pension plans haven't always been able to pay out, but the fact that an insurance system exists for them doesn't make them any more of a failure than a savings account backed by FDIC. And what issues with social security do you mean? The program has taken in more than it's paid out since '83.
- 6y ago
- javert 6y ago> instead of parking it safely while this global crisis plays out Because interest rates will never go back up, or if they do, they will be counterbalanced by inflation. This is the view of Ray Dalio at Bridgewater and (presumably) many other very smart people. I'm not that smart, but I agree. Thus, cash and cash obligations are no longer stores of wealth. Equities are, unfortunately. High volatility is just the price you pay. Equity prices are honestly not that high if this scenario plays out.
- danhak 6y agoForgive me if I say this sounds awfully like the "new paradigm" / "this time it's different!" phase of a bubble.
- toomuchtodo 6y agoBut it is different this time. Productivity growth is slowing [1], people are aging rapidly (in the US, baby boomers are retiring at a pace of 10,000 people per day, 5,000 of them die per day) [2], and secular stagnation is taking hold in most first world countries [3]. Sort of strange to expect today or the next 50 years to look like the last 50 years. [1] https://scholar.princeton.edu/sites/default/files/ernestliu/files/lms20190111.pdf https://scholar.princeton.edu/sites/default/files/ernestliu/... [2] https://research.stlouisfed.org/publications/economic-synopses/2019/04/19/factors-behind-the-decline-in-the-u-s-natural-rate-of-interest https://research.stlouisfed.org/publications/economic-synops... [3] https://web.archive.org/web/20200629061702/https://larrysummers.com/2016/02/17/the-age-of-secular-stagnation/ https://web.archive.org/web/20200629061702/https://larrysumm...
- marktangotango 6y agoYeesh, sounds like Japan in the 90's!
- toomuchtodo 6y agoJapan is a time machine, showing us the future of all developed countries as their population ages. No country is immune once their total fertility rate drops below replacement rate for a sustained period of time.
- amiga_500 6y agoIt's a well established economic term: financial repression. Understate inflation so real rates are negative, then your savings either dwindle or you give in to the pressure to take more risk.
- cool_dude85 6y agoIf the expected NPV of the riskier investment is much larger than the non-risky one, a "rational investor" would of course take it. That's literally what the words mean.
- refurb 6y agoIn a high volatility market, the NPV might range from -10% to +20%.
- ianhorn 6y agoMonth over month volatility is a poor reason to put money there. Long term average growth is a good reason. Over the 10-20 year periods in the last century, what widely available asset classes perform better?
- bryanlarsen 6y agoIf you invested into the German stock market in 1914, it would have taken over 100 years to get your money back. The America of the past 100 years has been quite exceptional. Using its history to predict the future is not a good idea, IMO.
- BozeWolf 6y agoLet that be a lesson: do not spend all your money at once. Buy chunks of stocks (etfs) periodically. Im sure the result would be much better then.
- armanboyaci 6y agoAre you sure about the German stock market? I've googled and found this https://commons.m.wikimedia.org/wiki/File:CDAX-Kursindex.png https://commons.m.wikimedia.org/wiki/File:CDAX-Kursindex.png
- svachalek 6y agoYou've always got to consider inflation over the long term, and in this case there is a well known hyperinflation period during the Weimar days. (I don't know about the GP statistic but this graph is clearly not meaningful)
- ianhorn 6y agoIf your currency is going to undergo hyperinflation, aren't equity or physical goods exactly where you want to keep your money?
- thephyber 6y ago
- baron_harkonnen 6y agoYou're thinking about your personal investments, not someone managing a large investment firm or hedge fund. This simple fixes for your personal investments would be seen as absolutely insane in the professional investment world. You can't just tell your clients "oh I put $100 Billion into some nearly 0% interest investments because I think the market is crazy", especially if the DJIA is having record months. Even the people managing your 401k are expected have a steady read of return and react slowly and calmly.
- claudeganon 6y agoIsn't some form of this what the Taleb-advised Universa fund is doing? https://www.bloomberg.com/news/articles/2020-04-08/taleb-advised-universa-tail-risk-fund-returned-3-600-in-march https://www.bloomberg.com/news/articles/2020-04-08/taleb-adv...
- NotSammyHagar 6y agoHoly shit. 41x! I'm in the wrong world. Even though I'm in the overpaid-programmer-industrial-complex, in an expensive west coast town with an expensive million dollar house and expensive taxes, I can't imagine what it would take to get into evil and profitable investment vehicles like these hedge funds. I just have no exposure to that world.
- gas9S9zw3P9c 6y agoI'm curious - why do you call the hedge fund world evil? I hear this quite often but where does it come from? I've worked in both a hedge fund and in tech, and I found the former to be less evil and pretentious. People in finance think and say "I want to make a ton of money" while people in tech say "I want to save the world" while thinking "I want to make a ton of money" - resulting in misaligned incentives and imposter syndrome everywhere.
- tossAfterUsing 6y agotoday i learned that (for some people) 'impostor syndrome` is a heuristic for cognitive dissonance.
- abvdasker 6y agoHave you talked to the people who use Robinhood? This is exactly how many of them think but in less sophisticated terms.
- jppope 6y ago/r/wallstreetbets for anyone looking
- trhway 6y ago> instead of parking it safely while this global crisis plays out. parking isn't safe. Parking is guaranteed to lose 20-30% because of the newly printed money and the resulting asset prices rise across the board. Yes, some assets may experience the swings during that money tsunami, yet on average across the board the assets would still rise 20-30% - ie. the amount of the newly printed money. Economy and market didn't part ways. The stock market is just like speedometer that got "upgraded" from mph to kmh - the number is higher while the car and the speed are still the same.
- cameldrv 6y agoThe problem is that cash is also quite risky right now. The money supply expanded by about 80% in the past few months. Stocks are more sensitive to economic conditions but less sensitive to inflation.