5 ms·

In my experience, it seems that a lot of people have an un-stated gut feeling that "doing something" must out-perform passive dollar cost averaging a broad low-

by KMag 4y ago

In my experience, it seems that a lot of people have an un-stated gut feeling that "doing something" must out-perform passive dollar cost averaging a broad low-fee index ETF. If we came up with some obfuscated mathematical dance that, if un-obfuscated, were obviously dollar cost averaging in a broad-based low-fee index ETF, I think it would be more popular. Edit: There are also lots of investment strategies where people are short tail-risk and don't realize it or properly account for it. For instance, my dad is a pretty smart guy (practicing medical doctor who never got his undergrad degree because he crushed the MCATs and got into med school after 3 years of undergrad, back in the 1970s when med school was less competitive) but he's convinced that his gut-feeling covered calls out-perform a simple buy-and-hold (on a non-risk-adjusted basis). I don't doubt it's possible to out-perform on a risk-adjusted basis, and maybe even on a non-adjusted basis with careful enough analysis, but he's never performed any analysis on the opportunity cost that he has given up over the years. Without any attempts to model or otherwise estimate opportunity costs, I doubt it's likely he's actually out-performing. He sees that most days, he's out-performing, and in the rare cases where his calls get allocated, he just tells himself "well, at least the long stock position did very well". He's short the tail risk, but essentially largely ignores that part because it's hidden by the gains in his simultaneous long position. He feels good because he's doing extra work, and most days he's out-performing, so the gut feeling is that he's out-performing the market on a non-risk-adjusted basis.

rurp 4y ago
Heh, I think that idea has a lot of promise. Casinos might offer some guidance here given how good they are at making games with fairly straightforward negative odds seem enticing. We need some sort of responsible investing vehicle that includes gamification, intermittent reinforcement, and a tiny chance for a huge payoff.
- sumy23 4y ago
  > We need some sort of responsible investing vehicle that includes gamification, intermittent reinforcement, and a tiny chance for a huge payoff. You’re basically describing options.
  - KMag 4y ago
    > You’re basically describing options. Well, with vanilla options, you'd need a basket of options to both reasonably closely replicate performance of a broad index (the "responsible vehicle" part) and also a small percentage of the time hitting a big pay-out. Presumably, you'd want mostly short-duration at-the-money calls on a low-fee broad-index ETF (so they often end up owning the ETF), and a small number of deep out-of-the money puts and calls on volatile micro-cap single names to get that sweet sweet irregular reinforcement dopamine hit. This is not investment advice.
    - sumy23 4y ago
      I don't think investing in short-term at-the-money options would be a good strategy because you'd lose a lot to premiums. It'd be better package long positions on the low-fee ETFs mixed with some deep otm options as an investment vehicle. Love the concept!
      - KMag 4y ago
        Sorry, I thought we were talking about restricting ourselves to using strictly a basket of vanilla options.
- erehweb 4y ago
  Premium Bonds in the UK are part of the way there https://www.nsandi.com/products/premium-bonds https://www.nsandi.com/products/premium-bonds
- KMag 4y ago
  I think perhaps micro-managing layered limit orders to try to squeeze the last penny out of multi-kilobuck index ETF purchases might be the right way to gamify responsible investing, though that does have the danger of soaking up hours during the workday, so there are negative consequences. Maybe they way to go is lump-sum investing into some bond ETFs with gamified rebalancing into an age-appropriate mix of bond ETFs and broad equity index ETFs, following some pattern similar to value averaging for the rebalance, rather than cost averaging. It shouldn't actually be too hard to get something that has the right balance of feeling like real work, being relatively difficult to screw up (or the most common errors having little long-term effect), and out-performing dollar cost averaging. This isn't investment advice, and even if it were, you shouldn't take investment advice from internet randos.
- TylerE 4y ago
  Sounds like the lottery. The problem is, when dealing with a zero (or negative) sum game, having a few big winners means you have lots of little losers, or a few big ones.
gruez 4y ago
>Edit: There are also lots of investment strategies where people are short tail-risk and don't realize it or properly account for it. For instance, my dad is a pretty smart guy (practicing medical doctor who never got his undergrad degree because he crushed the MCATs and got into med school after 3 years of undergrad, back in the 1970s when med school was less competitive) but he's convinced that his gut-feeling covered calls out-perform a simple buy-and-hold (on a non-risk-adjusted basis). Nice to see that's still around https://old.reddit.com/r/thetagang/wiki/index https://old.reddit.com/r/thetagang/wiki/index
- deleted 4y ago
  [deleted]
- prostoalex 4y ago
  Not saying the strategy outperforms, but he should be aware that there are ETFs now covering the covered-call strategy - XYLD, RYLD, QYLD - which automate most of that at reasonable cost.
  - ddorian43 4y ago
    Extremely expensive 0.6% fee and certain to under-perform the index in the long run.
  - ProjectArcturis 4y ago
    I'm sure he thinks he's better at selecting stocks and call strikes than a robo-index.
- readthenotes1 4y ago
  Less competitive? I know a doctor who got his MD in 1952 as a 21 year old (18 months college), another who got it in the 70s as a 24 year (3 years college), and 2 who just graduated this year at 26 and 29 (4 years college each). Listening to the stories, med school got progressively easier (1950: tons of WW2 vets on GI bill--older and deadly serious, only 1/3 made it through. 1970s: 2/3 made it through, most dropped first year. 2018: 95% made it through because the schools radically changed from weeding out to hyper-supportive)
WJW 4y ago
I once read an article describing this basically as "farming" vs "trapping" tactics. For a farmer, there is basically always more work to do (weeding, sowing, harvesting, maintaining tools and buildings, looking after animals etc etc etc) and often more work directly results in more profit. Trapping on the other hand is not like that. Once you have set your traps, you must now sit still and wait. Checking every 5 minutes if an animal has walked into the trap yet is actually counterproductive. The premise of the article was that investing is more like trapping than like farming. Since most of us come from societies with a long history of farming and the resulting cultural norms have permeated through said societies, many people feel like they "must do something" to tend to their investment crops properly. I'll add my own speculation that in many western societies the industrialization and class warfare rhetoric has created a meme that "only work deserves compensation", implying that supplying capital is an unworthy state of existence. (See for example the many posts on HN decrying every single landlord as a parasite on society) If you want to invest but also want to hold on to your identity as a wholesome "middle class" American (definitely not one of those nefarious "elites" you keep reading about in the news!), just sticking your money in an index fund and doing nothing else may feel dangerously capitalist. Fiddling with it gives you some emotional satisfaction back by "working" on the investments.
- beachy 4y ago
  That's an interesting premise, but as someone who does regular trapping for exotic pests, actual trapping is very much work. You do your rounds (a lot of walking), pull out dead animals and carry them with you, re-bait your traps, repair traps as required, dump the dead animals, and repeat over and over again. I guess there are other forms of trapping - more like hunting, a one off exercise to get that <whatever> - but I would hazard most professional trappers would see it as very much like work.
  - WJW 4y ago
    I agree that the actual "setting up traps" is work, but so is choosing investments (even if that is usually shunted off to an index fund these days). My gist was more that in both investing and trapping there is a point where the positions are set up and there just isn't anything that you can do to make the process go faster. Not being able to make it go faster by putting in additional work seems to be psychologically difficult to cope with for many people.

by KMag 4y ago

rurp 4y ago

Heh, I think that idea has a lot of promise. Casinos might offer some guidance here given how good they are at making games with fairly straightforward negative odds seem enticing. We need some sort of responsible investing vehicle that includes gamification, intermittent reinforcement, and a tiny chance for a huge payoff.

sumy23 4y ago
> We need some sort of responsible investing vehicle that includes gamification, intermittent reinforcement, and a tiny chance for a huge payoff. You’re basically describing options.
- KMag 4y ago
  > You’re basically describing options. Well, with vanilla options, you'd need a basket of options to both reasonably closely replicate performance of a broad index (the "responsible vehicle" part) and also a small percentage of the time hitting a big pay-out. Presumably, you'd want mostly short-duration at-the-money calls on a low-fee broad-index ETF (so they often end up owning the ETF), and a small number of deep out-of-the money puts and calls on volatile micro-cap single names to get that sweet sweet irregular reinforcement dopamine hit. This is not investment advice.
  - sumy23 4y ago
    I don't think investing in short-term at-the-money options would be a good strategy because you'd lose a lot to premiums. It'd be better package long positions on the low-fee ETFs mixed with some deep otm options as an investment vehicle. Love the concept!
    - KMag 4y ago
      Sorry, I thought we were talking about restricting ourselves to using strictly a basket of vanilla options.
erehweb 4y ago
Premium Bonds in the UK are part of the way there https://www.nsandi.com/products/premium-bonds https://www.nsandi.com/products/premium-bonds
KMag 4y ago
I think perhaps micro-managing layered limit orders to try to squeeze the last penny out of multi-kilobuck index ETF purchases might be the right way to gamify responsible investing, though that does have the danger of soaking up hours during the workday, so there are negative consequences. Maybe they way to go is lump-sum investing into some bond ETFs with gamified rebalancing into an age-appropriate mix of bond ETFs and broad equity index ETFs, following some pattern similar to value averaging for the rebalance, rather than cost averaging. It shouldn't actually be too hard to get something that has the right balance of feeling like real work, being relatively difficult to screw up (or the most common errors having little long-term effect), and out-performing dollar cost averaging. This isn't investment advice, and even if it were, you shouldn't take investment advice from internet randos.
TylerE 4y ago
Sounds like the lottery. The problem is, when dealing with a zero (or negative) sum game, having a few big winners means you have lots of little losers, or a few big ones.

gruez 4y ago

>Edit: There are also lots of investment strategies where people are short tail-risk and don't realize it or properly account for it. For instance, my dad is a pretty smart guy (practicing medical doctor who never got his undergrad degree because he crushed the MCATs and got into med school after 3 years of undergrad, back in the 1970s when med school was less competitive) but he's convinced that his gut-feeling covered calls out-perform a simple buy-and-hold (on a non-risk-adjusted basis). Nice to see that's still around https://old.reddit.com/r/thetagang/wiki/index https://old.reddit.com/r/thetagang/wiki/index

deleted 4y ago
[deleted]
prostoalex 4y ago
Not saying the strategy outperforms, but he should be aware that there are ETFs now covering the covered-call strategy - XYLD, RYLD, QYLD - which automate most of that at reasonable cost.
- ddorian43 4y ago
  Extremely expensive 0.6% fee and certain to under-perform the index in the long run.
- ProjectArcturis 4y ago
  I'm sure he thinks he's better at selecting stocks and call strikes than a robo-index.
readthenotes1 4y ago
Less competitive? I know a doctor who got his MD in 1952 as a 21 year old (18 months college), another who got it in the 70s as a 24 year (3 years college), and 2 who just graduated this year at 26 and 29 (4 years college each). Listening to the stories, med school got progressively easier (1950: tons of WW2 vets on GI bill--older and deadly serious, only 1/3 made it through. 1970s: 2/3 made it through, most dropped first year. 2018: 95% made it through because the schools radically changed from weeding out to hyper-supportive)

WJW 4y ago

I once read an article describing this basically as "farming" vs "trapping" tactics. For a farmer, there is basically always more work to do (weeding, sowing, harvesting, maintaining tools and buildings, looking after animals etc etc etc) and often more work directly results in more profit. Trapping on the other hand is not like that. Once you have set your traps, you must now sit still and wait. Checking every 5 minutes if an animal has walked into the trap yet is actually counterproductive. The premise of the article was that investing is more like trapping than like farming. Since most of us come from societies with a long history of farming and the resulting cultural norms have permeated through said societies, many people feel like they "must do something" to tend to their investment crops properly. I'll add my own speculation that in many western societies the industrialization and class warfare rhetoric has created a meme that "only work deserves compensation", implying that supplying capital is an unworthy state of existence. (See for example the many posts on HN decrying every single landlord as a parasite on society) If you want to invest but also want to hold on to your identity as a wholesome "middle class" American (definitely not one of those nefarious "elites" you keep reading about in the news!), just sticking your money in an index fund and doing nothing else may feel dangerously capitalist. Fiddling with it gives you some emotional satisfaction back by "working" on the investments.

beachy 4y ago
That's an interesting premise, but as someone who does regular trapping for exotic pests, actual trapping is very much work. You do your rounds (a lot of walking), pull out dead animals and carry them with you, re-bait your traps, repair traps as required, dump the dead animals, and repeat over and over again. I guess there are other forms of trapping - more like hunting, a one off exercise to get that <whatever> - but I would hazard most professional trappers would see it as very much like work.
- WJW 4y ago
  I agree that the actual "setting up traps" is work, but so is choosing investments (even if that is usually shunted off to an index fund these days). My gist was more that in both investing and trapping there is a point where the positions are set up and there just isn't anything that you can do to make the process go faster. Not being able to make it go faster by putting in additional work seems to be psychologically difficult to cope with for many people.