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The Buy and Hold Mindset

122 points by rmason 4y ago

deleted 4y ago
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DelaneyM 4y ago
It's a bit of an aside in the post (which I otherwise agree with), but dollar-cost averaging such as: > If you decide to invest $100,000 into the stock market because you agree with my reasoning in this post, then it would make a lot more sense to invest $10,000 a month over the next ten months than invest all of the $100,000 this month. (Quote from article.) That doesn't actually make a lot more sense, and that is not the argument for dollar-cost averaging. Assuming you're investing in a single equity/portfolio, then at the end of that ten month period you will have an effective entry price for the entire lot either way. Either that price is the value it's at _now_, or that price is the weighted average of ten entry prices. One thing we know, or at least which we're assuming when we choose to invest, is that over the long term prices go up. So unless you have outside knowledge or asymmetric insight suggesting prices will in fact go down, it makes no sense to DCA into the market. And if you do think prices will go down before they go up, then you should hold the entire amount back until you no longer believe the asset is likely to decline. Dollar-cost averaging is not an argument to buy slowly when you already have money, it is a reassurance to keep investing when process go down and not to hold any money back when investing money you're receiving on a regular schedule (like a paycheque). Ironically (and amusingly) DCA is also an entry method into a position when you're willing to accept lesser theoretical returns to avoid FOMO but are feeling timid, which is definitely on-brand for a VC.
- bojo 4y ago
  > One thing we know, or at least which we're assuming when we choose to invest, is that over the long term prices go up. Right, but what if the prices went down during that 10 month period, even if you were bullish? You invested at the top in one chunk, when you could have smoothed it out in increments instead. That smoothing function is the entire point of DCA and takes the guesswork out of reading the market, like trying to find entry points.
  - joshfee 4y ago
    But barring other information it could go down in that 10 month period or it could go up in that 10 month period, and the long term upward trend suggests its more likely for prices to go up than down in those 10 months.
    - nerdponx 4y ago
      Sounds like a bias-variance tradeoff to me.
  - DelaneyM 4y ago
    And what if the prices go up during the 10 month period? You invested at a much higher price than needed. The smoothing function of DCA will help mitigate FOMO and Buyer's Regret, but it won't (statistically) deliver higher returns.
    - SamBam 4y ago
      > but it won't (statistically) deliver higher returns. Would you take a coin-flip where heads you double your net worth and tails you lose all your money and assets? (Statistically) the expected outcome is zero, so it really shouldn't bother you either way, you could take the bet or not, it's the same if you go for it or if you don't. In the real world, though, lowering your risk means reducing the chance of both winning the bet and losing it. For many people it's worth more to have less risk of randomly timing the market poorly, even though they have less chance of randomly timing it well. Yes, over all investors the two decisions cancel out, but to the individual DCA can be worth lowering their risk.
      - DelaneyM 4y ago
        DCA'ing provides no mitigation of the risk of randomly timing the market poorly. The only risk it mitigates is the risk of a sudden bankruptcy, or some other massive exogenous event which disrupts your future plans. However even accounting for those events the expected value of DCA is still lower.
- sokoloff 4y ago
  DCA makes mathematical sense anytime you have a long-term bullish thesis (otherwise, "do not invest" is a better strategy), but have a belief that there is a short-term noise function super-imposed over the long-term uptrend and where that short-term noise function is relatively large in amplitude as compared to the expected long-term growth over the period. DCA makes psychological sense if the concern is a FOMO on the best possible entry price. It takes the psychological pressure of finding the absolute best off the table and replaces it with a smoothed average entry price. I think it's a more powerful psychological device (and I do tend to invest pretty much all at once when I reach a decision), but it's not entirely pointless mathematically.
  - conformist 4y ago
    Interesting…. Under what assumptions precisely is it optimal to dollar cost average over a short time interval, if short time fluctuations have a large magnitude relative to long term drift? Like eg if you assume geometric brownian motion it doesn’t seem to help?
    - chrchang523 4y ago
      Yes, you're correct about geometric brownian motion. The model must include some mean-reverting component (implied by "short time fluctuations") for DCA to come out ahead, and such a component would violate standard no-arbitrage assumptions. This is a reason I haven't made active use of DCA. But DCA doesn't give up much, either, so I'm fine with "passively" engaging in DCA-like behavior by haphazardly dumping spare money into index funds after min("significant" drop, time limit) instead of purely maximizing time in market.
  - aqme28 4y ago
    You can simplify the mathematical argument a lot by looking at DCA as forcing a relative "buy low sell high." When the price of the asset is lower, your DCA buys more, when it's higher you buy less. Relative to a single purchase at the average price, this is equivalent to buying low and selling high.
    - 4y ago
- FreakLegion 4y ago
  > So unless you have outside knowledge or asymmetric insight suggesting prices will in fact go down, it makes no sense to DCA into the market. Sure it does. Just like you say further down, people are "willing to accept lesser theoretical returns", except in this case it's to reduce e.g. tail risk. They could also buy up front and hedge, but that's already more technical than most people want to deal with.
  - DelaneyM 4y ago
    It depends somewhat also on what you're DCAing into. If you're DCAing into a major index, there's essentially no chance of it going to zero (that's a society-ending event, hedge with farming equipment and doomsday prepping). And thus, no statistical or mathematical benefit to DCAing. If you're expecting a non-continuous return function, such as a pending drug testing result or a major governments deal, then you're actively trading and a DCA strategy is almost certainly suboptimal. It's very hard to construct a situation which is both plausible and favorable for DCA _if you have all the funds upfront_.
    - FreakLegion 4y ago
      It doesn't need to go to zero to make sense. The US market fell by a third in a single month at the start of the pandemic, recovered over the next five months on its way to new heights heading into this year, and now is down a fifth again. DCAing is simply a low-rent hedge against getting caught out by those kinds of swings. You won't get to gloat about going all in at the bottom, but also won't have to cry about doing it at the top. DCAing is worse on average for simple objective functions, absolutely. Markets rise more consistently than they fall. But markets also fall faster than they rise. This may not matter to the hypothetical average person, but it matters to real people, and some of them make the perfectly rational decision, based on real-life economic factors that aren't captured by simple models, to trade returns for stability. You can formulate this as e.g. an MINLP model and it isn't at all hard to construct situations that are favorable to DCA when lump-sum is an option. All it takes is adding constraints to reflect a real person's life circumstances. Other strategies are still better than DCA, but they're also more complicated to execute, and we aren't talking about sophisticated investors here.
- twblalock 4y ago
  If you had made a lump sum investment the day before the crash in 1929 you would have regretted it, and it would have taken years for your investments to recover. DCA versus lump sum has been debated for a long time and there is really not a clear answer or expert consensus on the subject.
  - DelaneyM 4y ago
    There is absolutely expert consensus (among quants) that DCA _if you have the full lump sum up-front_ makes no sense. It's math.
  - silverdemon 4y ago
    Alternatively, you could have cautiously DCA-ed your lump sum in 12 monthly pieces, and then the 1929 crash happens the day after the 12th and final piece was invested. DCA cannot save us from a crash, though it can reduce the fear of a crash to the point where we actually make an investment rather than sit on the sidelines.
- c22 4y ago
  Research shows that timing the market is hard. The more times you try to do it, the more likely you are to fail. Dollar cost averaging saves you from having to express super human timing on all of your trades.
  - DelaneyM 4y ago
    Dollar-cost averaging is still timing the market, if you have the full amount up front. You're betting that your future weighted average is less than the current price, that's timing.
    - Nursie 4y ago
      You're trying to take short-term volatility out of the equation. If I think the stock will go up over the course of years but have really no idea what it's going to do over the course of hours/days/weeks, then approximating a buy-in at the average price over a longer period would seem to be a de-risking approach.
      - DelaneyM 4y ago
        It may well seem to be de-risking, but mathematically it doesn't.
        Nursie 4y ago
        Can you point me to some of this mathematical proof? Because I'm seeing advice all over the net that it can help iron out short-term volatility. Your point that "If you think it will go down over several months, you shouldn't be buying in" is fine, but I'm not sure it's equivalent to "I don't know what it's going to do anytime soon I'm buying this for long-term prospects". Imagine a stock with a sinusoidal price fluctuation at a frequency of just under a week, but which you expect to rise significantly over a 5 year period. Investing in that weekly over 5 weeks will net you a more locally average price than going all in today, particularly if you don't have good information about that sine pattern. Going all-in right now might net you a low price, but you may also be buying at a local maximum. (Think of discrete waveform sampling)
- dxbydt 4y ago
  > If you decide to invest $100,000 into the stock market because you agree with my reasoning in this post, then it would make a lot more sense to invest $10,000 a month over the next ten months than invest all of the $100,000 this month. Depending on the equity, you are essentially sampling from a skewnorm & summing over 10 variates. eg. if you invest in the broad market, ^GSPC (your s&p 500) has a skew of +0.4 and a variance of 2.8, so your five number summary works out to summary(mapply(function(x){sum(rsn(10, dp = cp2dp(c(0,1.67,0.4), "SN"))[1:10])},1:10000)) [-18.3, -3.7, -0.2,3.4,18.8]. While the median scenario is net neutral, you do end up underpaying 3-4 times if you fall below the first quartile. otoh, if you are feeling frisky and want to dump 100k into robinhood over the next 10 months, $hood has a skew of -0.88 & a variance of 26.3, so 10k realizations of this scenario - summary(res<-mapply(function(x){sum(rsn(10, dp = cp2dp(c(0,5.1,-0.88), "SN"))[1:10])},1:10000)) yields [-70.8, -10.6, 0.7,11.4,47.5] - much more interesting set of circumstances! I guess he's betting on prices generally headed down over the next 10 months, so he significantly underpays if things go per plan.
  - DelaneyM 4y ago
    > I guess he's betting on prices generally headed down over the next 10 months, so he significantly underpays if things go per plan. Yes, exactly that! And if one is betting on prices generally going down over the next 10 months one should just not enter the market at all.
    - bombcar 4y ago
      Or if you’re not sure but want to hedge buy now and buy some puts also.
      - DelaneyM 4y ago
        If you're just "not sure", buying puts wouldn't help. Running puts & long on a single equity is assuming a specific yield shape. A good example would be an upcoming test result report for a pharmaceutical - it's either going strongly and gradually up (long) or suddenly and significantly down (put), but not gradually down (in which case you'd be out on both puts and longs). But yeah, at this point you're a super-sophisticated investor and all of this discussion is meaningless. :)
- tlarkworthy 4y ago
  DCA reduces variance in your returns for a slightly lower rate of return. It's a risk reducer with a clear derivation. You exchange expected performance for reduced variance in outcome. That's useful, you can plan better with reduced variance. https://www.financialplanningassociation.org/article/journal/OCT15-dollar-cost-averaging-trade-between-risk-and-return https://www.financialplanningassociation.org/article/journal...
boringg 4y ago
I like the comparison of stocks to buildings in terms of cap rate P/E etc. And to his question that we don't know when the bottom is (totally true) but I suspect we still have a ways to go. FTX + Housing + global macro + Interest back into the market = downward pressure
andrewstuart 4y ago
>> The Gotham Gal and I buy and build a fair bit of real estate on the side This is not Fred Wilson's fault, and I don't target Fred for it - it is the fault of society in general, but I hate it that people "buy and build a fair bit of real estate on the side". I'm assuming he means residential. Rich people have no idea how it feels to be a renter when you want to own, but prices have been driven out of th bounds of possibility by people who can afford to "buy and build a fair bit of real estate on the side ". It's awful that society has divided into landlords and renters. And landlords/rich people really have no empathy - they're in their own lives and feeling good about how many houses they own. Government and society in general has completely failed by allowed housing to become a financial instrument instead of a modest/normal capitalist market as it was in the 1970s. In any such discussion you'll notice those who attack this line of thinking are ALWAYS house owners .... ALWAYS. These are the people who feel that any regulated fairness in housing is communism - that's because they are on the happy side of the housing equation. https://en.wikipedia.org/wiki/Australian_Dream https://en.wikipedia.org/wiki/Australian_Dream "The Australian Dream or Great Australian Dream is, in its narrowest sense, a belief that in Australia, home ownership can lead to a better life and is an expression of success and security. The term is derived from the American Dream, which first described the same phenomenon in the United States, starting in the 1940s." Owning a house used to be "the great Australian (American) dream". And now it's not. Now it's what rich people do many times over in a giant game of monopoly. https://www.forbes.com/sites/forbesrealestatecouncil/2021/09/28/homeownership-and-the-american-dream/?sh=68d84f9723b5 https://www.forbes.com/sites/forbesrealestatecouncil/2021/09... https://www.nytimes.com/1988/09/11/realestate/in-the-nation-why-owning-a-home-is-the-american-dream.html https://www.nytimes.com/1988/09/11/realestate/in-the-nation-...
- sokoloff 4y ago
  I think it's clear that rental properties should exist, because however much it sucks that some people can't buy a property to live in, it would suck a lot harder if the only way to live somewhere was to buy it. If rental properties should exist, who should own them? If renting of housing by private owners is banned, that's a small inconvenience for people who might be combining households (each partner lived apart initially and now want to move in together) or when otherwise taking a temporary assignment somewhere with the intention to return, but that's not the bulk of rental property pretty obviously. I think the greater challenge is that prospective home buyers are competing against other prospective home buyers. All else being equal, people earning a 25th percentile income and having a 25th percentile savings are going to lose out in a competitive bidding situation to people with a 26th percentile income and savings.
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ramesh31 4y ago
My number one buy right now is Roku. Down 75% from the COVID high with low debt and the best product on the market. I fully believe they will win the TVOS wars, which have untold billions at stake for advertising and data capture.
- mcculley 4y ago
  What does winning look like to you? I cannot imagine, for example, Apple pulling out of this war. Do you think other TVOS players will still be around?
  - ramesh31 4y ago
    Apple will be the Apple of the market, as they always are. The high end 25%. But Android TV is an absolute trainwreck. The level of lag is simply unnaceptable. And if there’s one thing that drives consumers nuts, it’s input lag. People will vote when they buy a TV. Roku is feature-for-feature a superior platform, with better performance, higher device penetration [0] and at a lower price. The only reason Google has gotten as far as they have is due to existing monopoly forces. [0] https://thedesk.net/2022/10/roku-amazon-market-share-domestic-q3-2022-parks-associates/ https://thedesk.net/2022/10/roku-amazon-market-share-domesti...
    - coding123 4y ago
      I keep buying Rokus. I think I'm on my 3rd one.
    - bombcar 4y ago
      Most everyone I know just casts from their phone via whatever. The smart TV is basically dead except for that.
- sokoloff 4y ago
  As a long-time (multi-decade) and very happy TiVo user, I'm a lot surprised and a little dismayed that they seem to have so badly fumbled the head-start they had in the battle for the better set-top box experience.
gw67 4y ago
If everyone thinks is bottom, it’s not bottom. A lot of YouTube videos saying “It’s bottom” in the title.
- georgebarnett 4y ago
  If everybody thinks the sun will rise tomorrow, it won't. Reminder: Nobody can predict the future.
dr_ 4y ago
If you find current valuations attractive , and plan on dollar cost averaging through the next 12 months, but realize that businesses, management, competitors may change the investment scenario - it makes far more sense to buy a fund consisting of many companies (maybe even the entire stock market) rather than to make bets on individual companies.
pcj-github 4y ago
Seeing your net worth go down by billions is probably a decent motivator to write a blog post hinting to the market that prices look real good now.
- MuffinFlavored 4y ago
  they looked better when the S&P was at 3500 than it being at 4000 currently down from 4800 at its high but the narrative then was “it’s headed to 2400-3200”
somethoughts 4y ago
There's also an unmentioned aspect to the real estate to stocks analogy. There is a spectrum in the types of real estate that is somewhat akin to the spectrum of value stocks to growth stocks to pure speculation based stocks. There are income producing properties such as apartment buildings, duplexes, strip mall commercial real estate in average cities. These are similar to consumer staples stocks like P&G, Walmart, utilities, etc. The income is generated via rent from reliable consumer demand. They are priced for boring cashflow (with high cap rates and low PE) but should endure. There are reliable growth properties in trendy cities that are legitimately and secularly growing where future increases in rents are derived from rising local salaries and demand. These are like FAANMG stocks. They are priced for growth (i.e. low cap rates - high PE) - such as Silicon Valley, Seattle, LA, Austin. On the flip side of the spectrum, there is properties which are designed for speculation (and optionally money laundering) not based on any sort of rental income - almost like the physical manifestation of bitcoin. Think never unoccupied 3rd vacation homes in Miami and New York. These are like ARK ETFS or crypto coins - both do well in speculative times and see less growth when interest rates go up.
- TylerE 4y ago
  I would NOT want to own commercial real estate right now, especially retail, especially in a boring medium town.
- csense 4y ago
  I've never understood real estate investing... - You have to do a bunch of physical maintenance of the property and be on-call to unclog toilets - You have to know landlord-tenant law inside and out, there are a lot of hidden gotchas that can get you sued for big money or even criminally prosecuted - You have to see stuff that's wrong with the property and understand how much you'll need to fix it - You have to know how to find all sorts of contractors who will do a good job and not rip you off - You can't invest in say the $500-$5000 range to get your feet wet at small scale, every property with any sort of building on it at all is like $50,000+, and building a brand-new house is even more expensive - Enormous leverage seems to be the norm, and in most states, the bank doesn't forgive debt that's not covered by sale of the collateral (house) - Anyone with enough money can do it, it's a perfectly competitive market where it seems difficult to have any kind of edge over professional landlords or house flippers that have built a career in this area, have a lot of capital and a staff of full-time experts optimizing every aspect down to a science - If I get on e.g. Zillow it says, "Such-and-such property in location A is worth $X and such-and-such property in location B is worth $Y where Y = 3X" and I say "Wait why is it that? Y = 2X or Y = 4X also seems equally reasonable, heck Y = X or Y = 5X don't seem unreasonable." I have no intuitive sense for what property value should be. - Your investment's locked up for a long time, it takes weeks / months to sell real estate. - In 2022, you'd be lucky if a computer from 2002 sells for maybe 5% - 10% of what it sold for in 2002. In 2022, you're telling me a house sells for.. enough more (in real terms) than what it sold for in 2002 that it would have been a worthwhile investment despite now being 20 years old(er)? That feels like some kind of violation of whatever is the financial equivalent of the laws of thermodynamics - You can do all your landlording right and still get screwed by tenants from hell. For me, a stock and an investment property both yielding 6.4% are in no way equivalent. Given all the downsides, the ROI on property would need to be like 5-10 times as high for stocks for me to even consider it.. and that gets into too-good-to-be-true returns. I know there are people who are experts in this area and people who say real estate's a good investment. But I don't understand real estate anywhere near well enough to put in the sums of money that seem to be required.
dragontamer 4y ago
But and hold has been corrupted into HODL, and cryptocoins enthusiasts / meme stonks will wreck people because of it. Buy a stock so that you keep holding it for 10 years is good advice, but not in the context of today's mania. It's advice that is supposed to mean 'buy safe things', not 'buy that thing with exponential growth that might be worth 1000x it's current value in 10 years. I do think that blogs / advice like what this post does is overall a good idea and good advice. But I find it difficult to discuss in practice due to the HODL corruption.
- colechristensen 4y ago
  Just don’t buy popular memes as long term investments.
  - smcn 4y ago
    I'd go even further, I don't think you should hold meme stocks longer than a day. You can always buy in the next day but momentum can swing way too much and kill any profit you made. For example: BBBY when it was revealed that Ryan Cohen sold his shares. Instant drop.
- SamBam 4y ago
  I saw the headline and my mind went to HODL as well, but the article itself is definitely about modest, safe investments, not "diamond hands" and moon-shots.
  - dragontamer 4y ago
    I agree. Its a good article in isolation. My main problem is that HODL is a pretty common mindset, based on random discussions I have on the street / with people in general. You know, the types who lose 60% on ARKK but they're sure that they're going to "make it back" over the next few years? Or the people who think that losing 60% on ARKK is similar to losing 15% in VTI / SPY? (For those who don't realize, starting with $100k, you end with ~$40k if you had ARKK, but $85k if you held onto VTI/SPY. Aka, those who held VTI/SPY have twice your money now relatively speaking). Unrealized losses _are_ losses. People must recognize this. People are corrupting the buy-and-hold advice to mean "ignore the unrealized losses" or "if you don't sell its not a loss", which is bullshit.
who2 4y ago
Money is the root of all evil.
- jonathanlb 4y ago
  Inaccurate. The full saying is: "For the love of money is a root of all kinds of evil."
kareemsabri 4y ago
DCA is always controversial here, someone always says lump sum is better, but I tend to think of the maxim of Ben Graham that "the stock market is a voting machine in the short term and a weighing machine in the long term". I expect prices to eventually converge to some "fair" or rational value for the stock(s) in question, but at any given moment they may be way off, particularly for a single name, so I like DCA as a way to mitigate that risk. I do however recognize that DCA is a psychological way for people to build comfort and a consistent investing habit, and for this reason I think it's extremely valuable. That said, if you're very long it's hard to picture entering Google or Apple at 15-18x earnings and doing very poorly. Personally I am DCA'ing because i) it's how I invest and ii) I do think there is more pain to come. There are many reasons for that, rallies amongst meme stock names after dips is one indicator imo. His analysis of Airbnb is interesting. Airbnb's trailing 12 month P/E ratio is 40x, not 15.5x. He is projecting forward Airbnb's recent monster quarter. This is a bit risky imo, though maybe he knows the business better than me. I'd still be more comfortable DCA'ing into Airbnb or travel as a sector, but 2 quarters ago their P/E was 150x, so at 40x it does look pretty attractive. Shameless plug, since this is right in our wheelhouse, I am the creator of a DCA focused custom indexing investing product[1] and a simulator to backtest DCA investing[2]. [1] https://www.tryshare.app https://www.tryshare.app [2] https://simulator.tryshare.app https://simulator.tryshare.app
- Cwizard 4y ago
  Isn’t it so that statistically lump-sum is better[0] but that you take on overvaluation risk? If you DCA you reduce that risk. [0] don’t have a ref but I think it has been shown that if you have a lump sum of money, historically you would have made the most gains by investing everything immediately (in the S&P500, there are only a few periods were this wasn’t true (therefore there is a risk)
  - kareemsabri 4y ago
    Yes, you risk buying at inflated prices let's say. The common idiom is "time in the market beats timing the market", meaning yeah, just get your money in if you have it. Here's one analysis [1] that claims since 1950 in every 10-year period, lump-sum would have been better 75% of the time. But there are some caveats. First, 25% of the time is a lot of the time. It may be possible to recognize an overheated market, by looking at historical earnings multiple averages for example. Second, they are using a "total market" index, even broader than the S&P 500. I don't know that many people who buy a total market index. Usually it's the S&P 500, or even a sector focus. The more specific you get, the more these results are likely to break down I would bet. We focus on DCA for people who are working for a living and investing out of income, which is obviously a different cohort than Fred Wilson, the VC. So lump-sum investing doesn't really factor into it. [1] https://www.northwesternmutual.com/life-and-money/is-dollar-cost-averaging-better-than-lump-sum-investing/ https://www.northwesternmutual.com/life-and-money/is-dollar-...
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europeanguy 4y ago
> Google’s business is not quite as resilient as a building, which is a hard business to mess up This guy lives in a different planet.
simple-thoughts 4y ago
There are so many flaws in this blog post. Cities generally don’t move very quickly, decline infrequently, and the real estate assets are tied to locations that are relatively stable over lifetimes. Google is not stable on those time horizons and neither is Airbnb. The valuation of these companies is still massively overblown because the current earnings may not going to exist in 20 years. So the chance of declines as well as the chance of growth needs to be included in present value calculations to find the fair market value of these firms. I can tell just by glancing at these P/E ratios that the potential for earnings decreases has not been priced in.
simonebrunozzi 4y ago
I was expecting a "pro crypto" thesis on this one, but it's not, at least directly. Refreshing. Unlike Sequoia or Kevin O'Leary about FTX and the crypto markets.

122 points by rmason 4y ago

deleted 4y ago

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It's a bit of an aside in the post (which I otherwise agree with), but dollar-cost averaging such as: > If you decide to invest $100,000 into the stock market because you agree with my reasoning in this post, then it would make a lot more sense to invest $10,000 a month over the next ten months than invest all of the $100,000 this month. (Quote from article.) That doesn't actually make a lot more sense, and that is not the argument for dollar-cost averaging. Assuming you're investing in a single equity/portfolio, then at the end of that ten month period you will have an effective entry price for the entire lot either way. Either that price is the value it's at _now_, or that price is the weighted average of ten entry prices. One thing we know, or at least which we're assuming when we choose to invest, is that over the long term prices go up. So unless you have outside knowledge or asymmetric insight suggesting prices will in fact go down, it makes no sense to DCA into the market. And if you do think prices will go down before they go up, then you should hold the entire amount back until you no longer believe the asset is likely to decline. Dollar-cost averaging is not an argument to buy slowly when you already have money, it is a reassurance to keep investing when process go down and not to hold any money back when investing money you're receiving on a regular schedule (like a paycheque). Ironically (and amusingly) DCA is also an entry method into a position when you're willing to accept lesser theoretical returns to avoid FOMO but are feeling timid, which is definitely on-brand for a VC.

bojo 4y ago
> One thing we know, or at least which we're assuming when we choose to invest, is that over the long term prices go up. Right, but what if the prices went down during that 10 month period, even if you were bullish? You invested at the top in one chunk, when you could have smoothed it out in increments instead. That smoothing function is the entire point of DCA and takes the guesswork out of reading the market, like trying to find entry points.
- joshfee 4y ago
  But barring other information it could go down in that 10 month period or it could go up in that 10 month period, and the long term upward trend suggests its more likely for prices to go up than down in those 10 months.
  - nerdponx 4y ago
    Sounds like a bias-variance tradeoff to me.
- DelaneyM 4y ago
  And what if the prices go up during the 10 month period? You invested at a much higher price than needed. The smoothing function of DCA will help mitigate FOMO and Buyer's Regret, but it won't (statistically) deliver higher returns.
  - SamBam 4y ago
    > but it won't (statistically) deliver higher returns. Would you take a coin-flip where heads you double your net worth and tails you lose all your money and assets? (Statistically) the expected outcome is zero, so it really shouldn't bother you either way, you could take the bet or not, it's the same if you go for it or if you don't. In the real world, though, lowering your risk means reducing the chance of both winning the bet and losing it. For many people it's worth more to have less risk of randomly timing the market poorly, even though they have less chance of randomly timing it well. Yes, over all investors the two decisions cancel out, but to the individual DCA can be worth lowering their risk.
    - DelaneyM 4y ago
      DCA'ing provides no mitigation of the risk of randomly timing the market poorly. The only risk it mitigates is the risk of a sudden bankruptcy, or some other massive exogenous event which disrupts your future plans. However even accounting for those events the expected value of DCA is still lower.
sokoloff 4y ago
DCA makes mathematical sense anytime you have a long-term bullish thesis (otherwise, "do not invest" is a better strategy), but have a belief that there is a short-term noise function super-imposed over the long-term uptrend and where that short-term noise function is relatively large in amplitude as compared to the expected long-term growth over the period. DCA makes psychological sense if the concern is a FOMO on the best possible entry price. It takes the psychological pressure of finding the absolute best off the table and replaces it with a smoothed average entry price. I think it's a more powerful psychological device (and I do tend to invest pretty much all at once when I reach a decision), but it's not entirely pointless mathematically.
- conformist 4y ago
  Interesting…. Under what assumptions precisely is it optimal to dollar cost average over a short time interval, if short time fluctuations have a large magnitude relative to long term drift? Like eg if you assume geometric brownian motion it doesn’t seem to help?
  - chrchang523 4y ago
    Yes, you're correct about geometric brownian motion. The model must include some mean-reverting component (implied by "short time fluctuations") for DCA to come out ahead, and such a component would violate standard no-arbitrage assumptions. This is a reason I haven't made active use of DCA. But DCA doesn't give up much, either, so I'm fine with "passively" engaging in DCA-like behavior by haphazardly dumping spare money into index funds after min("significant" drop, time limit) instead of purely maximizing time in market.
- aqme28 4y ago
  You can simplify the mathematical argument a lot by looking at DCA as forcing a relative "buy low sell high." When the price of the asset is lower, your DCA buys more, when it's higher you buy less. Relative to a single purchase at the average price, this is equivalent to buying low and selling high.
  - 4y ago
FreakLegion 4y ago
> So unless you have outside knowledge or asymmetric insight suggesting prices will in fact go down, it makes no sense to DCA into the market. Sure it does. Just like you say further down, people are "willing to accept lesser theoretical returns", except in this case it's to reduce e.g. tail risk. They could also buy up front and hedge, but that's already more technical than most people want to deal with.
- DelaneyM 4y ago
  It depends somewhat also on what you're DCAing into. If you're DCAing into a major index, there's essentially no chance of it going to zero (that's a society-ending event, hedge with farming equipment and doomsday prepping). And thus, no statistical or mathematical benefit to DCAing. If you're expecting a non-continuous return function, such as a pending drug testing result or a major governments deal, then you're actively trading and a DCA strategy is almost certainly suboptimal. It's very hard to construct a situation which is both plausible and favorable for DCA _if you have all the funds upfront_.
  - FreakLegion 4y ago
    It doesn't need to go to zero to make sense. The US market fell by a third in a single month at the start of the pandemic, recovered over the next five months on its way to new heights heading into this year, and now is down a fifth again. DCAing is simply a low-rent hedge against getting caught out by those kinds of swings. You won't get to gloat about going all in at the bottom, but also won't have to cry about doing it at the top. DCAing is worse on average for simple objective functions, absolutely. Markets rise more consistently than they fall. But markets also fall faster than they rise. This may not matter to the hypothetical average person, but it matters to real people, and some of them make the perfectly rational decision, based on real-life economic factors that aren't captured by simple models, to trade returns for stability. You can formulate this as e.g. an MINLP model and it isn't at all hard to construct situations that are favorable to DCA when lump-sum is an option. All it takes is adding constraints to reflect a real person's life circumstances. Other strategies are still better than DCA, but they're also more complicated to execute, and we aren't talking about sophisticated investors here.
twblalock 4y ago
If you had made a lump sum investment the day before the crash in 1929 you would have regretted it, and it would have taken years for your investments to recover. DCA versus lump sum has been debated for a long time and there is really not a clear answer or expert consensus on the subject.
- DelaneyM 4y ago
  There is absolutely expert consensus (among quants) that DCA _if you have the full lump sum up-front_ makes no sense. It's math.
- silverdemon 4y ago
  Alternatively, you could have cautiously DCA-ed your lump sum in 12 monthly pieces, and then the 1929 crash happens the day after the 12th and final piece was invested. DCA cannot save us from a crash, though it can reduce the fear of a crash to the point where we actually make an investment rather than sit on the sidelines.
c22 4y ago
Research shows that timing the market is hard. The more times you try to do it, the more likely you are to fail. Dollar cost averaging saves you from having to express super human timing on all of your trades.
- DelaneyM 4y ago
  Dollar-cost averaging is still timing the market, if you have the full amount up front. You're betting that your future weighted average is less than the current price, that's timing.
  - Nursie 4y ago
    You're trying to take short-term volatility out of the equation. If I think the stock will go up over the course of years but have really no idea what it's going to do over the course of hours/days/weeks, then approximating a buy-in at the average price over a longer period would seem to be a de-risking approach.
    - DelaneyM 4y ago
      It may well seem to be de-risking, but mathematically it doesn't.
      - Nursie 4y ago
        Can you point me to some of this mathematical proof? Because I'm seeing advice all over the net that it can help iron out short-term volatility. Your point that "If you think it will go down over several months, you shouldn't be buying in" is fine, but I'm not sure it's equivalent to "I don't know what it's going to do anytime soon I'm buying this for long-term prospects". Imagine a stock with a sinusoidal price fluctuation at a frequency of just under a week, but which you expect to rise significantly over a 5 year period. Investing in that weekly over 5 weeks will net you a more locally average price than going all in today, particularly if you don't have good information about that sine pattern. Going all-in right now might net you a low price, but you may also be buying at a local maximum. (Think of discrete waveform sampling)
dxbydt 4y ago
> If you decide to invest $100,000 into the stock market because you agree with my reasoning in this post, then it would make a lot more sense to invest $10,000 a month over the next ten months than invest all of the $100,000 this month. Depending on the equity, you are essentially sampling from a skewnorm & summing over 10 variates. eg. if you invest in the broad market, ^GSPC (your s&p 500) has a skew of +0.4 and a variance of 2.8, so your five number summary works out to summary(mapply(function(x){sum(rsn(10, dp = cp2dp(c(0,1.67,0.4), "SN"))[1:10])},1:10000)) [-18.3, -3.7, -0.2,3.4,18.8]. While the median scenario is net neutral, you do end up underpaying 3-4 times if you fall below the first quartile. otoh, if you are feeling frisky and want to dump 100k into robinhood over the next 10 months, $hood has a skew of -0.88 & a variance of 26.3, so 10k realizations of this scenario - summary(res<-mapply(function(x){sum(rsn(10, dp = cp2dp(c(0,5.1,-0.88), "SN"))[1:10])},1:10000)) yields [-70.8, -10.6, 0.7,11.4,47.5] - much more interesting set of circumstances! I guess he's betting on prices generally headed down over the next 10 months, so he significantly underpays if things go per plan.
- DelaneyM 4y ago
  > I guess he's betting on prices generally headed down over the next 10 months, so he significantly underpays if things go per plan. Yes, exactly that! And if one is betting on prices generally going down over the next 10 months one should just not enter the market at all.
  - bombcar 4y ago
    Or if you’re not sure but want to hedge buy now and buy some puts also.
    - DelaneyM 4y ago
      If you're just "not sure", buying puts wouldn't help. Running puts & long on a single equity is assuming a specific yield shape. A good example would be an upcoming test result report for a pharmaceutical - it's either going strongly and gradually up (long) or suddenly and significantly down (put), but not gradually down (in which case you'd be out on both puts and longs). But yeah, at this point you're a super-sophisticated investor and all of this discussion is meaningless. :)
tlarkworthy 4y ago
DCA reduces variance in your returns for a slightly lower rate of return. It's a risk reducer with a clear derivation. You exchange expected performance for reduced variance in outcome. That's useful, you can plan better with reduced variance. https://www.financialplanningassociation.org/article/journal/OCT15-dollar-cost-averaging-trade-between-risk-and-return https://www.financialplanningassociation.org/article/journal...

boringg 4y ago

I like the comparison of stocks to buildings in terms of cap rate P/E etc. And to his question that we don't know when the bottom is (totally true) but I suspect we still have a ways to go. FTX + Housing + global macro + Interest back into the market = downward pressure

andrewstuart 4y ago

>> The Gotham Gal and I buy and build a fair bit of real estate on the side This is not Fred Wilson's fault, and I don't target Fred for it - it is the fault of society in general, but I hate it that people "buy and build a fair bit of real estate on the side". I'm assuming he means residential. Rich people have no idea how it feels to be a renter when you want to own, but prices have been driven out of th bounds of possibility by people who can afford to "buy and build a fair bit of real estate on the side ". It's awful that society has divided into landlords and renters. And landlords/rich people really have no empathy - they're in their own lives and feeling good about how many houses they own. Government and society in general has completely failed by allowed housing to become a financial instrument instead of a modest/normal capitalist market as it was in the 1970s. In any such discussion you'll notice those who attack this line of thinking are ALWAYS house owners .... ALWAYS. These are the people who feel that any regulated fairness in housing is communism - that's because they are on the happy side of the housing equation. https://en.wikipedia.org/wiki/Australian_Dream https://en.wikipedia.org/wiki/Australian_Dream "The Australian Dream or Great Australian Dream is, in its narrowest sense, a belief that in Australia, home ownership can lead to a better life and is an expression of success and security. The term is derived from the American Dream, which first described the same phenomenon in the United States, starting in the 1940s." Owning a house used to be "the great Australian (American) dream". And now it's not. Now it's what rich people do many times over in a giant game of monopoly. https://www.forbes.com/sites/forbesrealestatecouncil/2021/09/28/homeownership-and-the-american-dream/?sh=68d84f9723b5 https://www.forbes.com/sites/forbesrealestatecouncil/2021/09... https://www.nytimes.com/1988/09/11/realestate/in-the-nation-why-owning-a-home-is-the-american-dream.html https://www.nytimes.com/1988/09/11/realestate/in-the-nation-...

sokoloff 4y ago
I think it's clear that rental properties should exist, because however much it sucks that some people can't buy a property to live in, it would suck a lot harder if the only way to live somewhere was to buy it. If rental properties should exist, who should own them? If renting of housing by private owners is banned, that's a small inconvenience for people who might be combining households (each partner lived apart initially and now want to move in together) or when otherwise taking a temporary assignment somewhere with the intention to return, but that's not the bulk of rental property pretty obviously. I think the greater challenge is that prospective home buyers are competing against other prospective home buyers. All else being equal, people earning a 25th percentile income and having a 25th percentile savings are going to lose out in a competitive bidding situation to people with a 26th percentile income and savings.

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ramesh31 4y ago

My number one buy right now is Roku. Down 75% from the COVID high with low debt and the best product on the market. I fully believe they will win the TVOS wars, which have untold billions at stake for advertising and data capture.

mcculley 4y ago
What does winning look like to you? I cannot imagine, for example, Apple pulling out of this war. Do you think other TVOS players will still be around?
- ramesh31 4y ago
  Apple will be the Apple of the market, as they always are. The high end 25%. But Android TV is an absolute trainwreck. The level of lag is simply unnaceptable. And if there’s one thing that drives consumers nuts, it’s input lag. People will vote when they buy a TV. Roku is feature-for-feature a superior platform, with better performance, higher device penetration [0] and at a lower price. The only reason Google has gotten as far as they have is due to existing monopoly forces. [0] https://thedesk.net/2022/10/roku-amazon-market-share-domestic-q3-2022-parks-associates/ https://thedesk.net/2022/10/roku-amazon-market-share-domesti...
  - coding123 4y ago
    I keep buying Rokus. I think I'm on my 3rd one.
  - bombcar 4y ago
    Most everyone I know just casts from their phone via whatever. The smart TV is basically dead except for that.
sokoloff 4y ago
As a long-time (multi-decade) and very happy TiVo user, I'm a lot surprised and a little dismayed that they seem to have so badly fumbled the head-start they had in the battle for the better set-top box experience.

gw67 4y ago

If everyone thinks is bottom, it’s not bottom. A lot of YouTube videos saying “It’s bottom” in the title.

georgebarnett 4y ago
If everybody thinks the sun will rise tomorrow, it won't. Reminder: Nobody can predict the future.

dr_ 4y ago

If you find current valuations attractive , and plan on dollar cost averaging through the next 12 months, but realize that businesses, management, competitors may change the investment scenario - it makes far more sense to buy a fund consisting of many companies (maybe even the entire stock market) rather than to make bets on individual companies.

pcj-github 4y ago

Seeing your net worth go down by billions is probably a decent motivator to write a blog post hinting to the market that prices look real good now.

MuffinFlavored 4y ago
they looked better when the S&P was at 3500 than it being at 4000 currently down from 4800 at its high but the narrative then was “it’s headed to 2400-3200”

somethoughts 4y ago

There's also an unmentioned aspect to the real estate to stocks analogy. There is a spectrum in the types of real estate that is somewhat akin to the spectrum of value stocks to growth stocks to pure speculation based stocks. There are income producing properties such as apartment buildings, duplexes, strip mall commercial real estate in average cities. These are similar to consumer staples stocks like P&G, Walmart, utilities, etc. The income is generated via rent from reliable consumer demand. They are priced for boring cashflow (with high cap rates and low PE) but should endure. There are reliable growth properties in trendy cities that are legitimately and secularly growing where future increases in rents are derived from rising local salaries and demand. These are like FAANMG stocks. They are priced for growth (i.e. low cap rates - high PE) - such as Silicon Valley, Seattle, LA, Austin. On the flip side of the spectrum, there is properties which are designed for speculation (and optionally money laundering) not based on any sort of rental income - almost like the physical manifestation of bitcoin. Think never unoccupied 3rd vacation homes in Miami and New York. These are like ARK ETFS or crypto coins - both do well in speculative times and see less growth when interest rates go up.

TylerE 4y ago
I would NOT want to own commercial real estate right now, especially retail, especially in a boring medium town.
csense 4y ago
I've never understood real estate investing... - You have to do a bunch of physical maintenance of the property and be on-call to unclog toilets - You have to know landlord-tenant law inside and out, there are a lot of hidden gotchas that can get you sued for big money or even criminally prosecuted - You have to see stuff that's wrong with the property and understand how much you'll need to fix it - You have to know how to find all sorts of contractors who will do a good job and not rip you off - You can't invest in say the $500-$5000 range to get your feet wet at small scale, every property with any sort of building on it at all is like $50,000+, and building a brand-new house is even more expensive - Enormous leverage seems to be the norm, and in most states, the bank doesn't forgive debt that's not covered by sale of the collateral (house) - Anyone with enough money can do it, it's a perfectly competitive market where it seems difficult to have any kind of edge over professional landlords or house flippers that have built a career in this area, have a lot of capital and a staff of full-time experts optimizing every aspect down to a science - If I get on e.g. Zillow it says, "Such-and-such property in location A is worth $X and such-and-such property in location B is worth $Y where Y = 3X" and I say "Wait why is it that? Y = 2X or Y = 4X also seems equally reasonable, heck Y = X or Y = 5X don't seem unreasonable." I have no intuitive sense for what property value should be. - Your investment's locked up for a long time, it takes weeks / months to sell real estate. - In 2022, you'd be lucky if a computer from 2002 sells for maybe 5% - 10% of what it sold for in 2002. In 2022, you're telling me a house sells for.. enough more (in real terms) than what it sold for in 2002 that it would have been a worthwhile investment despite now being 20 years old(er)? That feels like some kind of violation of whatever is the financial equivalent of the laws of thermodynamics - You can do all your landlording right and still get screwed by tenants from hell. For me, a stock and an investment property both yielding 6.4% are in no way equivalent. Given all the downsides, the ROI on property would need to be like 5-10 times as high for stocks for me to even consider it.. and that gets into too-good-to-be-true returns. I know there are people who are experts in this area and people who say real estate's a good investment. But I don't understand real estate anywhere near well enough to put in the sums of money that seem to be required.

dragontamer 4y ago

But and hold has been corrupted into HODL, and cryptocoins enthusiasts / meme stonks will wreck people because of it. Buy a stock so that you keep holding it for 10 years is good advice, but not in the context of today's mania. It's advice that is supposed to mean 'buy safe things', not 'buy that thing with exponential growth that might be worth 1000x it's current value in 10 years. I do think that blogs / advice like what this post does is overall a good idea and good advice. But I find it difficult to discuss in practice due to the HODL corruption.

colechristensen 4y ago
Just don’t buy popular memes as long term investments.
- smcn 4y ago
  I'd go even further, I don't think you should hold meme stocks longer than a day. You can always buy in the next day but momentum can swing way too much and kill any profit you made. For example: BBBY when it was revealed that Ryan Cohen sold his shares. Instant drop.
SamBam 4y ago
I saw the headline and my mind went to HODL as well, but the article itself is definitely about modest, safe investments, not "diamond hands" and moon-shots.
- dragontamer 4y ago
  I agree. Its a good article in isolation. My main problem is that HODL is a pretty common mindset, based on random discussions I have on the street / with people in general. You know, the types who lose 60% on ARKK but they're sure that they're going to "make it back" over the next few years? Or the people who think that losing 60% on ARKK is similar to losing 15% in VTI / SPY? (For those who don't realize, starting with $100k, you end with ~$40k if you had ARKK, but $85k if you held onto VTI/SPY. Aka, those who held VTI/SPY have twice your money now relatively speaking). Unrealized losses _are_ losses. People must recognize this. People are corrupting the buy-and-hold advice to mean "ignore the unrealized losses" or "if you don't sell its not a loss", which is bullshit.

who2 4y ago

Money is the root of all evil.

jonathanlb 4y ago
Inaccurate. The full saying is: "For the love of money is a root of all kinds of evil."

kareemsabri 4y ago

DCA is always controversial here, someone always says lump sum is better, but I tend to think of the maxim of Ben Graham that "the stock market is a voting machine in the short term and a weighing machine in the long term". I expect prices to eventually converge to some "fair" or rational value for the stock(s) in question, but at any given moment they may be way off, particularly for a single name, so I like DCA as a way to mitigate that risk. I do however recognize that DCA is a psychological way for people to build comfort and a consistent investing habit, and for this reason I think it's extremely valuable. That said, if you're very long it's hard to picture entering Google or Apple at 15-18x earnings and doing very poorly. Personally I am DCA'ing because i) it's how I invest and ii) I do think there is more pain to come. There are many reasons for that, rallies amongst meme stock names after dips is one indicator imo. His analysis of Airbnb is interesting. Airbnb's trailing 12 month P/E ratio is 40x, not 15.5x. He is projecting forward Airbnb's recent monster quarter. This is a bit risky imo, though maybe he knows the business better than me. I'd still be more comfortable DCA'ing into Airbnb or travel as a sector, but 2 quarters ago their P/E was 150x, so at 40x it does look pretty attractive. Shameless plug, since this is right in our wheelhouse, I am the creator of a DCA focused custom indexing investing product[1] and a simulator to backtest DCA investing[2]. [1] https://www.tryshare.app https://www.tryshare.app [2] https://simulator.tryshare.app https://simulator.tryshare.app

Cwizard 4y ago
Isn’t it so that statistically lump-sum is better[0] but that you take on overvaluation risk? If you DCA you reduce that risk. [0] don’t have a ref but I think it has been shown that if you have a lump sum of money, historically you would have made the most gains by investing everything immediately (in the S&P500, there are only a few periods were this wasn’t true (therefore there is a risk)
- kareemsabri 4y ago
  Yes, you risk buying at inflated prices let's say. The common idiom is "time in the market beats timing the market", meaning yeah, just get your money in if you have it. Here's one analysis [1] that claims since 1950 in every 10-year period, lump-sum would have been better 75% of the time. But there are some caveats. First, 25% of the time is a lot of the time. It may be possible to recognize an overheated market, by looking at historical earnings multiple averages for example. Second, they are using a "total market" index, even broader than the S&P 500. I don't know that many people who buy a total market index. Usually it's the S&P 500, or even a sector focus. The more specific you get, the more these results are likely to break down I would bet. We focus on DCA for people who are working for a living and investing out of income, which is obviously a different cohort than Fred Wilson, the VC. So lump-sum investing doesn't really factor into it. [1] https://www.northwesternmutual.com/life-and-money/is-dollar-cost-averaging-better-than-lump-sum-investing/ https://www.northwesternmutual.com/life-and-money/is-dollar-...

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europeanguy 4y ago

> Google’s business is not quite as resilient as a building, which is a hard business to mess up This guy lives in a different planet.

simple-thoughts 4y ago

There are so many flaws in this blog post. Cities generally don’t move very quickly, decline infrequently, and the real estate assets are tied to locations that are relatively stable over lifetimes. Google is not stable on those time horizons and neither is Airbnb. The valuation of these companies is still massively overblown because the current earnings may not going to exist in 20 years. So the chance of declines as well as the chance of growth needs to be included in present value calculations to find the fair market value of these firms. I can tell just by glancing at these P/E ratios that the potential for earnings decreases has not been priced in.

simonebrunozzi 4y ago

I was expecting a "pro crypto" thesis on this one, but it's not, at least directly. Refreshing. Unlike Sequoia or Kevin O'Leary about FTX and the crypto markets.