It’s All Speculation Don’t Kid Yourself

Everybody has a strategy. Some people call themselves investors and look down their noses at at people they call “speculators”. Speculators look down their noses at commodities traders like those ex-football jokers on CNBC with the pony tails. Those guys look down their noses at the Vegas card counters they call gamblers. My favorite lottery game is going out of business. It’s a game that has 3M:1 odds so for 3 bux you have a million to one shot. I usually spend 2 bux because the real odds are nearly zero and as the game progresses without a winner the excess the prize money of the lower payout more likely wins grows. This week I’m playing 4 chances for free on winnings from previously won payouts so my odds are 750K to 1, still effectively zero. The next higher up odds are lotto at 22M:1 but I haven’t bought into that so my risk tolerance is somewhere between 1M:1 and 22M:1.

My wife looked into scratch-off games and found web sites devoted to scratch-off strategies devoted to changing the odds. These strategies are quite similar to card counting and betting strategies used in Vegas. I didn’t know anything about them till she mentioned them to me. She was considering to get my kids some scratch-offs for stocking stuffers at Christmas and decided to teach herself about scratch-offs. In the end she didn’t buy any because if one kid won $100 and the other kid didn’t win the non winner would feel gypped and who needs that headache. My wife is smart. I would have just bought the tix and stuffed ’em in the sox next to the Christmas tree snickers. The correct trick would be to buy each kid a an entire roll of scratch-offs since each roll is pretty much guaranteed to have winners, and the fun is in being a winner but then the kids might have to go to gamblers anon if they had too much fun.

Doesn’t this narrative sound like a FIRE narrative? The investor considers himself quite wise investing only in blue chip stocks like wait for it: GE and SHLD better known as General Electric and Sears. Remember Blockbuster? Replaced by something that looks like a red industrial refrigerator and Netflix. Bet you’re glad you don’t own any Blockbuster! What about AAPL? People have made a fetish about owning iPhones and AAPL reaped the profits hitting $227 last Aug but $150 today in a roaring raging bull economy where a $1000 for a phone shouldn’t phase anybody, should it? Don’t look at me I’m running a five year old $200 Google 5x. When they quit updating the software I’ll move on up the line to something new/er that continues updating.

The point being what exactly do you own as you look down your nose? Do you own hype? AAPL is hype, GE making a come back is hype, winning the lotto is hype. They are stories we tell ourselves in which to encase our denial and shield ourselves from our stupidity. 4% x25 hmmmm low cost index funds is the BEST PORTFOLIO hmmmm You can’t beat the market hmmmm Can you clap with one hand? It’s all speculation. How much of your future have you based on hype? What’s the likelihood your portfolio will become a blockbuster, a Blockbuster or a GE? Bitcoin? Only a dope would invest in BTC but then I’m up 1300% in BTC with a free trade. I have no equity remaining in my BTC only profit. I took out the equity when I was up 5000% and put that into BRK.B which has gone up 30% since I bought it in 2016.

The first thing they tell you is thew “low cost mutual fund rap”, that’s the hook. The next they tell you is to pick your risk tolerance like you have a friggin clue what your “risk tolerance” is. (I’ve established my risk tolerance it’s between 1M:1 and 22M:1). You don’t want to look like a chump so you pick 80/20 OUT OF THIN AIR. They ask you how much do you need in retirement? You wan’t to look upper middle class so you pick $100K OUT OF THIN AIR and they go: OK daddyo here’s the deal save up 2.5M take out 4% and you can live forever on that dough! Have a nice day! They point you to a calculator that looks at periods of history of adjustable lengths and it query’s the history about failure. The first period starts in 1871, 6 years after the Civil war ended and only 2 years after they drove the golden spike. Only 10 years after the demise of the Pony freakin Express! You mean I’m supposed to base my projected income need for my 2036 projected death on 1871 economic conditions??? That’s supposed to make me feel warm and fuzzy and confident? I just looked in the mirror and do not have MORON tatted on my forehead. What’s tatted on your forehead? A screed by MMM or 10 bullet points by WCI? Famous WCI quote “it’s 20% content and 80% marketing”, iPhone “it’s 20% phone and 80% marketing”. Like the title says it’s all speculation don’t kid yourself. If you look in investopedia they define speculation and investing in terms of longevity and risk. A good assessment. If you base your 50 year retirement need on a highly speculative stock portfolio are you pretending you short term bet is a long term winner? The variables are amount, longevity, reward, risk, sequence of return, budget, taxes. All of these are quantifiable and none of them get picked out of thin air. None of them should rely on economic data analysis leading back to the era of the pony express. It’s always good to consider and re-consider the assumptions and then track the plan as it plays out.

Addendum: I didn’t win but found another game to play with the same kind of trickle down payout strategy. The odds of the grand prize is 1:300K, over all odds of wining something 1:7, In this game I’m looking at using a number choice strategy of most likely distributions as opposed to quick picks. I’ll limit myself to $100/yr and see what happens.

8 Replies to “It’s All Speculation Don’t Kid Yourself”

  1. Gasem I think you are the Morpheus of FIRE and you and your blog offer the red pill for those who want to go down the rabbit hole in the fire matrix.

    Definitely has altered my view on some things I read up and took as gospel. It is good to get views from everywhere because it is hard to predict the future and the best you can do is try and get as much info to make your own decision

    1. There is something called Bayesian statistics where the results are iterative. You start with one set of statistical assumptions and a new set of probabilities emerge based on new data. Card counting in Vegas black jack is an example. In that method you keep track of the cards as they appear so if a 5 has appeared 4 of a kind made out of 5’s is off the table. By understanding the cards like this the houses advantage goes from 8% wining to 0.2% wining, BUT if you then understand betting, if your odds of wining the next hand is say 60/40 you should bet a lot and over time the advantage goes to you because when you win you win biggly. The boggelhead approach tries to play to a draw. Playing to a draw is just as risky because if you don’t win the draw you loose so you basically have to play perfectly just to hit 50%. That’s what MMM’s shockingly simple math predicts, BEFORE you start dicking around with asset allocations and fund mixes. In my opinion, if you do an efficient frontier tangent portfolio absolutely mechanically with re-balancing your odds of wining are the optimum and that’s the real properly risk adjusted portfolio. The problem it doesn’t pay nearly as much in return compared to a more risky portfolio and therefore requires longer to reach it’s goal, except it’s payout during portfolio deflation is higher (remember the 4% x25 rap was based on and tested against a 50/50 portfolio and 30 years of retirement. A 50/50 expects 7.8% return) So a tangent portfolio may take 25 years but may safely payout 5+% over the same longevity so you need a smaller principal for the same cash flow, and you have to stick to the assumptions of re-balancing to the tangent asset allocation. People are greedy so when the market is good they goose the equities or start adding real estate or something which louses up the risk and wind up messing up the optimum balance of risk v reward. The tangent portfolio of SPY/VBMFX is 5.78% return with only 3.8% risk. This means if SPY looses 50% in a crash the tangent portfolio goes down only 12%. Spy has to make 100% to get back even and the tangent portfolio only has to make 24%. The tangent goes positive LONG before SPY so you can start pulling money out of the tangent under good SOR conditions much sooner. If your pulling money out of SPY while it’s under water you’re hosing yourself since you are selling low. In the 2008 crash it wasn’t till 2013 SPY was back even so you were pulling money out of SPY for a long time while it was under water aka selling low. When you’re accumulating, a higher risk is acceptable since the portfolio is accumulating, not being sold down, and closed to SORR. Deflation is not the equivalent of accumulation in terms of risk management. Bet you never read that one in a Larimore book. You can read about low risk moderate return portfolios by googling Harry Browne’s permanent portfolio.

  2. I have been all those forms of investor/ speculator. I have beaten the market, have also had the market beat us, have developed wealth without the market.

    I take nothing as gospel any longer.

    But I think I am developing some resilience.

    1. I have been all also and made and lost money. Sometimes I put money at risk just to understand how it works. My BTC “investment” was like that. BTC is more of a commodity than an investment so it’s a cross between currency futures trading and investing in something like GLD in the way it behaves. The point is no matter what profit or loss there is knowledge and a finer understanding to be had. If you actually understand it then your ability to predict is improved and in all speculation it’s the proper understanding of the odds that pays the rent. You also have to have consistency in your understanding. For example You reach market risk by diversifying to 20-30 stocks within a tiny%, increasing to 1000 stocks only improves diversity maybe 1% more, therefore adding a “global” fund say going from a 2 fund to a 3 fund bogglehead is basically an exercise in magical thinking since the 3 fund improves diversity by only the tiniest amount but completely throws you off the efficient frontier so for a minuscule diversity improvement you get a huge increase in risk. Understanding a simple thing like that makes a big difference in portfolio longevity.

  3. Enjoyed the trip. My favorite moments were 1) realizing my wife and I share a phone in common with you (reliable, affordable, less hype) and 2) the fact that we truly do have a patient who frequents our ED who has the word MORON tattooed on his forehead. Truth in advertising.

  4. Your lottery story reminded me of a recent 60 Minutes article on Gerry Selbee. He’s a retiree who made millions on the Massachusetts lottery. He figured out the odds on a game where a non-jackpot rolled down into the following drawings non-jackpot winners significantly increasing his odds of winning. While I watched, I was thinking this guy must be Gasem or his brother. I appreciate your quant bent to try and tilt the odds in your favor whether it’s on the risk or reward side.

    1. My game does exactly this. The “main prize” is capped at 2M and anything over rolls down and the odds are 3M:1 on the main but FAR better below. I won enough I basically played for free for about 4 years.

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