Do you want 20 per cent annual returns without risk?

Topic: optimal investing

Conclusion: to decide on how to invest, first you must ask “for what?”


Low risk, high return, please

I often get questions about what to invest in. What’s missing is “why?”, “for what?” and “at what potential cost?”. People want as high returns as possible, and preferably with high liquidity (the option to cash in at any point) and low risk of loss.

That’s not how investing works. Investing means taking risk and betting on an uncertain future. Anything that’s obvious and certain has already been bid up to a price promising zero returns. Actually these days, many investments that aren’t even perfectly certain promise negative returns — government bonds for example.

If you have nest egg of a year’s worth of income that you want to invest, you must first decide on at least two things:

  1. What you want to get out of the investment — becoming rich, getting a decent return to live off, or preserving your capital
  2. What you’re willing to risk for having a shot at that — risk having to start over from zero, risk getting a sub-par or zero return

My own portfolio consists of the following main 9 elements:

  1. Lemuria (physical gold, silver): insurance in case of a financial re-set
  2. Polskenet and Agerus, small private companies in mid and north Sweden: middle of the road value plays with reasonable growth, exposure to my homeland economy
  3. ESURF (electrical jet motor surfboards) : exposure to increasing demand for expensive toys, in effect a bet on continued growth and monetary madness
  4. Private loans and Lendify: interest income, a bet on the status quo with muted growth and low interest rates but not a depression
  5. Apartment (no mortgage): inflation hedge, safety — a place to stay
  6. Listed stocks and Svahn portfolio management: public equity risk, economic growth
  7. Creditsafe, Bofink: exposure to increasing focus on the credit economy
  8. Apstec: exposure to increased demand for safety from terrorism
  9. Fimbulvetr (private business, including two podcasts): staying agile and relevant, honing my future skills

All bases covered

It’s a mix of exposure to growth, inflation, deflation, monetary madness continuation, monetary re-set, debt management, terrorism and personal development. I think I’ve covered most outcomes, but I definitely have much more to gain from a strong economy than a weak. Sure, I would still welcome a stock market melt down, but I’m not so sure I would be able to profit that much from it since I would have too little liquid assets to put to use.

I’m not really geared for a stronger economy either — well, I’m not geared at all — but for me it’s much more important to preserve my capital (with some upside) than to multiply it. I have almost nothing to gain from doubling my net worth, whereas halving it or worse would put me at risk of not being and feeling rich anymore.


What’s your investment equation?

Who are you? What do you want? Why do you want it? What are you willing to risk to get it?

What are you not willing to risk?

Do you want to live comfortably? Do you want to be rich (and dont care if you become poor, as long as you’re not average)? Do you just want to fit in, actually be average? Is your focus on yourself and your family (absolute level) or on comparing and competing (relative riches), or on something else altogether (e.g., being admired for your investment performance)

Whether you should buy physical gold, government bonds, P2P lending like Lendify, public or private equity, gamble on derivatives with or without leverage, or focus on your own education, skills and business is a question of what the returns are for, when, and with what certainty. There is no such thing as an optimal investment or optimal investment strategy.

I can say this much though, most people should be invested in equites for the long run, while maintaining more or less liquid reserves (depending on where we are in the stock market cycle) in uncorrelated assets (such as commodities, currencies or precious metals), in order to take advantage of the quite regular large drawbacks that occur on the stock market.

Please note that right now (April 11, 2018) seems to be a very special period for both stocks and fixed income instruments like government bonds. Plainly stated: they are extremely expensive and due for severe pullbacks. That’s especially true for story stocks like Tesla (I’ll write about that one pretty soon) that is all but sure to fall by at least three quarters unless Musk pulls off something truly remarkable. Hope is not a strategy though. Remember that.


Now, today’s homework is to write down what you own and why.

Your second homework is to start taking responsibility for your future, by taking regular walks while listening to my podcast Future Skills. Start with the conversation with hedge fund billionaire Martin Sandquist (episode 3) or this one (episode 6) with futurologist and philosopher Alexander Bard.

 

Without precise definitions you end up in forecast hell

Topic: Imprecise definitions lead to useless models and conclusions

Discussion: If you’re performing macroeconomic research, which inflation are you talking about, which growth, which interest rate? The answers to those questions can be of crucial importance for your eventual investment outcome.

Length: Short — maybe 5 minutes reading time

Teaser: It’s easy to predict the weather. Not to mention stock market returns

PODCAST TIP: listen to my latest podcast episode (#6) on Future Skills with philosopher Alexander Bard. We talk about definitions of infantile grown-ups and much much more. Check it out on iTunes here, or your favorite Android app here.


Dream Warriors

Are you dreaming about making perfect economic forecasts, and using them for producing amazing equity investment returns? How does this sound to you:

Weather and production bottlenecks in combination with monetary policy induced growth are starting to cause higher commodity prices. Inflation is already showing in their wake. People worry about rising interest rates, just take a look at OIS spreads. Some central banks are turning less dovish. Higher interest rates means less funds for investments, lower growth, lower profits and lower share prices. Higher interest rates mean lower bond prices, higher borrowing costs, lower real estate prices among other things. Higher inflation means money loses its value. And this time it’s at a time you can’t hide in stocks or bonds. You could hide in gold. One bar of gold is always one bar of gold. Maybe that’s why the gold price in dollars is rising (despite obvious manipulations and jaw-boning from various authorities).

Does the above fit your view? Higher commodity prices => higher interest rates => sell stocks, bonds and real estate and use cash to buy gold and soft commodities, until the cycle turns again?

Well, hold your horses for just a little while.


What’s your definition of a boombastic jazz style?

Which commodity prices are you talking about exactly, when you say their prices are rising? Wheat, hogs, orange juice? Iron ore, coffee, cacao? Silver, cobalt? Platinum, palladium?

Similarly, which interest rates are you referring to? The Fed funds rate? Treasury bills, longer term bond market rates? Corporate bond rates, bank lending rates (to consumers, to corporate clients, to house builders?), peer to peer lendning rates? Intrabank market swap rates?

Oh, I almost forgot, “inflation” you said. Would that be the (ever manipulated and ever changing) CPI measure? Or the PPI gauge? Input our output PPI? How about house price inflation numbers? Or energy price inflation? Avocado prices?

My point in this post is that if you don’t clearly define exactly what variable you are talking about it becomes exteremly difficult to make any kind of coherent analysis, not to mention draw any practical conclusions whatsoever from the exercise. Macroeconomic research is difficult enough as it is without averaging everything together, whether it be “the inflation”, “the interest rate”, “the oil price”, “the stock market” or “GDP”.

Take that last one, e.g., GDP. What does Gross Domestic Product really tell you? What conclusions can you draw from it even if you knew its exact trajectory going forward a few quarters? How about nominal GDP vs. real GDP (using which deflator measure?), or GDP per capita? Then there are data series for wages, wage growth, hours worked, hourly wages, lost jobs, added jobs, seasonal adjustments (many orders of size larger than the actual net number), employment (measured in at  least three different ways depending on, e.g., how to define somebody without a job, based on whether he’s searching for a job or doesn’t care).

And what’s so special about GDP growth by the way? There’s zero useful correlation between real GDP growth and stock market returns. How about a house price recession like the one that began in 2006, several years before the ‘actual’ recession. Don’t even let me begin to talk about the NBER’s definition of a recession (no it’s not “two quarters of contracting real GDP”

 

“a significant decline in economic activity

spread across the economy, lasting more than a few months,

normally visible in real GDP, real income, employment, industrial production,

and wholesale-retail sales.”

 

No matter the problems of making macroeconomic models work at all, you don’t want to make it even harder by using impractical and vague definitions. My message in this post is that you need to make sure your definitions are practical and at least theoretically can lead to better decisions.

After that we can talk about the ephemeral character of macroeconomic causations and correlations, not to mention their flimsy associations with actual stock market behavior.

For now take this with you: Knowing what you know and knowing what you don’t know, is paramount in uncertain environments. And the financial markets are as uncertain and stochastic as they come.

Thus, make sure you do define all concepts and ideas about their connections precisely. That’s your only chance of keeping track of what you know and what you don’t. In addition, it’s your only fair chance of creating a feedback loop of increasing knowledge and strategy adaption.

Such directed or deliberate practice is in similar fashion your only chance of coming out on top in the arguably most competitive sport known to man (and yet untrained newbies gladly step into the ring and bet their life saving’s on themselves).

Today’s advice holds true for everyday life as well. I don’t know how many arguments with friends I could have saved, had we only defined the concepts and words precisely at the outset…


Stock market forecasts coming up

I’ll soon write a follow up on this article, where I’ll explain how stock market returns can be reliably forecast in much the same way as the weather can be accurately forecast. For now this teaser will suffice:

Just as I know there’ll be snow in the middle of Sweden on quite a few days every year between December and February, and almost completely certainly no snow 99 per cent of the time between June and August; a highly priced market will produce very low rates of return, and a lowly priced will produce high rates of return over the coming decade or so. But more detailed notes about next time and the exact implications for the current situation. Stay tuned.


FUTURE SKILLS: Don’t forget to check out the super energetic conversation with Alexander Bard on Future Skills Ep. #6! You’ll find it on iTunes here, or your favorite Android app here.

 

What if I told you there is a GREEN pill?

Do you choose blissful ignorance in a gilded cage (blue pill)?

Or painful truth and “freedom” in the gutter (red pill)?

Well, which is it?


Pills and bills

What if I told you there is a green pill?

There exists a place on the interwebs where truth is served without hesitation, but where you’re simultaneously encouraged to make your stay in whore village as short and rewarding as possible.


Push!

This green pill enclave teaches you to push your competency, push your abilities, push your targets, push your income, push your returns until you become WSP worthy. But it doesn’t end there. Making millions is important, but making billions is just plain stupid and a waste of your most precious resource – time.


Wall Street Playboys

WSPs teach how to make money, how much you should be making, what skills you need, how to prioritize, when to learn, when to experiment, what friends to keep, when to party and so on. WSPs tell you if you’re heading in loser direction, WSPs tell you if you need to, and how to accelerate, what risks to take.

And then they tell you when you’re done. If you can’t relax, if you can’t play, if you can’t enjoy yourself in the surroundings of your choice, the company of your choice, in a strong and healthy body with an alert mind then you are a loser to no matter how much material wealth you’ve got piled up.

The red pill lands you in a tent and on a yoga mat, which is interesting in your 20s, weird in your 30s and leads to premature death in your 70s

The blue bill leads to middle management and a quiet suburb


The green pill fills up your bank account, your muscles and your brain in your 30s, and releases you as an independent and intelligent alpha in your 40s, free and capable of doing exactly what you want.

The green pill place is called Wall Street Playboys and you’ll find them right here (P.S. buy their book EFFICIENCY; the book is in effect the green pill)


Many ways to Rome – Future Skills

Still here? If Wall Street Playboys‘ web site and book are the literate versions of the green pill, my podcast Future Skills is the audio version. With three different kinds of episodes I and Ludvig aim to provide the tools you need to be prepared for accelerating societal and technological change. We talk about:

  • How to learn more efficiently – metacognition and learning about learning
  • What to learn – methods, mindsets, skills
  • Where to invest your skills and resources for maximum returns – psychologically, mentally, financially and physically
  • How to identify and achieve your desires to enjoy your personal and financial investment returns

Check out our green pill podcast Future Skills and leave a much appreciated rating on iTunes or Stitcher.

Again, a quick rating on either place means more people get to make their life greener. We would appreciate it very much. In addition a review is your ticket to a competition throughout April 2018. Read more here.