Clarification: To me, a "good" investment is a positive expected value investment. Just like in poker, you need to have some knowledge or insight to make +EV plays. We can monday morning quarterback each decision the fish made to determine if any particular move was +EV after the fact. But that doesn't make the fish a savvy investor at the poker table. He will lose in the long term, no doubt. If he asked any of us how to improve, we'd point out a few books to read *before* he plays again, and advise him not to play again until he read them. So....why would we treat investing in stocks or real estate any different?

Most people need a passive way to store their money. I mean taking your argument to the extreme you shouldn't hold cash, since you don't influence monetary policy. Slightly less extreme, banks and mattress are -ev also due to (likely) inflation.

Investing in a diverse basket of stocks (or RE) has had good historical yields (vs cash) so should be fine for an uninformed person with a long time horizon. And for most people index funds are easily accessible, entirely passive, liquid, and low friction, vs RE which has some hurdles to overcome and capital requirements.

Obviously I think if you're smart and can influence the outcome of your investment you're silly not to do so (except for diversication/hedge reasons), but saying that an average joe shouldn't own stocks is a pretty extreme position, and the idea that you shouldn't own stocks except where you can influence outcomes is even more extreme..

I think that minimizing cash holdings is prudent in a deflationary environment, so yes I agree with that statement. I'd go even further than most, because I think that hyperinflation is likely in our lifetimes.

Why? What makes this "fine for an uninformed person"? And why in the world would this be the proper advice to give to an uninformed person. Wouldn't the proper advice be "stop being an uninformed person" rather than "keep being uninformed, just put your dumb money into stocks and take your chances on the roulette wheel"?

I'm not sure what you mean by extreme. Look, I've made more money than 99.9% of people on Earth. I also know a lot of rich people because 1) I've been a professional RE investor of a long time, and 2) I built a successful venture capital backed technology company. Those career choices expose you to people that made a lot of money, and made it through entrepreneurship or as investors. Many people on this forum have made as much or more than me just through poker.

What I have observed from my own experience and that of others like me is that exactly zero of them made any real money until they started taking "extreme" positions about wealth creation (the poker players take a particularly "extreme" position on this). If common wisdom worked, loads of more people would be rich. So calling a position extreme is meaningless because I don't care at all how many other people subscribe to or endorse the viewpoint. I only care about doing what makes the most sense. You have to explain to me what makes your approach better than mine.

You keep saying things like this. Long-term, the stock market is anything but a gamble. I don't think anyone has said that one is better than the other. It's just an alternative. But I will say that for most people, "stick your money into an S&P index fund" will end up being a better road for them than "learn how to make money in real estate". Or do you believe everyone has the ability to do what you do?

Your confident that the stock market will go up up is based on what, exactly? If you don't know why something will go up or down in value, and have no ability to influence whether it goes up or down, then what else would you call it other than a gamble?

I would never suggest that some needs to be in real estate. What I'm saying is that whatever one choses to invest in, they should develop an edge for that investment. The shouldn't blindly dump money into assets that they don't understand under the assumption that the asset always goes up. Assets don't always go up. And further, I'd say that if a person doesn't want to bother to learn about the investment they're making then the best course is to just not make it. Find something that you *do* want to learn about then invest in that.

The problem is that people don't want to spend their time learning about investments. They want to do other stuff with their time. Meanwhile, we have a many tens of billions of dollars industry filled with "experts" whose only job it is to convince people that they should pay fees for the experts to make financial decisions for them. It's every person's right, of course, to chose what they want to do with their money and time. But if this discussion is about what's *best*, then the answer is to gain an edge before you invest. For the person that doesn't want to spend the time learning about all this, I have no advice to give them. Because the advice is spend the time to get an edge, and there is nothing else.

I do believe that wholeheartedly. There's nothing that I've talked about in this thread that's too difficult for the average person to understand or execute on.

The stock market goes up in value long-term because businesses create wealth. All businesses? No. But the market is self-correcting - failures get weeded out, new successful business get added.


Let's do a little thought experiment. Imagine that to raise capital to expand your business you decided to sell shares in "Spex X Realty". After examining your business plan and reviewing your history I decide to buy 1% of the shares. After selling all that you planned, you still have 51% equity and are in total control of the business - I have no influence. Did I make a bad investment?


Also, is it a gamble that the sun will come up tomorrow?

You either aren’t giving yourself enough credit or are saying everyone can do this but a huge majority won’t be very successful but they can do it. There are a lot of really stupid people in this world.

You are also ignoring the fact that many people can’t do what you do because they lack the capital, skill and/or credit score.

A few points here.
1) I'm not misunderstanding your argument that people should become informed, nor am I arguing that you're incorrect that informed investors have higher EV.

2) I'm, first, comparing the following: hold cash vs. hold S&P index fund. Which would you do? Again, I understand your point that these aren't your only two options.

3) Let's take my situation. Extremely comfortable salary, partner in a consulting firm (i.e., invested in things I can control, to large degree), college funds for my kids (should these not be in the market?), retirement fund (should this not be in the market?), real estate (just my personal home). I work a LOT and want to spend my free time with my kids. My wife is a stay-at-home mom (which, with a 3yo and a ~1yo) is a more than full time job. I'm a reasonably smart guy, and my wife is a reasonably smart woman. Do you think that putting excess cash in a passive, diversified portfolio (say via wealthfront or another robo-advisor) is punting? It's liquid for when I have other investment opportunities (that I have more control over), but otherwise I am looking at history and expecting to beat holding cash.

I think this is totally fine and +ev, but I am very seriously open to what else I should be doing with cash.


I think maybe I didn't choose my words carefully enough, or I misinterpreted yours. I heard "putting money in the market is just gambling, and you might as well just play roulette" which i think is a legitimately bad thing to tell people, most of whom - even if they have most of the raw materials - won't be successful in an individual venture.

If you're arguing that stocks aren't going to create immense wealth, I agree with you. My point is that not everyone is super smart. Not everyone is organized. Not everyone can be an active manager of assets for a lot of reasons, or they choose to spend their days doing something else (e.g., a day job). And for those people, I think within those constraints, their options are effectively cash or stocks.

So maybe we can agree on: there's a group of people for whom stocks are not a great option. The market is certainly not value-maximizing versus actively managing your money, and to your point, when you can influence the outcome, your returns can be much higher.

For people are aren't going to actively manage their money - which I understand you aren't advocating - putting money into index funds will outperform holding cash in expectation. [The philosophical argument here that this isn't just flipping coins is that you're investing in other people's acumen in their space, and these people (CEOs, etc) have much larger stakes in these companies than you, so your incentives align.]

You say that as if the way investors price a stock has some inherent understanding of value behind it. But it doesn't. Market sentiment at *any given time* determines value, and that is often completely divorced from any fundamentals of the company's performance. Appreciation rates are the same, which is why I don't consider them when buying a property.

Yes. Because my business plan and history can't even come close to give you a fraction of the information you'd need to make an informed decision. You have to factor in the likelihood of me, or others on my executive team, enriching ourselves at the expense of shareholders. You have to consider who is on the board, and how they're incentivized. You have to consider how likely the board is to incentivize the executive team in the wrong way. You have to consider the impact of 3rd party manipulation of the stock price (e.g., front running, high volume trading, etc). You have to understand the likelihood of the executive team making good decisions as the company scales. You have to consider the corporate bylaws, what rights you would have as an investor, how many classes of stock exist and what rights they have, which banks the company is doing business with and how those banks operate, the ability of the team to weather and succeed in market adversity when the original business plan doesn't work, the likelihood that I'll get distracted by sub-par business lines, the employee compensation plan and it's impact on growth, the likelihood that I'll go on an acquisition spree, and the likelihood that the board will allow me to do that, that the attorneys will not miss something, etc. Not to mention that you are as much investing in the businesses of my suppliers, contractors, attorneys, and real estate market conditions in which my company operates.

The vast majority of these things are not knowable by public stock market investors. Most of those things fall into the "special knowledge" bucket that I discussed earlier. If you don't have special insight and don't have any control, then don't invest.

It's a hypothesis based on known scientific facts, in which the likelihood can be calculated to infinitesimally small margins of error and might even include the assumption of phenomena that science has never seen before (I'm no astrophysicist, so I don't know). Can the same be said of stock market returns? Not even close.

If one is too stupid or lazy to learn a business, then I have no advice for them other than get smarter or stop being lazy. If one is truly intellectually incapable of investing in RE and yet has enough moeny to make investments, then I'd say that's a rare bird indeed.

IN that case, their best investment is to save money, gain skill, and improve credit. Not invest in stocks.

But its a false dichotomy. I would hold cash until i was comfortable investing the cash in something that made sense.

Again, what I would personally do is hold the money in cash until I found something smart to do with it. So if you're asking me what advice I would give someone in your shoes, that is the advice. I'd also challenge you to ask yourself why, if you have an abundance of cash, you don't consider doing something with your time other than consulting. I'd challenge you to ask yourself what life you want for yourself and your family. Maybe you already have that life, I don't know. But an abundance of cash gives you lots of options to consider other paths. So that's the primary question I would give someone in your shoes: Are you getting what you want? If you could devote your work time to maximizing the returns on that cash, to say 30% COCR, could you create the life you want? I think those are really the fundamental questions.

Oh I was making an extreme comparison. Roulette is always a losing proposition. I think in stocks there is at least some chance of success.

Again, for people in that situation, I have no advice for them on what to do with their money. I fundamentally don't understand what would make investing in the S&P a good investment by any definition of "good" that I understand. Very possible that I'm missing something here that is obvious to everyone else. Wouldn't be the first time

mmmmm I don't necessarily agree with that. I think that, again, it comes down to what life this person wants to live. If their life is perfectly optimized already, then what's the point of taking the risk on *any* investment? If your life can't be improved then having more money......won't improve it. If it isn't optimized, then the question becomes how can it be improved, how quickly, and whats the expedient path to that improvement?

Perhaps this is where we're misaligned here. We're coming at this with different assumptions.

Aside: In a hyper-inflationary environment owning basically anything, including stocks, that aren't denominated in the inflating currency is preferable to owning anything denominated in the inflating currency. So I can see cases where stocks in aggregate are preferable to cash

That's an unreasonable stretch for reasons I've stated above in another response.

Nice, that's nice.

It's interesting to me to hear people on 2+2 taking such an outcomes based approach to investing. Of all places, I'd expect the folks on this particular forum to understand and inherently be behind the idea making investments with knowledge is critical, and to avoid investments where there is a lack of knowledge. That idea is probably the most fundamental assumption behind good poker play. Why would we apply that to hands of cards but not investments at much larger scale, with so incredibly much more on the line in term of one's personal future?

FWIW I’ve been behind you (silently) on this

I think the disconnect is that you don't think the bolded is applicable to the stock market. Others differ.

I'll make one attempt to resolve the difference here.

People are saying the stock market always goes up (a lot, like 7ish% per year on average) on sufficiently long periods. That is (proven) history.

Spex is saying, yah, but what proof do we have that history will repeat itself. Very good question. Plus, he may also be saying how do we know the sufficiently long period will be attained in the relevant time period. Severe and extended down turns do happen.

People's response is (or should be), but look at how long the proven history is. We have at least 140 years of proof. Possibly longer if you buy into market estimates from before about 1880. That is a super long time, and I'm willing to go with that history as proof the investment works. Most (or all) of the worst possible time periods are on the order of 10 years, some of them 20 years. So if your time horizon is more than 20 years (especially if more than 30 years) then you're good to go.

What do you think of all that, Spex?

If Spex's answer is, yah but I get 20+%, screw your 7%, then I am intrigued. I think he's really saying, yah, you can't even count on the 7% over the long period, so that's where y'all are disagreeing I think. But I'm most interested in the next question, which is how to get that 7% crushing, annihilating, 20% number.

Sort of thought that "history" was implied... spex said this was resulting, and I said there's a philosophical reason it would also be true, which he has pre-disagreed with (but I haven't read yet).

Obviously this thread is about actively investing and crushing, and I 100% support that. I just also happen to think there are better short-term (or long-term) liquid stores of value than cash.

I'm not saying it's impossible to make knowledgeable investments in stocks. I'm saying that knowledgeable part is the key. And to me, I don't think that historical returns of "balanced" portfolios qualifies as that. I'm asking anyone here to explain why it should. More than I'm necessarily arguing that indexes are no good, I'm just saying that if you can give me good reasons why investing in broad-based indexes of stocks is a good investment without using an argument based on past performance, I'd love to reconsider my viewpoint.

Hopefully closing on a house on the 13th. Inspection set for tomorrow. Same owner since the 40's and his kids are selling it from out of state. Thanks for the tip on finding an agent. He seemed a little shocked I found the deal before him but that could just be something he always says. I feel like a nervous virgin.

I agree with all of this, I think you've characterized it pretty close to accurately. I would add that US monetary policy since WW2 has had an enormous impact on the overall growth of the economy. But it is my viewpoint as a adherent of the Austrian school that current policy is catastrophically flawed such that a long-term downturn is likely. I would also argue that this downturn is likely to happen in our lifetimes, and this downturn will disproportionately impact stock and real estate prices. As has been discussed at length on this thread, I don't advocate for buying either of those assets for appreciation.


But WHY? That's what I'm trying to understand. What is the calculation that you use to make the determination that this is evidence at all? It's like driving and saying, "oh, since we went 10 miles east on harvey road, I'll bet my future on harvey rd continuing to go East". I would agree that harvey road is *more likely* to go east than another direction. But that's not the right question. The right question is how much more likely, how do you know, and what's the risk of being wrong?

Well, my current portfolio is doing more like 40%, but who's counting?

Congrats man! I think the nervousness is good, it'll keep you paying attention and sweating the details. That's a good thing for a new business. If you bought right, get your insurance in order with proper liability coverages, got good financing, the likelihood of getting hurt on the deal is very small. Micromanage everything until you get your legs. You'll be fine!

Okay. That explains a lot. Carry on with the real estate discussions, they are very good. But there's no point talking about anything else. Probably for the best.

Yah, I can't really answer the why more than my gut feel based on 140 years or more. It's a really long time. I do like your straight road analogy though, and acknowledge that skepticism is reasonable. Maybe I should have more hedge in my portfolio.

40... wtf!!!

Well, 40 on a COCR basis, so before you factor in tax impact or mortgage pay down. So it would be higher, but that's not really a number that is meaningful for me to track so I don't know for sure what it is. To be fair, those aren't risk adjusted returns either, so they don't include the likelihood of getting sued or the possibility of price declines across the portfolio.