Some people go over board when they preach all debt is bad.
sure, it is always a matter of weighing risks vs. rewards. however, in the case of the real estate bubble, i think people who are trying to leverage their way to wealth by extracting equity to buy more properties this far into the bubble are setting themselves up for a fall.
re: risk averse...
I don't necessarily believe you
right now my fixed income allocation is down to 21.5%, quite low for me. that means the rest, nearly 80%, is allocated to equities and options (this does not include my house, since i don't really consider a house as part of "net worth"). this equity allocation consists of a 64% (of portfolio) allocation to energy and over 10% to bullion (GLD) and miners, along with a few value stocks in third-world countries. i also have puts on a number of issues (tech and financial), but that is less than 1% of portfolio.
so, i do not consider that to be particularly risk averse by any mainstream definition. and of course most "analysts" would consider the huge overweighting of energy and gold, not to mention the nonexistent underweighting of every other US stock, to be highly risky. in order to have this type of portfolio, one must be willing to endure a lot of "tracking error", i.e., the portfolio does not closely follow the broad market.
tracking error is a huge no-no among professional investors, the majority of whom are overpaid closet indexers. for them, the primary risk is "career risk", which means losing your job if your portfolio has too much downside tracking error.
as i am not a professional, i don't have career risk, but of course nobody likes to underperform the market, so it is some kind of risk (even if only the risk that you will panic and sell when the tracking error is at its worst). the first week of this year, when energy stocks were sold heavily compared to the market (all the people waiting for the new calendar year to cash out their gains), i enjoyed some of this downside tracking error. i used this opportunity to increase my allocation (that is one reason i don't go 100% equities--i like to have spare powder).
to me, that is the key--taking advantage of the psychologically painful drawdowns. it is the total opposite of what the heart wants to do (SELL!), and is risk-confronting, not risk-avoiding.
met very few investors who are adequately compensated for the various risks that they take
i'm not sure what you mean. i certainly feel adequately compensated buying stocks with PEs of 8 to 12 and earning 30-50% a year even though the equity allocation ranges from 50-80%. we'll see how long this continues, but these past several years it's been like taking candy from a baby. i think the compensation for the various risks is quite excellent. the one risk i don't think is covered is a serious worldwide depression or extreme exogenous event, such as NYC getting nuked or a billion people dying from avian flu.
but it's hard to cover all the bases, and that's why they call it "risk".
these past several years, the scenario seems to have been: energy stocks are cheap, the analysts predict lower earnings, the stocks see their earnings and share prices rise by 50-60%, and analyst predict lower earnings again. lather, rinse, repeat. how long does this go on?
in one scenario, i imagine 5 to 10 years down the line, when many energy stocks are five- to ten-baggers and oil is at $150, the market finally becomes bullish on energy stocks and they start to trade to market multiples or even trade at a premium. there's a precedent for this--tech companies used to trade at a market discount due to the fact that most are just cyclical businesses that destroy capital in aggregate. but then the tech bubble happened and people can't get enough of them. REITs used to yield 10-15% just a few years ago, but now they barely outperform the 10yr UST. MLPs and RTs have seen yield compression and multiple expansion thanks to yield chasers.
so, i think it could happen to energy stocks as well, at some point. if/when that happens, i would no longer feel an adequate compensation for risk, so i would sell out (at hopefully much higher prices). maybe then it'd be time to become a tech bull. check the CSCO thread in 2015--i may be clown long by then :)
one of the reasons people find its a relative "no brainer" to turn 10k into 100k and difficult to impossible for them to turn 1 million into 10 million when theoretically the two efforts should be equal.
law of large numbers aside, this is true. however, in another important way, it's not true. one of the reasons one can have a hundred-bagger starting with 10K in the right kind of market is that one might take the perspective that a 100% loss is acceptable. after all, 10K is an amount many people in the US could save up in just a year or so. OTM options can appreciate 1000% in the right conditions, so betting 100% of portfolio on OTM options and acheiving such a ten-bagger twice in a row provides a hundred-bagger. of course, the odds of losing all the money instead are quite high.
but for the person who takes a year to save 10K, it would take 100 years to save 1 million. thus, a million is a different kind of animal, one to be groomed and nurtured instead of laying it all out on one bet at the race tracks. also, even a 10% return on a million is still the equivalent of 10 years of 10K savings for our lucky Average Joe. so he isn't doing too bad in that scenario.
of course, he could bet the whole wad again, but what if he misses? after all, it is very rare to succeed in making a hundred-bagger. the likelihood of losing one's whole wad is much greater. so if he stops using margin and betting 100% of his portfolio on OTM calls, i wouldn't call him risk averse; i would just say he's not an idiot. |
