Elm Wealth

Here's a fun game where you have 10 minutes to flip an unfair coin. In my experience I get the best results when I just move really fast and don't worry about matching Kelly exactly. https://elmwealth.com/coin-flip/

Are we disagreeing about the definition of "poor people"? I'm not sure why someone would find it so hard to believe that the poor, especially the long-term poor, have character traits that are not conducive to lifting themselves out of poverty. On that same vein, there is no particular evidence needed to convince someone that people who share the characteristics with me of not being very tall or particularly athletic have a terribly poor chance of making it in the NBA. But here is one study[0] which found, interestingly, that although a higher time preference (that is, preferring the present over the future) is correlated as expected with wealth, it is not significantly correlated with current income. Put another way: in the modern world where opportunities are varied, anyone, even people with poor impulse control and high time preference, could earn high incomes, but you only become wealthy (i.e. escape poverty) over time through putting aside some of that income to save and invest. Back to the American setting, "heavy hitters" of the lottery spend about $2500/yr[1]. If you instead put $200/mo into the S&P 500 over ten years, you'd be sitting on over $55k. Time under the curve matters greatly. The same personality traits that make someone prefer buying scratchers instead of investing for their future are the ones that keep them poor. I would have thought this to be self-evident. [0]: https://pmc.ncbi.nlm.nih.gov/articles/PMC7392281/ [1]:…

I had never paid much attention to Effective Altruism or SBF before FTX blew up, but when that happened I spent some time reading old EA forum posts and SBF tweets and interviews. One of the things that absolutely shocked me was the dismissal of the Kelly criterion by SBF and other EAs. The argument was that the Kelly criterion was only rationalized by a logistic utility function, and if you were going to use your money for altruistic purposes a linear utility function is more appropriate (at least up into the trillions of dollars) because you can help twice as many people with $200 billion as you can with $100 billion. This argument was used--by SBF and others--to justify truly absurd risk taking. I don't think it's an exaggeration to suggest that this misunderstanding may have been one of the primary drivers of Alameda's (and hence FTX's) downfall. For a group with as many smart people as EA and as many people obsessed with existential risks as EA not to have started screaming en masse when SBF suggested he would take a 51-49 bet on doubling utility or deleting all known life out of existence[1] is insane. The mathematical misunderstanding is one part of it. Kelly betting dominates any other betting strategy in the sense that as the number of bets increases the probability that the Kelly better will have more money than someone following any other strategy approaches 1. You don't need a logarithmic utility function. If I bet Kelly and you follow some other strategy,…

If you believe in long term mean reversion of CAPE ratio for US stocks, you'd expect price/earning multiples to contract by a factor of 2, over some hard to predict time frame, where CAPE reduces from 38 back to about 20. If we arbitrarily guess that contraction happens over 10 years, that'd be -6.7% / yr for 10 years, from 0.5^(1/10). Then add the return components you mentioned from dividends and earnings growth. One approach I've seen a few folks do is to fit a regression model of annualized real stock market returns over the next 10 years as some function of CAPE or 1/CAPE or log(CAPE). It doesn't give a very good fit on training data, R^2 in the range of 0.2-0.3, i.e. it cannot "explain" most of the variation in 10 year returns. CAPE based regression models like that have said the US stock market has been overpriced for the last decade! But investors in the US stock market have done pretty well over that period, with really good returns. Maybe these models are accurate but we've just gotten lucky? Maybe these models aren't very good. Hard to tell. Elm capital publish estimates of expected returns of a few asset classes quarterly: https://elmwealth.com/capital-market-assumptions/