MichaelDickens

MichaelDickens's Comments

EA Forum 2.0 Initial Announcement

Can you elaborate on how you turned off karma display? I would love to use your code if you're willing to share it. I strongly dislike posting on the EA Forum because of how the karma system works, and and my experience would be vastly improved if I couldn't see post/comment karma.

How Much Leverage Should Altruists Use?

Both are correct. The claim made by Lifecycle Investing is not that increasing stock exposure decreases risk in general. The claim is that by increasing stock exposure early in life and decreasing late in life, while keeping net lifetime exposure the same, you decrease risk.

The argument for this claim is that you have more dollars when you're older, therefore market swings in later years have a bigger effect on your portfolio than in earlier years. But you can negate this effect by using leverage when you're young, thus effectively increasing how much money you're investing with, and holding more bonds/cash when you're older.

Simplified example: suppose you have $100 today and will get another $100 next year. If you invest all your money in stocks during both years, then you are exposing $100 to equity risk this year, but $200 next year. If instead you invest with 1.5:1 leverage this year, and then next year you only invest 75% of your money, that means you're exposing $150 to equity risk during both years. Either way, you're investing $150 per year on average. But in the former scenario, you are taking twice as much risk in year 2, whereas in the latter scenario, you take the same amount of risk both years, which is better.

I'm not sure I'm explaining it well, so let me know if that doesn't make sense.

How Much Leverage Should Altruists Use?

I was reviewing my notes and I found this paper on managed futures: https://www.aqr.com/Insights/Research/White-Papers/Trend-Following-in-Focus

The paper has a section on why they don't think managed futures (a.k.a. trendfollowing) will stop working in the near future. Here's the summary I wrote in my notes (of the relevant section):

  • Assets invested in trendfollowing peaked in mid-2008 at $210B, and have declined to $120B
  • All systematic hedge fund strategies have $500B AUM, or 17% of all hedge fund assets
  • Futures market has grown since 2008, so trendfollowing as a % of futures markets has decreased by more than half

I don't find this super convincing, it's definitely still conceivable that trendfollowing strategies could basically stop working, but it's evidence that trendfollowing is not over-subscribed.

Long-term investment fund at Founders Pledge
  1. The risk-free interest is unusually low across the developed world and the US equity market looks expensive, but equity valuations in the non-US developed market are close to historical averages, and equity valuations in emerging markets are below average. So IMO it is reasonable to expect near-historical equity returns by investing outside the US. See https://mebfaber.com/2019/01/25/the-biggest-valuation-spread-in-40-years/
  2. The case for giving sort-of-later depends on the current interest rate, but the case for giving much later only depends on the difference between the long-run interest rate and the long-run discount rate. As Phil Trammell argues in the post linked by OP, the long-run interest rate most likely exceeds the philanthropic discount rate, which means we should give later.
How Much Leverage Should Altruists Use?

I like this idea—a centrally-managed fund would be a lot easier than a bunch of people separately doing their own thing. But it creates a problem where the investors/donors in the fund might have unrealistic expectations about performance and could become really unhappy if the fund underperforms the S&P for several consecutive years—which is bound to happen sometimes if the fund is aiming for low correlation. This would be particularly bad from an optics perspective. So there are pros and cons to this idea.

How Much Leverage Should Altruists Use?

Thanks for the comments, Peter!

I'm skeptical that managed futures will continue to do as well as backtesting suggests.

Me too, I did adjust the return estimate way down from the backtest I quoted, but I can see an argument that managed futures will provide zero excess return in the future.

Regarding momentum, see AQR's Fact, Fiction and Momentum Investing—specifically, "Myth No. 4: Momentum Does Not Survive, Or Is Seriously Limited By, Trading Costs."

How Much Leverage Should Altruists Use?

Can you clarify what exactly your concern is? Which of these best describes your position?

  1. Factor premia basically don't exist.
  2. Factor premia are much smaller than this essay claims.
  3. Factor premia are substantial, but this essay does not do enough to justify that claim, so it's not a good reference.

Initially I thought you were saying #1, but from your reply below, it sounds like you at least believe that factor premia exist, so now I'm not sure.

Edit: Or I guess a fourth option: factor premia exist, but generally should not be promoted (possibly because most readers will run into the same behavioral biases that cause the premia to exist).

Or something else entirely.

How Much Leverage Should Altruists Use?

I just updated the essay to include some more justification for (1) the claim that it's possible to beat the market and (2) the specific return estimates given. I added the new material to the sections "Improving on conventional wisdom" and "Return expectations", and have reproduced the latter below.

-------

As something of a corroboration, RAFI provides estimates of forward-looking five-year return for various long/short factors. At the time of this writing, it makes the following predictions for its long/short value and momentum factors (net of transaction costs):

  • 5.7% for US large-cap value
  • 1.1% for US large-cap momentum
  • 8.0% for US small-cap value
  • 6.4% for US small-cap momentum

(RAFI's projections for foreign developed market factors are similar but generally a bit higher.)

A concentrated long-only portfolio on a particular factor would have approximately the same expected return as the long/short factor plus the broad market (although that's not quite how the math works).

The underlying indexes used by VMOT make some improvements on RAFI's simple factor model (see Quantitative Value and Quantitative Momentum for details[^26]), so it might be reasonable to assume a higher expected return for VMOT. If we then subtract fees, we get something close to the original estimate I gave for VMOT (probably a bit higher[^27]).

RAFI believes the value and momentum premia will work as well in the future as they have in the past, and AQR makes the same claim in some of the papers I linked above. They offer good support for this claim, but in the interest of conservatism, we could justifiably subtract a couple of percentage points from expected return to account for premium degradation.

Note that RAFI's estimates use factor timing—attempting to guess how well factors will perform based on the current market environment, rather than just looking at historical behavior. This practice is not widely accepted; for example, see AQR's Factor Timing is Deceptively Difficult.

Also note that these numbers only give expected mean return. Even if these estimates are accurate, we could still see much higher or lower returns due to market volatility.

How Much Leverage Should Altruists Use?

I'm not surprised that this is a sticking point. I think people should be highly skeptical of claims about EMH violations, and I didn't present a lot of evidence, because that would have dramatically increased the length of this essay. I would refer to the sources I linked in the relevant section.

If you assume EMH is broadly true, almost all of the rest of the essay still applies. When I presented some rough estimates for target leverage under full Kelly and half Kelly, I gave estimates for the global market portfolio, as well as for value/momentum/managed futures. The main exception is if EMH is fully true, you might not want to invest in zero-correlation assets because there aren't really any with positive expected real return (AFAIK), but you'd still want to seek out low correlation to the extent that it's possible.

Regarding the claims I made about potential future performance:

  1. The claims on value and momentum are consistent with academic factor literature and estimates from evidence-focused investing firms like Research Affiliates.
  2. I didn't make any strong claims about managed futures performance, but the made-up numbers I gave are far lower than the theoretical backtest performance from the AQR paper I cited, as well as actual performance from practitioners such as Richard Dennis.

Investment writings taken as advice damaging especially valuable assets that would otherwise be used for altruism (just the flip side of the value of improvements)

I don't understand what this means, could you explain?

EDIT: I did a little more looking and found these two papers that might be persuasive to value and momentum skeptics:

https://www.aqr.com/Insights/Research/Journal-Article/Fact-Fiction-and-Momentum-Investing https://www.aqr.com/Insights/Research/Journal-Article/Fact-Fiction-and-Value-Investing

The papers themselves are fairly short, but they summarize a lot of evidence from other sources.

RPTP Is a Strong Reason to Consider Giving Later

I'm not clear on how RPTP fits into a general understanding of financial returns on investment. Clearly your RPTP matters, and if you have a lower RPTP than most people, that makes investing look relatively better for you. But why don't, say, financial advisors ever talk about this? Advisors largely make investment recommendations based on clients' risk tolerance, which is unrelated to RPTP.

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