There's also an unmentioned aspect to the real estate to stocks analogy. There is a spectrum in the types of real estate that is somewhat akin to the spectrum of value stocks to growth stocks to pure speculation based stocks.
There are income producing properties such as apartment buildings, duplexes, strip mall commercial real estate in average cities. These are similar to consumer staples stocks like P&G, Walmart, utilities, etc. The income is generated via rent from reliable consumer demand. They are priced for boring cashflow (with high cap rates and low PE) but should endure.
There are reliable growth properties in trendy cities that are legitimately and secularly growing where future increases in rents are derived from rising local salaries and demand. These are like FAANMG stocks. They are priced for growth (i.e. low cap rates - high PE) - such as Silicon Valley, Seattle, LA, Austin.
On the flip side of the spectrum, there is properties which are designed for speculation (and optionally money laundering) not based on any sort of rental income - almost like the physical manifestation of bitcoin. Think never unoccupied 3rd vacation homes in Miami and New York. These are like ARK ETFS or crypto coins - both do well in speculative times and see less growth when interest rates go up.
- You have to do a bunch of physical maintenance of the property and be on-call to unclog toilets
- You have to know landlord-tenant law inside and out, there are a lot of hidden gotchas that can get you sued for big money or even criminally prosecuted
- You have to see stuff that's wrong with the property and understand how much you'll need to fix it
- You have to know how to find all sorts of contractors who will do a good job and not rip you off
- You can't invest in say the $500-$5000 range to get your feet wet at small scale, every property with any sort of building on it at all is like $50,000+, and building a brand-new house is even more expensive
- Enormous leverage seems to be the norm, and in most states, the bank doesn't forgive debt that's not covered by sale of the collateral (house)
- Anyone with enough money can do it, it's a perfectly competitive market where it seems difficult to have any kind of edge over professional landlords or house flippers that have built a career in this area, have a lot of capital and a staff of full-time experts optimizing every aspect down to a science
- If I get on e.g. Zillow it says, "Such-and-such property in location A is worth $X and such-and-such property in location B is worth $Y where Y = 3X" and I say "Wait why is it that? Y = 2X or Y = 4X also seems equally reasonable, heck Y = X or Y = 5X don't seem unreasonable." I have no intuitive sense for what property value should be.
- Your investment's locked up for a long time, it takes weeks / months to sell real estate.
- In 2022, you'd be lucky if a computer from 2002 sells for maybe 5% - 10% of what it sold for in 2002. In 2022, you're telling me a house sells for.. enough more (in real terms) than what it sold for in 2002 that it would have been a worthwhile investment despite now being 20 years old(er)? That feels like some kind of violation of whatever is the financial equivalent of the laws of thermodynamics
- You can do all your landlording right and still get screwed by tenants from hell.
For me, a stock and an investment property both yielding 6.4% are in no way equivalent. Given all the downsides, the ROI on property would need to be like 5-10 times as high for stocks for me to even consider it.. and that gets into too-good-to-be-true returns.
I know there are people who are experts in this area and people who say real estate's a good investment. But I don't understand real estate anywhere near well enough to put in the sums of money that seem to be required.
Seriously, what do you expect? Money doesn't work. If you invest and want to turn an above-average profit, you need to put up something, be it knowledge, skills, or effort. As you said, owning a house requires a certain skillset, but that's exactly where your money would come from.
So if you're already in the construction business, or a real-estate lawyer, or simply have lots of experience and spare time, it's a good choice. If you're a software engineer who can't tell drywall from masonry and simply wants to do a few mouse clicks to gain a passive income, it's definitely not for you.
Anybody who has rented know most of the work is way overblown. The average landlord I've had can barely be bothered to lift his middle finger at you if something goes wrong. If the toilet is clogged, or the heat stops, or whatever it's generally left for the renter to figure out and take the loss.
What are you going to do, sue with whatever meager stash the average renter has left after paying the rent?
Much of the work is "gigged" out anyway. When something breaks at my current rental, I get told the job has been tendered, and then I get let known when someone has accepted the job. I'm not sure what happens if no-one accepts it.
It's also not the landlord doing that, it's the real-estate company.
And that's exactly the kind of investment that yields average returns. If you're fine with that you can also directly invest into a company doing this. If you want more, you have to cut some middlemen.
Owning a home takes a huge amount off of your taxes in the United States. This mainly applies to single people or people who don't file with dependents as they're taxed the most.
A home acts as a way to store and grow cash (mostly) securely. They also, generally, have higher than (stock) market rates of returns for the cash that you stuff in them. For instance, do a $50k kitchen renovation and that may entice a future buyer to buy at $100k more. There's a lot of examples like this throughout the housing renovation industry. Some home renovations are going to net you nothing, but defer something negative. For instance, I had to install a Radon system in my home because radioactive gas was leaking out of the crust deep beneath my basement. I won't get that $3k back but I won't live in a radioactive container and future buyers won't be scared off (rightfully so).
If you're renting (since you mentioned landlords) the economics change a bit. You need the house to look nice but you either need it super-durable or inexpensive to repair. What usually happens is that a rented home gets a makeover that will put it squarely in the price the landlord wants per month. This is done as cheap as possible because a fair amount of tenants are radioactive and will destroy everything not nailed down.
If you're selling your home after five years you may have some nominal value increase coupled with equity. For me, that amounted to about $35k on a $215k home. To replicate that in the markets you'd have to get involved in a life insurance plan that acts as a tax-free market account, which is significantly more complicated to manage. I know because I almost did it when I moved to California!
If you plan to stay in a house less than 5-8 years, I just wouldn't buy. You'll be somewhat upside down depending on your market.
In Australia it's backwards and bonkers, the tax legislation is geared toward giving real-estate investment properties a bunch of tax breaks while someone living in their home gets diddly squat.
I'm not necessarily saying we shouldn't pay tax on properties we live in, but I will say it's pretty on the nose to continue giving investment properties huge tax breaks while people are struggling to finance homes they live in or pay rent. The price inflation of homes caused by easy money and negative-gearing made easier due to lopsided tax policy makes the property market entirely detached from the average Australian.
This isn't really accurate. Homeowners get the enormous PPOR CGT exemption, which means they pay no capital gains on their primary home when they sell - This can be a massive amount of money in an up market (the past two decades, especially)
No, those things are separate problems, not two ways of saying the same thing.
Tenants being destructive is a known issue. My mother had a tenant that put four undocumented pitbulls in the house and one dug it's way through the flooring. She had another that refused to pay rent or move out and had to wait for months to get an eviction order. All of that is purely money lost if you're renting to people with no assets.
What I was talking about with landlords being cheap on renovations has to do with the economics of the situation. For instance, my mother won't put granite countertops in a house or use the most expensive paint or even moderately expensive carpet. In her state, every property that's had an animal in it requires new paint and new carpets every time there's a new tenant. If she was putting the nicest stuff in the tenants she rents to now would never be able to afford her rates.
Where landlords get unjustifiably cheap is when they make repairs on the cheap that cause more issues for the tenant.
There's a whole bunch of tax advantages and structural advantages. The mortgage interest tax deduction is the big one, and I think there's another one that applies to those who own up to 4 properties?
> In 2022, you'd be lucky if a computer from 2002 sells for maybe 5% - 10% of what it sold for in 2002. In 2022, you're telling me a house sells for.. enough more (in real terms) than what it sold for in 2002 that it would have been a worthwhile investment despite now being 20 years old(er)? That feels like some kind of violation of whatever is the financial equivalent of the laws of thermodynamics
The secret ingredient is that it's essentially illegal to build new homes anywhere remotely desirable.
Also god's not making any more land. So owning crap buildings on great locations is a great way to land bank for a payday in the future. Though climate change will redraw a lot of maps in this regard.
Not just near stuff... most people don't want to live in the middle of a desert, or where there's snow on the ground 9+ months a year (a lot of that undeveloped land is in Alaska, and not the little coastal strip where 90% of the population lives, either)
That's one reason why I'm so idealistic about the work-from-home trend we saw after Covid. I'm from one of those empty rural communities - the way of life is great if you can manage to make a living.
Leverage. You can borrow 80% for an investment property but no bank will lend you (not an individual anyway) money to buy ETFs. You might get a margin loan, which is much riskier than a mortgage and requires you to have X upfront to borrow 0.8X. A mortgage means you can borrow 5X.
There ade also tax benefits to real easte in some countries (most notably Australia). In short, the game is rigged and the market distorted to make real estate more attractive then it should be.
Leverage takes place with Stock and ETFs, too - it is just less obvious. Companies you buy stock of are of course leveraging their financial investments by taking loans from banks or emitting corporate bonds - and these loans are used to invest and generate profits, of which you receive your share.
Many of these are managed by a good agent. I answer 1 email per week pretty much, the effort is minuscule.
Leverage was the thing which made the numbers attractive. Example numbers in the UK for instance £50k deposit, £200k purchase price, £150k mortgage @ 2%, £12k per year rent = 18% gross yield (£9k return on your £50k cash in.). Before capital gains.
Imagine if you have £200k for 4 deposits then you could even be financially independent if your costs are low. It has been a very easy path to wealth.
With interest rates rising then the whole dynamic changes, but it has been an extraordinarily profitable and easy play for almost 20 years.
All of that makes sense if your options are a) buy this property with cash, or b) buy these stocks with cash.
If you don't have a handy $300k sitting around doing nothing, buying the property makes more sense, because you're buying it with someone else's money!
The lender makes their profit off the interest they are charging you. You can offset that cost partially (and, over time, completely) with rental income. When you dispose of the unit, any profit comes straight to you.
There are very few other places where you can use someone elses money to make a profit.
> That's only if the rent you receive is greater than the mortgage and interest you pay to the bank. Sometimes that math doesn't check out.
Rarely does it not check out over time. Rents go up every year, more in those years that see an interest rate increase. Repayments track the interest only.
In the first two years, your rental (and costs of rental) won't match the mortgage.
After five years it's unlikely that your rental income doesn't match the mortgage, interests and costs.
Well, then, don't buy a property with the aim of renting it out in a rent-controlled area.
And seeing as how you're essentially getting a return by investing someone else's money, go through the 3 month long eviction process and vet your renter more thoroughly.
Honestly, the way you say it, one would think that most landlords make a loss by renting out their properties.
Your investment isn’t locked up at all. You can call up a bank and cash out the equity in one property to purchase others. You can use the equity to get a secured loan at an extremely low interest rate. And the income you make from real estate improves your DTI which opens up your ability to get a loan for additional property and you can repeat the cycle over and over.
Of course, the real question is why would you want to frequently liquidate property if it is generating cash and tax benefits? Owning real estate isn’t about gambling for short term gains, it’s a long term wealth building tool.
> That feels like some kind of violation of whatever is the financial equivalent of the laws of thermodynamics
Houses lose in value slower. A 20 year old computer is worth basically nothing because of technological progress, the house I’m currently living in is 60 years old.
Then there’s the land the house stands on. Land is a limited resource that cannot be increased by production, especially in proximity to population centers. It follows completely different laws than mass-producible products.
Not true. I currently own one unit, and do have a slightly negative cashflow, but that's not really a problem.
The biggest advantage of real estate is that enables you to hedge your capital. My bank happily gave me a loan for 80% of the property value.
I would not be able to get a loan at these conditions without having the real estate as collateral.
So, while I do pay a small amount per month myself (which has gone down substantially recently due to 10% indexation), my tenant pays the biggest share of my loan.
As for rules and legislative obligations: I pay a professional organization to manage this for me. This does come at a cost, but it buys me a peace of mind. (It's all about risk vs reward, so no big surprise there.)
And finally: once the loan is finished, I can hedge that rental income to finance (multiple) new properties.
Update: one additional remark for those who might be triggered by this comment: I prefer to buy older buildings, so I have to make sure that l have "some" extra cash available for big ticket items coming my way: replacement of roofs, elevators and such. So I am betting on having to invest some extra cash over the course of one or more decades. However, if you do not want to do that, you can reduce the risk by going for newly-built, paying the extra premium upfront, have a reasonably steady cash flow from the start.
Also, as a rule of thumb, consider 10/12 of the yearly rent as a "regular" income. This should be more than enough to cover the "normal" expenses you might have.
physical maintenance and unclogging toilets: you don't need to do this maintenance yourself, you can outsource this to contractors, and even outsource the calling of those contractors to a management company.
knowing landlord-tenant laws inside and out: absolutely, yes, if you are doing it professionally. But this applies to everywhere you are doing business in.
properly evaluating properties, contractors that don't rip you off, etc.: absolutely an issue, yes. This is something you learn with experience however, and on the other hand it means that if you know this, you have an edge. See the blog entry by the mr money mustache guy who bought his house very cheaply from an older guy who didn't know that prices have went up in the decades he has owned the property [0]. So yes, this means that ideally you own multiple properties and have enough capital that you can afford one or two mistaken purchases or contractors, but you also need to have enough dedication and ability to learn. Also note that even with stocks you have this issue, there is a lot of advisors out there who are selling funds with high management fees, etc.
small scale property investment impossible: absolutely true, yes. Real estate investment is something for rich enough people, or at least people with good contacts, not for the average joe.
huge leverage is usual: yes, but on the other hand property investment is seen as a very secure way of investing, which is why such leverage is possible at all. Stocks on the other hand you never get that much leverage for them.
anyone with enough money can do it: this is in conflict to your other point about needing to know how to properly evaluate properties and finding good but not too expensive contractors.
investment being locked up: yes this is true. But moving around stocks too much is also generally a bad pattern.
tenants from hell: yes, this is a risk. Ideally you distribute the risk by owning multiple properties, e.g. an entire building instead of just one apartment, which brings us back to the "need to have money to own real estate" point. Also, you ideally don't own real estate where the rent is cheap but one where the rent is expensive. If it's expensive enough then only rich enough people can afford it, i.e. ideally DINK white collar workers. Those can still cause problems but you benefit from their higher job stability, lower incarceration rates, etc. The disadvantage is of course that it's harder to own multiple properties if the rent is expensive, as you need to invest more, and also if the tenant doesn't pay the rent for N months then a larger sum of money is lost. But on the other hand, if the tenant fucks up the sink and you need to replace it, then having 1500$ rent compared to 500$ rent means that your 3000$ sink pays off again with two rent payments for one tenant, and with 6 from the other (assuming you are mortgage free, the calculation is different if you add in mortgage).
I do agree with you however about your general point. Real estate investment is absolutely not for everyone, as (broad low fee index fund) stocks are for example. It is more complicated and higher maintenance. Still, if you have tons of money then putting a part of your portfolio into real estate seems like a good idea to me.
DCA is always controversial here, someone always says lump sum is better, but I tend to think of the maxim of Ben Graham that "the stock market is a voting machine in the short term and a weighing machine in the long term". I expect prices to eventually converge to some "fair" or rational value for the stock(s) in question, but at any given moment they may be way off, particularly for a single name, so I like DCA as a way to mitigate that risk. I do however recognize that DCA is a psychological way for people to build comfort and a consistent investing habit, and for this reason I think it's extremely valuable.
That said, if you're very long it's hard to picture entering Google or Apple at 15-18x earnings and doing very poorly. Personally I am DCA'ing because i) it's how I invest and ii) I do think there is more pain to come. There are many reasons for that, rallies amongst meme stock names after dips is one indicator imo.
His analysis of Airbnb is interesting. Airbnb's trailing 12 month P/E ratio is 40x, not 15.5x. He is projecting forward Airbnb's recent monster quarter. This is a bit risky imo, though maybe he knows the business better than me. I'd still be more comfortable DCA'ing into Airbnb or travel as a sector, but 2 quarters ago their P/E was 150x, so at 40x it does look pretty attractive.
Shameless plug, since this is right in our wheelhouse, I am the creator of a DCA focused custom indexing investing product[1] and a simulator to backtest DCA investing[2].
However, most of us don't have a pile of money just lying around, but rather we get a little money every two weeks or every month, in which case it's best to put away a little money every month:
Yeah, I addressed this in another comment[1]. "Most of the time" is doing a lot of work there, most is 75-80%. 20% is not negligible to me.
But as your article points it, DCA is not about getting the absolute best return, it's about risk mitigation.
> The only times when DCA beats LS is when the market crashes (i.e. 1974, 2000, 2008, etc.). This is true because DCA buys into a falling market, and, thus, gets a lower average price than a lump sum investment would.
If you are fearful of a crash (like now, as we are in the midst of war, recession, energy shortages, coming out of a pandemic etc.) risk mitigation may be higher on your list of priorities. I also think it just lowers cognitive load for people who aren't investing for a living.
All that said, I 100% agree with DCA as the best approach for people investing out of income!
> "Most of the time" is doing a lot of work there, most is 75-80%. 20% is not negligible to me.
If I'm on game show, and I have to (e.g.) pick a door to win a prize, with one strategy winning 80% of the time, and another that wins 20% of the time, I know what I'm using.
And it's not like it's even close (51/49 or even 60/40). This is a substantial "most".
The nuance about DCA that is commonly missed is that lump sum gives a better return on average. The key word is average; averages hide much!
When people struggle to understand that I say DCA can be thought of as a sort of insurance. You pay a price to insure your home to protect against the unlikely event that your house burns down. But on average buying insurance will loose you money. But the cost is comparatively low, and for each individual likely worth it to protect from total loss, even if in aggregate it's clearly a loosing proposition.
DCA is similar, most people will end up with marginally lower returns, however a small percentage of individuals caught close to a rare negative market event will be less impacted by sudden large drops and experience overall much greater returns in the long run than if they had invested as a lump sum due to the nature of volatility decay.
Absolutely. Sure, in a bull market you give up some upside but I doubt you're likely to really care. If I'm riding something all the way up and making profit, I'm happy. If I'm losing 20% or 40% of my money, I'm extremely unhappy. Human sensitivity to negative emotion makes the insurance worth it, imo.
And yes, averages are great for everyone but the outliers!
Isn’t it so that statistically lump-sum is better[0] but that you take on overvaluation risk? If you DCA you reduce that risk.
[0] don’t have a ref but I think it has been shown that if you have a lump sum of money, historically you would have made the most gains by investing everything immediately (in the S&P500, there are only a few periods were this wasn’t true (therefore there is a risk)
Yes, you risk buying at inflated prices let's say. The common idiom is "time in the market beats timing the market", meaning yeah, just get your money in if you have it. Here's one analysis [1] that claims since 1950 in every 10-year period, lump-sum would have been better 75% of the time. But there are some caveats.
First, 25% of the time is a lot of the time. It may be possible to recognize an overheated market, by looking at historical earnings multiple averages for example. Second, they are using a "total market" index, even broader than the S&P 500. I don't know that many people who buy a total market index. Usually it's the S&P 500, or even a sector focus. The more specific you get, the more these results are likely to break down I would bet.
We focus on DCA for people who are working for a living and investing out of income, which is obviously a different cohort than Fred Wilson, the VC. So lump-sum investing doesn't really factor into it.
it's about time in the markets, not timing the markets
However, whoever said the wise words about how Buy and Hold and been polluted by HODL was absolutely correct.
Stock indexes have a built in survivorship bias, as the failing or declining stocks eventually get diminished (especially if it is market cap weighted) or removed completely.
It's a bit of an aside in the post (which I otherwise agree with), but dollar-cost averaging such as:
> If you decide to invest $100,000 into the stock market because you agree with my reasoning in this post, then it would make a lot more sense to invest $10,000 a month over the next ten months than invest all of the $100,000 this month.
(Quote from article.)
That doesn't actually make a lot more sense, and that is not the argument for dollar-cost averaging.
Assuming you're investing in a single equity/portfolio, then at the end of that ten month period you will have an effective entry price for the entire lot either way. Either that price is the value it's at _now_, or that price is the weighted average of ten entry prices.
One thing we know, or at least which we're assuming when we choose to invest, is that over the long term prices go up. So unless you have outside knowledge or asymmetric insight suggesting prices will in fact go down, it makes no sense to DCA into the market. And if you do think prices will go down before they go up, then you should hold the entire amount back until you no longer believe the asset is likely to decline.
Dollar-cost averaging is not an argument to buy slowly when you already have money, it is a reassurance to keep investing when process go down and not to hold any money back when investing money you're receiving on a regular schedule (like a paycheque).
Ironically (and amusingly) DCA is also an entry method into a position when you're willing to accept lesser theoretical returns to avoid FOMO but are feeling timid, which is definitely on-brand for a VC.
DCA makes mathematical sense anytime you have a long-term bullish thesis (otherwise, "do not invest" is a better strategy), but have a belief that there is a short-term noise function super-imposed over the long-term uptrend and where that short-term noise function is relatively large in amplitude as compared to the expected long-term growth over the period.
DCA makes psychological sense if the concern is a FOMO on the best possible entry price. It takes the psychological pressure of finding the absolute best off the table and replaces it with a smoothed average entry price.
I think it's a more powerful psychological device (and I do tend to invest pretty much all at once when I reach a decision), but it's not entirely pointless mathematically.
> DCA makes mathematical sense anytime you have a long-term bullish thesis (otherwise, "do not invest" is a better strategy), but have a belief that there is a short-term noise function...
Math citation needed - the noise function you're hypothesizing could just as easily drive the average up as down, unless you have a reason to think it should go down, in which case you're timing the market and there's a better future time to go 100%.
I believe you're right, but I have always thought DCA was just a measure to transform "fixed amount to savings account" people into "fixed amount to Vanguard" people so that they can access the higher risk that is the S&P500 compared to a savings bank account.
Of course it could just as easily drive the average up, but the point is that it's a hedge: it's accepting a reduced chance of possible higher returns for the safety of reduced chance of possible lower returns.
Isn't it still a hedge? Statistically, you'll get the average price of the stock for the period you DCA. While if you enter at any single moment, you get a somewhat random price.
Another thought: if the thesis is that the price will go up, then whatever sum you have and want to invest, should you invest it all now - given that the price is supposed to go up?
If you commit to the strategy in advance, then you're picking an unknown price instead of a current price, and the unknown price is likely higher.
A financial hedge is, generally, something which reduces risk or improves on the risk:reward ratio in a mathematically demonstrable way. Generally this means bundling uncorrelated (or anticorrelated) assets. This concept won a Nobel for Econ in 1990(?), and is the foundation of modern portfolio theory.
Using "hedge" in a more colloquial way, it can mean "a way to protect yourself from an unexpected poor outcome". But by that definition this also fails, since you're just as vulnerable to outlier events, but the nature of those outlier events is different (and perhaps less intuitive).
You can simplify the mathematical argument a lot by looking at DCA as forcing a relative "buy low sell high." When the price of the asset is lower, your DCA buys more, when it's higher you buy less. Relative to a single purchase at the average price, this is equivalent to buying low and selling high.
Imagine you commit to buying $100 on each of date A, B, and C. On A, the price is $10/share. You buy 10 shares. On B, it’s $100/sh. You buy 1 share. On C, it’s $1/sh. You buy 100 shares. You have 111 shares at a cost-basis of $300 (or $2.70/share).
The time-weighted average price was $37/share.
DCA is a way to force yourself to make purchases at a variety of prices and times. (How likely is it with a single-purchase strategy that you'd own 111 shares at $2.70/sh of a stock that charted $10->$100->$1? How would you feel when you saw your $300 investment go to $111 in value? DCA takes a lot of that psychological pressure off and is amenable to decide-once and automate.)
Interesting…. Under what assumptions precisely is it optimal to dollar cost average over a short time interval, if short time fluctuations have a large magnitude relative to long term drift?
Like eg if you assume geometric brownian motion it doesn’t seem to help?
Yes, you're correct about geometric brownian motion. The model must include some mean-reverting component (implied by "short time fluctuations") for DCA to come out ahead, and such a component would violate standard no-arbitrage assumptions.
This is a reason I haven't made active use of DCA. But DCA doesn't give up much, either, so I'm fine with "passively" engaging in DCA-like behavior by haphazardly dumping spare money into index funds after min("significant" drop, time limit) instead of purely maximizing time in market.
> If you decide to invest $100,000 into the stock market because you agree with my reasoning in this post, then it would make a lot more sense to invest $10,000 a month over the next ten months than invest all of the $100,000 this month.
Depending on the equity, you are essentially sampling from a skewnorm & summing over 10 variates. eg. if you invest in the broad market, ^GSPC (your s&p 500) has a skew of +0.4 and a variance of 2.8, so your five number summary works out to
[-18.3, -3.7, -0.2,3.4,18.8]. While the median scenario is net neutral, you do end up underpaying 3-4 times if you fall below the first quartile.
otoh, if you are feeling frisky and want to dump 100k into robinhood over the next 10 months, $hood has a skew of -0.88 & a variance of 26.3, so 10k realizations of this scenario -
If you're just "not sure", buying puts wouldn't help. Running puts & long on a single equity is assuming a specific yield shape.
A good example would be an upcoming test result report for a pharmaceutical - it's either going strongly and gradually up (long) or suddenly and significantly down (put), but not gradually down (in which case you'd be out on both puts and longs).
But yeah, at this point you're a super-sophisticated investor and all of this discussion is meaningless. :)
DCA reduces variance in your returns for a slightly lower rate of return. It's a risk reducer with a clear derivation. You exchange expected performance for reduced variance in outcome. That's useful, you can plan better with reduced variance.
> One thing we know, or at least which we're assuming when we choose to invest, is that over the long term prices go up.
Right, but what if the prices went down during that 10 month period, even if you were bullish? You invested at the top in one chunk, when you could have smoothed it out in increments instead.
That smoothing function is the entire point of DCA and takes the guesswork out of reading the market, like trying to find entry points.
But barring other information it could go down in that 10 month period or it could go up in that 10 month period, and the long term upward trend suggests its more likely for prices to go up than down in those 10 months.
> but it won't (statistically) deliver higher returns.
Would you take a coin-flip where heads you double your net worth and tails you lose all your money and assets?
(Statistically) the expected outcome is zero, so it really shouldn't bother you either way, you could take the bet or not, it's the same if you go for it or if you don't.
In the real world, though, lowering your risk means reducing the chance of both winning the bet and losing it. For many people it's worth more to have less risk of randomly timing the market poorly, even though they have less chance of randomly timing it well.
Yes, over all investors the two decisions cancel out, but to the individual DCA can be worth lowering their risk.
The point is to sacrifice some return for lower variance. The absolute return is lower in expectation, but the argument would be that the risk-adjusted return is better.
So assume there's a normal distribution of price possibilities at each purchase point. You're going to end up with the _sum_ of those distributions, not the correlation or combination of them.
Presumably the deviations of those are growing more larger over time, but the are still the same underlying distribution curve as they sum up. The mean will trend steadily upwards.
The resulting price will be a normal distribution with a deviation of somewhere around the midpoint, and a mean of somewhere around the midpoint.
Now, with the mean increasing over time, your expected return will be decreasing the longer you wait. But what about the risk:return?
Unless you have outside knowledge about risk growing or lessening over time, it will remain constant over the DCA period, which means the risk factor of your investment (the standard deviation of the resulting DCA price) will be at exactly the midpoint of your purchase series.
So your expected return will be slightly lower, and your risk profile will be substantially larger, than just buying immediately.
DCA: math does not check out, not even close, _if you have all the money upfront_.
If you had made a lump sum investment the day before the crash in 1929 you would have regretted it, and it would have taken years for your investments to recover.
DCA versus lump sum has been debated for a long time and there is really not a clear answer or expert consensus on the subject.
Alternatively, you could have cautiously DCA-ed your lump sum in 12 monthly pieces, and then the 1929 crash happens the day after the 12th and final piece was invested.
DCA cannot save us from a crash, though it can reduce the fear of a crash to the point where we actually make an investment rather than sit on the sidelines.
> So unless you have outside knowledge or asymmetric insight suggesting prices will in fact go down, it makes no sense to DCA into the market.
Sure it does. Just like you say further down, people are "willing to accept lesser theoretical returns", except in this case it's to reduce e.g. tail risk. They could also buy up front and hedge, but that's already more technical than most people want to deal with.
It depends somewhat also on what you're DCAing into. If you're DCAing into a major index, there's essentially no chance of it going to zero (that's a society-ending event, hedge with farming equipment and doomsday prepping). And thus, no statistical or mathematical benefit to DCAing.
If you're expecting a non-continuous return function, such as a pending drug testing result or a major governments deal, then you're actively trading and a DCA strategy is almost certainly suboptimal.
It's very hard to construct a situation which is both plausible and favorable for DCA _if you have all the funds upfront_.
It doesn't need to go to zero to make sense. The US market fell by a third in a single month at the start of the pandemic, recovered over the next five months on its way to new heights heading into this year, and now is down a fifth again. DCAing is simply a low-rent hedge against getting caught out by those kinds of swings. You won't get to gloat about going all in at the bottom, but also won't have to cry about doing it at the top.
DCAing is worse on average for simple objective functions, absolutely. Markets rise more consistently than they fall. But markets also fall faster than they rise. This may not matter to the hypothetical average person, but it matters to real people, and some of them make the perfectly rational decision, based on real-life economic factors that aren't captured by simple models, to trade returns for stability.
You can formulate this as e.g. an MINLP model and it isn't at all hard to construct situations that are favorable to DCA when lump-sum is an option. All it takes is adding constraints to reflect a real person's life circumstances. Other strategies are still better than DCA, but they're also more complicated to execute, and we aren't talking about sophisticated investors here.
Research shows that timing the market is hard. The more times you try to do it, the more likely you are to fail. Dollar cost averaging saves you from having to express super human timing on all of your trades.
Dollar-cost averaging is still timing the market, if you have the full amount up front. You're betting that your future weighted average is less than the current price, that's timing.
You're trying to take short-term volatility out of the equation.
If I think the stock will go up over the course of years but have really no idea what it's going to do over the course of hours/days/weeks, then approximating a buy-in at the average price over a longer period would seem to be a de-risking approach.
Can you point me to some of this mathematical proof? Because I'm seeing advice all over the net that it can help iron out short-term volatility.
Your point that "If you think it will go down over several months, you shouldn't be buying in" is fine, but I'm not sure it's equivalent to "I don't know what it's going to do anytime soon I'm buying this for long-term prospects".
Imagine a stock with a sinusoidal price fluctuation at a frequency of just under a week, but which you expect to rise significantly over a 5 year period. Investing in that weekly over 5 weeks will net you a more locally average price than going all in today, particularly if you don't have good information about that sine pattern. Going all-in right now might net you a low price, but you may also be buying at a local maximum.
I believe your intuition is correct, and it just straightforwardly does help iron out short term volatility. What it de-risks is the likelihood the bottom arrives some time in the next year, at a point lower than today, and that you could have achieved a significantly lower average entry price by waiting. The risk it exposes you to is that it's already the bottom, and you're going to keep buying in on the recovery. So if you're long term optimistic but short term bearish, but lacking high confidence in your ability to call the bottom, DCA makes sense imho.
I don't know what the conjecture is that would make it not de-risking that, or what a proof would be, maybe GP will clarify.
It should be noted that many analyses of DCA versus lump sum are around the S&P 500 overall. In the case of highly volatile growth stocks or just single stock investing like Fred is discussing in the article, market timing risk is more acute, since the drawdowns are more severe (it is quite rare for the S&P 500 to drop 70-80%).
Shameless plus, I am the owner of a DCA investing app + a simulator tool to backtest DCA with different stocks, over different time periods
The intuitive leap which is hard and important is how "not knowing" works.
Presumably you are choosing to invest in an asset because over the long term you believe it will go up. But you know nothing about what it will do in any defined timeframe.
Choosing to DCA with a fixed strategy is choosing x prices at which to enter, of which (x-1) are unknown. But they are fixed, and based on your above assumptions you know nothing about them except that they're generally trending upwards (and thus your entry price is averaging up by DCAing). Knowing nothing means knowing nothing, it's as likely to vary upwards as down.
You can express the above as a summation with a positive (but unknown) dv/dt and a canceling-out e if you think better in notation, but I can't figure out how to make that legible in a HN comment.
If you have any reason to believe that there is more downside risk than upside risk over the DCA period, then you should delay investing until that is no longer true, and go 100% at that time.
DCA is essentially the same intuitive leap as the Monty Hall problem, but backwards.
I don’t know that the prices
during the DCA period are trending upwards, I have no information about short term fluctuations other than they exist.
I have no reason to believe that over the relatively short period of DCA that there is specific upside or downside coming along immediately, but I know that there is noise in the pricing. The rising trend I’m betting on is further down the line and very slow.
You’re adding assumptions that support your view, rather than addressing the problem as stated.
The only thing we know is that we're choosing an asset which we believe will trend upwards.
Over the relatively short period of DCA, it will trend upwards.
If you're saying you know that the rising trend won't begin until a future date, then that's an assumption you're adding, and it probably indicates you should wait until the rising trend begins until increasing.
> Over the relatively short period of DCA, it will trend upwards.
But this is an assumption!
> If you're saying you know that the rising trend won't begin until a future date, then that's an assumption you're adding
I'm saying I have no idea what's going to happen during the DCA period.
I think at this point its safe to say your view that DCA doesn't work to denoise a signal is predicated on assumptions about what the price trend is doing over the DCA timescale. If the stock is trending up over that period, then you're likely better off buying now regardless of local fluctuation. OK!
I've seen this advice all over too, but it's never accompanied by anything approximating a mathematical proof. IMO, the burden of proof is on showing DCA works, not the other way around. In any case, the problem with your analogy is that if you have no information about that sin wave, you're equally likely to be investing at a local minimum.
> you're equally likely to be investing at a local minimum.
If you invest at a few different times, whether fixed interval or random, is this not increasing the probability of approach an average value over the period you're investing?
I'm not asserting it's a good idea, I'm not using it as a strategy myself (or in fact making investment choices myself at all really), I'm just interested from the technical perspective.
> If you invest at a few different times, whether fixed interval or random, is this not increasing the probability of approach an average value over the period you're investing?
It does indeed increase the probability that you will approach the average value over that period.
But there's no reason to believe that average will be lower than the current value.
But and hold has been corrupted into HODL, and cryptocoins enthusiasts / meme stonks will wreck people because of it.
Buy a stock so that you keep holding it for 10 years is good advice, but not in the context of today's mania. It's advice that is supposed to mean 'buy safe things', not 'buy that thing with exponential growth that might be worth 1000x it's current value in 10 years.
I do think that blogs / advice like what this post does is overall a good idea and good advice. But I find it difficult to discuss in practice due to the HODL corruption.
One aspect of the buy and hold mentality I feel is missing from the discussion is direct registering (DRS) the shares you invest in a company.
The shares you buy through a broker-dealer are held in "street name" meaning they are registered with your broker-dealer. You enjoy beneficial ownership, meaning you enjoy the benefits of ownership even though the title to the shares are in your broker's name. You have IOU's, basically.
Because the shares aren't in your name, broker-dealers can lend them out to hedge funds shorting the company you're investing in. The shares can also vanish if the brokerage goes under.
DRSing your shares at the company's transfer agent ensures that the shares are registered under your name (and not the brokerage's), and prevents your shares from being lent out and being used against your investment.
> Because the shares aren't in your name, broker-dealers can lend them out to hedge funds shorting the company you're investing in.
This is part of how they absorb the fees inherent in trading. Or you can use a brokerage which pays you part of what is made for the loaning-out, and doesn't absorb the trading fees.
Or just don't worry about it, your chump-change investments being lent out doesn't matter.
> The shares can also vanish if the brokerage goes under.
Your brokerage firm made you agree to a bunch of documents explaining their SIPC insurance, where the assets will be transferred if they go under, etc, etc. It's not their fault if you just clicked through and ignored them.
Stick with the various major brokers and expend your effort worrying about lightning strikes and sharknados.
> your chump-change investments being lent out doesn't matter.
Who is to say my investments are chump-change? What's with the derision? I'm under no obligation to help broker-dealers make money off of lending out my shares, especially if those shares are being used to short the companies I'm invested in.
If retail investors DRS'd more of their long-term holdings, it absolutely would matter and have an effect on shares available to hedge funds to short.
I saw the headline and my mind went to HODL as well, but the article itself is definitely about modest, safe investments, not "diamond hands" and moon-shots.
I agree. Its a good article in isolation. My main problem is that HODL is a pretty common mindset, based on random discussions I have on the street / with people in general.
You know, the types who lose 60% on ARKK but they're sure that they're going to "make it back" over the next few years? Or the people who think that losing 60% on ARKK is similar to losing 15% in VTI / SPY? (For those who don't realize, starting with $100k, you end with ~$40k if you had ARKK, but $85k if you held onto VTI/SPY. Aka, those who held VTI/SPY have twice your money now relatively speaking).
Unrealized losses _are_ losses. People must recognize this. People are corrupting the buy-and-hold advice to mean "ignore the unrealized losses" or "if you don't sell its not a loss", which is bullshit.
I realized in the recent past that another part of the picture that may be missing for the HOLDers is that the losses can be initiated by other parties. That is to say if someone liquidates a company and it gets bought for $X which is some fraction of the share price the HOLDeler paid, then they will be forced into taking loses. That third party factor adds a whole other dimension to the risk of holding indefinitely, because there is no such thing as an indefinite runway in the market, someone can put an end to a company at any point in time just like we saw with TWTR recently.
Choosing Airbnb or Google or whatever because you think you know something about it or can predict the future is setting yourself up for failure.
Yahoo seemed like a great stock at one time. The market changed, the leadership was faulty etc.
>The top five stocks in 2000 were Microsoft, Cisco (CSCO), Exxon Mobil (XOM), GE (GE), and Intel (INTC); they represented 18% of the index. Five years later, Goldman pointed out, they represented just 12% of the index’s market capitalization. And 20 years later, they represent 8%.
From the article. "To be perfectly clear, I am not recommending Airbnb or Google stock here. I like both companies very much and think they are dominant in their sectors (travel and search) and likely will continue that dominance for the foreseeable future. But all businesses are at risk of poor management, new competitors, changing market structures and technologies, and many other things. Return comes with risks. Buildings can be risky too. Neighborhoods can change. Tax and other laws can change."
Fair enough but his analogy to buying buildings doesn’t make sense then. An index of stocks would be more like buying REITs which by the way have underperformed stocks in the last 5 and 10 years.
Buy a stock so that you keep holding it for 10 years is good advice, it is also good advice in todays environment.
Buy a stock so that you keep holding it for 10 years even if they pivot from computer repairs (because you think computers are going to be a thing) to bitcoin, to burning piles of cash because you joined the cult led by the CEO is a terrible idea.
I'd go even further, I don't think you should hold meme stocks longer than a day. You can always buy in the next day but momentum can swing way too much and kill any profit you made.
For example: BBBY when it was revealed that Ryan Cohen sold his shares. Instant drop.
I like the comparison of stocks to buildings in terms of cap rate P/E etc.
And to his question that we don't know when the bottom is (totally true) but I suspect we still have a ways to go. FTX + Housing + global macro + Interest back into the market = downward pressure
There are so many flaws in this blog post. Cities generally don’t move very quickly, decline infrequently, and the real estate assets are tied to locations that are relatively stable over lifetimes. Google is not stable on those time horizons and neither is Airbnb. The valuation of these companies is still massively overblown because the current earnings may not going to exist in 20 years. So the chance of declines as well as the chance of growth needs to be included in present value calculations to find the fair market value of these firms. I can tell just by glancing at these P/E ratios that the potential for earnings decreases has not been priced in.
>> The Gotham Gal and I buy and build a fair bit of real estate on the side
This is not Fred Wilson's fault, and I don't target Fred for it - it is the fault of society in general, but I hate it that people "buy and build a fair bit of real estate on the side".
I'm assuming he means residential.
Rich people have no idea how it feels to be a renter when you want to own, but prices have been driven out of th bounds of possibility by people who can afford to "buy and build a fair bit of real estate on the side ".
It's awful that society has divided into landlords and renters.
And landlords/rich people really have no empathy - they're in their own lives and feeling good about how many houses they own.
Government and society in general has completely failed by allowed housing to become a financial instrument instead of a modest/normal capitalist market as it was in the 1970s.
In any such discussion you'll notice those who attack this line of thinking are ALWAYS house owners .... ALWAYS. These are the people who feel that any regulated fairness in housing is communism - that's because they are on the happy side of the housing equation.
"The Australian Dream or Great Australian Dream is, in its narrowest sense, a belief that in Australia, home ownership can lead to a better life and is an expression of success and security. The term is derived from the American Dream, which first described the same phenomenon in the United States, starting in the 1940s."
Owning a house used to be "the great Australian (American) dream". And now it's not. Now it's what rich people do many times over in a giant game of monopoly.
I think it's clear that rental properties should exist, because however much it sucks that some people can't buy a property to live in, it would suck a lot harder if the only way to live somewhere was to buy it.
If rental properties should exist, who should own them? If renting of housing by private owners is banned, that's a small inconvenience for people who might be combining households (each partner lived apart initially and now want to move in together) or when otherwise taking a temporary assignment somewhere with the intention to return, but that's not the bulk of rental property pretty obviously.
I think the greater challenge is that prospective home buyers are competing against other prospective home buyers. All else being equal, people earning a 25th percentile income and having a 25th percentile savings are going to lose out in a competitive bidding situation to people with a 26th percentile income and savings.
Not sure how you came to think I said rental should not exist.
I think governments should regulate to ensure housing markets are fair, with a primary goal of ensuring people who want to own a house can buy one.
I fundamentally believe that it should be within the means of anyone who wants to own a house to have one. That means firefighters, kindergarten teachers, garbage collection workers, receptionists, old and young people - all those people who frankly have zero chance right now.
Governments should use they tools they have to discourage monopoly style property hoarding.
Housing should not be used at hotel rooms - I disagree with the cored concept of AirBNB because residential housing should be for the ordinary lives of citizens,m not for investors to make money from travel holidays. Things like AirBNB distort the market.
I am against residential housing being sold to non citizens/permanent residents.
"More supply will solve insane pricing!" is what governments and property investors like to say. It sure sounds plausible - sounds like market economics doesn't it..... if there's so much of something on the market that supply outstrips demand then prices MUST go down, right?
Seems like a ridiculous idea to me that so many houses will be built that prices will crash down to the level that anyone can buy them.
In fact I think what happens when there is more supply is that investors buy more houses to put renters into.
It will never happen that so many houses will be built that they become so cheap that the pricing will crash.
Property developers love to say "more supply!" because it makes them more money, that's all - they know more supply will never drives prices down so much that anyone could afford a house.
>> Seems like a ridiculous idea to me that so many houses will be built that prices will crash down to the level that anyone can buy them
There is an entire history of business where that exact thing happens (assuming anyone isn't literal). Watch the markets for energy (increased drilling causes prices to drop), metals (mines come online, prices drop), ag commodities... and real estate. There was a massive overbuild in the US during the late 90's and early 2000s, which resulted in a big drop in prices.
Notice the dip after there had been a build up of supply? Prices dropped about 30%. Then notice the shortage of building for several years... and a run up in prices shortly after? The old supply and demand...
Just using common sense - land is a gigantic part of the cost of a house. If zoning laws made it such that you can build more units on a given piece of land...how could prices do anything but go down?
The old "supply is the solution" is old because it has been true since the beginning of humans buying and selling things.
It's not a theoretical question, but a practical question of relative magnitudes. Can we actually supply enough housing to stabilize prices? And let's say we did, perhaps a great cost, but then what happens in the next big demographic shift? And what of the environmental impact in the process?
The "direct" solution is not always the best. This line of thinking always reminds me of the approach to medicine where they'd rather cut out your gallbladder than put you on an elimination diet and send you to an acupuncturist.
Given that there are many areas of the US where there is enough housing for houses to be affordable by the barely or not-quite middle class, it seems like that is possible. Detroit, Pittsburgh, Buffalo, Memphis, Oklahoma City, Kansas City, Richmond, New Orleans, Cincinnati, Columbus, Cleveland, Philly and lots of the surrounding suburban and rural areas.
> In fact I think what happens when there is more supply is that investors buy more houses to put renters into.
Solve that with more supply. Those people only have finite money. We can keep building inexpensive housing and selling it to them at insane prices for longer than they can keep buying them at insane prices.
The problem is that, once we break them, then we almost certainly overshoot. The price seriously craters, and everyone who bought a house in the last N years takes a huge bath.
This is basically the housing market. Homebuilders react to high prices by continuing to build more homes as long as they can do so at a profit. Not hard to understand. There is always overshooting. That's OK, it results in a lot of homes.
Those who complain that there isn't enough housing are complaining that they are being priced out of popular areas. It's like complaining you can't afford a BMW and have to stick with an old Ford. Housing in the U.S. is still available and home ownership rates are relatively high.
The problem is that well-paid jobs are scarce, and getting scarcer, which puts a lot of pressure on housing in the handful of areas that have well-paid jobs. But that's not a problem with the national housing market, but the local markets in hot regions, which are captive to local zoning laws in those markets. Again, not something homebuilders can address easily.
I wish people would stop talk about housing problems and instead focus on the distribution-of-jobs problem. Housing is never going to be fast enough to catch up to a hot jobs market area, and it will always end up overshooting. Moreover, as a nation, we need well paid jobs to be much more geographically diverse if we are to survive as something other than pockets of wealth surrounded by vast regions of poverty.
Agree with a lot of this, but the zoning problems are real. They can't be fixed by homebuilders (of any type) and local governments face perverse incentives on the issue, so it can only be solved at a state level (US). In other jurisdictions it's likely similar.
I agree that the pains of restrictive zoning are very real and punish newcomers. When I was in SF, I lived in a rent controlled unit in which there was a cranky old lady paying $800 for a 2 bedroom apartment while a young couple moved into a smaller unit in the same building and were paying $3000. They were planning on having a child, but it was really hard. Both working full time just to afford rent. That's what happens when you freeze housing supply.
But the usual counterweight is to move to areas with more liberal zoning -- e.g. zoning is locally controlled and if a city wants to stop growing, then there's not much that can be done to stop them - California is trying, but there is a lot of opposition to forcing cities to grow if they don't want to.
The solution is to not build a major corporate HQ in such a city, or to move the HQ to cities that embrace growth -- which is the majority. But if that doesn't happen, then good jobs only exist in areas with restrictive zoning, and that's what makes the zoning painful.
We know what happens when the high-paying jobs become more geographically distributed. We saw it in Portland and Austin in the past few decades, for example: people are drawn to those places from California and housing prices go up significantly.
People do that to escape the high prices in California -- but by doing so, they cause prices to increase in the places they move to, because doing so creates a sudden influx of demand from buyers who have more spending power than the people who already lived there.
If the housing supply had been increased in California, fewer people would be flooding into Austin from California to buy houses.
> when there is more supply is that investors buy more houses to put renters into.
Where would the investors create these new renters from?
Immigration and net-new household formation are two sources. (If rental properties are cheaper, people might move out of their parents house earlier, might take fewer [possibly zero] roommates, or might move to a location because the rent is cheap. All of those factors seem quite small compared to a contemplated large increase in housing supply. However, you can only make so many new households by driving the price of rent down. At some point, either new households stop being able to soak up the supply or investors aren't willing to keep pushing the price of rentals down.)
Turn the problem around. If we assume as a given that some people can't afford houses at the level of supply that currently exists, does not increasing the supply help those hopeful buyers at all?
Yeah it's really not, it's about trying to keep the housing market about housing the local population rather than allowing in investor funds from overseas which warps it, changes what gets built at what price, and drives people into rental rather than ownership.
If you don't have the right to live somewhere, why should you be competing in the housing market and pricing out the local population?
Particularly if the nature of your competition is to keep properties mostly empty while speculating on price (see, for example, a lot of the high-end apartment development in London).
It's not xenophobia, it's a fundamental disagreement in what housing is actually for.
Not everyone agrees that property rights are absolute or supreme. Some of us think markets should be set up to help people, not the other way around, particularly where human needs like housing are involved.
It's certainly not clear that a preference for housing people over capital is 'xenophobic'.
Xenophobic - what a load of garbage. It's well known that countries have policies on whether or not foreign buyers are allowed to buy residential real estate. Me having an opinion on that does not make me xenophobic.
>>Any tax payer should be treated equally..
Foreign buyers are not taxpayers in Australia/Canada/USA.
"The Prohibition on the Purchase of Residential Property by Non-Canadians Act (Act) comes into force on January 1, 2023. It prohibits the purchase of residential property in Canada by non-Canadians unless they are exempted by the Act or its regulations, or the purchase is made in certain circumstances specified in the regulations."
In Australia and Canada, Chinese money has flooded our real estate markets - much of that money is anecdotally said to be the gains of corrupt officials and people trying to exit the country due to the oppressive regime.
"Chinese investors flooding billions into the Australian real estate market prompt money laundering fears"
This outflow of capital from China, pouring into Australia and Canada pushes up prices, meaning that people who are not citizens or permanent residents are buying local real estate and inflating prices. Every house owned by a non citizen/permanent resident means one more that cannot be bought by a citizen/permanent resident.
Why should people from other countries be entitled to own our residential real estate? If you believe the purpose of housing is to house the citizens and permanent residents then there's every reason to close out foreign buyers, as Canada has done:
"Demand for U.S. homes from foreign investors is pushing up home prices, exacerbating concerns over housing affordability"
"Housing markets are preferred destinations for foreign investors looking for yields, vacation homes or safe havens, or for those dodging tax restraints and corruption crackdowns in their home countries. But demand for U.S. homes from foreign investors, especially Chinese, pushes up home prices, exacerbating concerns over housing affordability, according to new research from Wharton."
If you want to prevent foreign investments, then say so. Why say non-citizens and permanent residents? In a multi-cultural society like US, non-citizens and permanent residents do form a significant portion of the population and they also need place to live.
Pointing to foreign investment is a strawman argument as the original poster called for banning non-citizens and permanent residents.. not non-residents.
Rental property will always exist. We need to completely ban nightly rentals. If you want to operate a hotel, build and operate a hotel. If a community was built to operate with nightly rentals, like, say, Sun River, OR, then perhaps they can zone appropriately for nightly rentals. Pseudo hotels should not be operating in traditional neighborhoods.
So instead of having a residential building with Airbnbs inside you'll now have a hotel. How does that solve the issue?
If there's X number of people who need an overnight stay in the city and you want to accommodate them - what difference it makes if they stay in residential studios or hotel rooms?
What you're saying resonates with me intuitively and anecdotally, but it's hard to square with the historical overall US homeownership rate, which peaked right before the Great Recession: https://fred.stlouisfed.org/series/RHORUSQ156N
Is there other data available that supports your view?
If nobody is building real estate, how do prices do anything but go up? From a supply side perspective, real estate has always been about financials. Everyone is trying to make money. Zoning rules make it harder to build more... and hence there isn't more...
Your exact quote was I hate it that people "buy and build a fair bit of real estate on the side". Their interpretation of your comments is quite straightforward.
Preach it brother/sister. Everyone is out here treating real estate as an investment and inserting themselves pointless middle-people extracting capital from those who are blocked from entering the housing market or even scaling their living situation to match their family requirements.
It's incredibly depressing to see comments like yours considered "wrong" and in the minority and even more so vociferously defended against in the name of "small-business owners" or the "capitalism IS fair" crowd. Despite those who succeeded being a survivorship bias group.
Housing is a right, and should not be an investment.
To invest in housing alienates its purpose which is stability and shelter. It creates an antagonistic lens in which its ownership is held, not for those housed and protected by it, but those who wish to squeeze as much blood from the stone it has become.
The state/city could nationalize apartment blocks easily and and provide cheap or free housing to those who want it (not means tested, you want somewhere to live but don't want to deal with a landlord? Here's your state housing).
This will provide a floor for landlords to compete against and keep prices down.
If you find current valuations attractive , and plan on dollar cost averaging through the next 12 months, but realize that businesses, management, competitors may change the investment scenario - it makes far more sense to buy a fund consisting of many companies (maybe even the entire stock market) rather than to make bets on individual companies.
My number one buy right now is Roku. Down 75% from the COVID high with low debt and the best product on the market. I fully believe they will win the TVOS wars, which have untold billions at stake for advertising and data capture.
Pretty much every TV on sale today is a "smart" TV. Roku needs to convince customers that they should buy their device too. That is increasingly becoming a tough sell.
My number one trade is shorting Tesla. I've been short via puts since over $300 and recently rolled over my position to extend the expiration to June. I think $100 is easily in range, giving Tesla a market cap over $300B which is still ridiculous.
Good luck on your ROKU but I personally feel like that's dead money. They are basically another TIVO and they are a small player that will likely get bought, but not from a position of strength but from weakness. But different opinions are what makes a market, so good luck!
I am very low on Roku. Not saying they won’t rebound some, I just don’t see what they offer over any of their competition. They sell cheap bottom barrel ad inventory. That is it. There is a limit to the growth there.
What does winning look like to you? I cannot imagine, for example, Apple pulling out of this war. Do you think other TVOS players will still be around?
Apple will be the Apple of the market, as they always are. The high end 25%.
But Android TV is an absolute trainwreck. The level of lag is simply unnaceptable. And if there’s one thing that drives consumers nuts, it’s input lag. People will vote when they buy a TV.
Roku is feature-for-feature a superior platform, with better performance, higher device penetration [0] and at a lower price. The only reason Google has gotten as far as they have is due to existing monopoly forces.
As a long-time (multi-decade) and very happy TiVo user, I'm a lot surprised and a little dismayed that they seem to have so badly fumbled the head-start they had in the battle for the better set-top box experience.
There's also an unmentioned aspect to the real estate to stocks analogy. There is a spectrum in the types of real estate that is somewhat akin to the spectrum of value stocks to growth stocks to pure speculation based stocks.
There are income producing properties such as apartment buildings, duplexes, strip mall commercial real estate in average cities. These are similar to consumer staples stocks like P&G, Walmart, utilities, etc. The income is generated via rent from reliable consumer demand. They are priced for boring cashflow (with high cap rates and low PE) but should endure.
There are reliable growth properties in trendy cities that are legitimately and secularly growing where future increases in rents are derived from rising local salaries and demand. These are like FAANMG stocks. They are priced for growth (i.e. low cap rates - high PE) - such as Silicon Valley, Seattle, LA, Austin.
On the flip side of the spectrum, there is properties which are designed for speculation (and optionally money laundering) not based on any sort of rental income - almost like the physical manifestation of bitcoin. Think never unoccupied 3rd vacation homes in Miami and New York. These are like ARK ETFS or crypto coins - both do well in speculative times and see less growth when interest rates go up.
I've never understood real estate investing...
- You have to do a bunch of physical maintenance of the property and be on-call to unclog toilets
- You have to know landlord-tenant law inside and out, there are a lot of hidden gotchas that can get you sued for big money or even criminally prosecuted
- You have to see stuff that's wrong with the property and understand how much you'll need to fix it
- You have to know how to find all sorts of contractors who will do a good job and not rip you off
- You can't invest in say the $500-$5000 range to get your feet wet at small scale, every property with any sort of building on it at all is like $50,000+, and building a brand-new house is even more expensive
- Enormous leverage seems to be the norm, and in most states, the bank doesn't forgive debt that's not covered by sale of the collateral (house)
- Anyone with enough money can do it, it's a perfectly competitive market where it seems difficult to have any kind of edge over professional landlords or house flippers that have built a career in this area, have a lot of capital and a staff of full-time experts optimizing every aspect down to a science
- If I get on e.g. Zillow it says, "Such-and-such property in location A is worth $X and such-and-such property in location B is worth $Y where Y = 3X" and I say "Wait why is it that? Y = 2X or Y = 4X also seems equally reasonable, heck Y = X or Y = 5X don't seem unreasonable." I have no intuitive sense for what property value should be.
- Your investment's locked up for a long time, it takes weeks / months to sell real estate.
- In 2022, you'd be lucky if a computer from 2002 sells for maybe 5% - 10% of what it sold for in 2002. In 2022, you're telling me a house sells for.. enough more (in real terms) than what it sold for in 2002 that it would have been a worthwhile investment despite now being 20 years old(er)? That feels like some kind of violation of whatever is the financial equivalent of the laws of thermodynamics
- You can do all your landlording right and still get screwed by tenants from hell.
For me, a stock and an investment property both yielding 6.4% are in no way equivalent. Given all the downsides, the ROI on property would need to be like 5-10 times as high for stocks for me to even consider it.. and that gets into too-good-to-be-true returns.
I know there are people who are experts in this area and people who say real estate's a good investment. But I don't understand real estate anywhere near well enough to put in the sums of money that seem to be required.
Seriously, what do you expect? Money doesn't work. If you invest and want to turn an above-average profit, you need to put up something, be it knowledge, skills, or effort. As you said, owning a house requires a certain skillset, but that's exactly where your money would come from.
So if you're already in the construction business, or a real-estate lawyer, or simply have lots of experience and spare time, it's a good choice. If you're a software engineer who can't tell drywall from masonry and simply wants to do a few mouse clicks to gain a passive income, it's definitely not for you.
Anybody who has rented know most of the work is way overblown. The average landlord I've had can barely be bothered to lift his middle finger at you if something goes wrong. If the toilet is clogged, or the heat stops, or whatever it's generally left for the renter to figure out and take the loss. What are you going to do, sue with whatever meager stash the average renter has left after paying the rent?
Much of the work is "gigged" out anyway. When something breaks at my current rental, I get told the job has been tendered, and then I get let known when someone has accepted the job. I'm not sure what happens if no-one accepts it.
It's also not the landlord doing that, it's the real-estate company.
And that's exactly the kind of investment that yields average returns. If you're fine with that you can also directly invest into a company doing this. If you want more, you have to cut some middlemen.
Owning a home takes a huge amount off of your taxes in the United States. This mainly applies to single people or people who don't file with dependents as they're taxed the most.
A home acts as a way to store and grow cash (mostly) securely. They also, generally, have higher than (stock) market rates of returns for the cash that you stuff in them. For instance, do a $50k kitchen renovation and that may entice a future buyer to buy at $100k more. There's a lot of examples like this throughout the housing renovation industry. Some home renovations are going to net you nothing, but defer something negative. For instance, I had to install a Radon system in my home because radioactive gas was leaking out of the crust deep beneath my basement. I won't get that $3k back but I won't live in a radioactive container and future buyers won't be scared off (rightfully so).
If you're renting (since you mentioned landlords) the economics change a bit. You need the house to look nice but you either need it super-durable or inexpensive to repair. What usually happens is that a rented home gets a makeover that will put it squarely in the price the landlord wants per month. This is done as cheap as possible because a fair amount of tenants are radioactive and will destroy everything not nailed down.
If you're selling your home after five years you may have some nominal value increase coupled with equity. For me, that amounted to about $35k on a $215k home. To replicate that in the markets you'd have to get involved in a life insurance plan that acts as a tax-free market account, which is significantly more complicated to manage. I know because I almost did it when I moved to California!
If you plan to stay in a house less than 5-8 years, I just wouldn't buy. You'll be somewhat upside down depending on your market.
In Australia it's backwards and bonkers, the tax legislation is geared toward giving real-estate investment properties a bunch of tax breaks while someone living in their home gets diddly squat.
I'm not necessarily saying we shouldn't pay tax on properties we live in, but I will say it's pretty on the nose to continue giving investment properties huge tax breaks while people are struggling to finance homes they live in or pay rent. The price inflation of homes caused by easy money and negative-gearing made easier due to lopsided tax policy makes the property market entirely detached from the average Australian.
This isn't really accurate. Homeowners get the enormous PPOR CGT exemption, which means they pay no capital gains on their primary home when they sell - This can be a massive amount of money in an up market (the past two decades, especially)
I appreciate the correction, but I feel that doesn't help people trying to live in their homes. We're not all climbing the property ladder after all.
> This is done as cheap as possible because a fair amount of tenants are radioactive and will destroy everything not nailed down.
The other way of phrasing this is that landlords are as cheap as possible, resulting in tenants who are fed up of being fleeced for garbage.
No, those things are separate problems, not two ways of saying the same thing.
Tenants being destructive is a known issue. My mother had a tenant that put four undocumented pitbulls in the house and one dug it's way through the flooring. She had another that refused to pay rent or move out and had to wait for months to get an eviction order. All of that is purely money lost if you're renting to people with no assets.
What I was talking about with landlords being cheap on renovations has to do with the economics of the situation. For instance, my mother won't put granite countertops in a house or use the most expensive paint or even moderately expensive carpet. In her state, every property that's had an animal in it requires new paint and new carpets every time there's a new tenant. If she was putting the nicest stuff in the tenants she rents to now would never be able to afford her rates.
Where landlords get unjustifiably cheap is when they make repairs on the cheap that cause more issues for the tenant.
There's a whole bunch of tax advantages and structural advantages. The mortgage interest tax deduction is the big one, and I think there's another one that applies to those who own up to 4 properties?
> In 2022, you'd be lucky if a computer from 2002 sells for maybe 5% - 10% of what it sold for in 2002. In 2022, you're telling me a house sells for.. enough more (in real terms) than what it sold for in 2002 that it would have been a worthwhile investment despite now being 20 years old(er)? That feels like some kind of violation of whatever is the financial equivalent of the laws of thermodynamics
The secret ingredient is that it's essentially illegal to build new homes anywhere remotely desirable.
Also god's not making any more land. So owning crap buildings on great locations is a great way to land bank for a payday in the future. Though climate change will redraw a lot of maps in this regard.
There is an excess of land, particularly in the USA.
The issue is that people want to live near, you know, stuff.
Not just near stuff... most people don't want to live in the middle of a desert, or where there's snow on the ground 9+ months a year (a lot of that undeveloped land is in Alaska, and not the little coastal strip where 90% of the population lives, either)
That's one reason why I'm so idealistic about the work-from-home trend we saw after Covid. I'm from one of those empty rural communities - the way of life is great if you can manage to make a living.
Leverage. You can borrow 80% for an investment property but no bank will lend you (not an individual anyway) money to buy ETFs. You might get a margin loan, which is much riskier than a mortgage and requires you to have X upfront to borrow 0.8X. A mortgage means you can borrow 5X.
There ade also tax benefits to real easte in some countries (most notably Australia). In short, the game is rigged and the market distorted to make real estate more attractive then it should be.
Leverage takes place with Stock and ETFs, too - it is just less obvious. Companies you buy stock of are of course leveraging their financial investments by taking loans from banks or emitting corporate bonds - and these loans are used to invest and generate profits, of which you receive your share.
Many of these are managed by a good agent. I answer 1 email per week pretty much, the effort is minuscule.
Leverage was the thing which made the numbers attractive. Example numbers in the UK for instance £50k deposit, £200k purchase price, £150k mortgage @ 2%, £12k per year rent = 18% gross yield (£9k return on your £50k cash in.). Before capital gains.
Imagine if you have £200k for 4 deposits then you could even be financially independent if your costs are low. It has been a very easy path to wealth.
With interest rates rising then the whole dynamic changes, but it has been an extraordinarily profitable and easy play for almost 20 years.
At least in the US, mortgage rates currently are around 7%, not 2%. That eats a lot of margin, especially on a managed property.
Indeed. The higher rates remove all benefits of leverage, and the investment borderline at best. It has worked well for the last 15 years however.
All of that makes sense if your options are a) buy this property with cash, or b) buy these stocks with cash.
If you don't have a handy $300k sitting around doing nothing, buying the property makes more sense, because you're buying it with someone else's money!
The lender makes their profit off the interest they are charging you. You can offset that cost partially (and, over time, completely) with rental income. When you dispose of the unit, any profit comes straight to you.
There are very few other places where you can use someone elses money to make a profit.
That's only if the rent you receive is greater than the mortgage with interest you pay to the bank. Sometimes that math doesn't work out.
> That's only if the rent you receive is greater than the mortgage and interest you pay to the bank. Sometimes that math doesn't check out.
Rarely does it not check out over time. Rents go up every year, more in those years that see an interest rate increase. Repayments track the interest only.
In the first two years, your rental (and costs of rental) won't match the mortgage.
After five years it's unlikely that your rental income doesn't match the mortgage, interests and costs.
>Rents go up every year,
Unless you live in an area with rent control or have a tenant who has payment issues and evictions are long and tedious.
Well, then, don't buy a property with the aim of renting it out in a rent-controlled area.
And seeing as how you're essentially getting a return by investing someone else's money, go through the 3 month long eviction process and vet your renter more thoroughly.
Honestly, the way you say it, one would think that most landlords make a loss by renting out their properties.
Trust me, they aren't.
It's one of the reasons why rent control works negatively in the long run.
> Your investment's locked up for a long time, it takes weeks / months to sell real estate.
Most people overlook this in their calculations, as well as ignoring the 6% real estate commission on a sale.
I'm with you on "nope" to real estate investments.
Your investment isn’t locked up at all. You can call up a bank and cash out the equity in one property to purchase others. You can use the equity to get a secured loan at an extremely low interest rate. And the income you make from real estate improves your DTI which opens up your ability to get a loan for additional property and you can repeat the cycle over and over.
Of course, the real question is why would you want to frequently liquidate property if it is generating cash and tax benefits? Owning real estate isn’t about gambling for short term gains, it’s a long term wealth building tool.
> That feels like some kind of violation of whatever is the financial equivalent of the laws of thermodynamics
Houses lose in value slower. A 20 year old computer is worth basically nothing because of technological progress, the house I’m currently living in is 60 years old.
Then there’s the land the house stands on. Land is a limited resource that cannot be increased by production, especially in proximity to population centers. It follows completely different laws than mass-producible products.
You seem to be completely forgetting that a rental property basically means someone else is paying down your loan and building your equity for you.
Only if it has positive cashflow, a low vacancy rate, and no major damage from the renters.
That is far from guaranteed, and the first one hasn’t been true in a lot of areas for almost a decade.
Not true. I currently own one unit, and do have a slightly negative cashflow, but that's not really a problem.
The biggest advantage of real estate is that enables you to hedge your capital. My bank happily gave me a loan for 80% of the property value.
I would not be able to get a loan at these conditions without having the real estate as collateral.
So, while I do pay a small amount per month myself (which has gone down substantially recently due to 10% indexation), my tenant pays the biggest share of my loan.
As for rules and legislative obligations: I pay a professional organization to manage this for me. This does come at a cost, but it buys me a peace of mind. (It's all about risk vs reward, so no big surprise there.)
And finally: once the loan is finished, I can hedge that rental income to finance (multiple) new properties.
Update: one additional remark for those who might be triggered by this comment: I prefer to buy older buildings, so I have to make sure that l have "some" extra cash available for big ticket items coming my way: replacement of roofs, elevators and such. So I am betting on having to invest some extra cash over the course of one or more decades. However, if you do not want to do that, you can reduce the risk by going for newly-built, paying the extra premium upfront, have a reasonably steady cash flow from the start.
Also, as a rule of thumb, consider 10/12 of the yearly rent as a "regular" income. This should be more than enough to cover the "normal" expenses you might have.
So you’re losing money now, speculating on future gains.
That is different than leveraging capital for positive cash flow, and one that has historically burned folks bad during downturns.
But we’ll see how it goes!
physical maintenance and unclogging toilets: you don't need to do this maintenance yourself, you can outsource this to contractors, and even outsource the calling of those contractors to a management company.
knowing landlord-tenant laws inside and out: absolutely, yes, if you are doing it professionally. But this applies to everywhere you are doing business in.
properly evaluating properties, contractors that don't rip you off, etc.: absolutely an issue, yes. This is something you learn with experience however, and on the other hand it means that if you know this, you have an edge. See the blog entry by the mr money mustache guy who bought his house very cheaply from an older guy who didn't know that prices have went up in the decades he has owned the property [0]. So yes, this means that ideally you own multiple properties and have enough capital that you can afford one or two mistaken purchases or contractors, but you also need to have enough dedication and ability to learn. Also note that even with stocks you have this issue, there is a lot of advisors out there who are selling funds with high management fees, etc.
small scale property investment impossible: absolutely true, yes. Real estate investment is something for rich enough people, or at least people with good contacts, not for the average joe.
huge leverage is usual: yes, but on the other hand property investment is seen as a very secure way of investing, which is why such leverage is possible at all. Stocks on the other hand you never get that much leverage for them.
anyone with enough money can do it: this is in conflict to your other point about needing to know how to properly evaluate properties and finding good but not too expensive contractors.
investment being locked up: yes this is true. But moving around stocks too much is also generally a bad pattern.
tenants from hell: yes, this is a risk. Ideally you distribute the risk by owning multiple properties, e.g. an entire building instead of just one apartment, which brings us back to the "need to have money to own real estate" point. Also, you ideally don't own real estate where the rent is cheap but one where the rent is expensive. If it's expensive enough then only rich enough people can afford it, i.e. ideally DINK white collar workers. Those can still cause problems but you benefit from their higher job stability, lower incarceration rates, etc. The disadvantage is of course that it's harder to own multiple properties if the rent is expensive, as you need to invest more, and also if the tenant doesn't pay the rent for N months then a larger sum of money is lost. But on the other hand, if the tenant fucks up the sink and you need to replace it, then having 1500$ rent compared to 500$ rent means that your 3000$ sink pays off again with two rent payments for one tenant, and with 6 from the other (assuming you are mortgage free, the calculation is different if you add in mortgage).
I do agree with you however about your general point. Real estate investment is absolutely not for everyone, as (broad low fee index fund) stocks are for example. It is more complicated and higher maintenance. Still, if you have tons of money then putting a part of your portfolio into real estate seems like a good idea to me.
[0]: https://www.mrmoneymustache.com/2017/08/02/introducing-the-m...
I would NOT want to own commercial real estate right now, especially retail, especially in a boring medium town.
DCA is always controversial here, someone always says lump sum is better, but I tend to think of the maxim of Ben Graham that "the stock market is a voting machine in the short term and a weighing machine in the long term". I expect prices to eventually converge to some "fair" or rational value for the stock(s) in question, but at any given moment they may be way off, particularly for a single name, so I like DCA as a way to mitigate that risk. I do however recognize that DCA is a psychological way for people to build comfort and a consistent investing habit, and for this reason I think it's extremely valuable.
That said, if you're very long it's hard to picture entering Google or Apple at 15-18x earnings and doing very poorly. Personally I am DCA'ing because i) it's how I invest and ii) I do think there is more pain to come. There are many reasons for that, rallies amongst meme stock names after dips is one indicator imo.
His analysis of Airbnb is interesting. Airbnb's trailing 12 month P/E ratio is 40x, not 15.5x. He is projecting forward Airbnb's recent monster quarter. This is a bit risky imo, though maybe he knows the business better than me. I'd still be more comfortable DCA'ing into Airbnb or travel as a sector, but 2 quarters ago their P/E was 150x, so at 40x it does look pretty attractive.
Shameless plug, since this is right in our wheelhouse, I am the creator of a DCA focused custom indexing investing product[1] and a simulator to backtest DCA investing[2].
[1] https://www.tryshare.app
[2] https://simulator.tryshare.app
> DCA is always controversial here, someone always says lump sum is better […]
That's because lump sum is better most of the time… if you already have a pile of money to invest:
* https://ofdollarsanddata.com/dollar-cost-averaging-vs-lump-s...
However, most of us don't have a pile of money just lying around, but rather we get a little money every two weeks or every month, in which case it's best to put away a little money every month:
* https://ofdollarsanddata.com/just-keep-buying/
Yeah, I addressed this in another comment[1]. "Most of the time" is doing a lot of work there, most is 75-80%. 20% is not negligible to me.
But as your article points it, DCA is not about getting the absolute best return, it's about risk mitigation.
> The only times when DCA beats LS is when the market crashes (i.e. 1974, 2000, 2008, etc.). This is true because DCA buys into a falling market, and, thus, gets a lower average price than a lump sum investment would.
If you are fearful of a crash (like now, as we are in the midst of war, recession, energy shortages, coming out of a pandemic etc.) risk mitigation may be higher on your list of priorities. I also think it just lowers cognitive load for people who aren't investing for a living.
All that said, I 100% agree with DCA as the best approach for people investing out of income!
[1] https://news.ycombinator.com/item?id=33786050
> "Most of the time" is doing a lot of work there, most is 75-80%. 20% is not negligible to me.
If I'm on game show, and I have to (e.g.) pick a door to win a prize, with one strategy winning 80% of the time, and another that wins 20% of the time, I know what I'm using.
And it's not like it's even close (51/49 or even 60/40). This is a substantial "most".
The nuance about DCA that is commonly missed is that lump sum gives a better return on average. The key word is average; averages hide much!
When people struggle to understand that I say DCA can be thought of as a sort of insurance. You pay a price to insure your home to protect against the unlikely event that your house burns down. But on average buying insurance will loose you money. But the cost is comparatively low, and for each individual likely worth it to protect from total loss, even if in aggregate it's clearly a loosing proposition.
DCA is similar, most people will end up with marginally lower returns, however a small percentage of individuals caught close to a rare negative market event will be less impacted by sudden large drops and experience overall much greater returns in the long run than if they had invested as a lump sum due to the nature of volatility decay.
Absolutely. Sure, in a bull market you give up some upside but I doubt you're likely to really care. If I'm riding something all the way up and making profit, I'm happy. If I'm losing 20% or 40% of my money, I'm extremely unhappy. Human sensitivity to negative emotion makes the insurance worth it, imo.
And yes, averages are great for everyone but the outliers!
Dollar Cost Averaging
thank you. Jeez people please don't drop some random acronyms and expect people to pick up themselves
note taken
Isn’t it so that statistically lump-sum is better[0] but that you take on overvaluation risk? If you DCA you reduce that risk.
[0] don’t have a ref but I think it has been shown that if you have a lump sum of money, historically you would have made the most gains by investing everything immediately (in the S&P500, there are only a few periods were this wasn’t true (therefore there is a risk)
Yes, you risk buying at inflated prices let's say. The common idiom is "time in the market beats timing the market", meaning yeah, just get your money in if you have it. Here's one analysis [1] that claims since 1950 in every 10-year period, lump-sum would have been better 75% of the time. But there are some caveats.
First, 25% of the time is a lot of the time. It may be possible to recognize an overheated market, by looking at historical earnings multiple averages for example. Second, they are using a "total market" index, even broader than the S&P 500. I don't know that many people who buy a total market index. Usually it's the S&P 500, or even a sector focus. The more specific you get, the more these results are likely to break down I would bet.
We focus on DCA for people who are working for a living and investing out of income, which is obviously a different cohort than Fred Wilson, the VC. So lump-sum investing doesn't really factor into it.
[1] https://www.northwesternmutual.com/life-and-money/is-dollar-...
it's about time in the markets, not timing the markets
However, whoever said the wise words about how Buy and Hold and been polluted by HODL was absolutely correct.
Stock indexes have a built in survivorship bias, as the failing or declining stocks eventually get diminished (especially if it is market cap weighted) or removed completely.
It's a bit of an aside in the post (which I otherwise agree with), but dollar-cost averaging such as:
> If you decide to invest $100,000 into the stock market because you agree with my reasoning in this post, then it would make a lot more sense to invest $10,000 a month over the next ten months than invest all of the $100,000 this month. (Quote from article.)
That doesn't actually make a lot more sense, and that is not the argument for dollar-cost averaging.
Assuming you're investing in a single equity/portfolio, then at the end of that ten month period you will have an effective entry price for the entire lot either way. Either that price is the value it's at _now_, or that price is the weighted average of ten entry prices.
One thing we know, or at least which we're assuming when we choose to invest, is that over the long term prices go up. So unless you have outside knowledge or asymmetric insight suggesting prices will in fact go down, it makes no sense to DCA into the market. And if you do think prices will go down before they go up, then you should hold the entire amount back until you no longer believe the asset is likely to decline.
Dollar-cost averaging is not an argument to buy slowly when you already have money, it is a reassurance to keep investing when process go down and not to hold any money back when investing money you're receiving on a regular schedule (like a paycheque).
Ironically (and amusingly) DCA is also an entry method into a position when you're willing to accept lesser theoretical returns to avoid FOMO but are feeling timid, which is definitely on-brand for a VC.
DCA makes mathematical sense anytime you have a long-term bullish thesis (otherwise, "do not invest" is a better strategy), but have a belief that there is a short-term noise function super-imposed over the long-term uptrend and where that short-term noise function is relatively large in amplitude as compared to the expected long-term growth over the period.
DCA makes psychological sense if the concern is a FOMO on the best possible entry price. It takes the psychological pressure of finding the absolute best off the table and replaces it with a smoothed average entry price.
I think it's a more powerful psychological device (and I do tend to invest pretty much all at once when I reach a decision), but it's not entirely pointless mathematically.
> DCA makes mathematical sense anytime you have a long-term bullish thesis (otherwise, "do not invest" is a better strategy), but have a belief that there is a short-term noise function...
Math citation needed - the noise function you're hypothesizing could just as easily drive the average up as down, unless you have a reason to think it should go down, in which case you're timing the market and there's a better future time to go 100%.
I believe you're right, but I have always thought DCA was just a measure to transform "fixed amount to savings account" people into "fixed amount to Vanguard" people so that they can access the higher risk that is the S&P500 compared to a savings bank account.
Of course it could just as easily drive the average up, but the point is that it's a hedge: it's accepting a reduced chance of possible higher returns for the safety of reduced chance of possible lower returns.
But it's not a hedge.
If you commit to the strategy (buy monthly for 10 months) then you're just choosing an unknown price over a known price.
And if you don't commit to the strategy, then you're actively trading and not DCA'ing.
Isn't it still a hedge? Statistically, you'll get the average price of the stock for the period you DCA. While if you enter at any single moment, you get a somewhat random price.
Another thought: if the thesis is that the price will go up, then whatever sum you have and want to invest, should you invest it all now - given that the price is supposed to go up?
If you commit to the strategy in advance, then you're picking an unknown price instead of a current price, and the unknown price is likely higher.
A financial hedge is, generally, something which reduces risk or improves on the risk:reward ratio in a mathematically demonstrable way. Generally this means bundling uncorrelated (or anticorrelated) assets. This concept won a Nobel for Econ in 1990(?), and is the foundation of modern portfolio theory.
Using "hedge" in a more colloquial way, it can mean "a way to protect yourself from an unexpected poor outcome". But by that definition this also fails, since you're just as vulnerable to outlier events, but the nature of those outlier events is different (and perhaps less intuitive).
This makes sense, thanks!
You can simplify the mathematical argument a lot by looking at DCA as forcing a relative "buy low sell high." When the price of the asset is lower, your DCA buys more, when it's higher you buy less. Relative to a single purchase at the average price, this is equivalent to buying low and selling high.
A single purchase at the weighted average price is the same as the DCA'd purchase. In both cases you buy X shares for Y$.
Imagine you commit to buying $100 on each of date A, B, and C. On A, the price is $10/share. You buy 10 shares. On B, it’s $100/sh. You buy 1 share. On C, it’s $1/sh. You buy 100 shares. You have 111 shares at a cost-basis of $300 (or $2.70/share).
The time-weighted average price was $37/share.
DCA is a way to force yourself to make purchases at a variety of prices and times. (How likely is it with a single-purchase strategy that you'd own 111 shares at $2.70/sh of a stock that charted $10->$100->$1? How would you feel when you saw your $300 investment go to $111 in value? DCA takes a lot of that psychological pressure off and is amenable to decide-once and automate.)
> DCA takes a lot of that psychological pressure off...
Yes, that exactly. It's a psychological trick (if you have all the money upfront) and not a financially sound one.
Interesting…. Under what assumptions precisely is it optimal to dollar cost average over a short time interval, if short time fluctuations have a large magnitude relative to long term drift? Like eg if you assume geometric brownian motion it doesn’t seem to help?
Yes, you're correct about geometric brownian motion. The model must include some mean-reverting component (implied by "short time fluctuations") for DCA to come out ahead, and such a component would violate standard no-arbitrage assumptions.
This is a reason I haven't made active use of DCA. But DCA doesn't give up much, either, so I'm fine with "passively" engaging in DCA-like behavior by haphazardly dumping spare money into index funds after min("significant" drop, time limit) instead of purely maximizing time in market.
In principal, how do I pick whether to DCA over 10 years, 1 year, 1 month, 1 day, or 1 hour?
> If you decide to invest $100,000 into the stock market because you agree with my reasoning in this post, then it would make a lot more sense to invest $10,000 a month over the next ten months than invest all of the $100,000 this month.
Depending on the equity, you are essentially sampling from a skewnorm & summing over 10 variates. eg. if you invest in the broad market, ^GSPC (your s&p 500) has a skew of +0.4 and a variance of 2.8, so your five number summary works out to
summary(mapply(function(x){sum(rsn(10, dp = cp2dp(c(0,1.67,0.4), "SN"))[1:10])},1:10000))
[-18.3, -3.7, -0.2,3.4,18.8]. While the median scenario is net neutral, you do end up underpaying 3-4 times if you fall below the first quartile.
otoh, if you are feeling frisky and want to dump 100k into robinhood over the next 10 months, $hood has a skew of -0.88 & a variance of 26.3, so 10k realizations of this scenario -
summary(res<-mapply(function(x){sum(rsn(10, dp = cp2dp(c(0,5.1,-0.88), "SN"))[1:10])},1:10000))
yields [-70.8, -10.6, 0.7,11.4,47.5] - much more interesting set of circumstances!
I guess he's betting on prices generally headed down over the next 10 months, so he significantly underpays if things go per plan.
> I guess he's betting on prices generally headed down over the next 10 months, so he significantly underpays if things go per plan.
Yes, exactly that! And if one is betting on prices generally going down over the next 10 months one should just not enter the market at all.
Or if you’re not sure but want to hedge buy now and buy some puts also.
If you're just "not sure", buying puts wouldn't help. Running puts & long on a single equity is assuming a specific yield shape.
A good example would be an upcoming test result report for a pharmaceutical - it's either going strongly and gradually up (long) or suddenly and significantly down (put), but not gradually down (in which case you'd be out on both puts and longs).
But yeah, at this point you're a super-sophisticated investor and all of this discussion is meaningless. :)
DCA reduces variance in your returns for a slightly lower rate of return. It's a risk reducer with a clear derivation. You exchange expected performance for reduced variance in outcome. That's useful, you can plan better with reduced variance.
https://www.financialplanningassociation.org/article/journal...
> One thing we know, or at least which we're assuming when we choose to invest, is that over the long term prices go up.
Right, but what if the prices went down during that 10 month period, even if you were bullish? You invested at the top in one chunk, when you could have smoothed it out in increments instead.
That smoothing function is the entire point of DCA and takes the guesswork out of reading the market, like trying to find entry points.
But barring other information it could go down in that 10 month period or it could go up in that 10 month period, and the long term upward trend suggests its more likely for prices to go up than down in those 10 months.
Sounds like a bias-variance tradeoff to me.
And what if the prices go up during the 10 month period? You invested at a much higher price than needed.
The smoothing function of DCA will help mitigate FOMO and Buyer's Regret, but it won't (statistically) deliver higher returns.
> but it won't (statistically) deliver higher returns.
Would you take a coin-flip where heads you double your net worth and tails you lose all your money and assets?
(Statistically) the expected outcome is zero, so it really shouldn't bother you either way, you could take the bet or not, it's the same if you go for it or if you don't.
In the real world, though, lowering your risk means reducing the chance of both winning the bet and losing it. For many people it's worth more to have less risk of randomly timing the market poorly, even though they have less chance of randomly timing it well.
Yes, over all investors the two decisions cancel out, but to the individual DCA can be worth lowering their risk.
DCA'ing provides no mitigation of the risk of randomly timing the market poorly.
The only risk it mitigates is the risk of a sudden bankruptcy, or some other massive exogenous event which disrupts your future plans.
However even accounting for those events the expected value of DCA is still lower.
The point is to sacrifice some return for lower variance. The absolute return is lower in expectation, but the argument would be that the risk-adjusted return is better.
If you're committing to the strategy in advance, it delivers neither lower variance nor better risk-adjusted return.
It certainly does deliver lower variance, how could it not?
How could it?
So assume there's a normal distribution of price possibilities at each purchase point. You're going to end up with the _sum_ of those distributions, not the correlation or combination of them.
Presumably the deviations of those are growing more larger over time, but the are still the same underlying distribution curve as they sum up. The mean will trend steadily upwards.
The resulting price will be a normal distribution with a deviation of somewhere around the midpoint, and a mean of somewhere around the midpoint.
Now, with the mean increasing over time, your expected return will be decreasing the longer you wait. But what about the risk:return?
Unless you have outside knowledge about risk growing or lessening over time, it will remain constant over the DCA period, which means the risk factor of your investment (the standard deviation of the resulting DCA price) will be at exactly the midpoint of your purchase series.
So your expected return will be slightly lower, and your risk profile will be substantially larger, than just buying immediately.
DCA: math does not check out, not even close, _if you have all the money upfront_.
If you had made a lump sum investment the day before the crash in 1929 you would have regretted it, and it would have taken years for your investments to recover.
DCA versus lump sum has been debated for a long time and there is really not a clear answer or expert consensus on the subject.
Alternatively, you could have cautiously DCA-ed your lump sum in 12 monthly pieces, and then the 1929 crash happens the day after the 12th and final piece was invested.
DCA cannot save us from a crash, though it can reduce the fear of a crash to the point where we actually make an investment rather than sit on the sidelines.
There is absolutely expert consensus (among quants) that DCA _if you have the full lump sum up-front_ makes no sense. It's math.
> So unless you have outside knowledge or asymmetric insight suggesting prices will in fact go down, it makes no sense to DCA into the market.
Sure it does. Just like you say further down, people are "willing to accept lesser theoretical returns", except in this case it's to reduce e.g. tail risk. They could also buy up front and hedge, but that's already more technical than most people want to deal with.
It depends somewhat also on what you're DCAing into. If you're DCAing into a major index, there's essentially no chance of it going to zero (that's a society-ending event, hedge with farming equipment and doomsday prepping). And thus, no statistical or mathematical benefit to DCAing.
If you're expecting a non-continuous return function, such as a pending drug testing result or a major governments deal, then you're actively trading and a DCA strategy is almost certainly suboptimal.
It's very hard to construct a situation which is both plausible and favorable for DCA _if you have all the funds upfront_.
It doesn't need to go to zero to make sense. The US market fell by a third in a single month at the start of the pandemic, recovered over the next five months on its way to new heights heading into this year, and now is down a fifth again. DCAing is simply a low-rent hedge against getting caught out by those kinds of swings. You won't get to gloat about going all in at the bottom, but also won't have to cry about doing it at the top.
DCAing is worse on average for simple objective functions, absolutely. Markets rise more consistently than they fall. But markets also fall faster than they rise. This may not matter to the hypothetical average person, but it matters to real people, and some of them make the perfectly rational decision, based on real-life economic factors that aren't captured by simple models, to trade returns for stability.
You can formulate this as e.g. an MINLP model and it isn't at all hard to construct situations that are favorable to DCA when lump-sum is an option. All it takes is adding constraints to reflect a real person's life circumstances. Other strategies are still better than DCA, but they're also more complicated to execute, and we aren't talking about sophisticated investors here.
Research shows that timing the market is hard. The more times you try to do it, the more likely you are to fail. Dollar cost averaging saves you from having to express super human timing on all of your trades.
Dollar-cost averaging is still timing the market, if you have the full amount up front. You're betting that your future weighted average is less than the current price, that's timing.
You're trying to take short-term volatility out of the equation.
If I think the stock will go up over the course of years but have really no idea what it's going to do over the course of hours/days/weeks, then approximating a buy-in at the average price over a longer period would seem to be a de-risking approach.
It may well seem to be de-risking, but mathematically it doesn't.
Can you point me to some of this mathematical proof? Because I'm seeing advice all over the net that it can help iron out short-term volatility.
Your point that "If you think it will go down over several months, you shouldn't be buying in" is fine, but I'm not sure it's equivalent to "I don't know what it's going to do anytime soon I'm buying this for long-term prospects".
Imagine a stock with a sinusoidal price fluctuation at a frequency of just under a week, but which you expect to rise significantly over a 5 year period. Investing in that weekly over 5 weeks will net you a more locally average price than going all in today, particularly if you don't have good information about that sine pattern. Going all-in right now might net you a low price, but you may also be buying at a local maximum.
(Think of discrete waveform sampling)
I believe your intuition is correct, and it just straightforwardly does help iron out short term volatility. What it de-risks is the likelihood the bottom arrives some time in the next year, at a point lower than today, and that you could have achieved a significantly lower average entry price by waiting. The risk it exposes you to is that it's already the bottom, and you're going to keep buying in on the recovery. So if you're long term optimistic but short term bearish, but lacking high confidence in your ability to call the bottom, DCA makes sense imho.
I don't know what the conjecture is that would make it not de-risking that, or what a proof would be, maybe GP will clarify.
It should be noted that many analyses of DCA versus lump sum are around the S&P 500 overall. In the case of highly volatile growth stocks or just single stock investing like Fred is discussing in the article, market timing risk is more acute, since the drawdowns are more severe (it is quite rare for the S&P 500 to drop 70-80%).
Shameless plus, I am the owner of a DCA investing app + a simulator tool to backtest DCA with different stocks, over different time periods
https://simulator.tryshare.app/
The intuitive leap which is hard and important is how "not knowing" works.
Presumably you are choosing to invest in an asset because over the long term you believe it will go up. But you know nothing about what it will do in any defined timeframe.
Choosing to DCA with a fixed strategy is choosing x prices at which to enter, of which (x-1) are unknown. But they are fixed, and based on your above assumptions you know nothing about them except that they're generally trending upwards (and thus your entry price is averaging up by DCAing). Knowing nothing means knowing nothing, it's as likely to vary upwards as down.
You can express the above as a summation with a positive (but unknown) dv/dt and a canceling-out e if you think better in notation, but I can't figure out how to make that legible in a HN comment.
If you have any reason to believe that there is more downside risk than upside risk over the DCA period, then you should delay investing until that is no longer true, and go 100% at that time.
DCA is essentially the same intuitive leap as the Monty Hall problem, but backwards.
I don’t know that the prices during the DCA period are trending upwards, I have no information about short term fluctuations other than they exist.
I have no reason to believe that over the relatively short period of DCA that there is specific upside or downside coming along immediately, but I know that there is noise in the pricing. The rising trend I’m betting on is further down the line and very slow.
You’re adding assumptions that support your view, rather than addressing the problem as stated.
I'm adding no assumptions, and my view is math.
The only thing we know is that we're choosing an asset which we believe will trend upwards.
Over the relatively short period of DCA, it will trend upwards.
If you're saying you know that the rising trend won't begin until a future date, then that's an assumption you're adding, and it probably indicates you should wait until the rising trend begins until increasing.
> Over the relatively short period of DCA, it will trend upwards.
But this is an assumption!
> If you're saying you know that the rising trend won't begin until a future date, then that's an assumption you're adding
I'm saying I have no idea what's going to happen during the DCA period.
I think at this point its safe to say your view that DCA doesn't work to denoise a signal is predicated on assumptions about what the price trend is doing over the DCA timescale. If the stock is trending up over that period, then you're likely better off buying now regardless of local fluctuation. OK!
I've seen this advice all over too, but it's never accompanied by anything approximating a mathematical proof. IMO, the burden of proof is on showing DCA works, not the other way around. In any case, the problem with your analogy is that if you have no information about that sin wave, you're equally likely to be investing at a local minimum.
> you're equally likely to be investing at a local minimum.
If you invest at a few different times, whether fixed interval or random, is this not increasing the probability of approach an average value over the period you're investing?
I'm not asserting it's a good idea, I'm not using it as a strategy myself (or in fact making investment choices myself at all really), I'm just interested from the technical perspective.
> If you invest at a few different times, whether fixed interval or random, is this not increasing the probability of approach an average value over the period you're investing?
It does indeed increase the probability that you will approach the average value over that period.
But there's no reason to believe that average will be lower than the current value.
> But there's no reason to believe that average will be lower than the current value.
100%, not disagreeing. But it does reduce the risk that you're buying at an outlier price.
But and hold has been corrupted into HODL, and cryptocoins enthusiasts / meme stonks will wreck people because of it.
Buy a stock so that you keep holding it for 10 years is good advice, but not in the context of today's mania. It's advice that is supposed to mean 'buy safe things', not 'buy that thing with exponential growth that might be worth 1000x it's current value in 10 years.
I do think that blogs / advice like what this post does is overall a good idea and good advice. But I find it difficult to discuss in practice due to the HODL corruption.
One aspect of the buy and hold mentality I feel is missing from the discussion is direct registering (DRS) the shares you invest in a company.
The shares you buy through a broker-dealer are held in "street name" meaning they are registered with your broker-dealer. You enjoy beneficial ownership, meaning you enjoy the benefits of ownership even though the title to the shares are in your broker's name. You have IOU's, basically.
Because the shares aren't in your name, broker-dealers can lend them out to hedge funds shorting the company you're investing in. The shares can also vanish if the brokerage goes under.
DRSing your shares at the company's transfer agent ensures that the shares are registered under your name (and not the brokerage's), and prevents your shares from being lent out and being used against your investment.
> Because the shares aren't in your name, broker-dealers can lend them out to hedge funds shorting the company you're investing in.
This is part of how they absorb the fees inherent in trading. Or you can use a brokerage which pays you part of what is made for the loaning-out, and doesn't absorb the trading fees.
Or just don't worry about it, your chump-change investments being lent out doesn't matter.
> The shares can also vanish if the brokerage goes under.
https://www.investopedia.com/terms/s/sipc.asp
Your brokerage firm made you agree to a bunch of documents explaining their SIPC insurance, where the assets will be transferred if they go under, etc, etc. It's not their fault if you just clicked through and ignored them.
Stick with the various major brokers and expend your effort worrying about lightning strikes and sharknados.
> your chump-change investments being lent out doesn't matter.
Who is to say my investments are chump-change? What's with the derision? I'm under no obligation to help broker-dealers make money off of lending out my shares, especially if those shares are being used to short the companies I'm invested in.
If retail investors DRS'd more of their long-term holdings, it absolutely would matter and have an effect on shares available to hedge funds to short.
You can also lend out your shares to earn the interest yourself: https://www.fidelity.com/trading/fully-paid-lending
> The shares can also vanish if the brokerage goes under.
No, shares are covered by SIPC up to 500K. Brokers may have additional insurance above that but at the very least 500K is covered.
I saw the headline and my mind went to HODL as well, but the article itself is definitely about modest, safe investments, not "diamond hands" and moon-shots.
I agree. Its a good article in isolation. My main problem is that HODL is a pretty common mindset, based on random discussions I have on the street / with people in general.
You know, the types who lose 60% on ARKK but they're sure that they're going to "make it back" over the next few years? Or the people who think that losing 60% on ARKK is similar to losing 15% in VTI / SPY? (For those who don't realize, starting with $100k, you end with ~$40k if you had ARKK, but $85k if you held onto VTI/SPY. Aka, those who held VTI/SPY have twice your money now relatively speaking).
Unrealized losses _are_ losses. People must recognize this. People are corrupting the buy-and-hold advice to mean "ignore the unrealized losses" or "if you don't sell its not a loss", which is bullshit.
I realized in the recent past that another part of the picture that may be missing for the HOLDers is that the losses can be initiated by other parties. That is to say if someone liquidates a company and it gets bought for $X which is some fraction of the share price the HOLDeler paid, then they will be forced into taking loses. That third party factor adds a whole other dimension to the risk of holding indefinitely, because there is no such thing as an indefinite runway in the market, someone can put an end to a company at any point in time just like we saw with TWTR recently.
> Buy a stock so that you keep holding it for 10 years is good advice
Not really. Individual stocks are too risky for casual investors.
Buy and hold the entire market instead.
That’s my major beef with this guy’s article. It has been shown repeatedly that picking stocks does not work.
https://www.cnbc.com/amp/2020/09/18/stock-picking-has-a-terr...
Choosing Airbnb or Google or whatever because you think you know something about it or can predict the future is setting yourself up for failure.
Yahoo seemed like a great stock at one time. The market changed, the leadership was faulty etc.
>The top five stocks in 2000 were Microsoft, Cisco (CSCO), Exxon Mobil (XOM), GE (GE), and Intel (INTC); they represented 18% of the index. Five years later, Goldman pointed out, they represented just 12% of the index’s market capitalization. And 20 years later, they represent 8%.
From the article. "To be perfectly clear, I am not recommending Airbnb or Google stock here. I like both companies very much and think they are dominant in their sectors (travel and search) and likely will continue that dominance for the foreseeable future. But all businesses are at risk of poor management, new competitors, changing market structures and technologies, and many other things. Return comes with risks. Buildings can be risky too. Neighborhoods can change. Tax and other laws can change."
Fair enough but his analogy to buying buildings doesn’t make sense then. An index of stocks would be more like buying REITs which by the way have underperformed stocks in the last 5 and 10 years.
https://www.fool.com/research/reits-vs-stocks/
Huh? That's not the point of the article at all? He is talking about holding periods and cap rate, not SPY vs a REIT.
Or even just the top 500. Now if only there was an easy and convenient neat to do that…
I have close to zero financial knowledge but even I r managed to fund a Vanguard Roth IRA in my name. If I can do it, anyone can do it.
It isn't ideal. It is 100% VTSAX. But I did it. All on my own. No need to worry about a target date or anything like that.
Yes. I was being tongue in cheek.
Buy a stock so that you keep holding it for 10 years is good advice, it is also good advice in todays environment.
Buy a stock so that you keep holding it for 10 years even if they pivot from computer repairs (because you think computers are going to be a thing) to bitcoin, to burning piles of cash because you joined the cult led by the CEO is a terrible idea.
Just don’t buy popular memes as long term investments.
I'd go even further, I don't think you should hold meme stocks longer than a day. You can always buy in the next day but momentum can swing way too much and kill any profit you made.
For example: BBBY when it was revealed that Ryan Cohen sold his shares. Instant drop.
I like the comparison of stocks to buildings in terms of cap rate P/E etc.
And to his question that we don't know when the bottom is (totally true) but I suspect we still have a ways to go. FTX + Housing + global macro + Interest back into the market = downward pressure
There are so many flaws in this blog post. Cities generally don’t move very quickly, decline infrequently, and the real estate assets are tied to locations that are relatively stable over lifetimes. Google is not stable on those time horizons and neither is Airbnb. The valuation of these companies is still massively overblown because the current earnings may not going to exist in 20 years. So the chance of declines as well as the chance of growth needs to be included in present value calculations to find the fair market value of these firms. I can tell just by glancing at these P/E ratios that the potential for earnings decreases has not been priced in.
>> The Gotham Gal and I buy and build a fair bit of real estate on the side
This is not Fred Wilson's fault, and I don't target Fred for it - it is the fault of society in general, but I hate it that people "buy and build a fair bit of real estate on the side".
I'm assuming he means residential.
Rich people have no idea how it feels to be a renter when you want to own, but prices have been driven out of th bounds of possibility by people who can afford to "buy and build a fair bit of real estate on the side ".
It's awful that society has divided into landlords and renters.
And landlords/rich people really have no empathy - they're in their own lives and feeling good about how many houses they own.
Government and society in general has completely failed by allowed housing to become a financial instrument instead of a modest/normal capitalist market as it was in the 1970s.
In any such discussion you'll notice those who attack this line of thinking are ALWAYS house owners .... ALWAYS. These are the people who feel that any regulated fairness in housing is communism - that's because they are on the happy side of the housing equation.
https://en.wikipedia.org/wiki/Australian_Dream
"The Australian Dream or Great Australian Dream is, in its narrowest sense, a belief that in Australia, home ownership can lead to a better life and is an expression of success and security. The term is derived from the American Dream, which first described the same phenomenon in the United States, starting in the 1940s."
Owning a house used to be "the great Australian (American) dream". And now it's not. Now it's what rich people do many times over in a giant game of monopoly.
https://www.forbes.com/sites/forbesrealestatecouncil/2021/09...
https://www.nytimes.com/1988/09/11/realestate/in-the-nation-...
I think it's clear that rental properties should exist, because however much it sucks that some people can't buy a property to live in, it would suck a lot harder if the only way to live somewhere was to buy it.
If rental properties should exist, who should own them? If renting of housing by private owners is banned, that's a small inconvenience for people who might be combining households (each partner lived apart initially and now want to move in together) or when otherwise taking a temporary assignment somewhere with the intention to return, but that's not the bulk of rental property pretty obviously.
I think the greater challenge is that prospective home buyers are competing against other prospective home buyers. All else being equal, people earning a 25th percentile income and having a 25th percentile savings are going to lose out in a competitive bidding situation to people with a 26th percentile income and savings.
Not sure how you came to think I said rental should not exist.
I think governments should regulate to ensure housing markets are fair, with a primary goal of ensuring people who want to own a house can buy one.
I fundamentally believe that it should be within the means of anyone who wants to own a house to have one. That means firefighters, kindergarten teachers, garbage collection workers, receptionists, old and young people - all those people who frankly have zero chance right now.
Governments should use they tools they have to discourage monopoly style property hoarding.
Housing should not be used at hotel rooms - I disagree with the cored concept of AirBNB because residential housing should be for the ordinary lives of citizens,m not for investors to make money from travel holidays. Things like AirBNB distort the market.
I am against residential housing being sold to non citizens/permanent residents.
Rather than worry about hoarding, what if it was just easier to build more of it? Look at zoning in SF bay area. Or Sydney.
Ahhh, the old "supply is the solution!" response.
"More supply will solve insane pricing!" is what governments and property investors like to say. It sure sounds plausible - sounds like market economics doesn't it..... if there's so much of something on the market that supply outstrips demand then prices MUST go down, right?
Seems like a ridiculous idea to me that so many houses will be built that prices will crash down to the level that anyone can buy them.
In fact I think what happens when there is more supply is that investors buy more houses to put renters into.
It will never happen that so many houses will be built that they become so cheap that the pricing will crash.
Property developers love to say "more supply!" because it makes them more money, that's all - they know more supply will never drives prices down so much that anyone could afford a house.
>> Seems like a ridiculous idea to me that so many houses will be built that prices will crash down to the level that anyone can buy them
There is an entire history of business where that exact thing happens (assuming anyone isn't literal). Watch the markets for energy (increased drilling causes prices to drop), metals (mines come online, prices drop), ag commodities... and real estate. There was a massive overbuild in the US during the late 90's and early 2000s, which resulted in a big drop in prices.
See here:
https://tradingeconomics.com/united-states/housing-starts#:~....
The US needed around 1-1.2 million houses to cover new household formation during that period. Massive overbuild. Now look at prices:
https://fred.stlouisfed.org/series/ASPUS
Notice the dip after there had been a build up of supply? Prices dropped about 30%. Then notice the shortage of building for several years... and a run up in prices shortly after? The old supply and demand...
Just using common sense - land is a gigantic part of the cost of a house. If zoning laws made it such that you can build more units on a given piece of land...how could prices do anything but go down?
The old "supply is the solution" is old because it has been true since the beginning of humans buying and selling things.
It's not a theoretical question, but a practical question of relative magnitudes. Can we actually supply enough housing to stabilize prices? And let's say we did, perhaps a great cost, but then what happens in the next big demographic shift? And what of the environmental impact in the process?
The "direct" solution is not always the best. This line of thinking always reminds me of the approach to medicine where they'd rather cut out your gallbladder than put you on an elimination diet and send you to an acupuncturist.
Given that there are many areas of the US where there is enough housing for houses to be affordable by the barely or not-quite middle class, it seems like that is possible. Detroit, Pittsburgh, Buffalo, Memphis, Oklahoma City, Kansas City, Richmond, New Orleans, Cincinnati, Columbus, Cleveland, Philly and lots of the surrounding suburban and rural areas.
Those statistics above aren't theoretical, it's empirical data, and prices went down 30%.
> In fact I think what happens when there is more supply is that investors buy more houses to put renters into.
Solve that with more supply. Those people only have finite money. We can keep building inexpensive housing and selling it to them at insane prices for longer than they can keep buying them at insane prices.
The problem is that, once we break them, then we almost certainly overshoot. The price seriously craters, and everyone who bought a house in the last N years takes a huge bath.
This is basically the housing market. Homebuilders react to high prices by continuing to build more homes as long as they can do so at a profit. Not hard to understand. There is always overshooting. That's OK, it results in a lot of homes.
Those who complain that there isn't enough housing are complaining that they are being priced out of popular areas. It's like complaining you can't afford a BMW and have to stick with an old Ford. Housing in the U.S. is still available and home ownership rates are relatively high.
The problem is that well-paid jobs are scarce, and getting scarcer, which puts a lot of pressure on housing in the handful of areas that have well-paid jobs. But that's not a problem with the national housing market, but the local markets in hot regions, which are captive to local zoning laws in those markets. Again, not something homebuilders can address easily.
I wish people would stop talk about housing problems and instead focus on the distribution-of-jobs problem. Housing is never going to be fast enough to catch up to a hot jobs market area, and it will always end up overshooting. Moreover, as a nation, we need well paid jobs to be much more geographically diverse if we are to survive as something other than pockets of wealth surrounded by vast regions of poverty.
Agree with a lot of this, but the zoning problems are real. They can't be fixed by homebuilders (of any type) and local governments face perverse incentives on the issue, so it can only be solved at a state level (US). In other jurisdictions it's likely similar.
I agree that the pains of restrictive zoning are very real and punish newcomers. When I was in SF, I lived in a rent controlled unit in which there was a cranky old lady paying $800 for a 2 bedroom apartment while a young couple moved into a smaller unit in the same building and were paying $3000. They were planning on having a child, but it was really hard. Both working full time just to afford rent. That's what happens when you freeze housing supply.
But the usual counterweight is to move to areas with more liberal zoning -- e.g. zoning is locally controlled and if a city wants to stop growing, then there's not much that can be done to stop them - California is trying, but there is a lot of opposition to forcing cities to grow if they don't want to.
The solution is to not build a major corporate HQ in such a city, or to move the HQ to cities that embrace growth -- which is the majority. But if that doesn't happen, then good jobs only exist in areas with restrictive zoning, and that's what makes the zoning painful.
Yup, agree. Houston is a good example.
It's a bit of a chicken and egg though.
We know what happens when the high-paying jobs become more geographically distributed. We saw it in Portland and Austin in the past few decades, for example: people are drawn to those places from California and housing prices go up significantly.
People do that to escape the high prices in California -- but by doing so, they cause prices to increase in the places they move to, because doing so creates a sudden influx of demand from buyers who have more spending power than the people who already lived there.
If the housing supply had been increased in California, fewer people would be flooding into Austin from California to buy houses.
If supply and demand does not explain housing prices, then why was housing ever affordable?
> when there is more supply is that investors buy more houses to put renters into.
Where would the investors create these new renters from?
Immigration and net-new household formation are two sources. (If rental properties are cheaper, people might move out of their parents house earlier, might take fewer [possibly zero] roommates, or might move to a location because the rent is cheap. All of those factors seem quite small compared to a contemplated large increase in housing supply. However, you can only make so many new households by driving the price of rent down. At some point, either new households stop being able to soak up the supply or investors aren't willing to keep pushing the price of rentals down.)
Turn the problem around. If we assume as a given that some people can't afford houses at the level of supply that currently exists, does not increasing the supply help those hopeful buyers at all?
What if we built a trillion houses; in your imagination, would all that housing still be expensive? Would each one have a tenant?
>I am against residential housing being sold to non citizens/permanent residents.
How to say xenophobic without saying it.. Any tax payer should be treated equally..
Assuming the most logical reading of that is (non-(citizens/permanent residents)), those are mostly all tax payers [either current or near-future].
I agree it's abhorrent xenophobic policy if meant to be ((non-citizens)/(permanent residents)), but I read it as naturally meaning the other.
It's xenophobic either way.
Yeah it's really not, it's about trying to keep the housing market about housing the local population rather than allowing in investor funds from overseas which warps it, changes what gets built at what price, and drives people into rental rather than ownership.
If you don't have the right to live somewhere, why should you be competing in the housing market and pricing out the local population?
Particularly if the nature of your competition is to keep properties mostly empty while speculating on price (see, for example, a lot of the high-end apartment development in London).
It's not xenophobia, it's a fundamental disagreement in what housing is actually for.
No, it's a fundamental agreement about what property rights are really for.
Not everyone agrees that property rights are absolute or supreme. Some of us think markets should be set up to help people, not the other way around, particularly where human needs like housing are involved.
It's certainly not clear that a preference for housing people over capital is 'xenophobic'.
Xenophobic - what a load of garbage. It's well known that countries have policies on whether or not foreign buyers are allowed to buy residential real estate. Me having an opinion on that does not make me xenophobic.
>>Any tax payer should be treated equally..
Foreign buyers are not taxpayers in Australia/Canada/USA.
"The Prohibition on the Purchase of Residential Property by Non-Canadians Act (Act) comes into force on January 1, 2023. It prohibits the purchase of residential property in Canada by non-Canadians unless they are exempted by the Act or its regulations, or the purchase is made in certain circumstances specified in the regulations."
https://www.bennettjones.com/Blogs-Section/Canadas-Ban-on-Fo...
In Australia and Canada, Chinese money has flooded our real estate markets - much of that money is anecdotally said to be the gains of corrupt officials and people trying to exit the country due to the oppressive regime.
"Chinese investors flooding billions into the Australian real estate market prompt money laundering fears"
https://www.abc.net.au/news/2015-10-12/chinese-investors-flo...
This outflow of capital from China, pouring into Australia and Canada pushes up prices, meaning that people who are not citizens or permanent residents are buying local real estate and inflating prices. Every house owned by a non citizen/permanent resident means one more that cannot be bought by a citizen/permanent resident.
Why should people from other countries be entitled to own our residential real estate? If you believe the purpose of housing is to house the citizens and permanent residents then there's every reason to close out foreign buyers, as Canada has done:
https://www.immigration.ca/canada-foreign-buyer-ban-starting...
https://www.cwilson.com/not-for-sale-canada-closes-the-door-...
"Demand for U.S. homes from foreign investors is pushing up home prices, exacerbating concerns over housing affordability"
"Housing markets are preferred destinations for foreign investors looking for yields, vacation homes or safe havens, or for those dodging tax restraints and corruption crackdowns in their home countries. But demand for U.S. homes from foreign investors, especially Chinese, pushes up home prices, exacerbating concerns over housing affordability, according to new research from Wharton."
https://knowledge.wharton.upenn.edu/article/foreign-purchase...
> This outflow of capital from China, pouring into Australia and Canada pushes up prices
My family in Australia (locals) complain about this all the time as well - chinese money flooding in and making it unaffordable for them.
They own 14 properties between the 5 of them.
If you want to prevent foreign investments, then say so. Why say non-citizens and permanent residents? In a multi-cultural society like US, non-citizens and permanent residents do form a significant portion of the population and they also need place to live.
Pointing to foreign investment is a strawman argument as the original poster called for banning non-citizens and permanent residents.. not non-residents.
Anyone who is not a citizen or a permanent resident is a foreign buyer - that's how the legislation defines it.
What about people in US on H1-B visas?
Who would own these rentals if not the landlords/rich?
Rental property will always exist. We need to completely ban nightly rentals. If you want to operate a hotel, build and operate a hotel. If a community was built to operate with nightly rentals, like, say, Sun River, OR, then perhaps they can zone appropriately for nightly rentals. Pseudo hotels should not be operating in traditional neighborhoods.
So instead of having a residential building with Airbnbs inside you'll now have a hotel. How does that solve the issue?
If there's X number of people who need an overnight stay in the city and you want to accommodate them - what difference it makes if they stay in residential studios or hotel rooms?
What you're saying resonates with me intuitively and anecdotally, but it's hard to square with the historical overall US homeownership rate, which peaked right before the Great Recession: https://fred.stlouisfed.org/series/RHORUSQ156N
Is there other data available that supports your view?
If nobody is building real estate, how do prices do anything but go up? From a supply side perspective, real estate has always been about financials. Everyone is trying to make money. Zoning rules make it harder to build more... and hence there isn't more...
You must be the house owner somehow reading into my comments as "no-one should build real estate".
Your exact quote was I hate it that people "buy and build a fair bit of real estate on the side". Their interpretation of your comments is quite straightforward.
>> but I hate it that people "buy and build a fair bit of real estate on the side"
Just reading.
Yeah that isn't me saying "no-one should build real estate".
Preach it brother/sister. Everyone is out here treating real estate as an investment and inserting themselves pointless middle-people extracting capital from those who are blocked from entering the housing market or even scaling their living situation to match their family requirements.
It's incredibly depressing to see comments like yours considered "wrong" and in the minority and even more so vociferously defended against in the name of "small-business owners" or the "capitalism IS fair" crowd. Despite those who succeeded being a survivorship bias group.
Housing is a right, and should not be an investment. To invest in housing alienates its purpose which is stability and shelter. It creates an antagonistic lens in which its ownership is held, not for those housed and protected by it, but those who wish to squeeze as much blood from the stone it has become.
> Housing is a right,
If we accept that as true, then let the state build minimal housing for those who cannot afford shelter.
TBH, that still won't take away the buy-to-rent investors, because people will still want better housing than the state provides.
The state/city could nationalize apartment blocks easily and and provide cheap or free housing to those who want it (not means tested, you want somewhere to live but don't want to deal with a landlord? Here's your state housing).
This will provide a floor for landlords to compete against and keep prices down.
The state/city could nationalize cars from car rental companies easily and and provide cheap or free cars to those who want it
The state/city could nationalize restaurants easily and and provide cheap or free food to those who want it
The state/city could nationalize Apple easily and and provide cheap or free iPhones to those who want it
Seems like we found the solution /s
+1
If you find current valuations attractive , and plan on dollar cost averaging through the next 12 months, but realize that businesses, management, competitors may change the investment scenario - it makes far more sense to buy a fund consisting of many companies (maybe even the entire stock market) rather than to make bets on individual companies.
> Google’s business is not quite as resilient as a building, which is a hard business to mess up
This guy lives in a different planet.
I was expecting a "pro crypto" thesis on this one, but it's not, at least directly.
Refreshing.
Unlike Sequoia or Kevin O'Leary about FTX and the crypto markets.
Seeing your net worth go down by billions is probably a decent motivator to write a blog post hinting to the market that prices look real good now.
they looked better when the S&P was at 3500 than it being at 4000 currently down from 4800 at its high
but the narrative then was “it’s headed to 2400-3200”
Money is the root of all evil.
Inaccurate. The full saying is: "For the love of money is a root of all kinds of evil."
If everyone thinks is bottom, it’s not bottom. A lot of YouTube videos saying “It’s bottom” in the title.
If everybody thinks the sun will rise tomorrow, it won't.
Reminder: Nobody can predict the future.
My number one buy right now is Roku. Down 75% from the COVID high with low debt and the best product on the market. I fully believe they will win the TVOS wars, which have untold billions at stake for advertising and data capture.
Pretty much every TV on sale today is a "smart" TV. Roku needs to convince customers that they should buy their device too. That is increasingly becoming a tough sell.
My number one trade is shorting Tesla. I've been short via puts since over $300 and recently rolled over my position to extend the expiration to June. I think $100 is easily in range, giving Tesla a market cap over $300B which is still ridiculous.
Good luck on your ROKU but I personally feel like that's dead money. They are basically another TIVO and they are a small player that will likely get bought, but not from a position of strength but from weakness. But different opinions are what makes a market, so good luck!
I am very low on Roku. Not saying they won’t rebound some, I just don’t see what they offer over any of their competition. They sell cheap bottom barrel ad inventory. That is it. There is a limit to the growth there.
What does winning look like to you? I cannot imagine, for example, Apple pulling out of this war. Do you think other TVOS players will still be around?
Apple will be the Apple of the market, as they always are. The high end 25%.
But Android TV is an absolute trainwreck. The level of lag is simply unnaceptable. And if there’s one thing that drives consumers nuts, it’s input lag. People will vote when they buy a TV.
Roku is feature-for-feature a superior platform, with better performance, higher device penetration [0] and at a lower price. The only reason Google has gotten as far as they have is due to existing monopoly forces.
[0] https://thedesk.net/2022/10/roku-amazon-market-share-domesti...
Most everyone I know just casts from their phone via whatever. The smart TV is basically dead except for that.
I keep buying Rokus. I think I'm on my 3rd one.
As a long-time (multi-decade) and very happy TiVo user, I'm a lot surprised and a little dismayed that they seem to have so badly fumbled the head-start they had in the battle for the better set-top box experience.
TiVo has missed the window to pivot a few times. I am surprised they still exist as a company.
Roku's best bull case (IMO) is as an acquisition. Which is not improbable!