As someone who received a Large Sum of Money (as defined in this post) last year, here’s what I actually did with it:
spent some of it on my living expenses while I acquired skills to get a new job, then looked for a job
invested it in Vanguard index funds
donated a small portion of it
spent more of it on living expenses when I decided to quit my job and look for a new one
and most recently did a calculation regarding what I thought I could afford to lose, and invested that much money in individual stocks plus some in a startup founded by member of the rationalist community.
I want to emphasize that the last step here is something I cannot recommend anyone do with money they can’t afford to lose. But if your reason for saving/investing is to give later, being willing to make riskier investments makes sense, just as riskier careers do.
P.S. Perhaps I should be explicit that I find this post a bit odd, because the definition of Large Sum of Money used in this post doesn’t seem all that large to me. For Bay Area techies, it could easily mean “I am a Google employee and my RSUs just vested.”
i understand you finding the premise odd. However, it became apparent to me in the course of casual conversations that many people do indeed have an intuition that you should be able to do something ‘clever’ with sums on this level. Evidence for that Is provided by most of the rest of the comments.
I basically believe the efficient market hypothesis, but the inference/implication here doesn’t seem right to me.
The risk from investing in individual stocks rather than broad indices is pretty minor (and for philanthropic capital I think it is completely negligible), and if you accept the EMH the returns are the same. There are a number of other considerations (tax issues, small amounts of domain expertise or insight, hedging) that might lead one to purchase individual stocks instead. The amounts of money involved don’t have to be too large before it starts to look worthwhile to be thinking about these issues.
What would that look like? Ex post the returns of different stocks are very different. Ex ante, if you think some stock is going to have low returns, sell it short.
A tardy reply. But I presume there could be some evidence? If you try to think of any, can you? If not how could anyone have much confidence in this whatsoever?
I don’t quite understand what you are asking for here / what you are potentially disagreeing with. What kind of evidence do you expect?
The average stock has the same returns as the index, that’s the definition of the index (for some notion of average and some universe of stocks). If you are a good enough predictor, then from your perspective some stocks might have predictably low returns. And in that case you can trivially beat the market.
There is a huge amount of evidence that when there is bad news about an asset’s expected future returns, the price of that asset generally drops, raising the expected future returns. But I assume that’s not what you are wondering about.
Nope. I bought Google, IBM, Microsoft, and a South American agribusiness company, all in an attempt to bet on guesses about long-term trends (information technology and maybe natural resources being really important). I’m unsure if this is a good idea—arguably I should focus on maximizing near-term expected returns—but it’s something I’m doing now. For reasons Paul gave, it’s at least no worse than investing in an index, but maybe I should have used the money for a larger Angel investment, I don’t know.
It could be worse, mostly by correlating your investment returns with the general success of the tech sector (with which your ordinary income is tightly linked, and moreover which drives much effective altruist philanthropy).
As someone who received a Large Sum of Money (as defined in this post) last year, here’s what I actually did with it:
spent some of it on my living expenses while I acquired skills to get a new job, then looked for a job
invested it in Vanguard index funds
donated a small portion of it
spent more of it on living expenses when I decided to quit my job and look for a new one
and most recently did a calculation regarding what I thought I could afford to lose, and invested that much money in individual stocks plus some in a startup founded by member of the rationalist community.
I want to emphasize that the last step here is something I cannot recommend anyone do with money they can’t afford to lose. But if your reason for saving/investing is to give later, being willing to make riskier investments makes sense, just as riskier careers do.
P.S. Perhaps I should be explicit that I find this post a bit odd, because the definition of Large Sum of Money used in this post doesn’t seem all that large to me. For Bay Area techies, it could easily mean “I am a Google employee and my RSUs just vested.”
i understand you finding the premise odd. However, it became apparent to me in the course of casual conversations that many people do indeed have an intuition that you should be able to do something ‘clever’ with sums on this level. Evidence for that Is provided by most of the rest of the comments.
Why did you invest in individual stocks? Did you have insider information about them?
I basically believe the efficient market hypothesis, but the inference/implication here doesn’t seem right to me.
The risk from investing in individual stocks rather than broad indices is pretty minor (and for philanthropic capital I think it is completely negligible), and if you accept the EMH the returns are the same. There are a number of other considerations (tax issues, small amounts of domain expertise or insight, hedging) that might lead one to purchase individual stocks instead. The amounts of money involved don’t have to be too large before it starts to look worthwhile to be thinking about these issues.
Are the considerations you mention written up in more depth anywhere? I’m not that familiar with some of them. Pointers?
This depends a lot on how many stocks you’re buying, right? Or would you still make this claim if someone were buying < 10 stocks? < 5?
How come?
If the returns were worse, the price would drop.
Interesting—is there empirical evidence that this in fact happens?
What would that look like? Ex post the returns of different stocks are very different. Ex ante, if you think some stock is going to have low returns, sell it short.
A tardy reply. But I presume there could be some evidence? If you try to think of any, can you? If not how could anyone have much confidence in this whatsoever?
I don’t quite understand what you are asking for here / what you are potentially disagreeing with. What kind of evidence do you expect?
The average stock has the same returns as the index, that’s the definition of the index (for some notion of average and some universe of stocks). If you are a good enough predictor, then from your perspective some stocks might have predictably low returns. And in that case you can trivially beat the market.
There is a huge amount of evidence that when there is bad news about an asset’s expected future returns, the price of that asset generally drops, raising the expected future returns. But I assume that’s not what you are wondering about.
Nope. I bought Google, IBM, Microsoft, and a South American agribusiness company, all in an attempt to bet on guesses about long-term trends (information technology and maybe natural resources being really important). I’m unsure if this is a good idea—arguably I should focus on maximizing near-term expected returns—but it’s something I’m doing now. For reasons Paul gave, it’s at least no worse than investing in an index, but maybe I should have used the money for a larger Angel investment, I don’t know.
It could be worse, mostly by correlating your investment returns with the general success of the tech sector (with which your ordinary income is tightly linked, and moreover which drives much effective altruist philanthropy).