If it were easy, Everyone would be doing it

And for a period of time, it certainly seemed so. I was reading bloggers (yeah, not investors) making yearly returns of 11%, 12%, even more than that. I was asking myself why I was only cautiously deploying capital into p2p while people out there were making a killing. Then scams popped. Then COVID arrived.

The other day I found this blog and boy, if Jordan said that you miss 100% of the shots you do not take, this lad was a p2p scam sniper: Kuetzal, Grupeer, TFGCrowd and Crowdestor. This is not schadenfreude but sometimes reading that the opposite happens makes you feel less bad. I am kind of appreciative of the honesty of putting out there your failings, even if after the first GME debacle I feel young folks take their financial mistakes with not-enough shame: might be a positive if only there was more reflection on the errors made, the conclusion should not be a simple LOL. (editor’s note: I simply scrolled fast on that single post, do not take my comment as a judgement on the author or the overall blog).

JPMorgan published their annual guide to Alternatives. These are the guys you are competing with (the guide does not specify if these are gross or net of fees):

and these the yields available as of today:

If in the last ten years you made more than 10%/year you would be better than the average professional money manager. As shown by today’s yields, achieving 10%/year in the next 10 years will not be that easy. But if you scroll social media, the reality seems to be different: not only in the p2p space, amateurs were printing money buying Tesla, meme stocks, crypto and so on. It is so easy. I speak with professional money managers and they are convinced they can beat a traditional benchmark applying ESG filters, because it is obvious that bad polluters will be bad investments (apparently there is no price low enough for a coal company to become a decent investment). If you used this logic last year you would have double your capital: do the right thing and become rich. How come you did not get the memo?

I write this blog and at the same I very very rarely speak about investments with anyone in my family, and in 90% of those occasions is just with my dad. I have the passion, I have the knowledge and yet I would probably be a bad financial advisor. Partially I still feel it as a taboo topic, partially because I know what to expect from the other side, misconceptions, wrong takes, the hard work to push the right lessons through. And it is 100% my fault; once I asked an acquaintance how he was investing his money and we had a very interesting conversation (he’s Canadian and he mentioned investing in gold, so expecting cliches is also correct).

I have more and more frequent conversations about investments with my wife (it has more to do with us becoming parents than us wanting to live the life). While she has (had?) faith in my judgement, the other evening she really called me out on real estate investing. In short, the discussion gravitated around few things:

• It is easy: my main point is that I do not want to deal with other human beings, like tenants, administrators and workers. I am pissed when I have to deal with Interactive Brokers customer service. But we agreed this is just a personal preference, I think she would be actually really good on these aspects…and she agreed. Sometimes it feels easy because the hard part was to get access to the opportunity. Anyone can technically buy an apartment but how many can put together the 20% down-payment? Banks are happy to lend…on the ads you see on internet, getting a mortgage when you need it (i.e. you do not have funds) is another story.

• Everyone is making money with it: she literally told me it is the only way to build generational wealth (honestly I was quite surprised by the choice of the word) and compared it to my not-so-great advice to her to open an account with Vanguard and buy a Target Date fund. I tried to explain her that the examples she has of successful investors close to us are just that, examples; we do not even know if they are indeed that successful…we know the anecdotes they decide to share with us.

• The generational wealth part: I told her the classic stories. People remember only the purchase and sale price, not how much thy spent in between. The investment usually takes decades, so the ‘huge’ gains are not that huge if annualised, it is just the miracle of compounding. Most of the gains comes from the fact that you can easily leverage the investment, while you cannot do it with Vanguard.

What impressed me the most is that I concluded saying that it is true that you can make lot of money that way, but you can lose more as well (we are definitely not in the position to build a big portfolio of investments, so our risk would be concentrated) and she basically only listen to the first part: “so you admit you can gain more”. The risk part of the equation was gone.

The conventional measure of risk used in financial markets is volatility but the real risk is a permanent loss of capital. If you invest in a broad stock index, you might experience nasty >30% drawdowns but if you do not hit the sell button after a period of time you will be back whole (now show me Japan). If you invest in a single stock, the chance you will not see your purchase price again are not that good: since 1980, roughly 40% of all stocks have suffered a permanent 70%+ decline from their peak value. Same occurs if you invest in the wrong p2p platform or loan originator, when you get some cents on the dollar but very rarely you get back 100% of your initial capital. Each single investment has an initial probability to produce a gain, but instead of experiencing that probability distribution (something closer to invest in an index/basket) we see only the final outcome, one of the many possible scenarios. That is why when we hear stories of friends gaining money, we might think about the risk but what stays in our mind is the final positive result.

Coincidentally, Barry Ritholtz just posted below graph on Twitter. Sounds familiar? It is easy to make money (in real estate) if you never tried to make money (in real estate).

The reality is a bit more complicated than that; as an example, Dan Rasmussen of Verdad Capital explains it well in his latest podcast interview with Meb Faber. In financial markets, opportunities are created when others run from a trade; and going against the crowd is not easy, especially when the market does not immediately turn in your favour. Dr Burry story in the Big Short is the rule, not the exception. Not only you need competence, it feels more like every ten years you have to un-learn what you learned in the last ten. Value works and then get crushed. Everyone wants to live in central London and then Cornwall is the new place to be. Fuck NYC, NYC is dead…do you remember the aftermath of 9/11?

There are a lot of opportunities out there, if you find a really easy one remember that is better to be lucky than good.

What I am reading now:

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