The wealth-building thread

[levimax]

I think you've mistaken about risk, I never said the rich have lower risk, I said they have access to certain opportunities that the poors don't.

Let me give you an example, a real estate project opportunity came my way, minimum investment is $1m/lot. The person who broached me, is trying to get an LLC for about a hand full of investors. You think someone with a net worth of $200k will be offer this?

Another example, when the market had a dip due to the start of the tariffs, that was a great time to just buy SPY, people who already have assets can leverage a margin loan and only pay the interest while the loan is open, well that is an opportunity. Sure enough market bounced right back few months later.

To your example of private equity, why are you thinking that the only exit strategy is IPO? That's just silly.

Of course all of these carry risks, and greater risk that just a long term S&P500. My point is this is only available to rich people.

Now if you take exception to fees, that's fine, one can do a lot of it themselves to save on the fees. But to say that rich people don't have access to opportunities and financial engineering that the poor don't have access to, that's just unreal.

The fees are what can make these so called "opportunities" suboptimal as an investment. Just because something is only offered to rich people does not automatically make it a better risk adjusted investment. I evaluate investments based on their risk adjusted return, the calculation is not as straightforward as Ohm's law but it does give you some perspective to compare.

Anyone can trade on margin and the rich have the same restrictions as the poor which is set by the SEC. Poor people just have to make smaller investments. Trading on margin is not always the best idea if you want to build long term wealth.

I never said IPO was the only way private equity cashed out, my point is for every huge winner there many more "muddle through" companies that are not home runs as well as failed companies. If you look at the overall returns of private equity less the costs of managing these investments and paying all the commissions to the sales guys and all the other fees it is not all "Alibaba and SpaceX". It is a high risk, high fee, low liquidity, long term investment which is suited for rich people that don't need liquidity and can live with extremely variable returns. It is also fun to brag to your friends when the fund does hit on a "home run". On a risk adjusted basis how it compares to the S&P is going to vary from and firm to firm and time period to time period but it is not going to be a huge difference that you need to worry about if you are trying to build wealth. With the current FOMO going on there are even ETF's that invest in private equity so even poor people can now participate, even if it is ill advised.

One thing to keep in mind that most people don't think about. If there really was an investment strategy that consistently outperformed the S&P 500 on a risk adjusted basis then all you would have to do is invest in that strategy and short the S&P 500 futures against it and you would have guaranteed risk free money streaming in for the rest of your life and the more you added to the strategy the richer you would become. Even the rich people have not been offered this opportunity because it isn't really possible.

 

[blueone]

Anyone can trade on margin and the rich have the same restrictions as the poor which is set by the SEC. Poor people just have to make smaller investments. Trading on margin is not always the best idea if you want to build long term wealth.

Good point, and also pretty much anyone with a reasonably sized brokerage account can take a loan against pledged assets. It is amazing that the ignorant people on LinkedIn who complain about billionaires, who they think don't sell shares of stock to finance their lifestyles or new investments, and just take loans against their equity assets to avoid capital gains taxes. And then die with a stepped up basis for their heirs. Not only is the math for loans questionable unless you are confident the gains from owning the stock will exceed the interest costs, but these folks forget you still have to pay at least the interest from cash, take additional loans, or execute asset sales to pay the interest. Did they flunk middle school math? And then they overlook that many millions of Americans take home equity loans to capture real estate gains without selling, but somehow loans against assets is a strategy that only billionaires can use. But the most fascinating aspect to me is that on LinkedIn people post with their real names, often headshot photos, and list their employer. Amazing. At least on a forum like this, if you're going to post ignorant or stupid stuff, you can hide behind an anonymous userid.

 

[PristineSound]

The fees are what can make these so called "opportunities" suboptimal as an investment. Just because something is only offered to rich people does not automatically make it a better risk adjusted investment. I evaluate investments based on their risk adjusted return, the calculation is not as straightforward as Ohm's law but it does give you some perspective to compare.

Anyone can trade on margin and the rich have the same restrictions as the poor which is set by the SEC. Poor people just have to make smaller investments. Trading on margin is not always the best idea if you want to build long term wealth.

I never said IPO was the only way private equity cashed out, my point is for every huge winner there many more "muddle through" companies that are not home runs as well as failed companies. If you look at the overall returns of private equity less the costs of managing these investments and paying all the commissions to the sales guys and all the other fees it is not all "Alibaba and SpaceX". It is a high risk, high fee, low liquidity, long term investment which is suited for rich people that don't need liquidity and can live with extremely variable returns. It is also fun to brag to your friends when the fund does hit on a "home run". On a risk adjusted basis how it compares to the S&P is going to vary from and firm to firm and time period to time period but it is not going to be a huge difference that you need to worry about if you are trying to build wealth. With the current FOMO going on there are even ETF's that invest in private equity so even poor people can now participate, even if it is ill advised.

One thing to keep in mind that most people don't think about. If there really was an investment strategy that consistently outperformed the S&P 500 on a risk adjusted basis then all you would have to do is invest in that strategy and short the S&P 500 futures against it and you would have guaranteed risk free money streaming in for the rest of your life and the more you added to the strategy the richer you would become. Even the rich people have not been offered this opportunity because it isn't really possible.

Ok, you have brought up risk again, so let me try very hard to rearticulate this point. I have never said these alternative investments are lower risk. In fact, I said they are higher risk. I also said one needs to know how to manage their risk and know what their risk tolerance are. I also stated for the those of us who don't have access to these alternative investments, it's best to stick with the market, and in some cases, even if you have access perhaps still stick with the market.

Bluetone said it best here:

My view: unless you're rich enough that hundreds of thousands or millions of dollars qualifies as "play money" to you, and unless you're knowledgeable enough in the markets and the efficacy of the investments (like, for example, being an angel investor in a start-up), IMO you should stick to conventional equities, funds, or debt instruments, and be happy you're not involved in these "special opportunities".

And I agree with him:

My experience, unless you have a net worth of $2m, you unlikely will have access to any alternative investments. Until then, your best bet is just index funds or a small business (high risk). I personally would recommend index funds with steady and long term balls of steel. Once you hit, I would say $1m net worth, you may want to consider getting a financial advisor, if you don't have the financial knowledge.

Now, it appears as if you may have mistaken me to be advocating for alternative investments, I am not and I have not, you asked me questions and I replied to it.

And I think you summed up some of what Bluetone and I are saying here:

It is a high risk, high fee, low liquidity, long term investment which is suited for rich people that don't need liquidity and can live with extremely variable returns.

I would now like to address the topic of fees.

Do you work for free? Would you like to make as much money as you can? I am asking stupid questions of course, right?

The fee is the fee, that is life. If you think the fee is too high, don't invest. I have a fund with a minimum entry that I would not be able to afford when I was in my 20's. The risk is higher than, say SPY, the return is also higher, the fee is slightly higher, but again, what is my risk tolerance? How much can I afford to lose? These are all personal choices, and this isn't something that I would recommend to the general public.

 

[PristineSound]

Good point, and also pretty much anyone with a reasonably sized brokerage account can take a loan against pledged assets. It is amazing that the ignorant people on LinkedIn who complain about billionaires, who they think don't sell shares of stock to finance their lifestyles or new investments, and just take loans against their equity assets to avoid capital gains taxes. And then die with a stepped up basis for their heirs. Not only is the math for loans questionable unless you are confident the gains from owning the stock will exceed the interest costs, but these folks forget you still have to pay at least the interest from cash, take additional loans, or execute asset sales to pay the interest. Did they flunk middle school math? And then they overlook that many millions of Americans take home equity loans to capture real estate gains without selling, but somehow loans against assets is a strategy that only billionaires can use. But the most fascinating aspect to me is that on LinkedIn people post with their real names, often headshot photos, and list their employer. Amazing. At least on a forum like this, if you're going to post ignorant or stupid stuff, you can hide behind an anonymous userid.

Not everyone has this portfolio size, and the interest rate is variable based on the size of loan.

But yes, many people have access to it, but that is not meaningful if they don't have investment opportunities. Again, one must optimize the risk for their individual situation.

 

[Timcognito]

Nobody is talking about the heard mentality. It affects both private and public investors small and large. Without a large financial base the conservative approach to investing can be successful but not lead to large quick leaps in wealth. Look at who got wealthy Gates, Bezos, Musk and others, how? Some using their own funds, taking risks, being narrowly focused and having a vision that was easily communicated to other investors.

So AI, overvalued yes, as a crowded segment with both companies and investors, but no one can deny there will be huge winners within the segment just like dot com. If you are not willing to do you homework be careful.

SpaceX way overvalued? Few want to go to the moon or mars, space tourism and the capital costs are huge so only the mega rich corporations can even attempt it. Now what if the the model is to take internet access from highly competitive, expensive large market terrestrial infrastructure and replace it with direct to customer internet and communication from inexpensive satelites launched from just a couple of sites to anywhere on earth with reusable rocketry? It is an opportunity displace not only those already connected locally but reach those without any access for sorts issues physical, financial, geopolitical and collect $50-200/month from 100s of millions customers. Who are SpaceX competitors? How many? How quickly will they catch up? How are they financed? What infrastructure and expertise do they already have?

Too late for me to take chances, like others I invest in the indexes and bonds, but I live where DSL, cell or cable are your choices, all unreliable and expensive. My SpaceX residential dish gives me many of my neighbors internet for $50-80/mo rain or shine, no linemen or trucks, cell towers, or wires outside my house. Maybe that is the next big thing? Remember the paths Amazon and Google, can SpaceX already be a bargain?

 

[Chromatischism]

Ultimately, you have to have money to make money in the markets. Poor people could not "buy the dip" in March-April 2020. Not only do they lack the capital, they lack the education and preparation to even be ready for such an event. They are too busy worrying about putting food on the table and clothes on the kids.

 

[PristineSound]

Ultimately, you have to have money to make money in the markets. Poor people could not "buy the dip" in March-April 2020. Not only do they lack the capital, they lack the education and preparation to even be ready for such an event. They are too busy worrying about putting food on the table and clothes on the kids.

Well said.

I had a moderately wealthy co-worker, during the dip, he was scrambling to allocate cash to buy. Yet, poor people were shtting bricks watching their 401k dropping.

 

[Sal1950]

Times are changing and you need to be all the more careful going forward. Your pensions are the exit strategy of all these bankrupt AI giants. Cash dollar itself is even no longer safe. And no I don't have the solution

I'm 75, retired and living on my savings-investments and extremely conservative.
While I somewhat agree with your statement, there's little that can be done about the future. I'm reasonably comfortable with 5 star US banks and FDIC insured CD's. If that goes to shit, I'll aways have my guns to hold off the creditors. LOL

2 - 50+% drawdowns that offered (after completion) a few of the greatest investing opportunities in my lifetime

Glad it worked out for you, so many others lost their asss.

Ultimately, you have to have money to make money in the markets. Poor people could not "buy the dip" in March-April 2020. Not only do they lack the capital, they lack the education and preparation to even be ready for such an event. They are too busy worrying about putting food on the table and clothes on the kids.

Exactly. I'm going to "unwatch" this thread now, I really have no business here.
cent' anni.
Sal

 

[PristineSound]

Exactly. I'm going to "unwatch" this thread now, I really have no business here.
cent' anni.
Sal

At this stage of your life, the most important thing is having the appropriate portfolio balance.

Luckily you still get SS, I can't say I know the fate of it when it's my turn to collect.

 

[Groove01]

The over arching question (or statement) that wealthy people have access to alternative investment is pretty simple - of course they do.

The question whether it’s an advantage is more nuanced and the answer IMHO is - sometimes and it depends.

The investment objectives of wealthy individuals are very different and they operate under a very different set of considerations. As such, they have different opportunities available to them to match those unique objectives and considerations.

They are playing on a different board, some of the things they have access to simply wouldn’t make sense for normal/avg investors.

 

[Timcognito]

Some of the advantages the wealthy are more fundamental than instruments in the financial markets and taxes especially for corporations, such as purchasing smaller competitors, consolidation of large assets leading less competition, multinational market access, large private company ownership shield from shareholders, offshore tax shelters, access to legislation through lobbying, Citizens United anonymity, huge collateral holdings leading to huge leverage in borrowing, participation in expensive and punitive legal and IP litigation with competitors, and many others.

 

[JeffS7444]

Poor people could not "buy the dip" in March-April 2020.

I remember that time well. And while I had investable cash from rolling over a retirement account from a previous job, the value of said account had also crashed, so I wasn't feeling wealthy. And while the S&P 500 had regained some of it's value, I speculated there could be other, deeper, crashes to come, what with everyone sitting at home in isolation, and no plague cure yet in sight. I sat on cash for a couple of days before heeding advice about not attempting to time the market, and late April 2020, I felt anything but certain as I put it all into index funds ("I hope you know what you're doing..."). In retrospect, it seems brilliant, awesome, and inevitable, but at the time, it actually felt pretty scary to me.

 

[Chromatischism]

I remember that time well. And while I had investable cash from rolling over a retirement account from a previous job, the value of said account had also crashed, so I wasn't feeling wealthy. And while the S&P 500 had regained some of it's value, I speculated there could be other, deeper, crashes to come, what with everyone sitting at home in isolation, and no plague cure yet in sight. I sat on cash for a couple of days before heeding advice about not attempting to time the market, and late April 2020, I felt anything but certain as I put it all into index funds ("I hope you know what you're doing..."). In retrospect, it seems brilliant, awesome, and inevitable, but at the time, it actually felt pretty scary to me.

Indeed: oftentimes the best time to buy does not look like the best time to buy, and pressing the button can be scary.

 

[PristineSound]

I remember that time well. And while I had investable cash from rolling over a retirement account from a previous job, the value of said account had also crashed, so I wasn't feeling wealthy. And while the S&P 500 had regained some of it's value, I speculated there could be other, deeper, crashes to come, what with everyone sitting at home in isolation, and no plague cure yet in sight. I sat on cash for a couple of days before heeding advice about not attempting to time the market, and late April 2020, I felt anything but certain as I put it all into index funds ("I hope you know what you're doing..."). In retrospect, it seems brilliant, awesome, and inevitable, but at the time, it actually felt pretty scary to me.

I would not call that timing the market. But I would never recommend this kind of opportunistic maneuver to the average person.

 

[JeffS7444]

Regarding SpaceX: WSJ has published articles about the steps people can take to ensure it's not creeping into their managed retirement accounts. My own non-expert view is that it looks bright and shiny, but whether it's a wise investment is another matter. Then there's the matter of the other companies which got rolled into it's stock: My man-on-the-street view is that StarLink is the best of them, while X and xAI smell kinda funky.

 

[PristineSound]

Regarding SpaceX: WSJ has published articles about the steps people can take to ensure it's not creeping into their managed retirement accounts. My own non-expert view is that it looks bright and shiny, but whether it's a wise investment is another matter. Then there's the matter of the other companies which got rolled into it's stock: My man-on-the-street view is that StarLink is the best of them, while X and xAI smell kinda funky.

I personally would not worth about SpaceX making into your portfolio, the fund manager is here to make money, he won't go for SpaceX because it's shiny, it har to make financial sense.

I worry more about the macroeconomics. There's a lot of things that made the US economy the US economy slipping today. Such as being the world reserved currency, to name one.

 

[Audionaut]

I will say this. I been in the far orbit of private equity and investment bankers in my early twenties to early thirties, all that stuff you read and fantasized about, is all real.

That's pretty much the same line of reasoning as when an audio subjectivist tells you that only xxx produce the right sound.

"I will say this. I've been in the orbit of high-end audio reviewers, boutique manufacturers, and passionate audiophiles from my early twenties to my early thirties. All that stuff you read and fantasize about—night-and-day differences between cables, magical tube amps, and transformative DAC upgrades—is all real."

 

[PristineSound]

That's pretty much the same line of reasoning as when an audio subjectivist tells you that only xxx produce the right sound.

"I will say this. I've been in the orbit of high-end audio reviewers, boutique manufacturers, and passionate audiophiles from my early twenties to my early thirties. All that stuff you read and fantasize about—night-and-day differences between cables, magical tube amps, and transformative DAC upgrades—is all real."

What? That is a silly comparison, you are talking about subjectivism, I am talking about actual returns on investments and investment opportunities.

 

[JeffS7444]

But I would never recommend this kind of opportunistic maneuver to the average person.

What might you have done instead?

 

[PristineSound]

What might you have done instead?

What I might have done isn't what I would recommend to the general investor.

But this is what I have done during the dip, I moved some fixed income investments to equities, SPY specifically. I also took out a margin loan to put into SPY, I paid only interest for 3 months, and when it rebound, I sold and paid back the margin loan. I also rebalanced my portfolio.

The amount that I did was an amount I can afford to lose, which wasn't a lot.

I regret not able to do the same during the start of the pandemic. And I regret that I didn't have enough money during the great recession.

The key is, I'm young, and I got time, and with time, the S&P500 has been proven to be failsafe for 100 years.

But now, I don't think I will have enough time on my side to do things like that again.

EDIT: correction. S&P only has been around for 70 years.