Rich get richer as economy gets better; everyone else is worse off

[Malthus]

Well, the chance of getting into an accident if you drive drunk is below 1%, but let's assume it's exactly 1%.  So, if at least 1% qualifies as "predictable" in your world, then of course your statement was correct.  Pretty much any result is predictable.

What you are missing is the context. In this analogy, the "accident" has already happened, the car is in the ditch with wheels spinning - that is, we already know that the non-rich have fared more poorly.

While the chances of getting into any accident may be only 1% for any particular trip, some rather higher figure of accidents are "caused or contributed" to by drinking and driving. So if you drink and drive and get into an accident, yes, it's "predictable" that the two would be related, right? While by no means being "ensured"?   

I'd love to see you arguing otherwise in court: "yes, your honour, my client was drunk as a freaking skunk when he plowed into that minivan full of nuns, but there was no way he could reasonably have predicted his drinking would cause or contribute to that - why look at the figures, only 1% of drunk trips result in accidents!" 

Well, everything is predictable after it already happened.

Another winning line to use in court. 

"Your honour, it may seem like my client downing a bottle of Southern Comfort and plowing into a vanful of nuns was somehow negligent, but this is not so. It's merely an artifact of hindsight. How was he to know he was doing anything stupid or criminal? After all, everything is predictable after it already happened. "

[garbon]

Thus, if you get all screwed up because you invested in one asset class alone, this is an "entirely predictable" result - much like a drunk driver plowing into a vanful of nuns ought, in hindsight, to have known that drinking and driving was a bad, bad idea. Drinking and driving is a bad idea because it increases your risks. Investing in one asset is a bad idea for much the same reason.

Now, no doubt you will go on about how, actually, plowing into a vanful of nuns is massively unlikely (I mean, how many nuns are there around anyway?) but this is to miss the larger point. 

But wouldn't that depend on time frame / circumstance? I mean if you owned a house prior to bubble and then sold during bubble (all your assets tied up there) then it was a good thing for you as you made out very well.  Similarly if you absolutely had to be somewhere at a certain time but you were drunk, if traffic happened to be very light (because it was very early morning) and you made it to where you needed to be without injury, then you made out very well.  It seems like with both only if you expand the timeframe to include some event where your behavior would be injurious (bubble burst, you were driving during rush hour) then is it predictable to say that you'd get that negative outcome.

Admittedly I think the housing example works better (which I think highlights differences between that and the hypothetical drunk driving case you posit).

[The Minsky Moment]

Savings come out of income.  And middle class income is stagnating as well.

Either they can save more or they can expect their net worth to stagnate.

I don't understand.

Sure the middle class could keep apace with double digit net worth gains despite decreasing income by reducing their consumption to third world levels.  Except they couldn't because the resulting depression would tank the entire economy and drag down all assets with them. 

[fhdz]

Thus, if you get all screwed up because you invested in one asset class alone, this is an "entirely predictable" result - much like a drunk driver plowing into a vanful of nuns ought, in hindsight, to have known that drinking and driving was a bad, bad idea. Drinking and driving is a bad idea because it increases your risks. Investing in one asset is a bad idea for much the same reason.

Now, no doubt you will go on about how, actually, plowing into a vanful of nuns is massively unlikely (I mean, how many nuns are there around anyway?) but this is to miss the larger point. 

But wouldn't that depend on time frame / circumstance? I mean if you owned a house prior to bubble and then sold during bubble (all your assets tied up there) then it was a good thing for you as you made out very well.  Similarly if you absolutely had to be somewhere at a certain time but you were drunk, if traffic happened to be very light (because it was very early morning) and you made it to where you needed to be without injury, then you made out very well.  It seems like with both only if you expand the timeframe to include some event where your behavior would be injurious (bubble burst, you were driving during rush hour) then is it predictable to say that you'd get that negative outcome.

Admittedly I think the housing example works better (which I think highlights differences between that and the hypothetical drunk driving case you posit).

In both cases it seems to me the main factor is luck (which the drunk driver is more likely to recognize, actually) rather than investment acumen.

[garbon]

In both cases it seems to me the main factor is luck (which the drunk driver is more likely to recognize, actually) rather than investment acumen.

Totally true. But then I'd think you can only say it is predictable that a person who has all of their assets in one place (their home) will lost networth if you are looking a time-frame where you are saying a bubble will burst (if the bubble is continuing to inflate then that chain of events isn't predictable). Similar I guess, but not as easy to swallow with the drunk driver and rush hour.

[DGuller]

Yes, I think that's what I was trying to say.

Having said that, if your assets are large to begin with, smaller gains over a longer period of time might be preferable to the chance that a huge investment will ruin you.

There are definitely a lot of advantages to diversification, and in a theoretical world where you can borrow unlimited funds, there is no reason to ever not be diversified.

Guller, what's your opinion of an investment strategy which would look something like 90% of assets in very low-risk investment and 10% in ridiculously risky ventures? (Or 80/20, or whatever split might give one the best spread between lowest potential downside and large potential upside)

No opinion.  I know just enough to know that there is a lot to know about, and that I won't know it without working in the field (and maybe not even then).

[DGuller]

Another winning line to use in court. 

"Your honour, it may seem like my client downing a bottle of Southern Comfort and plowing into a vanful of nuns was somehow negligent, but this is not so. It's merely an artifact of hindsight. How was he to know he was doing anything stupid or criminal? After all, everything is predictable after it already happened. "

I'm not sure how this discussion got into the courtroom, and what these non sequiturs have to do with anything. 

[fhdz]

In both cases it seems to me the main factor is luck (which the drunk driver is more likely to recognize, actually) rather than investment acumen.

Totally true. But then I'd think you can only say it is predictable that a person who has all of their assets in one place (their home) will lost networth if you are looking a time-frame where you are saying a bubble will burst (if the bubble is continuing to inflate then that chain of events isn't predictable). Similar I guess, but not as easy to swallow with the drunk driver and rush hour.

Yes, which is why it seems the more prudent decision - given that there are bubbles that burst, and little kids who run across the street - is to focus on one's exposure to risks rather than to attempt to predict when the bubble will burst or when the kid will run into traffic.

Drunk driving is a bit of a different "investment" in that there is no real potential for dramatic gain - the best you can hope for is that you made it home all right - and major potential for serious downside. On Taleb's triad scale, drunk driving would rank along with smoking as one of the most fragile sorts of investment strategies.

[The Minsky Moment]

Savings come out of income.  And middle class income is stagnating as well.

Middle class income has been stagnant for a long time, but to a degree I'm not always convinced this is a problem. Namely because I do not believe quality of life is stagnant. The average hourly wage, at least according to the BLS, has barely changed in real terms since the 1960s. Would anyone here argue that quality of life is not significantly higher in 2013 for the average wage earner than it was in 1964?

That may be true but doesn't change the fact the amount of resources available to mobilize for wealth creation is not increasing for the middle class but is increasing for the already very wealthy.  So it really doesn't address the subject of the thread.

[Malthus]

Thus, if you get all screwed up because you invested in one asset class alone, this is an "entirely predictable" result - much like a drunk driver plowing into a vanful of nuns ought, in hindsight, to have known that drinking and driving was a bad, bad idea. Drinking and driving is a bad idea because it increases your risks. Investing in one asset is a bad idea for much the same reason.

Now, no doubt you will go on about how, actually, plowing into a vanful of nuns is massively unlikely (I mean, how many nuns are there around anyway?) but this is to miss the larger point. 

But wouldn't that depend on time frame / circumstance? I mean if you owned a house prior to bubble and then sold during bubble (all your assets tied up there) then it was a good thing for you as you made out very well.  Similarly if you absolutely had to be somewhere at a certain time but you were drunk, if traffic happened to be very light (because it was very early morning) and you made it to where you needed to be without injury, then you made out very well.  It seems like with both only if you expand the timeframe to include some event where your behavior would be injurious (bubble burst, you were driving during rush hour) then is it predictable to say that you'd get that negative outcome.

Admittedly I think the housing example works better (which I think highlights differences between that and the hypothetical drunk driving case you posit).

You are fighting the hypothetical. In the example I gave, the guy lost value, or the accident happened. The issues then is "was this bad result a predictable result because I did X"? By which is meant "did I increase my risk of a bad result in a way I could have foreseen by doing X"?

I would have thought the answer obvious, but apparently it isn't. 

Sure, you may invest in a single asset class and come out ahead, or drive drunk and get to your destination. But if a bad result occurs rather than a good result, strikes me as being entirely predicatble.

Which is a seperate issue from whether it is "worth it". You may want to invest in a single asset class because you have an appetite for risk and want the chance of higher returns. You may have a compelling reason to fdrive drunk.

[garbon]

In both cases it seems to me the main factor is luck (which the drunk driver is more likely to recognize, actually) rather than investment acumen.

Totally true. But then I'd think you can only say it is predictable that a person who has all of their assets in one place (their home) will lost networth if you are looking a time-frame where you are saying a bubble will burst (if the bubble is continuing to inflate then that chain of events isn't predictable). Similar I guess, but not as easy to swallow with the drunk driver and rush hour.

Yes, which is why it seems the more prudent decision - given that there are bubbles that burst, and little kids who run across the street - is to focus on one's exposure to risks rather than to attempt to predict when the bubble will burst or when the kid will run into traffic.

Well presumably that varies greatly. I mean I don't think there are a lot of options open to most of these net loss people who needed a home and that's where their money went.  I guess they could have rented and then invested that money elsewhere but I don't know how viable that is on a countrywide basis.

And also, doesn't seem like necessary the best way if you want to increase your net worth - sounds like a good way to remain static or incrementally increase your net worth.

[fhdz]

In both cases it seems to me the main factor is luck (which the drunk driver is more likely to recognize, actually) rather than investment acumen.

Totally true. But then I'd think you can only say it is predictable that a person who has all of their assets in one place (their home) will lost networth if you are looking a time-frame where you are saying a bubble will burst (if the bubble is continuing to inflate then that chain of events isn't predictable). Similar I guess, but not as easy to swallow with the drunk driver and rush hour.

Yes, which is why it seems the more prudent decision - given that there are bubbles that burst, and little kids who run across the street - is to focus on one's exposure to risks rather than to attempt to predict when the bubble will burst or when the kid will run into traffic.

Well presumably that varies greatly. I mean I don't think there are a lot of options open to most of these net loss people who needed a home and that's where their money went.  I guess they could have rented and then invested that money elsewhere but I don't know how viable that is on a countrywide basis.

And also, doesn't seem like necessary the best way if you want to increase your net worth - sounds like a good way to remain static or incrementally increase your net worth.

I guess my feeling would be on a personal level that incrementally increasing my net worth with a reasonable hedge against catastrophic ruin would be "better" than hoping to get lucky on a housing bubble.

Alternatively, one could attempt to recognize when *others* have entered into highly fragile investment strategies and bet against them, although I still wouldn't want to do that without a hedge against ruin. If I bet 10% of my assets against a bunch of folks who are sure they can predict the next housing burst, I can potentially make a really good return. Having said that, if I mis-time it and lose my investment, it's only 10% of my assets and the other 90% are still safe and boring.

[garbon]

Sure, you may invest in a single asset class and come out ahead, or drive drunk and get to your destination. But if a bad result occurs rather than a good result, strikes me as being entirely predicatble.

But only for the time frame. For someone who bought a house as prices were increasing, it was "entirely predictable" that they could sell it later for more money. So that predictability only really comes with the backdrop of knowing if someone is in a boom or bust.  After all, even if you look at a long time period like say 50 years - you know that your house value will go up and down but it isn't entirely predictable if your house value will be up or down at the end of that time period.

Also, I don't think any of this would predict that the top 13% would end up with more wealth. Certainly it could see them remaining stable as other investments made up for their loss of house net worth but wouldn't predict them gaining what other networth groups lost.

[garbon]

I guess my feeling would be on a personal level that incrementally increasing my net worth with a reasonable hedge against catastrophic ruin would be "better" than hoping to get lucky on a housing bubble.

Alternatively, one could attempt to recognize when *others* have entered into highly fragile investment strategies and bet against them, although I still wouldn't want to do that without a hedge against ruin. If I bet 10% of my assets against a bunch of folks who are sure they can predict the next housing burst, I can potentially make a really good return. Having said that, if I mis-time it and lose my investment, it's only 10% of my assets and the other 90% are still safe and boring.

Sure I think that's fair to say.

[fhdz]

I guess my feeling would be on a personal level that incrementally increasing my net worth with a reasonable hedge against catastrophic ruin would be "better" than hoping to get lucky on a housing bubble.

Alternatively, one could attempt to recognize when *others* have entered into highly fragile investment strategies and bet against them, although I still wouldn't want to do that without a hedge against ruin. If I bet 10% of my assets against a bunch of folks who are sure they can predict the next housing burst, I can potentially make a really good return. Having said that, if I mis-time it and lose my investment, it's only 10% of my assets and the other 90% are still safe and boring.

Sure I think that's fair to say.

This of course assumes I have assets beyond my house One day soon, perhaps I will have a small stake to invest.