Victor Haghani and James White: The Missing Billionaires

Victor Haghani and James White: The Missing Billionaires | Rational Reminder 270

Рет қаралды 11,541

Күн бұрын

If the wealthiest families of the past century spent a reasonable amount of their wealth, invested in the stock market, and paid taxes, there would be thousands of billionaires today. But there aren’t. So, what happened? To answer this question, we are joined by authors and finance professionals, Victor Haghani and James White. Their recently released book, The Missing Billionaires: A Guide to Better Financial Decisions, uses the missing billionaires puzzle to explore how and why most investors fail to capture the returns offered by the market. Victor was a founding partner of Long-Term Capital Management (LTCM), the multi-billion-dollar hedge fund that famously collapsed in 1998 and nearly took the global financial markets down with it. His participation in the downfall of LTCM led him to reassess much of the way he thought about investing, and in this episode, he shares some simple but powerful frameworks and personal finance recommendations. We also receive accessible explanations of the Merton model and expected utility theory from James, take a deep dive into dynamic asset allocation, discuss optimal solutions for lifetime spending, and learn more about the certainty equivalent return and Sharpe ratios, plus so much more. Whether you’re an entrepreneur invested in your own business or simply focused on building long-term wealth, Victor and James’ book (and this conversation about it) will be a valuable resource for better financial decision-making, so be sure to tune in today!
Timestamps:
0:00:00 Intro
0:06:31 What the puzzle of the missing billionaires is
0:10:16 What Victor thinks explains the puzzle of the missing billionaires
0:15:34 Describing the coin flipping experiment documented in a paper in the Journal of Portfolio Management
0:27:07 How the “Merton share” for sizing positions in risky assets works
0:36:21 What the Merton share tells us about asset allocation over time, if it is possible to estimate expected equity returns
0:38:00 How confident investors should be in estimating expected stock returns
0:46:38 How Victor and James forecast volatility for determining the optimal risky share
0:52:01 James describes the concept of expected utility
0:58:05 What the certainty-equivalent return is
1:02:06 How the certainty-equivalent return can be used to evaluate investments
1:16:24 Why the expected utility framework hasn’t caught on more widely
1:20:58 How Victor's experience with LTCM affected him professionally and personally
1:31:59 What the inputs to optimal lifetime spending are
1:34:23 How using the Merton-Samuelson formulation would actually look in practice
1:49:10 Advice for young people as they start their financial journey
1:52:06 The most important piece of wisdom that you can leave the audience with
1:55:44 Victor and James define success in their lives
Participate in our Community Discussion about this Episode:
community.rationalreminder.ca...
Books From Today’s Episode:
The Missing Billionaires - www.amazon.com/Missing-Billio...
Stumbling on Happiness - www.amazon.com/Stumbling-Happ...
The Man Who Solved the Market - www.amazon.com/Man-Who-Solved...
Links From Today’s Episode:
Rational Reminder on iTunes - itunes.apple.com/ca/podcast/t....
Rational Reminder Website - rationalreminder.ca/
Shop Merch - shop.rationalreminder.ca/
Join the Community - community.rationalreminder.ca/
Follow us on X - / rationalremind
Follow us on Instagram - @rationalreminder
Benjamin on X - / benjaminwfelix
Cameron on X - / cameronpassmore
Cameron on LinkedIn - / cameronpassmore
Victor Haghani on LinkedIn - / victorhaghani
James White on LinkedIn - / james-white-b4310a47
Elm Wealth - elmwealth.com/
When Genius Failed - www.amazon.com/When-Genius-Fa...
Where are all the Billionaires?: Victor Haghani at TEDxSPS - • Where are all the Bill...
‘What's Past is Not Prologue’ - papers.ssrn.com/sol3/papers.c...
‘Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case’ - www.jstor.org/stable/1926560
‘Stock Prices, Earnings, and Expected Dividends’ - www.jstor.org/stable/2328190
‘No Place to Hide: Investing in a World With No Risk-Free Asset’ -papers.ssrn.com/sol3/papers.c...
‘Sharpening Sharpe Ratios’ - papers.ssrn.com/sol3/papers.c...
‘A Sharper Lens for Sizing Up Nickels and Steamrollers’ -papers.ssrn.com/sol3/papers.c...
‘Do Options Belong in the Portfolios of Individual Investors?’ - elmwealth.com/do-options-belo...

Пікірлер: 20

@andrewfriedrichs9340 9 ай бұрын

I think i will need to listen to this one a second time. The concept is easy enough, asset allocation should depend on expected returns and expected volatility, but the practical implementation seems difficult. I would be interested to see what a "forever" portfolio looks like.

@rui569 9 ай бұрын

Time well spent is certainly a weekly listen to this podcast.

@anotherpace 9 ай бұрын

a good point about how taking a more volatile portfolio approach with a lens on the risk/reward will have a better outcome if one also is willing to adjust spend, not take on big ongoing commitments (easier to skip a vacation a couple of years than to stop paying mortgage payments on the cottage). obviously makes sense once articulated, but I hadn't heard it said out loud before.

@josh9231 4 ай бұрын

I see that Haghani learned at LTCM to include fat negative tails in calculating the risk to your portfolio, not just trusting a mathematical formula that bases maximum volatility on a small limited data set. Bravo, I learned from their mistakes reading “ When genius failed” Black Swan events will happen. volatility can and will go outside of the parameters. The markets can get as wild as you can imagine.

@MasterMind468 9 ай бұрын

You should do an episode on the housing crisis. Its stopping canadians from having enough money to invest

@thomas6502 9 ай бұрын

+1 (...for Canada's neighbors too. This seems like a problem young folks in the US are facing as well.)

@thomas6502 9 ай бұрын

Wow, thank you! (Again.)

@juanjuan5314 9 ай бұрын

What about in Europe? Do the data show the same results?

@innerscorecard9433 9 ай бұрын

Fascinating conversation. A very basic question: If an asset class is returning 10% CAGR and has SD of 20%; how would we calculate risk adjusted return?

@muffemod 9 ай бұрын

However you want.

@ib23579 9 ай бұрын

The formula is (CAGR minus risk free return)/SD. In your example, if the risk free return is 2%, then Sharpe is (10-2)/20=.4.

@FranciscoPerez-ff1pp 9 ай бұрын

I just don't see how time diversification increases compounded expected return in the coin flip experiment. If the distribution is iid, the expected return of the coinflip is not mean reverting, hence the variance of the compounded return increases as you increase the number of coin flips, then you don't gain anything diversifying over time as they suggest. It is called the time diversification fallacy... What am I missing here? Somebody can help me understand?

@dumpsterdiver6415 9 ай бұрын

This episode was fascinating but it still left me kinda empty-handed. What do i do now with my asset allocation? Do i take too much risk or not enough? Iam a simple man, a bogle head, a merriman. There should be a simple way to calculate the risk in ones allocation.

@rationalreminder 9 ай бұрын

elmwealth.com/portfolio-choice2/

@Jack-tk3ub 9 ай бұрын

I noticed that the KZfaq episode is around 20 mins longer than the podcast - is that due to editing?

@rationalreminder 9 ай бұрын

Audio podcast gets sped up 10% and is more heavily edited for things like um and long pauses

@ib23579 9 ай бұрын

I wish they made precise what is meant by risk-adjusted returns. If Sharpe ratio does not quite measure it, what does the term mean? In my amateur view, the main issue with Sharpe is time period dependence, for example, Sharpe of S&P 500 during 2000-2010 and during 2010-2020 are totally different. What are then the risk-adjusted returns of S&P 500? Has anyone tried averaging Sharpe ratio over all rolling periods of a given length, say 10/20/30 years long?

@stevew6647 9 ай бұрын

Also, sharpe counts upwards volatility as volatility, which doesn’t fit the psychology. Measures like Sortino, or even max drawdown from max NAV, are probably better.

@maxwellbjerke6163 8 ай бұрын

I know these guys said the don’t think retail investors don’t need options, and you also previous made a video disparaging covered calls. But under this expected utility model where the right tail is less useful since losing is worse than gaining, don’t covered calls make some sense?

@rationalreminder 8 ай бұрын

They look at covered calls in their book and show they they don’t make sense in an expected utility framework. Statman and Shefrin have a paper showing that a prospect theory investor may like covered calls. -Ben