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aleph_minus_one 3 days ago

Index funds give you something like the expected value over a huge class of possible investments.

What you aim for if you want to invest early is rather a probability distribution of

- get rich with a small (but nevertheless realistic) probability p

- get something between little, nothing, and loosing a little bit with probability 1-p

This is a very different offering than the profit probability distribution that index funds give you.

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JumpCrisscross 3 days ago | parent | next [-]

> What you aim for if you want to invest early

Sure. I’m saying someone pursuing that portfolio will probably end up underperforming an index. Most new early-stage VCs do.

> get something between little, nothing, and loosing a little

Broadly speaking, when your investment outcomes don’t differentiate between anything and zero, you’re mostly going to get zero.

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aleph_minus_one 3 days ago | parent [-]

> I’m saying someone pursuing that portfolio will probably end up underperforming an index.

This holds if you consider "underperforming" to be a comparison of expected values.

On the other hand, if you consider "probability of getting a really huge payoff" to be the measure by which the investments are compared, the index fund is the one that looses in the comparison.

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JumpCrisscross 3 days ago | parent | next [-]

> if you consider "probability of getting a really huge payoff" to be the measure by which the investments are compared

That’s gambling. You’re truncating the curve below the top. It’s a terrific strategy for middlemen. Its expected value is lower than index investing.

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mahemm 3 days ago | parent | prev [-]

Would you be comfortable using this same logic to invest most of your net worth in lottery tickets/betting on black in a casino? If not, I'd be curious to hear what is different in that for you.

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aleph_minus_one 3 days ago | parent [-]

> Would you be comfortable using this same logic to invest most of your net worth in lottery tickets/betting on black in a casino?

I wouldn't "invest" in lottery tickets because for these p is far too small (exception: if I found a loophole in the system of the lottery, which has been found for some lotteries). For casinos, there is additionally the very important aspect that the casino will scam you (if you start winning money (for example by having found some clever strategy that gives you an advantage), the security will escort you out of the building and ban you from entering the casino again).

So, to give an explanation of the differences:

- Because "the typical run" for such an investment will be loosing, you should never invest your whole net worth (or a significant fraction thereof) into such an investment. The advice that I personally often give is to use index funds or stock investments for generating the money for investments that are much more risky, but have huge possible payouts.

- You should only do such an "early investment" if you have a significant information advantage over the average person. Such an advantage is plausible, for example, if you are deeply interested in technology topics

- Lottery tickets have an insanely small p (as defined in my comment). You only do "early investments" into topics where the p is still small, but not absurdly bad. The difference is that for lottery tickets the p is basically well-known. On the other hand, for "early investments", people can only estimate the p. Because of your information advantage from the previous point, you can estimate the p much better than other people, which gains you a strong advantage in picking the right "early investments" to choose.

But be aware that this is a strategy for risk-affine people. If you aren't, you better stay, for example, with index funds.

	▲	JumpCrisscross 3 days ago \| parent [-]
		> this is a strategy for risk-affine people If you’re paying a fair price for the risk, sure. Most of the examples you gave seemed to be in deep speculative territory to the point that they don’t very much resemble anything economic.

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3 days ago | parent | prev [-]

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