Sunday, April 29, 2018

What is your Samuelson Number ?



Since we are in the topic of the Kelly Criterion and leveraged portfolios can be justified, let's about Samuelson numbers.

In the book Lifecycle Investing by Barry Nalebuff and Ian Ayres, one controversial concept they spoke about is called the Samuelson Number named after Paul Samuelson, the first American to win the Nobel Prize for Economics.

In this book, the book asks the following question to its readers :

If you would already be retired or financially independent today, how much worth of equities would you have. For some people, it might be, say,  $1,200,000 worth of equities.

Nalebuff and Ayres would then go on to suggest that a young graduate should employ 200% leverage to first accumulate $1,200,000 in equities and then pay off the amounts owed subsequently with investment returns and salary contributions. So a fresh graduate would start with a leverage of 200%, after reaching $1,200,000  the leverage would slowly start to drop until it becomes an unleveraged equity portfolio. Thereafter, investments beyond $1,200,000 will flow into the bond component of the portfolio.

I read Lifecycle Investing quite a while ago but I did not have the courage to put its ideas into practice. Over time, even Paul Samuelson began to question this approach because employing leverage meant skirting with the possibility of ruin.

I see modifying this approach using our low tax REITs regime as something feasible for a young Millenial investor today for several serious reasons :

a) We can now backtest a relatively powerful portfolio of REITs to return 10% which has a low standard deviation of around 13-15% and yield about 6.5%. This means that every $1 contributed into this leveraged pool can generate 10 cents in dividends every year. ( Currently achieved in my margin portfolio )

b) With 10% yields, a $2,000 passive monlthly income can be achieved with only $240,000. This allows the Millenial worker to cover his own expenses in a relatively short period of time in his early 30s.

c) Given how short STEM careers are because of technological disruption, this may be safer than trying to be loyal to an industry/company upon graduation because the need to keep  relearning your skills to stay ahead in the workforce or be relegated to the gig economy.

d) Once $240,000 is achieved, the worker will have two sources of income. His work is not over because he has to deleverage his portfolio to retire, but he will be in a way safer position than someone ho has to rely on his corporate job.

My challenge for the upcoming year is to use of my alchemical skills to combine the ideas of Vicki Robin, Barry Nalebuff, various Quantitative hedge fund investing approaches and a few other authors to create a new workshop that is mathematically tested to allow a new age knowledge worker to reach financial independence at the earliest time.

For now I have yet to complete this project because I have yet to begin crafting a backtest pure equity portfolio.

But in the meantime, it will be great to start thinking about your own Samuelson number.



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