Wednesday, April 20, 2022

Too true to be good


The traction for the last article has been quite good and we're seeing some younger investors come up to support the idea of LPFIRE that employs liquidity mining to get over 100% to offset basic expenses. 

Viability aside, let's look at the primary opposition to the idea of Liquidity mining which is based on the idea of "Too good to be true".

A useful rule of thumb in investing is the idea of "too good to be true".  If an investment idea is "too good to be true, it is best to avoid it". If you go by this creed, then you would have avoided most scams out there which include Ponzi gold schemes, and land banking deals that are at 12% with capital guaranteed.  

The question has always been execution, to know that something is too good to be true, you need an understanding of baseline returns, equities return about 6.8% after accounting for inflation, so most claims of anything above 10% tend to involve a little bit of luck so should be avoided unless more data can be shown.  

It is therefore no surprise that many investors deem crypto yield farming as largely too good to be true. I don't see any need to dissuade these investors but note that the baseline returns for bitcoin stand at about 90% annualised. It can also be argued that no baseline exists. 

So suppose we apply Charlie Munger's idea to invert, what is the opposite of "too good to be true"?

I think the answer should be investment schemes that are "Too true to be good."

This is also a powerful mental model we need to install into our OS. Notice that the same folks who are not open-minded about new investment ideas also tend to err on the conservative side when it comes to investments. 

I did a casual google search for endowment plans sold locally and so far, there are plans that make you lose liquidity for 2-3 years and pay less than 2% a year when held to maturity. The folks who invent and hawk these products are really shameless given that our inflation rate is hitting 4% and getting into these products will guarantee a loss in real purchasing power over the next 1 year. 

It's almost like dating for BBFAs. 

Crypto yield farming is like the hot chick who rates 9/10, clearly out of your league, but for reasons unknown, enjoy hanging out with you. Naturally, you should conduct deal diligence to find out what is wrong with her, maybe she was born male, or owe loan sharks a lot of money. But still 9/10 should mean something right?

These chicks are too good to be true.

The question is whether your self-esteem is so low that you avoid this earlier chick in principle, and instead, go for a chubby, plain looking 2/10 that prefers korean drama to dining in with you. In this case, you are guaranteed no competition if you go after her. If anything, you know that the ugly, chubby kids you have in the future are definitely yours.

This second chick is too true to be good.

I think in all matters, you need both mental models to navigate the investment world and should find a fairly good portfolio that conforms to your risk appetite. 

Crypto bros will ask you to give 9/10 but maybe a tranny a shot. Commission Financial Advisors selling endowments want you to settle with ugly chick and have really BBFA kids who are guaranteed to be yours.

Which will you choose ?


1 comment:

  1. Have some fun with the 9s and 10s. But when you settle down, make sure your kids are yours.

    Same with investments.