What is an Education?

image courtesy of http://www.pngpix.com/download/stack-books-png-image

             
Walking around an institution of higher learning, I’m sometimes shocked by how little learning seems to be emphasized. Such an observation isn’t a slight on my school by any means—I understand that there’s a finite amount of control professors wield over the motivations of the students, but there seems to be a certain aversion to learning the material beyond what is required to get the desired grade. For example, in many of my classes I’ve seen students grill the teacher about what vocabulary, formulas, and concepts they need to know for an upcoming test. More often than not, they’ll study these things alone and neglect to pick up on the subtleties that make the material remotely applicable and enriching. Dependence on study guides, flashcards, and problem sets creates a culture of narrow-mindedness, in which information is stockpiled, briefly retained, and dumped in time to re-load for the next exam. I understand that some degree of this is a necessary biproduct of standardized evaluations, but I would have anticipated something more of a burning desire to learn and truly understand the material (at least for in-major classes).

In many ways, college becomes a game. Who can do the research ahead of time to find the good (or easy) professors, memorize quickly the terms for the upcoming assessments, and race through courses to get their diploma the fastest? A friend of mine told me in conversation that she was shocked at how much interest I took in her paid research on a molecule that, when tagged in different places, could potentially permit thinning or thickening of blood. Most of the time, when she’d tell people that she planned to spend the next few hours “doing research,” the typical response would be one of commiseration. Why should people be sorry for someone who gets to study what they love? Someone who is able to foment their learning in a creative and challenging environment ought not be pitied, but envied!

Unfortunately, this simply isn’t the case. An education shouldn’t be confined by four brick walls, or the Chemical Engineering Lab on campus. It should be an iterative process, sharpened in conversations outside of class, curiosity constantly ignited and satiated by exposing oneself to different opinions, articles, journals, books, and the myriad of resources all colleges offer an inquisitive mind. What a blessing it is, when we step back objectively, to be in a place where we have no agenda beyond the strengthening of our mind and shaping of our worldview. 

Sean

300% return on stocks? The dangers of Leveraged Investing

Making 3x returns in Stocks (2/3/18)

image courtesy of (http://frank.jou.ufl.edu/wp-content/uploads/2014/09/92883161.jpg)

         

           Growing up, one of the things that most fascinated me was the stock market. Something about Keynes’ animal spirits, the irrational exuberance of investors, and erratic and unpredictable returns appealed to me. It seemed to me that with a surfeit of information I ought to be able to select securities that would perform better than everyone else’s—after all, my sixth-grade simulated portfolio had more than quadrupled in the four years since I reexamined it! Oh, youth.

Perhaps at the heart of my interest is the few lucky trades I made right off the bat—not unlike “beginner’s luck” in gambling, they convinced me that there was money to be made, and I became entranced with the idea that Eugene Fama was wrong (market efficiency theory? Irrelevant!) Perhaps, there exists enough asymmetric information such that a privileged and knowledgeable individual (a portfolio manager, for example) could wade through the noise and locate the signal of a deeper lying trend, uncovering mis-priced securities. Inside Traders, for example, consistently make a tidy profit. Unfortunately, such results could not be replicated by 99.9% of us. Millennial investors get a bad rap—we are more ethically conscious than our predecessors and certainly make a concerted effort to save for the future—but many of the views we hold are intrinsically contradictory (for example, a desire for a strong dollar, and a trade surplus). A few of the problems I see in young investors are unwilling assumption of excess risk, a lack of a clear exit strategy, and a belief that the markets can be timed accurately. I’ve been privy to these myself at times, but would like to spend time writing about the Leveraged ETF (which aims for 2-3 times index returns), and whether or not it's a good investment option.

Stocks are evaluated on a risk-return basis, which is typically measured in standard deviations from the expected return (E(x)) of the security. ETF’s, or exchange-traded funds, work similarly, but are managed for a nominal fee and provide exposure to a broad swath of asset classes, offering instant diversification. Such funds can be found in other funds, market indexes, foreign assets, commodities, and a wide variety of other assets, with fluctuating fees based on the frequency of the need for re-balancing. Vanguard’s S&P 500 index, for example, has expenses of only 0.14% annually, far less than the historical load of a managed mutual fund. In the long run, the S&P returns about 8% annually, or 5-6% adjusted for inflation (and including dividends). A leveraged ETF would then in theory provide an investor with a 16-24% return. Given the power of compounding, why would such an investment not appeal to all investors, let alone millennials? The return since the inception of Direxion’s Large Cap Bull ETF (3X leverage) is right around 90% per year, up some 700%!

Unfortunately, any data we have is necessarily backwards-looking. Even Value at Risk (VaR) models subscribe to this logical fallacy, meaning that systemic, or broader-market risk, is the same towards the end of the bull market (right now) as it would have been immediately after the crash (2008) in many models. Likewise, with a conception in 2012, the Direxion fund (SPXL, NYSE) has been fortunate enough to exist in a bull market with very few significant corrections. Although the S&P will march upwards in the long run, the difficulty of timing markets makes such investments unattractive. Should the S&P correct 5% from current levels, and then rally to its previous close, it would be a break-even investment. The mirroring leveraged fund would not—it would correct 15%, recover 15.8%, and end up 1.6% lower than before, despite no net change in the greater market. In short, as an investor you must be careful to evaluate potential risks and returns in such speculative securities, and know what you’re getting yourself into. The best tip I’ve heard is not to invest anything you’re not able and willing to lose—if you want to try to time the market, there are intelligent ways to do so, but the risk of a sideways market or unexpected correction can never be completely mitigated. Even the best investors struggle to predict market trends. For the casual investor, a long-term buy and hold index fund seems to consistently outperform active models. Hope this helps!