Question


Hot Hot...

Is 30% rate per year a ponzi?

OK...here's the deal: I am studying economics last year (at Princeton - BS) and I have developed my own stock trading strategy which is practically risk free. That said, the strategy can yield an annual return of 30% or even more with no volatility. Thing is that...as a student currently I am far from rich and with 30% per year I will hardly be a millionaire in the near future. For instance, mathematically if I want to make 1 million dollars with 30% per year - then I need 1.3^x*$5000=$1000000 or 20 years to wait(even a little more than that). So...insted of starting with $5000 and waiting 20 years to be a millionaire - I am having some ideas on how to get investors - problem is that most people don't believe that I can make 30% without risk in stock trading. The obvious solution will be to lower the promised rate...at say: 19%. Is that more trustworthy? Actually, I am trying to convince them that 30% isn't that high given that, for instance John Paulson made over 100% last year - the S&P 500 index has a long term mean of over 16%, Warren Buffet has achieved 30%, Sorros too...even venture capital firms look for opportunities of over 50%. But still most people don't take their decisions based on s&p 500 - but based on what banks offer. For instance, if you approach a potential investor with: "I can give you 30% rate in my fund: "hot capital management LLC" - then the investor thinks: "F** it, how come bank of america makes 3% and you give me 30%?" - well...they do that because bankers are actually nothing but brokers who take your money and give this money to hedge funds - who on their turn make 20% or more and then return the money to the banker. The banker then saves the big gains for himself and leaves you with just 5%. It's pretty much how capitalism works today. But still...it's all about psychology and people think. What do you say? What interest would you offer to get investors? Thanks!

4 weeks ago - 4 answers

Best Answer

Chosen by Asker

30% without volatility doesn't exist. Warren Buffet buys businesses and he experiences ups and downs. Soros has made huge bets and won while losing on others. Bankers don't take your money and lend to hedge funds in most cases. They are able to generate their returns by leverage. They can borrow from the Fed at very low rates and invest that at slightly higher yields. If they borrow at 1% and invest at 3% they make a nearly risk free 2%. That doesn't sound like much until you realize they leverage it at anywhere from 8-15 to 1. So 2% time a leverage of 8 is 16% nearly risk free (I say nearly because look at the number of banks that have failed this year.) If you want an investor to put their money to work with you, you need to develop a history. Take your $5000 and make 30% for a couple of years. Once you have a track record (including pull backs) you have something to talk about. Until then you have zero credibility especially when you claim to be able to generate risk free returns of 30% when the best paid minds on Wall Street can't.

by Ask The Wealth Squad

4 weeks ago

Asker's Rating: 

Other Answers

30% looks like high yield to me and that translates to high risk no, thanks, I am not interested, I'll plug along with my municipals

by tro- 4 weeks ago

Assuming that you're using recent market trends (I've nearly quadrupled my net worth since August, 2008 by carefully timing exiting and re-entering the equity markets -- no joke, over 400%!) your model will fail to generate 30% annually over a 20 year period. What anyone manages over a short period of time is really irrelevant to the long term. I'm not fool enough to think that I could maintain the past 14 months returns going forward, and the past 4 months has been at a much more modest rate. Don't forget that while a VC will brag about his wins, he'll keep his losers under his hat! If anyone came to me with a claimed 30% per annum long-term rate of return, I'd assume it was some sort of scam and run them out. The SEC would probably assume the same thing. Over any rolling 20 year span the equity markets typically return around 8% or so. That's a pretty good return. If someone came to me showing how that could be boosted to 10% or 12% I might be interested but I'd need to see a LOT of proof even at those levels.

by Bostonian In MO- 4 weeks ago

You're right - any savvy informed investor isn't going to believe that you can make 30%, or even 19%, practically risk free over the long term. You mention "with no volatility" - how are you going to ensure that? In any given day, or even month or year depending on what the market is doing and your particular choice of stocks, it's very possible. It's also very possible to LOSE than much in a given time period. There are obviously stocks that probably don't have a huge downside - they also don't have a huge upside. But in any case, good luck to you. And one thing you are forgetting when you do your "have to wait 20 years" calculation - unless you're planning to be a struggling student for the next 20 years, you should be able to get a good job and be putting more money in each year. Admittedly money put in during the 5th, 10th or even 2nd year won't have as much growth due to the shorter time, but the amounts won't be chickenfeed either. Much of the reason Madoff was able to suck so many people in (sorry, able to get so many investors) is because of his background and credentials. And probably that 's also why the SEC seemed to be asleep at the switch even though they received reports on his activities showing that what he was claiming was just plain impossible. Your best bet might be to try to get a job with a big investment fund for maybe ten years - if you consistently do that well over that time, they'll be paying you a fortune and you'll have lots more to invest for yourself.

by Judy- 3 weeks ago