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Open Thread

Reader Feedback

Great responses to monday's post on why equities build wealth, mostly on Twitter. The most common critique is that even if equities and bonds have similar risk-adjusted returns, we can look at other moments of the distribution and see differences: equities are more leptokurtic, and levering up bonds won't change that. Which is true, but still leaves mysteries: real estate is also a big source of wealth, and while it's hard to gather good data on this, it doesn't seem like a high-kurtosis asset class. It could be that extreme success in real estate owes more to leverage than to skill (or perhaps to skill at structuring leverage well and holding off creditors until the cycle turns). But kurtosis can't be the entire answer, because you can increase it by selling your equities and replacing them with call options on the same assets. Perhaps the transaction costs eat the profits there (the big options-related fortunes come from market-making, i.e. having a bias towards selling options, not from buying short-dated YOLO options). It's been a fun discussion so far.

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