That's not a very useful model for four reasons: First, there are many more possible outcomes of making an investment than 100% gain or 100% loss. Second, the outcome of an investment is a function of time. And third, what matters is not the actual number, but the purchasing power that number represents, so you have to measure your returns relative to inflation. You can "guarantee" yourself a positive return by buying T-bills, but the average rate on those is 2% and the average inflation rate is higher than that. So you can "double" your money in ~35 years, but your actual spending power will almost certainly go down. Finally, investment returns necessarily regress to a mean that is the growth rate of the overall economy, which historically has been positive. So to the extent that you are flipping a coin, it's a coin that is biased towards positive returns.
True, but with some tweaks this is a representative model.
You can just carry any non-100% gain/loss "swimlane" as a game still-in-progress. Eventually on larger time scale, puchasing power adjusted or not, a swimlane of an investment will certainly hit one of those outcomes.
The outcome is a function of time but a large number of swimlanes guarantees that you can sample any time and observe the same distribution of settled outcomes. You can reasonably assume that the probability of transition from unsettled to settled state at any time is constant. You could model it as markov process. In fact there are many economic agent models doing something like this (OLG models where generations of economic agents overlap in time as child/worker/retiree). Even though these models make sense only on generational scale, with enough agents you can see the micro-structure being consistent in smaller time scales by "ticking" or sampling at smaller time steps the markov process.
The spending power issue could be ignored as "without loss of generality" in most cases or the thesis could be restated in terms of something that preserves purchasing power as part of the coin toss game.
Investment returns mean-revert only if allowed to by policy. Policy can override economic forces for very long generational time scales, thus making it still relevant for individuals.
And I personally don't agree with (or don't understand) these models being used for micro-structure analysis, but I think macro-level interpretations such as wealth distribution may be valid.
> The spending power issue could be ignored as "without loss of generality"
Great! Then you will have no problem accepting the following offer: you give me $1000 today, I will give you an arbitrary amount of money that you get to specify (so it has to be computable -- no busy beavers allowed). The catch is that I get to specify when the payout happens (of course with the same proviso: the payout will happen after a computable amount of time).
Well, no. This game sucks for individuals. That's not the point though. The point is that even though the game sucks, this is the game that represents the economic reality. And while this tweak of you or somebody deciding when to pay is a real part of the game, it is still a markov process that will result in the same wealth distribution due to the law of large numbers and people settling at the endpoints all the time, no matter how delayed in time or how small the chance.
> this is the game that represents the economic reality
No, it isn't. Economic reality is nothing like flipping coins, neither for individuals, nor in the aggregate, except insofar as both contain a random element.
> it is still a markov process
So what? Saying "it's a Markov process" is simply making the observation that there is a random element. Yes, flipping coins has a random element, and yes, the market has a random element. It does not follow that flipping coins is a good model of the market. On this logic, coin-flipping would be a "good model" of any non-deterministic process.
The interesting thing about Markov processes is not that they contain random elements. The interesting thing about Markov processes is that you can make reliable predictions about some of them despite the fact that they contain random elements. But coin-flipping is not one of those processes about which interesting predictions can be made. The economy is.
I keep saying Markov process because it encodes any kind of chance over time on a large scale. It encodes how smart the entrepreneurs and investors are born, how many opportunities they get per time step, how corrupt the regulators are, how the competition will interfere. There are real averages in numerical terms for all of these parameters that can be used. A coin flip can represent an arbitrary model if you tweak the time lags and the payouts. And if the game is large enough you can fix the payouts and extend the lags until you hit your desired fixed payouts. Coin flipping on a large scale can capture almost any economic model.
Suppose to have an idiotic model like for example "investing is flipping a coin". Then you calculate how many coin flips waiting a certain amount of time corresponds to. Then you conclude, see, these N people are the lucky coin flippers.
Now suppose of all the crazy investing philosophies in existence, you learn that all N greatest investors (or "N luckiest coin flippers" according to you), suppose you learn all of them have the exact same investing philosophy.
Would this make you reconsider whether your "investing is coin flipping" model is a useful model?
I take quiet satisfaction imagining that I say really smart stuff I read elsewhere, get dismissed by morons, and then the morons 3 years later read the exact same idea from a reputable source and go "hold on a second, that's what that guy on those forums was saying" :-)
I think you're likely wildly over-estimating the number of times that last thought enters into people's minds (even if it's the case, I think it doesn't occur to most people).
I believe OP is talking about the human emotion of flipping that coin the 19th time (or indeed the 18th, or 17th...). While the math might be as simple as doubling x times it's very different to actually do it!
// There are approximately 25M millionaires in the US.
Really? Population of the US is like 350M. Is 7% of US population millionaires? Like, one of out every 14 people out there? I guess that's believable but counter-intuitive.
"The median household wealth in 2021 was $166,900. The 10th percentile of household wealth was zero dollars, meaning 1 in 10 households had wealth of
zero dollars or less. The 90th percentile of household wealth was $1,623,000, meaning 1 in 10 households had wealth exceeding $1.6 million."
>> If 100 million people flipped 20 coins, 95 would get 20 heads
If they were starting out with $2 million and betting it on a coin flip, they would owe 37% income tax on the winnings of each flip.
And try finding someone to bet you $1 trillion on a coin flip.
Charlie Munger's strategy was not to start out with $2 million and bet it with a 0.0001% chance of winning $2 trillion and a 99.9999% chance of losing it all.
Some people invest money out of each paycheck, study how to best allocate that money between the investment options available to them, do that for many decades, and become millionaires. Some people buy a $2 lottery ticket and become millionaires that day. They both just got lucky, am I right?
If 100 million people flipped 20 coins, 95 would get 20 heads.
There are approximately 25M millionaires in the US.