Before Financial Freedom, Earn Real Money With Real Skill

Another day of heavy internet surfing, and the biggest lesson was this: there is no investment strategy that lets you lie down and get financially free.

Author: Koutian Wu; GitHub: ktwu01

Point one is return. More risk, more return, assuming the Sharpe ratio is about the same. In general the Sharpe ratio moves around 1 and does not vary much.

That leads to two approaches. One is QQQ. Plenty of people recommend it, and the long run return is good, but if you buy it with borrowed money you carry real risk, because it draws down. QQQ’s maximum drawdown is about 50%. Put a million in and one day you may be looking at half a million. Can you hold through that? Most people sell at the bottom. My take is that borrowing to buy after it has already fallen a lot is OK.

Borrowing has another problem. The money you repay is real money. What does your QQQ account show? Unrealized PNL, a number on a screen, and it is not real money until you sell. If the price falls, your monthly payment does not. That cash flow pressure can break you. So you want it to pay you some dividends, for example with Schwab’s SCHD. Dividends and growth usually pull against each other, though. If you want cash flow, you give up some growth. You cannot have both.

So how do you actually reach FIRE? My current view is that, at its core, you need to make money through real skill.

Real skill comes in a few forms.

The first is seeing the market clearly. Nobody can. You can look at fundamentals, but that is not a great method either.

The second is learning quant through the greeks, alpha, beta, gamma. The problem is you may build a quant strategy and still underperform the market, in which case you might as well buy TQQQ. A lot of people put in the work and get stuck exactly here.

The third is whether you have a fast, high frequency strategy. That is arbitrage. The classic example is the same asset priced differently in different markets, and you trade the spread, a bit like a market maker. Another version is picking a thinly traded cryptocurrency and using the market maker’s trading bot to catch price spikes, which is also arbitrage. All of these need infrastructure that ordinary people do not have.

Looking back, investing is more like an amplifier. A big principal gets amplified. A small one, even with a great yearly return, does not add up to much.

Instead of studying investing every day, start with a different question. How do I use real skill to earn more real money?

That is all for today.