Candide meets leverage

Ian Ayres to indebted graduates: buy stocks on margin!

You are a recent Chicago graduate, and you left college with outstanding student loans of $50,000. You have savings of $10,000. What’s the best use of them?
Here is seriously meant advice from Dr Pangloss Ian Ayres of Freakanomics fame:

Most young college and professional school graduates have amassed significant student loans, and many more take on home mortgages. But Barry [Nalebuff] and I now believe that many of these savers would be wise to expose themselves to leveraged stock risk rather than merely use any savings to pay down existing debt.

What can I add to this?

  • On your second date with someone you really like, use your margin investing to illustrate your financial acumen.
  • If the investments go sour, and Enzo and Igor come calling from the debt collectors, remind them civilly but firmly that you can’t get out of your student loans by bankruptcy.

Commenters are invited to offer further advice to young Candide.

Author: James Wimberley

James Wimberley (b. 1946, an Englishman raised in the Channel Islands. three adult children) is a former career international bureaucrat with the Council of Europe in Strasbourg. His main achievements there were the Lisbon Convention on recognition of qualifications and the Kosovo law on school education. He retired in 2006 to a little white house in Andalucia, His first wife Patricia Morris died in 2009 after a long illness. He remarried in 2011. to the former Brazilian TV actress Lu Mendonça. The cat overlords are now three. I suppose I've been invited to join real scholars on the list because my skills, acquired in a decade of technical assistance work in eastern Europe, include being able to ask faux-naïf questions like the exotic Persians and Chinese of eighteenth-century philosophical fiction. So I'm quite comfortable in the role of country-cousin blogger with a European perspective. The other specialised skill I learnt was making toasts with a moral in the course of drunken Caucasian banquets. I'm open to expenses-paid offers to retell Noah the great Armenian and Columbus, the orange, and university reform in Georgia. James Wimberley's occasional publications on the web

17 thoughts on “Candide meets leverage”

  1. Commenters are invited to offer further advice to young Candide.

    Choose a portfolio of high-beta stocks, so as to maximize expected returns.

  2. Crappy advice wrapped in a snotty handkerchief surrounded by soiled undies…

    The stock market is dead to the very engine that always drove it: The Middle Class. We aren't investing in it and won't be investing in it. And that's because our parent's stock market simply doesn't exist anymore. The market where one invested long term in the country's companies and made a reasonable profit…

    That market is a dead duckie…

    And yes I was very happy to finally see a national columnist finally notice all this:

    The Fall of trust in America by Gail Marks-Jarvis at the Chicago Tibune:

    What was once covert and only partly true…

    Is now transparent and overly true:

    The market is a rigged game for the rich to continuously wring profit out of the middle class.

    You'd have to be a dunce not to see it as a killing floor where only fools dare tread.

    Until the rules of the stock market change…

    And for me, until we get a Tobin Tax…

    I'll suffer CDs, T-bills, and the mattress forever and a day.

    To hell with the Stock Market…

    To hell with Wall Street…

    And the quicker to hell with them the better…

  3. I must admit to not having read Freakanomics. And Ayres' posts at Balkinization have pretty much guaranteed that I never will… This one being a perfect example of why. It's like he has no comprehension of the fact that "risks' can actually eventuate, that we don't live on average.

  4. > his one being a perfect example of why. It’s like he has no comprehension of the fact

    > that “risks’ can actually eventuate, that we don’t live on average.

    Sort of like the University of Chicago Business School Dept of Economics, Wall Street, and the hard right-wing Republican Party eh?


  5. If I were to offer such advice, I would say that it is best to be a banker. It is best to sit in heaven and pull the strings of all the judges and politicians. To paraphrase Don Corleone, an investment banker with his with his briefcase can steal more in an hour than a hundred men with guns could steal in a hundred years.

  6. If an idea runs counter to your intuition, the conventional wisdom, or your prejudices, it's sure to be false! No need to give it a second thought. At least that seems to be the advice that Wimberbley would offer.

    By the way, although Ayres posts occasionally on the Freakonomics blog, I don't think he's really "of Freakonomics fame."

  7. "To paraphrase Don Corleone, an investment banker with his with his briefcase can steal more in an hour than a hundred men with guns could steal in a hundred years."

    …and with little or no penalty if you've stolen from the unwashed masses. If you steal from the wealthy, well, that's another story.

  8. Ragout: Ayres isn´t offering counter-intuitive advice based on careful observation and robust modelling, as Keynesians do on debt and unemployment. Instead he´s offering exactly the advice, ignoring downside risk, that created the financial crisis in the first place on Wall Street, Main Street and Pennsylvania Avenue: a crisis of over-leveraging (Ayres) and sudden deleveraging (Enzo). Commonsense Grandma prudence would have avoided it; and in this case common sense was right.

  9. The funny thing is that Ayres is a political liberal, who has done a lot to rescue law and economics from the worst of Chicago money-always-wins.

    His theory works great if you either:

    1. Live forever or

    2a. Have a high income when you're young, or can always borrow from your future, or never consume, and

    2b. Can buy insurance against five-sigma events from an insurer who is guaranteed to survive them.

    Postulate a uniform spherical economy . . .

  10. James Wimberley: I haven't read Ayres' book "Lifecycle Investing," so I'll have to take your word that it's not "based on careful observation and robust modeling." I'm quite surprised though, since everything I've read by Ayres has been excellent: his popular book "Supercrunchers," his work on Lojack and gun control, and especially has writings on racial discrimination. I'm especially surprised that a brilliant guy like Ayres could have written a whole book on investing without even considering the obvious possibility of downside risk.

  11. A good time for the cautionary tale of the statistician who drowned in a lake that was, on average, three feet deep.

    More pragmatically, though, this again makes me happy that my daughters have dual citizenship and will thus be able to avoid drowning in debt if they choose to attend a quality university.

  12. Katja's comment brings to mind a joke an actuary expert I retained used to tell: Two actuaries go duck hunting — one fires and misses to the right. The other fires and misses to the left. They turn and give each other a high five because, on average, they hit the duck.

    Most financial advisers tell you that, before you consider "investing" you should amass three to six months worth of living expenses in a fairly liquid account or instrument. Under that theory, it is a highly dubious proposition that the $10,000 should be considered savings eligible for investment of any kind. Investing on the margins is almost always stupid for an individual who cannot manage risk the way larger investors CAN (ha ha — although as we have seen, often don't). My view: if Lehman couldn't manage its margin risk, what chance do I have? If I can it's probably only because I am lucky not because I do anything right. It's generally not a good idea to plan on being lucky.

  13. The advice that I would give is to enjoy the Chicago economist's liver with fava beans and a nice Chianti 🙂

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