Why Invest?#
Most people would say that the goal of investing is money, such as a net worth of 100 million or an annualized return rate of XX%. But money is ultimately just a tool, not a goal, for individuals. Reflecting on the following two questions can help clarify the purpose:
What are your personal desires? How much money is needed to achieve them? (It is even better to question why we should think about the above questions in the first place)
Everyone has different interests and hobbies, which also leads to significant differences in the amount of money needed. This also results in different risk preferences. Personally, my answer is to have a life that allows for the freedom to allocate time and energy to satisfy my curiosity. Pursuing a 0.001% social status, luxury consumption, and so on, would require higher return expectations and risk tolerance.
What is the underlying goal of investment returns?#
Everyone talks about financial freedom and pursuing a net worth of 100 million and a XX% return rate. Are these reasonable goals? First of all, net worth and return rate are standards for measuring currency. Why do we need to measure with currency? The answer to this question is purchasing power. The underlying human need is the intake (protein) and consumption (energy) of hydrocarbons. Therefore, the purchasing power of hydrocarbons is a reasonable standard for determining whether an individual has achieved financial freedom. The essence of investment goals is to enhance the purchasing power of hydrocarbons.
Which currency is best suited to measure purchasing power?#
Currently, the answer is the US dollar. As the currency with the largest global transaction volume, a larger transaction volume represents more accurate value discovery (purchasing power pricing). It also means that the inflation index (CPI) measured in US dollars has better reference significance. However, it should be noted that the US market's CPI does not represent the CPI of overseas markets. The currency used to measure purchasing power is not fixed. Assuming that in the future, more transactions are conducted using ETH as the medium of exchange, ETH may become the new standard for measuring purchasing power.
What is the level of return rates in the market?#
Returns and risks go hand in hand. Only by correctly understanding the return rates in the market can we have reasonable expectations for our goals.
Let's first look at Warren Buffett's long-term investment returns, Buffett's Return & CAGR. The table shows the return rates of Berkshire Hathaway since its investment records. Before this, Buffett's estimated return rates were better than the data in the table.
It can be seen that Warren Buffett, known as the "Oracle of Omaha," achieved over 2,300 times returns in his 56-year public investment career, with a compound annual growth rate of only 14.84%. If we narrow the time range to before 2000, Buffett achieved a higher compound annual growth rate of 20.01%. It can be said that the large scale of investments affected Buffett's level of returns. Let's also take a look at the situation of top VC/PE firms.
The following chart is from the top-tier primary market fund, Sequoia Fund:
https://www.sequoiafund.com/performance
Investing $10,000 in 1970 resulted in a 620-fold return by 2023, with a compound growth rate of 12.89% over 53 years. As a top-tier primary market fund, Sequoia has not outperformed the S&P 500 in the past decade. It is worth noting that with the brand of Sequoia, many high-quality companies seek financing from them, and they have access to more excellent investment opportunities compared to other VC/PE firms.
Even top-tier institutions in the primary and secondary markets have difficulty achieving a compound growth rate of 20% in the long term. As individual investors, why should we expect more?
What is a suitable investment goal for individuals?#
Considering that top-tier institutions are limited by their management scale, many illiquid assets are not suitable for their positions, which may affect their return rates. On the other hand, individuals and small institutions with smaller capital enjoy liquidity advantages, which means they can profit from low attention to high attention assets. At this stage, a reasonable personal investment goal can be set as achieving a long-term return rate 15%-20% higher than CPI, measured in US dollars. This goal is relatively reasonable and challenging.