Author Topic: 'Stache building via Long Shots?  (Read 12093 times)

JohnGalt

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'Stache building via Long Shots?
« on: August 07, 2012, 04:26:43 PM »
Does anyone else ever consider taking a handful of high risk, high variance, high return scenarios to shorten the path to FI?

My particular thoughts usually involve casino type gambling - I used to play poker and even played often and well enough to cover most of my living expenses for a couple semesters in college when I was in between jobs.  However - it needn't be limited to casino gambling.  It could be something like penny stock investing or the like. 

I'm not talking about degenerate, long-term, gambling addiction stuff.   I'm talking about taking a calculated one time risk.  Looking at my current income and net worth and saying I'm 5-7 years out from FI right now.  If I took $20k and 2 weeks of vacation to play high stakes poker - I could potentially do really well and shave a couple years off of that 5-7 and would only set myself back a few months if I came back with nothing.  I completely understand that, from a purely mathematical perspective - my expected value is probably negative going into this scenario - making it a non-viable long-term option.  But the high degree of variance makes it intriguing to me as a one time play.

Just wondering if anyone else ever thinks anything similar.

smedleyb

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Re: 'Stache building via Long Shots?
« Reply #1 on: August 07, 2012, 04:55:02 PM »
I plan on buying a boatload of Twitter when it comes public, while investing a decent chunk in a couple of other social media stocks.  It's a high risk, high reward bet.  I think this falls inside the parameters of what you're discussing. 

JohnGalt

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Re: 'Stache building via Long Shots?
« Reply #2 on: August 07, 2012, 05:17:56 PM »
I plan on buying a boatload of Twitter when it comes public, while investing a decent chunk in a couple of other social media stocks.  It's a high risk, high reward bet.  I think this falls inside the parameters of what you're discussing.

I think my interest in this type of play is the primary reason I follow your posts on investing. 

Long-term - I don't think your strategy is the right investing strategy for me.  I just don't feel like the long-term expected return is worth the effort.  However - I might be interested in making a few big plays if I thought I found a decent opportunity. 

Do you mean an IPO play on Twitter?  Are you thinking it will be better priced to start than Facebook was?  I guess I just see them as having the same inherent problems - How do they turn their user base into a reasonable profit stream? 

tooqk4u22

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Re: 'Stache building via Long Shots?
« Reply #3 on: August 07, 2012, 05:29:21 PM »
I plan on buying a boatload of Twitter when it comes public, while investing a decent chunk in a couple of other social media stocks.  It's a high risk, high reward bet.  I think this falls inside the parameters of what you're discussing.

I think the better way is to find a way to get into Twitter before it goes public then dump it when it does.

James

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Re: 'Stache building via Long Shots?
« Reply #4 on: August 07, 2012, 05:47:53 PM »
I plan on buying a boatload of Twitter when it comes public, while investing a decent chunk in a couple of other social media stocks.  It's a high risk, high reward bet.  I think this falls inside the parameters of what you're discussing.


I think there is a fairly decent chance, if Twitter were to go public relatively soon, that the Facebook fiasco will create a situation of hesitation and fear leading to a much lower start and much better potential for a decent profit.  Still wouldn't touch an individual stock like that with the proverbial 10 ft pole, but just a thought.

smedleyb

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Re: 'Stache building via Long Shots?
« Reply #5 on: August 07, 2012, 06:08:41 PM »
I plan on buying a boatload of Twitter when it comes public, while investing a decent chunk in a couple of other social media stocks.  It's a high risk, high reward bet.  I think this falls inside the parameters of what you're discussing.


I think there is a fairly decent chance, if Twitter were to go public relatively soon, that the Facebook fiasco will create a situation of hesitation and fear leading to a much lower start and much better potential for a decent profit.  Still wouldn't touch an individual stock like that with the proverbial 10 ft pole, but just a thought.

This is a great observation James.  I hope it proves to be accurate, because I'm incredibly bullish on Twitter, much more so than FB, and would love a more rationally priced IPO.

 


arebelspy

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Re: 'Stache building via Long Shots?
« Reply #6 on: August 07, 2012, 06:45:17 PM »
It takes a great deal of my self control to not do what you propose, JohnGalt.

Yes, I have thought of it, many times.

I convince myself not to do so by looking at the returns I'm getting in real estate, and tell myself to be satisfied with that and be satisfied with hitting FI in 5 years or so.

Slow and steady wins the race and all that.

Besides, if I took a chunk of money (say, 1 year's savings) and put it on something that was slightly +EV (a coin flip which was 51% in my favor, for example), the worst that could happen is I push back FI by a year.  Best that could happen is I move it forward by a year (assuming a 1:1 payout, no odds).  The worst case seems worse to me than the best case being good.  That is, I'm okay with my current time to FI.  But during that last year, I feel like I'll be anxious to be done.  And if I had to work another year beyond that because of a risk I took a few years earlier that didn't pan out, I think that would annoy me more than the happiness I'd get out of not having to work that last year.

Also, though it's egotistical, I'd rather say I got to FI through hard work and smarts rather than give more fuel to the people who will undoubtably say I got lucky to retire so early.

So I look at my returns (and more specifically look at the amount we're putting away each month) and I calculate my time to FI, and I remind myself that I like my job a lot, and I don't do it.

But I do think about it.
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arebelspy

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Re: 'Stache building via Long Shots?
« Reply #7 on: August 07, 2012, 07:46:32 PM »
Let me give another example of this which happened to me today. I was recently contacted by another investor I know about an opportunity to invest with her friend, who is offering a 12% return in 4 months (i.e. 36% annualized). He's a quant trader who supposedly gets amazing returns. She's been investing with him for 4 years.  It's a 300k minimum investment that is getting pooled to make 3MM that's getting invested (and is supposedly "guaranteed" by a different 6MM). My friend and a few of her investor friends are putting up 270k and are wondering if I want to finish it with 30k and make 3600 (12%) return in 4 months.

I see that and think Bernie Madoff.

But I also think well, what if it does work, even if just for a short while?  I could get such fantastic returns that I could FI in 2-3 years instead of 5.

I'm in the middle of writing up the email to let her know I'll have to pass on the deal.
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JohnGalt

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Re: 'Stache building via Long Shots?
« Reply #8 on: August 07, 2012, 08:06:09 PM »
It takes a great deal of my self control to not do what you propose, JohnGalt.

Yes, I have thought of it, many times.

I convince myself not to do so by looking at the returns I'm getting in real estate, and tell myself to be satisfied with that and be satisfied with hitting FI in 5 years or so.

Slow and steady wins the race and all that.

Besides, if I took a chunk of money (say, 1 year's savings) and put it on something that was slightly +EV (a coin flip which was 51% in my favor, for example), the worst that could happen is I push back FI by a year.  Best that could happen is I move it forward by a year (assuming a 1:1 payout, no odds).  The worst case seems worse to me than the best case being good.  That is, I'm okay with my current time to FI.  But during that last year, I feel like I'll be anxious to be done.  And if I had to work another year beyond that because of a risk I took a few years earlier that didn't pan out, I think that would annoy me more than the happiness I'd get out of not having to work that last year.

Also, though it's egotistical, I'd rather say I got to FI through hard work and smarts rather than give more fuel to the people who will undoubtably say I got lucky to retire so early.

So I look at my returns (and more specifically look at the amount we're putting away each month) and I calculate my time to FI, and I remind myself that I like my job a lot, and I don't do it.

But I do think about it.

That's typically the same way I look at it - and, more often than not, come to the same conclusion you did that the downside is worse than the potential upside - but there are days when I think back to some of the runs I went on playing poker - increasing my bankroll ten fold in just a few sessions - and I look at it as the potential for way more than a 1:1 payout.  I'm risking a few months of additional work to potentially save well over a year.


smedleyb

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Re: 'Stache building via Long Shots?
« Reply #9 on: August 08, 2012, 07:10:15 AM »
Let me give another example of this which happened to me today. I was recently contacted by another investor I know about an opportunity to invest with her friend, who is offering a 12% return in 4 months (i.e. 36% annualized). He's a quant trader who supposedly gets amazing returns. She's been investing with him for 4 years.  It's a 300k minimum investment that is getting pooled to make 3MM that's getting invested (and is supposedly "guaranteed" by a different 6MM). My friend and a few of her investor friends are putting up 270k and are wondering if I want to finish it with 30k and make 3600 (12%) return in 4 months.

I see that and think Bernie Madoff.

But I also think well, what if it does work, even if just for a short while?  I could get such fantastic returns that I could FI in 2-3 years instead of 5.

I'm in the middle of writing up the email to let her know I'll have to pass on the deal.

That is straight up bullshit.  Any trader who can guarantee that kind of return -- and deliver -- should have no problem pitching their services to any number of high powered financial outfits who would easily lay out billions of dollars to be invested.  That trader himself would be a millionaire many times over (managing 10's of billions) by now and wouldn't have to run around scrounging to raise a 100K here, and a 100K there.

Even Madoff never promised those kinds of silly returns, and he was the greatest scoundrel of them all.

I feel sorry for your friend, Arebelspy.

 


tooqk4u22

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Re: 'Stache building via Long Shots?
« Reply #10 on: August 08, 2012, 08:47:49 AM »
Back to the topic at hand - I do believe that poker has skill element to it in regards to understanding statistical probabilities and evaluating peoples behaviors, but it also involves luck.  So to your question of taking $20K and playing poker to get to FI quicker - I would say that if you truly are exceptional at the skill parts I mentioned and aren't betting the bank such that a bad beat ruins you (i.e lady luck showing her ugly side) then why wouldn't you do it - I think it is better than investing in individual stocks. 

That said, playing a 5/10 game is a lot different than high stakes, the higher you go the more talented the player typically (although there are stupid wealthy people that show up as well, but at that is not who you are playing against).

JohnGalt

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Re: 'Stache building via Long Shots?
« Reply #11 on: August 08, 2012, 09:10:58 AM »
Back to the topic at hand - I do believe that poker has skill element to it in regards to understanding statistical probabilities and evaluating peoples behaviors, but it also involves luck.  So to your question of taking $20K and playing poker to get to FI quicker - I would say that if you truly are exceptional at the skill parts I mentioned and aren't betting the bank such that a bad beat ruins you (i.e lady luck showing her ugly side) then why wouldn't you do it - I think it is better than investing in individual stocks. 

That said, playing a 5/10 game is a lot different than high stakes, the higher you go the more talented the player typically (although there are stupid wealthy people that show up as well, but at that is not who you are playing against).

I completely agree.  My deal is that while, overall, I'm ahead from my time playing 1-2 and 2-5 - I know I have a shitty hourly rate and I don't feel that I'm by any means an "exceptional" player (above average for a low-stakes player is where I'd put myself). 

I'm also way out of practice at this point... it's been years since I played regularly (I play once every couple months these days, not 3+ times a week like I did in college and the first couple years after).  Add to that the fact that I've never played anything over 2-5 (I think the most I've ever had in front of me on a table is $2500) - I have no idea what moving up to higher (probably a better term as I wouldn't be playing for true "high stakes") stakes would feel like. 

That said - the one thing that makes it tempting as a one time attempt is that I wouldn't really be worried about bank roll management or going broke - I'll still have my day job that can replace the money in a relatively short period of time.  If I hit a bad beat, I go home and that's it - no going back to the bank for more money.  If I just hold my own and break even - well maybe I had some fun.  If I can hit a good run of cards - I do feel that I have a good enough base skill to make something out of it and the discipline to get up before losing it all back. 

tooqk4u22

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Re: 'Stache building via Long Shots?
« Reply #12 on: August 08, 2012, 10:23:49 AM »
World Series of Poker fits the bill perfectly - fixed investment of $10k and set field so probability of winning is far greater than the lottery.  Even 9th place won $800k last year.

Again fierce talen, luck, focus, discipline come into play. 

If you were going to make the argument to use poker to get to FI this would be it.

arebelspy

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Re: 'Stache building via Long Shots?
« Reply #13 on: August 08, 2012, 10:27:05 AM »
Back to the topic at hand - I do believe that poker has skill element to it in regards to understanding statistical probabilities and evaluating peoples behaviors, but it also involves luck.  So to your question of taking $20K and playing poker to get to FI quicker - I would say that if you truly are exceptional at the skill parts I mentioned and aren't betting the bank such that a bad beat ruins you (i.e lady luck showing her ugly side) then why wouldn't you do it - I think it is better than investing in individual stocks. 

That said, playing a 5/10 game is a lot different than high stakes, the higher you go the more talented the player typically (although there are stupid wealthy people that show up as well, but at that is not who you are playing against).

I completely agree.  My deal is that while, overall, I'm ahead from my time playing 1-2 and 2-5 - I know I have a shitty hourly rate and I don't feel that I'm by any means an "exceptional" player (above average for a low-stakes player is where I'd put myself). 

I'm also way out of practice at this point... it's been years since I played regularly (I play once every couple months these days, not 3+ times a week like I did in college and the first couple years after).  Add to that the fact that I've never played anything over 2-5 (I think the most I've ever had in front of me on a table is $2500) - I have no idea what moving up to higher (probably a better term as I wouldn't be playing for true "high stakes") stakes would feel like. 

That said - the one thing that makes it tempting as a one time attempt is that I wouldn't really be worried about bank roll management or going broke - I'll still have my day job that can replace the money in a relatively short period of time.  If I hit a bad beat, I go home and that's it - no going back to the bank for more money.  If I just hold my own and break even - well maybe I had some fun.  If I can hit a good run of cards - I do feel that I have a good enough base skill to make something out of it and the discipline to get up before losing it all back.

The problem with that is that your ROR (risk of ruin) is very high then.

And you are okay with hitting that ROR, but what that means is you are very likely to hit it.

Plus, if you made a good chunk of money, I know it'd be hard for me to stop.  Say you reduce your FI time from 8 years to 7 (or 6).. would it not be hard to go back and try to reduce it to 5, or 4?  At what point are you okay saying "well yeah, I just earned several years salary in a few weeks... and I'll go back to work now for the next 5 years"?

Seems tough, to me at least.

Which then itself increases your ROR, playing with such a large percent (or all) of your bankroll..
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sol

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Re: 'Stache building via Long Shots?
« Reply #14 on: August 08, 2012, 11:03:48 AM »
If there truly were an opportunity/investment like this that had a 50 percent chance of losing one month salary and a 50 percent chance of making a here's salary, I would take it in a heartbeat. Your expected value is 11 months salary every time you play.

With odds like that, I'd be playing every day. But I expect your perception of the expected payout is somewhat skewed, since this is exactly what casinos try so hard to instill. They want you to think that the odd of winning are much better than they actually are.    Selective memory of past runs of good luck is human nature, and they count on that.

JohnGalt

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Re: 'Stache building via Long Shots?
« Reply #15 on: August 08, 2012, 11:09:29 AM »
Plus, if you made a good chunk of money, I know it'd be hard for me to stop.  Say you reduce your FI time from 8 years to 7 (or 6).. would it not be hard to go back and try to reduce it to 5, or 4?  At what point are you okay saying "well yeah, I just earned several years salary in a few weeks... and I'll go back to work now for the next 5 years"?

This would certainly be the toughest part (aside from actually making that good chunk to begin with).  It would definitely be very difficult to keep from making those winnings the new bank roll to attempt even more.  I think it's likely that I could set those thoughts aside - but it certainly adds more risk to an already risky proposition.

arebelspy

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Re: 'Stache building via Long Shots?
« Reply #16 on: August 08, 2012, 11:25:57 AM »
If there truly were an opportunity/investment like this that had a 50 percent chance of losing one month salary and a 50 percent chance of making a here's salary, I would take it in a heartbeat. Your expected value is 11 months salary every time you play.

With odds like that, I'd be playing every day. But I expect your perception of the expected payout is somewhat skewed, since this is exactly what casinos try so hard to instill. They want you to think that the odd of winning are much better than they actually are.    Selective memory of past runs of good luck is human nature, and they count on that.

I missed those numbers.  Yes, that's hugely +EV.. I was presupposing a 1:1 (i.e. one year's salary to win one year's salary).

EDIT: Oh did you mean John's comment of "I'm risking a few months of additional work to potentially save well over a year."?

I'm guessing that comment was not based on expected value, but variance.

That is, even if I'm throwing a 6-sided die, and I win a year's salary on rolling a 6, but lose 3 month's salary on rolling a 1-5.. it's negative EV, but still offers the option to "risk a few month's salary to save a year."
« Last Edit: August 08, 2012, 11:28:17 AM by arebelspy »
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JohnGalt

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Re: 'Stache building via Long Shots?
« Reply #17 on: August 08, 2012, 11:32:11 AM »
If there truly were an opportunity/investment like this that had a 50 percent chance of losing one month salary and a 50 percent chance of making a here's salary, I would take it in a heartbeat. Your expected value is 11 months salary every time you play.

With odds like that, I'd be playing every day.

What if you had a slightly positive expected value, but low percentage of winning, only given a single attempt, and you had to wager 10% of your 'stache?  20%?  I'd imagine there is a point that you would no longer be willing to risk that such a % of your 'stache on a gamble even if it had a positive expected value. 


Also - I completely understand the selective memory issue with stuff like this where the "lucky" times stand out more than the unlucky times.  That's why I meticulously tracked my poker stats for about a year back when I was playing often.  I did have a positive return - but for an atrocious hourly rate.


JohnGalt

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Re: 'Stache building via Long Shots?
« Reply #18 on: August 08, 2012, 11:35:55 AM »
That is, even if I'm throwing a 6-sided die, and I win a year's salary on rolling a 6, but lose 3 month's salary on rolling a 1-5.. it's negative EV, but still offers the option to "risk a few month's salary to save a year."

Yup - that's the type of situation I had in mind with this post.  Though I might make it a 12-sided die, where rolling a 6 gets you 2 years salary but anything else costs you 3 months.  Just to make the swing even larger. 

mechanic baird

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Re: 'Stache building via Long Shots?
« Reply #19 on: August 08, 2012, 12:05:28 PM »
I plan on buying a boatload of Twitter when it comes public, while investing a decent chunk in a couple of other social media stocks.  It's a high risk, high reward bet.  I think this falls inside the parameters of what you're discussing.


I think there is a fairly decent chance, if Twitter were to go public relatively soon, that the Facebook fiasco will create a situation of hesitation and fear leading to a much lower start and much better potential for a decent profit.  Still wouldn't touch an individual stock like that with the proverbial 10 ft pole, but just a thought.

This is a great observation James.  I hope it proves to be accurate, because I'm incredibly bullish on Twitter, much more so than FB, and would love a more rationally priced IPO.

Whatever the stock you are bullish about, you just can't deviate from valuation and risk assessment and risk management.. 2) Let the numbers convince you if it's a good buy 2) Define exit 3) build scenarios if the stock takes a nose dive, how do you handle it to still be profitable...

If you can manage risk, you can manage any investment.

mechanic baird

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Re: 'Stache building via Long Shots?
« Reply #20 on: August 08, 2012, 12:14:04 PM »
OK, back to the topic.
Yes, I have consistently thought about if there is ever a "shortcut"..
I have been in real estate business for the last 15 years and I know there is no short cut there.. Long road ahead but reward is handsome.. Good thing I started early..

Now, I am convinced that "buy and hold" strategy in stock market these days no longer can provide the historic return.. I must be able to manage risks of the securities... there is much to learn.. So that's my "short cut".. Learn a lot about market and manage risks. To be specific:
1. Learn from trusted analyst. For me, I follow Mike Stathis from AVA Research
2. Use Mike's Dividend Gem and market forecast ( I am not good at stock picking so I leave it to the pro) to build a dividend centric portfolio
3. Only trade during market corrections with broader index such as QQQ and DIA. The rest of the time, manage risk, build plans, build scenarios, and buy on weakness to bring down the cost basis.

I think with this strategy and my sizable investment to start with, I can hit FI a lot sooner. But learning how to manage risk is really difficult so I am still learning...
« Last Edit: August 08, 2012, 12:15:55 PM by mechanic baird »

Richard3

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Re: 'Stache building via Long Shots?
« Reply #21 on: August 09, 2012, 07:03:18 AM »
Speaking as someone who covers his expenses from sportsbetting, I strongly suggest people intending to take shots (whether that's high stakes poker, or a tiny gold mining stock, or whatever) read about the Kelly criteria. Sure, it's common sense in many ways, and applicability of the actual formula to one shot events can be debated, but the concept of maximising EG (bankroll growth) is an important one.

Basically, even highly +EV events may not be worth risking much on if they are unlikely (I'd very happily take a thousand to one on the Browns winning the Superbowl, but not for much even though it's about 100% expected profit because 99.5% of the time I wind up with nothing).

Unless you have a really messed up utility curve, risking money on -EV events should only be for fun and or lifechanging money (for example my habit of buying a lottery ticket when the jackpot is > 100m).

JohnGalt

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Re: 'Stache building via Long Shots?
« Reply #22 on: August 09, 2012, 07:33:43 AM »
Speaking as someone who covers his expenses from sportsbetting, I strongly suggest people intending to take shots (whether that's high stakes poker, or a tiny gold mining stock, or whatever) read about the Kelly criteria. Sure, it's common sense in many ways, and applicability of the actual formula to one shot events can be debated, but the concept of maximising EG (bankroll growth) is an important one.

Basically, even highly +EV events may not be worth risking much on if they are unlikely (I'd very happily take a thousand to one on the Browns winning the Superbowl, but not for much even though it's about 100% expected profit because 99.5% of the time I wind up with nothing).

Unless you have a really messed up utility curve, risking money on -EV events should only be for fun and or lifechanging money (for example my habit of buying a lottery ticket when the jackpot is > 100m).

I might make the argument that the kelly criteria does not really apply to a one time thing. 
I might also make the argument that, if the payout is enough to cut down time to reach FI by 1/3 or even 1/2, it would be life changing money. 
I might even admit to having a messed up utility curve (Economics degree here, I actually have a pretty decent understanding of what that means)

But, in the end, I'm not really trying to make an argument that this is a good idea or that I recommend anyone attempt something along these lines.  There's a reason I haven't attempted it.  It's really just something I've started day-dreaming about since I'm past learning the ERE/MMM concepts and am looking ahead towards 5+ years of working towards a goal.  It's difficult to know where you want to be and accept that it's just going to take time to get there so I start wondering if there are any shortcuts.

Richard3

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Re: 'Stache building via Long Shots?
« Reply #23 on: August 09, 2012, 09:28:41 AM »
I think the point of FI is that it isn't a life changing event, it's a process. Aside from not working any more, not much changes when you tick over the magic number.

JohnGalt

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Re: 'Stache building via Long Shots?
« Reply #24 on: August 09, 2012, 09:49:53 AM »
I think the point of FI is that it isn't a life changing event, it's a process. Aside from not working any more, not much changes when you tick over the magic number.

I disagree.  Going from my life now - working 50-60 hours per week, too drained to do much of anything after work, living in a major city - to my planned FI life - working when I choose, spending most of my time enjoying the outdoors, volunteering, visiting family and friends - I see that tick over the magic number as a huge life changing moment.  Sure it would be nice to hit a $100M payout lottery - but the majority of the change in my life would be from the first $500K that pushed me into FI. 

arebelspy

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Re: 'Stache building via Long Shots?
« Reply #25 on: August 09, 2012, 09:52:12 AM »
I think the point of FI is that it isn't a life changing event, it's a process. Aside from not working any more, not much changes when you tick over the magic number.

Really depends on the person.  Under one of our potential plans, the wife and I will be having our first kid around the time we hit FI (specifically timing them to line up).  That FI enables us to be home for that (and not have to get up at 5 for a job when the baby kept us up all night) is a big shift, IMO.
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Le Dérisoire

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Re: 'Stache building via Long Shots?
« Reply #26 on: August 09, 2012, 02:14:12 PM »
Let me give another example of this which happened to me today. I was recently contacted by another investor I know about an opportunity to invest with her friend, who is offering a 12% return in 4 months (i.e. 36% annualized). He's a quant trader who supposedly gets amazing returns. She's been investing with him for 4 years.  It's a 300k minimum investment that is getting pooled to make 3MM that's getting invested (and is supposedly "guaranteed" by a different 6MM). My friend and a few of her investor friends are putting up 270k and are wondering if I want to finish it with 30k and make 3600 (12%) return in 4 months.

I see that and think Bernie Madoff.

But I also think well, what if it does work, even if just for a short while?  I could get such fantastic returns that I could FI in 2-3 years instead of 5.

I'm in the middle of writing up the email to let her know I'll have to pass on the deal.

Sorry to be out of the subject, but I just wanted to tell you that your friends should not worry. This proven investment method is taught by very successfull investors at the Charles Ponzi's school of Economics. Also, an annual 36% return on a short-term guaranteed investment is sooo common these days.

I, myself, became rich helping an african prince by opening a bank account for him in exchange of 10% of his well-earned assets (the civil war is so bad in his country that he had to randomly send emails around the world for help... so sad).

$_gone_amok

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Re: 'Stache building via Long Shots?
« Reply #27 on: August 09, 2012, 02:26:24 PM »
I make a handful of high risk investments as a part of my overall investment strategy. Often times I limit these investment to 5 to 10% of my portfolio. We still have ~15 years to go before we retire so we could afford taking the risk.

Richard3

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Re: 'Stache building via Long Shots?
« Reply #28 on: August 09, 2012, 03:26:09 PM »
I think the point of FI is that it isn't a life changing event, it's a process. Aside from not working any more, not much changes when you tick over the magic number.

Really depends on the person.  Under one of our potential plans, the wife and I will be having our first kid around the time we hit FI (specifically timing them to line up).  That FI enables us to be home for that (and not have to get up at 5 for a job when the baby kept us up all night) is a big shift, IMO.

The big shift is the kid though. not the FI. People have kids without FI and FI without kids. Just because you hope to have both at about the same time doesn't mean the two are related. The kid gives you a deadline, but if you don't make it to the FI goal by his birthday you wont have completely failed - maybe getting 90% of the way there means you can only work part time, or take a consulting job, or whatever.

I'll try and explain the "process" idea more clearly since it helped me a lot recently.

You need X to cover your annual expenses. X must equal salary + other earned income + investment income + (simplifying slightly to assume you don't borrow or spend savings to cover spending).

When X can be covered from only investment income you're completely FI (hooray). You can do this by increasing income or reducing expenditure.

As your investments grow, the amount you require from salary + other earned reduces. Many people choose not to reduce the amount they earn from these sources and speed up the process of growing investment income.

However this doesn't mean that FI is a switch that goes from off to on the second you reach 33x annual expenses in your investment account (3% real return assumed). When that happens you just go from 99% FI to 102% FI or whatever (given current expenditure).

This doesn't have to happen when you save your millionth dollar. You could equally decide to stop buying bacon (don't do this, bacon is awesome) and thereby reduce annual expenditure  so the 975,000 you have is now 33x expenses. The point is though that giving up bacon is not the one single event that made you FI, it's just the last step of the process.

In a perfect world (one where you could live wherever you wanted and sell exactly as many hours of your primary skill as you needed to cover the difference between expenses and investment income) "reaching FI" would just be the week where you worked 0 hours instead of 1.

Obviously reality gets in the way, but not as much as a lot of people think.



JohnGalt

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Re: 'Stache building via Long Shots?
« Reply #29 on: August 09, 2012, 03:50:46 PM »
However this doesn't mean that FI is a switch that goes from off to on the second you reach 33x annual expenses in your investment account (3% real return assumed). When that happens you just go from 99% FI to 102% FI or whatever (given current expenditure).

This makes perfect sense looking at it from a math perspective... but the reality is that I will not gradually reduce my time at work to 0 over time as I get closer and closer to FI.  My life won't change until I actually reach a point on that FI scale where I feel comfortable leaving my full time employment to pursue other interests.  Maybe the life changing event here occurred when I decided to make FI a priority - but if something were to take me from being 5 years away from that goal to being 2 or 3 years away from that goal, it's still a significant event.  Maybe we should just label it a life accelerating event? 


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Re: 'Stache building via Long Shots?
« Reply #30 on: August 09, 2012, 09:48:18 PM »
I think the point of FI is that it isn't a life changing event, it's a process. Aside from not working any more, not much changes when you tick over the magic number.

I disagree.  Going from my life now - working 50-60 hours per week, too drained to do much of anything after work, living in a major city - to my planned FI life - working when I choose, spending most of my time enjoying the outdoors, volunteering, visiting family and friends - I see that tick over the magic number as a huge life changing moment. Sure it would be nice to hit a $100M payout lottery - but the majority of the change in my life would be from the first $500K that pushed me into FI.

Hey, that life sounds familiar, save the major city part.

You just captured the essence of FI the way I see it. 


arebelspy

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Re: 'Stache building via Long Shots?
« Reply #31 on: August 09, 2012, 10:53:01 PM »
The big shift is the kid though. not the FI. People have kids without FI and FI without kids. Just because you hope to have both at about the same time doesn't mean the two are related.

I figured someone would say this, but I disagree.  The FI and kid are very related.  Imagine two people, one with a full time job raising their kid.  The other is MMM.

They both have a kid, so clearly the shift in that scenario isn't from the kid.. It's from being FI.

Your presupposition that hitting a magical number doesn't change anything is only true if you don't intent to FIRE.. I.e. you continue work and life as if nothing changed. 

That may be the case for you, it's not for everyone though.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

shadowmoss

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Re: 'Stache building via Long Shots?
« Reply #32 on: August 10, 2012, 09:17:58 AM »
To the original OP:  is there anything material stopping you from at least trying out your plan to see if it is feasible?  Set an amount aside and start playing again and see how it goes?  I personally enjoy casinos.  I put it in the entertainment category.  I do slots, so I don't win a lot, I don't lose a lot.  I get free rooms when I travel sometimes.  I enjoy it.  I also don't gamble my entire paycheck, or even a large percentage of it.  If you are thinking about making part of your retirement from playing poker, get back into it in a small way and see if you still have the touch.  Doesn't have to be all or nothing, or does it?  I don't play poker or watch it on TV, so I don't really know how it all works.  And, no, I don't want to sit in on a few hands with you.  :)

JohnGalt

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Re: 'Stache building via Long Shots?
« Reply #33 on: August 10, 2012, 12:25:23 PM »
To the original OP:  is there anything material stopping you from at least trying out your plan to see if it is feasible?  Set an amount aside and start playing again and see how it goes?  I personally enjoy casinos.  I put it in the entertainment category.  I do slots, so I don't win a lot, I don't lose a lot.  I get free rooms when I travel sometimes.  I enjoy it.  I also don't gamble my entire paycheck, or even a large percentage of it.  If you are thinking about making part of your retirement from playing poker, get back into it in a small way and see if you still have the touch.  Doesn't have to be all or nothing, or does it?  I don't play poker or watch it on TV, so I don't really know how it all works.  And, no, I don't want to sit in on a few hands with you.  :)

I'm not completely out of poker - I still make a trip to the casino every few months and play home games about as often too.  It's very hard to judge whether or not I "still have the touch" playing sporadically like this.  I don't track them real well anymore - but even if I did, the sample would be too small to draw an reliable conclusions of off.  Unfortunately, I think it would me going back to playing at least a couple times per week before I had any confidence in knowing what my long term prospects might be - and I just can't spend that much time playing anymore (not to mention I live twice as far from the casino and have lost most of my contacts for the local underground games).  Regardless - I never want to rely on poker to cover my basic stuff like rent, food, etc (the typical pro poker life is not very glamorous - it's high stress for little reward).  I view it more like a hobby with the potential to turn a side profit. 

ShavinItForLater

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Re: 'Stache building via Long Shots?
« Reply #34 on: August 12, 2012, 01:40:58 PM »
I can tell you that in your shoes I would not do it.  I understand the temptation, but if you believe trying it is -EV, then conceptually this is no different than playing the lottery.  I think the time and energy you put into it could likely be put towards a side hustle or part time job with a pretty much guaranteed +EV.

I'd also point out that with every hand of poker, you're deciding to continue or quit, so to say it's risking a few months of net pay for potentially years of winnings is a fallacy.  If you took 3 months pay and won 3 months pay, you are now risking 6 months pay to continue.  Sure you can fool yourself into thinking it's only the 3 months pay you're risking, that the rest is "free money", but you really are just fooling yourself.  The winnings are no different than the original capital you're risking.  If every bet is -EV, then you're just hoping you get lucky and making poor decisions all along the way.  The only way to avoid this would be a one time bet like a single number on the roulette wheel, and I doubt you'd be as likely to consider doing that.  Why?  Because it's more obvious that the odds are highly against you.

To qualify how I understand the temptation, back in the mid 90s I played blackjack, really just on a lark, using a basic counting cards system.  It was very small-scale--almost always the $5 tables after work for the day was done, and I would quit when I was up $200 for the night, whether it was 15 minutes or 3 hours later.  My winnings went up pretty steadily--one of my superiors at work even joked with me about quitting my job to gamble full time.  One night I hit $200 winnings almost immediately, and decided to try the $25 table, and hit it big for my standards, up over $2,000.  I was actually scared to cash in thinking I'd have to sign a tax form or the pit boss would have a talk with me or something (it was uneventful).

I was up probably about $6,000 at the peak.  Then mysteriously my net winnings started steadily going down.  I probably was just lucky early on, hard to say really.  I had promised myself that I would quit if I ever got back to zero, and I would have, but my fiance (now wife of 15 years) thought I was addicted to gambling, didn't want to marry an addict, and demanded that I quit.  I did, and used the $3,000 or so to offset wedding expenses.

I have also taken risks in other areas of life.  I left a pretty stable and high paying job to help found a tech startup, with two small children and a stay-at-home mom at home.  However, it wasn't some work out of my basement and hope thing.  I knew the other founders from previous jobs, and the CEO had raised money and offered me a salary around the same as what I had been making, in addition to stock grants.  I figured the worst that would happen would be that it imploded and I'd get another job like I had before, and the position and experience would still look good on the ol' resume.  Best case, they'd IPO and I'd be at FIRE instantly.  We also invested some of our own money a few months later, although that was not a requirement.  There were other reasons to do it as well--I was pretty burned out at the old job, and the startup would mean a lot less travel.

I did leave after two years (long story), and I'm actually back at the same company I left (they generally welcome back people who leave as long as it was on good terms).  The startup is still going and actually still may IPO, and depending on valuation might push me into FIRE.  If they don't we'll be OK though.  Looking back on the startup, I think it was a good decision, even though it didn't work out exactly how I had hoped.  The key difference for me is that it was essentially a win-win no matter what happened.  If you had a situation like that, I'd say go for it.

If you do go ahead with the poker, I'd advise you to set very clear limits that you will not violate--just like having stops in the stock market.  If you had a run and then lost it all, I think you could easily be tempted to risk *another* few months salary to try again, or to "get back to even".  Also have a very definite point where you will take all the winnings off the table and stop for good.  I'd still advise against it overall though.

Richard3

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Re: 'Stache building via Long Shots?
« Reply #35 on: August 12, 2012, 04:15:20 PM »
The big shift is the kid though. not the FI. People have kids without FI and FI without kids. Just because you hope to have both at about the same time doesn't mean the two are related.

I figured someone would say this, but I disagree.  The FI and kid are very related.  Imagine two people, one with a full time job raising their kid.  The other is MMM.

They both have a kid, so clearly the shift in that scenario isn't from the kid.. It's from being FI.


So the difference between someone who is FI and someone who isn't is the FI? I can't dispute that, but fortunately you were more specific in your hypothetical:

There's more to being MMM than being FI. A pre-100% FI MMM-type would still use cloth diapers, or find time to read books with the kid, or whatever the key differences you think there are in this scenario - because his priorities are straight. THAT'S the difference, not the FI.

Unless you're going to become a different person, the comparison we're trying to make is between Thursday-You and Friday-You or March-You and April-You or 2011-You and 2012-You. Even at the less granular measurements there is still a trend line to be drawn.

Quote

Your presupposition that hitting a magical number doesn't change anything is only true if you don't intent to FIRE.. I.e. you continue work and life as if nothing changed. 

That may be the case for you, it's not for everyone though.

Oh, I definitely intend to wind down how much I work in the future and what I work as. In fact, most of my recent planning has been to get the ability to work part time without sacrificing my hourly. However, even if I didn't have this option, I still wouldn't believe in a magic number because there are at least two numbers in even the simplest FI equation.

Income - Expenditure must be >= 0

Let's lock in the real return you can get at 3%. Let's further assume there is only one possible source for you to swap your time for money. Let's further assume there are no more ways to swap your time for food or shelter or anything money is used for.

In this very restrictive case let's say your magic number is $1m for investments to produce 30k income after inflation which will cover your desired lifestyle.

Your investments are $950k when your boss calls you in to his office and says "you're fired, and I've told everyone in a thousand mile radius to never hire you for anything and they're all going to listen to me because I'm actually Darth Vader!"

Are you going to starve to death because you're not at the magic number yet? Of course you're not, you're just going to have to cut down from 30k expenditure to 28.5k. So $1m wasn't really a magic number at all, just a preferred one.


arebelspy

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Re: 'Stache building via Long Shots?
« Reply #36 on: August 12, 2012, 04:32:58 PM »
Richard, you and I will have to agree to disagree, because I don't agree with most of what you just posted.  We are quite different people, apparently, so I'd just caution you to not make blanket statements that apply to you and apply them to everyone.

Back on topic..
The only way to avoid this would be a one time bet like a single number on the roulette wheel, and I doubt you'd be as likely to consider doing that.  Why?  Because it's more obvious that the odds are highly against you.

I think that's exactly what the OP is proposing.  See: dice example above.

Taking a "shot," even if the odds are against you (-EV), to risk a few months worth of savings to reduce FI time by a few years.  Yes, similar to lotto playing, but rather than playing a very small amount against very long odds, playing a larger amount against only medium odds.

I think the OP's mention of poker has confused the issue for many (as it's potentially +EV, but takes work, discipline, etc.)

The more interesting question (to me, at least) is taking the long shot, despite being -EV, as long as it's not too stacked against you.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

iwannaretire

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Re: 'Stache building via Long Shots?
« Reply #37 on: August 12, 2012, 06:12:32 PM »
Has the OP ever considered trading futures or currencies?  In a lot of ways, they are like poker, especially in terms of risk management and the use of leverage can get you nice wins in a short period of time if you are successful.  I've heard poker players tend to do better than the average person in trading them.   And you can learn a system on a demo before risking any money. 

JohnGalt

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Re: 'Stache building via Long Shots?
« Reply #38 on: August 12, 2012, 06:35:39 PM »
Richard, you and I will have to agree to disagree, because I don't agree with most of what you just posted.  We are quite different people, apparently, so I'd just caution you to not make blanket statements that apply to you and apply them to everyone.

Back on topic..
The only way to avoid this would be a one time bet like a single number on the roulette wheel, and I doubt you'd be as likely to consider doing that.  Why?  Because it's more obvious that the odds are highly against you.

I think that's exactly what the OP is proposing.  See: dice example above.

Taking a "shot," even if the odds are against you (-EV), to risk a few months worth of savings to reduce FI time by a few years.  Yes, similar to lotto playing, but rather than playing a very small amount against very long odds, playing a larger amount against only medium odds.

I think the OP's mention of poker has confused the issue for many (as it's potentially +EV, but takes work, discipline, etc.)

The more interesting question (to me, at least) is taking the long shot, despite being -EV, as long as it's not too stacked against you.

That's exactly what I was getting at.  Poker happens to be the thing that comes to mind for me because I used to play often - but I wasn't really looking to discuss poker specifically. 

I guess the question could really be more generalized to ask how people working towards early retirement handle risk taking during their accumulation phase vs their FI phase. 


JohnGalt

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Re: 'Stache building via Long Shots?
« Reply #39 on: August 12, 2012, 06:39:09 PM »
Has the OP ever considered trading futures or currencies?  In a lot of ways, they are like poker, especially in terms of risk management and the use of leverage can get you nice wins in a short period of time if you are successful.  I've heard poker players tend to do better than the average person in trading them.   And you can learn a system on a demo before risking any money.

No, I have not.  I can't say that I'm really interested in learning a new skill in this regard.  When it comes to mind - it's because I'm looking for a quick shortcut to just get me to FI faster without doing (much) additional work.  If I was willing to do more work - I could just avoid the risk all together and get side jobs.

ShavinItForLater

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Re: 'Stache building via Long Shots?
« Reply #40 on: August 12, 2012, 08:56:48 PM »
The only way to avoid this would be a one time bet like a single number on the roulette wheel, and I doubt you'd be as likely to consider doing that.  Why?  Because it's more obvious that the odds are highly against you.

I think that's exactly what the OP is proposing.  See: dice example above.

Taking a "shot," even if the odds are against you (-EV), to risk a few months worth of savings to reduce FI time by a few years.  Yes, similar to lotto playing, but rather than playing a very small amount against very long odds, playing a larger amount against only medium odds.

I think the OP's mention of poker has confused the issue for many (as it's potentially +EV, but takes work, discipline, etc.)

The more interesting question (to me, at least) is taking the long shot, despite being -EV, as long as it's not too stacked against you.

That's exactly what I was getting at.  Poker happens to be the thing that comes to mind for me because I used to play often - but I wasn't really looking to discuss poker specifically. 

I guess the question could really be more generalized to ask how people working towards early retirement handle risk taking during their accumulation phase vs their FI phase.

Well let's put some round numbers on it, I'll approximate since I'm not a math major or a gambling expert.  Based on your original post it looks like you're looking for an 8 to 1 payout on $20,000.  Let's assume you can find a high limit casino bet with close to even odds, that would give you a 10% chance of reaching your goal before losing your entire bankroll.  Maybe you could even get a bit better than that, but for the sake of argument 10% probably isn't too far off.

In other words then, you are proposing taking a 90% risk of needing to work an additional 3 months, in exchange for a 10% chance of needing to work 2 years less instead.  That's also assuming you have the discipline to make this a one-time-only deal, win or lose, because with a -EV, doing it again worsens your odds, and makes your downside risk essentially unlimited.  It will be very tempting if you lose the first time to try again--and probably even more tempting to try again if you succeed the first time.

Do you consider that as the odds being stacked against you?  90% chance of failure seems that way to me, but you might look at it differently.  If I were in your shoes I would not take that bet and focus instead on speeding up the slow road--but hey, it's your life.

arebelspy

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Re: 'Stache building via Long Shots?
« Reply #41 on: August 12, 2012, 09:03:53 PM »
It will be very tempting if you lose the first time to try again--and probably even more tempting to try again if you succeed the first time.

This is one of the biggest unsolved problems I see with this plan.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

JohnGalt

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Re: 'Stache building via Long Shots?
« Reply #42 on: August 12, 2012, 09:23:57 PM »
Does the situation ever turn from a negative expected value (or if you can't get over the idea of -ev, maybe neutral ev) with the bet to a positive expected utility because you value getting to FI 1 or 2 years sooner much more than the negative impacting of working an additional 3 months?

arebelspy

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Re: 'Stache building via Long Shots?
« Reply #43 on: August 12, 2012, 10:02:08 PM »
Does the situation ever turn from a negative expected value (or if you can't get over the idea of -ev, maybe neutral ev) with the bet to a positive expected utility because you value getting to FI 1 or 2 years sooner much more than the negative impacting of working an additional 3 months?

Possibly.  Depends on how much you hate your job and/or how eager you are to start your post FIRE activities.

I'm still in the slow and steady camp, but I do consider it, and look for ways to utilize long shot possibilities (SPY Puts being a recent example).

It is hard dropping 20k or so into a long shot when that could be the down payment on another house that generates a good return (or a note, or whatever your current investment strategy is).
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

ShavinItForLater

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Re: 'Stache building via Long Shots?
« Reply #44 on: August 12, 2012, 11:00:10 PM »
The management of risk is something I consider to be at the very heart of personal finance.  There really is no way to take no risk at all, so it's more of a matter of choosing how much risk and what kinds of risk you're willing to take. 

When talking about investments, first of all you're not even going to call it a valid investment until you have some expectation of at least nominal +EV.  However the general guidance I go by is that even for +EV investments, you also need to trade off short term volatility against long term risks like the erosion of value through inflation.  5 years is generally the magic number--less than 5 years, inflation risk isn't generally a big deal, and volatility in equity investments is considered too big a risk to make it worthwhile.  The general advice for less than 5 years is to keep it in ultra-conservative places like money market accounts or CDs.  Greater than 5 years, the inflation risk is considered higher, and the equity volatility risk in things like stocks decreases as things even out over time--for those longer timeframes, investments like stocks and bonds make more sense because you are so much more likely to come out ahead after you consider inflation risk.  In this case though, we're talking neutral or negative EV, so really none of that even applies--you aren't going in with any expectation of positive returns over repeated attempts--you're just hoping to get lucky when the odds are by definition not in your favor.

To your question, I don't know that it makes much sense to me to say what if I don't mind the risk of loss as much as the potential reward.  If we assume neutral EV, then you'd have a 12.5% of success and an 87.5% chance of failure for your 8 to 1 payout.  Still a pretty large chance that you're setting yourself 3 months further back rather than 2 years forward, and personally not a bet I'd be likely to take on any significant scale.

Talking about how neutral EV might give you a positive utility just amplifies my concern about you doing this over and over again unless you get lucky and hit your goal immediately.  Under this scenario and with these 1/8 odds of success, if you truly believed that the positive utility of advancing 2 years was greater than the negative utility of setting yourself back 3 months, then logically it would follow that you'd be willing to do it over and over again infinitely--even though you'd be setting yourself back as much as you brought yourself forward equally over time, resulting in no change at all.  If it were even slightly negative EV, then you'd essentially be saying that you value the times you win more than the times you lose, even though the net effect was that you'd be pushing yourself back farther and farther over time--a rather absurd concept.  This argument would *only* potentially make sense if you make it a one-shot deal, and again, hope you're lucky.

Personally, I'd choose *any* use for that money that had a +EV, such as the real estate idea arebelspy suggested, or paying off a mortgage if you had one, or a stock or a bond, or even a savings account would be superior in my mind.  I know it doesn't get you the 1-2 year jump forward you were hoping for, but I'd take a smaller but likely positive return over a larger gamble at neutral/negative odds any day.