Everything Code Hurdle-Rate Test
Compare returns with the claimed loss of purchasing power, not with zero
- Difficulty
- Advanced
- Time to result
- ~ongoing to results
- Steps
- 5
- Confidence
- 91%
The Everything Code Hurdle-Rate Test is Pal's method for judging investments against his estimate of currency debasement rather than against a zero return. He claims purchasing power against scarce assets falls by about eight percent annually, then adds an assumed inflation rate to produce an approximately eleven-percent hurdle. He divides or compares asset performance against that rate and concludes that, under his thesis and chosen periods, technology and crypto cleared it while broad equities, property and gold did not. The reusable mechanism is to state a purchasing-power benchmark, estimate the hurdle transparently, compare assets over consistent periods, and then examine risk. The episode does not independently establish Pal's rates or forecasts, so they should be treated as his macro thesis, not settled facts.
Origin
Extracted from The Diary of a CEO
Core principles
- 01Nominal gains can conceal a loss of purchasing power
- 02Every return should be judged against an explicit hurdle rate
- 03The hurdle is an estimate, not an established constant
- 04Risk and drawdowns still matter when an asset clears the hurdle
How to run it
- 1
Define purchasing power
Choose the basket, index or scarce-asset comparison that represents what future money must buy.
Pro tip Use a measure relevant to the investor's actual future needs.
Watch out Inflation and asset-price debasement are not interchangeable measures.
- 2
Estimate the hurdle
Set an annual rate for the claimed loss of purchasing power and record the evidence and assumptions behind it.
Watch out Pal's eleven-percent figure is asserted in the episode, not independently verified there.
- 3
Normalize the comparisons
Measure candidate assets across the same period and account for reinvestment where appropriate.
Pro tip Test more than one start date to reduce selection bias.
Watch out Exceptional historical returns do not establish future returns.
- 4
Calculate the excess
Subtract or otherwise compare the hurdle with each nominal return to estimate real progress under the thesis.
Watch out A positive excess return does not make an asset safe.
- 5
Apply the risk gate
Assess volatility, drawdowns, liquidity, concentration and the consequences if the thesis is wrong.
Pro tip Model a severe loss before making an allocation decision.
Watch out Do not infer that only the highest historical return deserves investment.
In the wild
Pal combines his claimed eight-percent debasement estimate with an assumed three-percent inflation rate to create an eleven-percent annual hurdle. He then argues that the S&P 500 merely matched it, while the Nasdaq and crypto historically exceeded it. Those inputs and conclusions are his claims and would require independent verification before use.
→ Nominal performance is reframed as performance relative to a stated purchasing-power thesis.
Common mistakes
Treating the hurdle as settled fact
The result depends heavily on how purchasing power, inflation and the comparison period are defined.
Ignoring risk after clearing the hurdle
High historical returns can coexist with severe drawdowns, loss, illiquidity and concentration risk.
Is it for you?
Best for
It is best for investors comparing long-term returns under an explicit macroeconomic thesis.
Not ideal for
It is not ideal as a sole basis for concentrating a portfolio or accepting losses someone cannot bear.
From the transcript
“What do I invest in? So, I started dividing everything by that.”
“There were only two assets in the world that outperformed this. Technology, crypto.”
From the episode
The Investing & Crypto Expert: "We Only Have 6 Years Until Everything Changes!", "The S&P 500 Isn't Worth Your Time!", "Don't Keep Spare Cash In A Bank!"