Investing Thread

Off Topic
41

[quote]Soco wrote:
I really think the average person needs to get their personal finances in order before they spend too much time thinking about investing. Sure if you read everything out there, you might get a slightly average return than the average investor but if you are paying 18% interest on credit card bills than it doesn’t matter.

I personally am more of an index investor , so I am admittedly biased.

[/quote]

Sure, that makes sense. I really tend to forget that most people are drowning in debt, because that’s just not how my family did things, and I honestly can’t even imagine living like that.

I mean, I have a good $30k debt (student loan), but I never have more consumer debt than I can pay off immediately. So yes, for an indebted person, dealing with that is a major priority.

However, knowing business doesn’t give you a slightly higher return, it makes you a successful business man or women instead of a degenerate gambler. Warren Buffet didn’t get to where he is by reading the motley fool or crazy lies told by a fraud (Rich dad, poor dad), he got there by studying business and applying what he learned.

Regarding index funds, I don’t know enough to have my own opinion yet, but Kevin Cork presents a decent argument against them in “The investment book” (a Canadian book, probably not readily available in the US). He argues that they will always yeild sub-index returns, because:

  1. They have some administrative fees (even though they are low). This one alone guarantees sub-index returns.

  2. Unlike the index, they have to buy (sell) stock with each new purchase (redemption).

  3. They have to follow the market, and the market. This often means buying high and selling low, which plain doesn’t make sense.

Conversly, some mutual funds consistently perform better than the market.

42

[quote]Aleksandr wrote:
The motley fool is “gimmicky”, IMO. Rich Dad, Poor Dad is BS. If you want to learn about investing, read text books. Finance, marketing, accounting, HR/OB, all of it. I think that the more you understand business, the better an investor you’ll be. The other option, of course, is to be a high-stakes gambler.[/quote]

Any favorite books?

43

[quote]MattFarlick wrote:
If people have to ask for investing advice they don’t have a clue what they are doing when it comes to investing.
[/quote]

True, to an extent. But how does one learn without asking? Hopefully, by asking questions, they’ll receive thoughtful, intelligent answers, as well as referrals to excellent books on the subject (such as Peter Lynch’s One Up on Wall Street).

Now why do you say that? Can you provide some examples? Are you saying that those “in the know” should keep it that way? I’m genuinely curious here.

More or less true, although I would qualify this by saying that people who are “day-trading” don’t have a clue, as opposed to those who buy and hold over the long term.

44

[quote]TeeVee69 wrote:
Everybody’s risk tolerance profile is different. 4-5% in a CD is just fine for some folks who don’t want to risk any part of their principal. Yes, you can earn more with other investments, but you’ll probably have greater risk (higher volatility) to go along with them.[/quote]

Remember, too, that investing is practically worthless if you don’t beat the rate of inflation, which is why bonds aren’t necessarily all that appropriate for long-term investing.

45

I’m 21, started trading stocks last fall with about $6k. I’m down a couple hundred because of a bonehead, “fear-driven” decision on a penny stock. I want to swing trade because I am too impatient to just buy and hold, and I got the time to watch stocks. I’ve got 2.5 years of college left.

As for paying for college, should put as much as possible on student loans(after getting all the scholarships possible), or should I use part of my savings? I would like to graduate with a decent savings.

46

Regarding Index Funds vs Actively Managed funds, Burton Malkiel makes a pretty good argument for index funds in A Random Walk down Wall Street.

47

[quote]Soco wrote:
Any favorite books?
[/quote]

One Up on Wall Street, by Peter Lynch.

You Have More Than You Think, by David and Tom Gardner.

Just for starters, though… pretty much anything by Peter Lynch, the recommondation for The Intelligent Investor (Benjamin Graham) was also a good one.

48

Have to back up Soco here, Rich Dad Poor Dad series of books are a good read for those with minimal knowledge; a good starting place but certainly not where one’s thirst for knowledge should stop.

I wouldn’t be looking at these books for a specific answer to your “how do I start” type questions but the thing about these books is they train your mind to focus on the many possibilities that exist and that focus will push toward asking more questions and seeking more answers.

This is what will ultimately lead you toward financial freedom - your focus on building your dreams and your wealth.
It’s all in your continued focus.

49

[quote]KiloSprinter wrote:
I’m 21, started trading stocks last fall with about $6k. I’m down a couple hundred because of a bonehead, “fear-driven” decision on a penny stock. I want to swing trade because I am too impatient to just buy and hold, and I got the time to watch stocks. I’ve got 2.5 years of college left.

As for paying for college, should put as much as possible on student loans(after getting all the scholarships possible), or should I use part of my savings? I would like to graduate with a decent savings.[/quote]

Kilo, I would strongly advise against swing trading. No one has figured out how to time the market. Remember that any of your gains will also be reduced somewhat by your brokerage fees.

If you are too impatient to buy and hold, now may not be the time to invest. Buy and hold really is one of the best ways to make market in the market. Think about long-term returns.

50

[quote]Aleksandr wrote:

  1. They have some administrative fees (even though they are low). This one alone guarantees sub-index returns.

  2. Unlike the index, they have to buy (sell) stock with each new purchase (redemption).

  3. They have to follow the market, and the market. This often means buying high and selling low, which plain doesn’t make sense.

Conversly, some mutual funds consistently perform better than the market.[/quote]

1 - True, but they have lower fees than any actively managed fund. Nearly all actively managed funds underperform versus the market.

2- True, but they do tend to keep their active trading to a minimum.

3- True, but if you have a number of index funds you can rebalance your portfolio on a regular basis and thus buy low and sell high.

Overall, I agree with many of your points but I think there aren’t many Warren Buffets out there. Some people have a gift for investing and others…well others should stick with index funds.

As for fool.com and rich dad(the author does seem like a scam artist), I think both need to be taken with a grain of salt as they both are clearly fronts for more products. That being said. I think both have some very useful information.

51

[quote]Soco wrote:
Aleksandr wrote:
The motley fool is “gimmicky”, IMO. Rich Dad, Poor Dad is BS. If you want to learn about investing, read text books. Finance, marketing, accounting, HR/OB, all of it. I think that the more you understand business, the better an investor you’ll be. The other option, of course, is to be a high-stakes gambler.

Any favorite books?

[/quote]

Not yet, I’m still young and learning (as opposed to in a few years, when I’ll be old and learning). But I would recommend Fundementals of Corporate Finance by Ross, Westerfield, Jordan, and Roberts. I think they are from the chicago school, and they seem to believe that the stock market is semi-strong efficient, and I am skeptical.

I prefer Warren Buffet’s view, who said “I?d be a bum on the street with a tin cup if the markets were always efficient.”

Also, look into Ben Graham’s “Mr. Market” analogy :slight_smile:

52

[quote]blooey wrote:
Regarding Index Funds vs Actively Managed funds, Burton Malkiel makes a pretty good argument for index funds in A Random Walk down Wall Street.[/quote]

care to present those arguments (at least the basics)?

53

[quote]Soco wrote:
Overall, I agree with many of your points but I think there aren’t many Warren Buffets out there. Some people have a gift for investing and others…well others should stick with index funds.
[/quote]

The fact that all index funds under-perform, while some (although very few) out-perform tells you what you should be looking for.

At the same time, I’ll be honest, I don’t love mutual funds. The second I have 40k to invest, I am going to buy individual stocks and diversify myself. I think I’m smarter than most fund managers, anyway :open_mouth:

54

I could be wrong as it’s been a long time since I read it, but all I really got from Rich Dad, Poor Dad was :

  • My “first” dad didn’t know how to manage his money

  • My “other” dad did

  • Invest your money!

All I got out of the book was…Don’t spend your money, invest it. I didn’t really get any hints, tips, or advice or anything. Like I said though, I think I read it when I was 15 or 16 so I could be WAY wrong.

55

[quote]Lonnie123 wrote:
I could be wrong as it’s been a long time since I read it, but all I really got from Rich Dad, Poor Dad was :

  • My “first” dad didn’t know how to manage his money

  • My “other” dad did

  • Invest your money!

All I got out of the book was…Don’t spend your money, invest it. I didn’t really get any hints, tips, or advice or anything. Like I said though, I think I read it when I was 15 or 16 so I could be WAY wrong.[/quote]

You’re not ‘way wrong’ Lonnie, but you were young and probably only absorbed a portion at that age. There is more info in it but if a person was specifically looking for property books, there are better ones, likewise if you were looking specifically for books on the sharemarket, there are better ones. Most people just want to know how to get rich and the answer to that is a little more in depth than you’ll get out of any 1 book.
I could recommend some good ones but I don’t know if you can get them in the US… or if anyone’s interested.

56

[quote]PSlave wrote:
MattFarlick wrote:
If people have to ask for investing advice they don’t have a clue what they are doing when it comes to investing.

True, to an extent. But how does one learn without asking? Hopefully, by asking questions, they’ll receive thoughtful, intelligent answers, as well as referrals to excellent books on the subject (such as Peter Lynch’s One Up on Wall Street).

If people give investing advice they don’t have a clue what they are doing when it comes to investing.

Now why do you say that? Can you provide some examples? Are you saying that those “in the know” should keep it that way? I’m genuinely curious here.

If people are trading they just don’t have a clue.

More or less true, although I would qualify this by saying that people who are “day-trading” don’t have a clue, as opposed to those who buy and hold over the long term.
[/quote]

I was referring to those asking for advice about the hot stock, where to invest, what instruments to buy/sell etc. For those wanting to learn about finance or investing that is a different story, but one with an equally unhappy ending.

Let us draw a comparison between investing and bodybuilding/weight training/nutrition and hope it helps some of those who have spent more time dealing with one area than the other. Both investing and bodybuilding/weight training/nutrition have the possibility of great rewards: lots of money, and an aesthetically pleasing physique – both ultimately resulting in sex with beautiful women.

Achieving success in investing or bodybuilding/weight training/nutrition is not exactly easy; however, given the desire by so many to achieve such success other unscrupulous people decide to exploit this natural human desire by marketing gimmicks, magic potions, market beating systems, etc.

Weight training/bodybuilding/nutrition has all kinds of gimmicks, from ab-rollers, to supplements, to zone diets, and any other kind of crap you can think of that people will buy in their quest to better themselves. Investing has everything from day trading, to technical analysis and swing trading, to investor’s business daily, to using astrology to predict stocks etc.

All this stuff is the same thing: bullshit in a shiny package. As far as investing goes, don’t think you can beat the market because there are a million books on the shelf that say you can and are written in a language 10 year olds could understand. Don’t think William O’Neal figured out a magic formula and instead of using it himself he’s selling it to you because he is such an altruistic individual. Don’t think that after not having an MBA, or not going to college, not reading the Economist cover to cover, or not even being able to understand a cash flow statement that you are going to know how to invest and produce market beating returns.

Ultimately, as much as I would like to drop the name of a book or two that if read, understood, and the concepts diligently applied, would allow one to… well you know what… fuck it. For those wanting to learn about investing, simply go to the investing section in Barnes and Noble and pick the book with the sexiest cover and most extraordinary title (hopefully with no statistics or mathematical formulas either!) and use that as your investment guide.

57

[quote]Aleksandr wrote:
blooey wrote:
Regarding Index Funds vs Actively Managed funds, Burton Malkiel makes a pretty good argument for index funds in A Random Walk down Wall Street.

care to present those arguments (at least the basics)?[/quote]

It’s been a while since I’ve read the book, but as far as I can remember, his arguments are based mainly on evidence. That is:

  1. The average mutual fund does not beat the S&P 500 index (after fees).
  2. A fund that performs well in the past is just as likely as another fund to perform well, averagely(?), or poorly in the future.

Both of those statements are true (if you look at all the available data, and no, I don’t have it on me). So, you cannot pick mutual funds randomly and guarantee a high return because (1) ensures that you will, on average, lose money. You cannot pick funds based on past returns because past results are a poor indicator of future performance (2). So you have to pick a good mutual fund from other data, which is…what?

Personally, I think it IS possible to beat the index consistently (witness Berkshire Hathaway, ESL, Rennaissance, Harvard and Yale endowments), but it takes more time and effort than most people are willing and able to put in. If you have $4000 to invest, why would you spend 10 hours per week earning an (excellent) annual return of 20% ($800) if you could instead spend 10 hours a week at McDonalds, earning $800 in 16 weeks? That’s an extreme example (I’m sure you could find a better job, or invest in your education and find a better job), but I hope you get the point. It’s just to say that there’s a large opportunity cost at low levels of investment, and the cost shrinks as your pool of funds grows.

Of course, if you still want to pick your own stocks and beat the market, more power to you. I’ll be doing the same thing, of course =).

58

[quote]MattFarlick wrote:
I was referring to those asking for advice about the hot stock, where to invest, what instruments to buy/sell etc.
[/quote]

Ah, good point, I believe I misunderstood your original post. To be fair, I have rarely heard the, “Psst, this stock is really hot” type of “tip,” as most of my friends and coworkers don’t venture into the market, but I always find it funny – and just a little pathetic – to hear someone touting the next big thing without any real information, such as earnings, cash, etc to back it up.

Good analogy… and sex with many beautiful women is my goal on both fronts. Well said!

59

[quote]Aleksandr wrote:
Soco wrote:
The fact that all index funds under-perform, while some (although very few) out-perform tells you what you should be looking for.

At the same time, I’ll be honest, I don’t love mutual funds. The second I have 40k to invest, I am going to buy individual stocks and diversify myself. I think I’m smarter than most fund managers, anyway :O[/quote]

If you can do better than index funds than go for it, invest in individual stocks. I would never start an argument with Warren Buffet about the advantages of passive investing over his methods at Berkshire Hathaway. Even if I was drunk.

The problem for most people is that they undercount their losses and overestimate their gains. Combine that with trasaction costs associated with taxes and buying and selling shares, and you tend to get returns far below any index fund.

*On a related note, here is an interesting article by the way about Hedge Funds put out by the federal reserve.

60

[quote]duke wrote:
You say 4, 5 or 6% return maybe good enough for a young fella, but the derivatives market can return 30% or more. I’m aiming at 90% gross return for this year on derivatives. My real estate returns have averaged over 12% compound. Why would anyone, regardless of age, think that 4 to 6 % is okay.

Knowledge is a key to high returns, not having a fund manager doing your work for you. Einstein apparently said something like… One of the most amazing things on earth is the power of compounding growth… I’m sure someone will know the exact quote, but it’s bloody true.

Invest in your own knowledge and compound your returns.

If you’re interested, if you played a 36 hole game of golf and bet just $1 on the first hole and doubled (compounded) on every hole after that. How much is your potential gain (or loss) at the 36th hole.
Does the answer amaze anyone?

Duke[/quote]

Could you explain what a derivative is in the investing world? Who do you read?