Learning Investing

[Valentas]

I am looking to learn investing.
I am going into a job next year and currently read blogs like Mr Money Moustache
about working, saving and investing. My goal is NOT to retire early because I find
life without work to be unfulfilling and enjoy the grind. What I want, in my opinion,
is to be able to 'want' to work and not 'need' to work.

The current plan is to learn basics of investing and how it all works. I am interested in
reading books, articles and maybe gain advice from fellow members, especially those who
worked for a while already and were making investments for years to share your experience.

I am aware of ways to achieve better returns(specializing, ownership, sales) and most likely choose two of those to focus on but those are risky endeavours and hence I would like to have a backup plan of saving, investing.

Please share your experience.

 

[Turnevies]

I have some specific knowledge on Black-Scholes and so on but I think if you want to take investing serious, that is not really the place to start. There is a whole section on Khan Academy focussed on finance, I think that may be a good place to start.

 

[Architect]

The most important thing and place to start is to understand yourself. There's no 'understanding investing' as it's a huge field and you need to pick your approach. And, when it gets serious and you have real money you have to live with your decisions.

• For example you can day trade. Doesn't work for me, too arbitrary and takes too much time.
• Or you can just time value average and stick money in the market and not pay attention. Doesn't work for me as it's too passive.
• Or you can pick stocks. Doesn't work for me as anybody who believes they can know how an individual company is going to perform is delusional.
• Or, you can do momentum investing (invest with the crowd). Doesn't work for me as I usually go against the crowd, not with.

Ah, now I have a clue. I'm often a contrarian, and I analyze globally not specifically, so there you have it. I study macroeconomic trends and invest contrarily. I've told the story before but I bet against the world in 2007 and invested in a global crash in markets due to a housing bubble. Sold my house and put it in long levered treasuries basically. Made a bundle. Since then there haven't been too many big trends, just following the timeline of de-leverging, but now I'm preparing for the next big turning point.

Anyhow, works for me, so pick your poison.

 

[YOLOisonlyprinciple]

1. Stock Markets day trading etc

Absolute Garbage.
There are huge amts os studies to prove markets are efficient. Meaning no one can realistically consistently beat the market.
The only possible way is by insider information; but you are fooling yourself if u think u can get more insider information than trillion dollar firms

2. Investing using Black scholes etc

Also Garbage.
Companies use super computers and special fibre cables and locate their computers next to the stock market servers to eliminate almost any lag.
They will use nobel prize winners and math experts to derive specialised algorithms to accurately predict way better than a single indvidual can


3. Bubbles

you are kidding urself if u think that an individual, you is capable of predicting bubbles better than trillion $ firms with billions$ in research


4. Property- Reasonable investment because it is inefficient mkt so you can actually use local knowledge to gain profits

5. Gold-
No idea, but probably a decent invstt, with advantage that ure more likely to not want to sell jewels plus they look cool.

6. "Managed" Mutual Funds

Garbage. There is no evidence that active management is beneficial enuf to offset the management costs to result in a net gain.

7. "Index Matching" Mutual Funds

Decent, but situation specific- Long term goals related.
Low management costs. All they do is buy enough stock to ensure that the specified distribution across sectors (say, you todl them to invest 70% into steel and 30% into telecom"), their only job is to do administrative work to ensure this is done.

When to use- when your income needs match the investment growth trend. Say, there is a surge in employment in IT to your country, and it will take 5-10 yrs to mature which means in 5-10 years the IT hardware manufacturers will get good returns. And you as an individual want money 5-10 yrs down the line for child's college fees or sumthg, then investing on this "IT hardware manufacturers" wud be a good idea.
I know that was a very vague example but that is all i could come up with instantly

Rule of thumb, dont buy individual company stocks; only focus on sectors


Summary-

1. Stocks, Commodities, mutual funds
Garbage

2. Unit Linked Investments
Decent

3. Fixed Investments
Best Choice

4. Property
Decent if you have specific insider information


Conclustion-
Mostly invest your money in fixed income investments, none of this "market linked" or "inflation linked" stuff.
Just plain fixed, guaranteed interest rates
Also you may want to bet against your employment industry so that if there is large scale unemployment atleast your investments are doing good



And, also thinking you are "lucky" or "good at investing" is foolish.
So, just dont waste time on learning to invest. If you really want to learn to invest, try to find local business opportunities, maybe local property prices or a friend/someone who is going to setup a new business. But that requires a whole different skillset, and it wouldnt be really worth acquiring the skills unless you really have a large amount to invest in.
But, if you really want to study/practice/get "higher" returns it is only by investing in a local area, in small inefficient markets where it is possible to acquire an information advantage.

Other than that only fixed return investments

 

[YOLOisonlyprinciple]

Also, if you ask most "day traders" "investment agents" etc, they always always invest their "personal savings" in fixed income investments.
None of the market mutual funds BS.
They know what they are doing and dont invest in their own products cos they know their products are garbageand wont invest their "personal money" in any of that garbage


Also, dont get fooled by guaranteed returns, etc
If anything gives you no upper cap, it is generally not a good investment because they are smarter than us which means they profit more by way of management costs, lower than mean guaranteed returns etc.,
What i mean is this, if an invesmnt is guaranteeing 5% returns while fixed market investment is 5.5% while saying that if they get more returns than that you enjoy that too.
What it actually means however is, we expect the market to give 6% returns on average. But, we are going to charge 1% in management costs and also we expect charges from early withdrawals etc to be another 0.2%
Which means, if the individual went for fixed investment he wudve got 5.5%, but now he is expected to get only 4.8%

What i mean to say is, any fancy product which is not a flat out fixed income product is a way for the big companies to make money that is why they give 10% + commission charges to agents for those and 0.5% commission on fixed investments
So, dont get greedy if someone says you will get market returns, but you will be guaranteed a minimum. Companies are always for profit

 

[Valentas]

I am grateful for so many new terms introduced. I will investigate all of them and as Architect said, pick my poison. I'm wondering whether precious metals are a good investment. They were always valuable throughout history while paper currencies collapse eventually. I personally do not understand what are the consequences of record-low interest rates(apart from better mortgage deals) and, say, how quantitative easing or helicopter money affect the world economy. Does anyone have resources in my mind I can study? Like Architect said, he studies macroeconomic trends but how does one go about understanding the fundamentals needed to study those trends? I guess my question is what do I need to learn to understand current economic climate and actions taken by banks and governments?

 

[Tannhauser]

I like the term "investing using Black Scholes", whatever that means. Anyway...

As someone working in a hedge fund doing systematic trading with equities, I can say this about the stock market: if you are looking at the market from the perspective of having read a couple of books, and even a lot of academic papers, the market will indeed look efficient. Even for a hedge fund, with a bunch of PhDs in mathematics and a good infrastructure with low trading costs, it is very hard to consistently outperform the market.

However, it is a huge joke to say that the markets are efficient. For example, I was recently shocked by the miscalculation the whole market did of the probability of Brexit. The market can be quite stupid, but one needs to do *a lot* of disciplined research, and think extremely critically about your own hypotheses about the market. You also need a lot of creativity. If an idea is in a book, it probably doesn't work anymore. Basically you have to outwit a lot of people in the market who themselves are trying to outwit everyone else.

Apart from fixed income with 0 (or negative) interest, there is nothing in the market that is riskless, including property and gold. Everything, in the end, is speculation. If you are keeping cash, you are betting against inflation. If you are holding debt, you are betting against deflation. If you are buying property, you are betting on a sustained demand for that particular property in the future. I personally see no other approach to investing other than having a broad and deep understanding of the economy and the markets. Only then can one start doing good decisions about where to put money.

 

[Architect]

3. Bubbles
you are kidding urself if u think that an individual, you is capable of predicting bubbles better than trillion $ firms with billions$ in research

I put my capital where my mouth is and have been successfully doing this for 15 years.

1. Stocks, Commodities, mutual funds
Garbage

Really?

2. Unit Linked Investments
Decent

Seriously?

3. Fixed Investments
Best Choice

Oh my ....

4. Property
Decent if you have specific insider information

OK, maybe the best advice you've given so far, but there are many ways of RE investing (commercial, residential, cash flow, REIT's, flipping, and so forth) so in general this advice doesn't do much.

Conclustion-
Mostly invest your money in fixed income investments, none of this "market linked" or "inflation linked" stuff.
Just plain fixed, guaranteed interest rates

OK enough

I'm wondering whether precious metals are a good investment.

Not generally. Gold for example is subject to many forces; production (mining), hoarding (it's used as savings in the Middle East), gold bugs, central bank machinations (they rent out their gold stocks). Consider it a commodity (which it is) and decide whether you have the guts for commodities.

I guess my question is what do I need to learn to understand current economic climate and actions taken by banks and governments?

CB's are liquidating bad debt taken on during the previous bubble(s), in addition to providing liquidity (just cheap capital for hire - i.e. loans at cheap rates).

The first, most fundamental concept is you have to understand what money is. Funny how so few people really understand it, but once you do you see how everything in finance flows from this basic principle. Pick up a copy of The Power of Gold, the History of an Obsession by Peter L Bernstein - get it from your library. Read that through and cogitate on the nature of money.

 

[Architect]

I like the term "investing using Black Scholes", whatever that means.

lol, yeah I had the same thought

if you are looking at the market from the perspective of having read a couple of books, and even a lot of academic papers, the market will indeed look efficient. Even for a hedge fund, with a bunch of PhDs in mathematics and a good infrastructure with low trading costs, it is very hard to consistently outperform the market.

However, it is a huge joke to say that the markets are efficient.

Yes exactly, I didn't reply to the market efficiency trope just because I'm so tired of addressing that. That whole philosophy came from the Fresh Water economists and has been pushed so much it's become a religion, like so many things in finance. Interestingly after the 2008 crash the Nobel committee implicitly vindicated both the Salt and Fresh water economists, recognizing that markets are both efficient and inefficient.

Apart from fixed income with 0 (or negative) interest, there is nothing in the market that is riskless, including property and gold. Everything, in the end, is speculation.

Yes, and even fixed income is a speculation that the asset will continue to have value!

 

[YOLOisonlyprinciple]

I like the term "investing using Black Scholes", whatever that means. Anyway...

No need to be patronizing about it. I know Black Scholes is just a formula for derivatives valuation.

I just mentioned it that way cos Turnevies used it.
By "investing using Black Scholes" im just using it as an umbrella term for investing using any mathematical models and economic models and such, espl micro economic models.

Even for a hedge fund, with a bunch of PhDs in mathematics and a good infrastructure with low trading costs, it is very hard to consistently outperform the market.

You are reiterating the exact point i made, and yet it seems that you disagree with me.

As someone working in a hedge fund doing systematic trading with equities, I can say this about the stock market: if you are looking at the market from the perspective of having read a couple of books, and even a lot of academic papers, the market will indeed look efficient.
However, it is a huge joke to say that the markets are efficient. For example, I was recently shocked by the miscalculation the whole market did of the probability of Brexit. The market can be quite stupid, but one needs to do *a lot* of disciplined research, and think extremely critically about your own hypotheses about the market. You also need a lot of creativity. If an idea is in a book, it probably doesn't work anymore. Basically you have to outwit a lot of people in the market who themselves are trying to outwit everyone else.

I didnt want to go into a theoretical discussion into efficiency. Of course there are several studies to suggest both efficiency and inefficiency.
My reply was to OP who isnt very financially literate so i replied to him in very informal terms.

Yes the market isnt perfectly efficient, but is it efficient enough for a non-finance expert to be able to beat the market consistently?
I think so

And, yes i havent worked in investment. Ive only worked in actuarial teams, i was initially inclined to transition to investment banking later, but lost interest in it.
My knowledge only comes from academics. But facts are facts nevertheless.

I personally see no other approach to investing other than having a broad and deep understanding of the economy and the markets. Only then can one start doing good decisions about where to put money.

This is where the key question comes.
Should OP spend the time and effort to study concepts worth years of learning or rather focus on some other investment alternative?

There is a cost to gathering information, how many years of reading do you think it would take OP to be able to actually make accurate investment decisions such that he is able to meet his financial needs better by active investing than passively putting them in a bank?

Also, dont forget the costs of learning directly as in getting your hands burnt initially, is the risk really worth it? Is the time worth it.
If OP wants to learn concepts and wants to do it as an interest, nothing matters. But if OP wants to learn stuff to actually get greater returns, then i would be inclined to say that the cost-benefit doesnt work out.

OP would probably be better off in spending the time in:
a. Improving his skillset in his native profession, or a new one
b. Investing based on special information OP might have, which are local businesses and local real estate.

imo, the cost of learning plus the cost of being updated in the financial sector is too high to be worth it unless you are pursuing a career in it, and in the absence of an environment to readily receive information and quickly analyse it, i feel it just gets worser

If OP has any surplus funds imo hes better off putting it in a savings account or fixed interest securities where atleast the nominal values are more or less guaranteed and is more likely to match OPs life requirements, as in my opinion any effects of inflation and macro economic changes will probably be matched by reduction in prices of OP's needs

That is exactly what i suggested and i stand by that

 

[YOLOisonlyprinciple]

I put my capital where my mouth is and have been successfully doing this for 15 years.

Can you tell me one logical reason why you were able to consistently beat the larger players, and how do you tell confidently that you will be able to consistently do so in the future?

How much of your success is personal bias?
And if they are not biased, what are the possible hurdles a billion dollar company may face in identifying techniques that you used and applying them on the field?

Imo, any individual claiming to be consistently succeeding in the markets AND GETTING BETTER THAN AVERAGE RETURNS in the absence of appropriate infrastructure and specialisation, to me, just doesnt add up.

Quote:
Conclustion-
Mostly invest your money in fixed income investments, none of this "market linked" or "inflation linked" stuff.
Just plain fixed, guaranteed interest rates

Oh my ....

I was just warning OP against pseudo- fixed returns as OP might be a novice.
I work in the actuarial department of an insurance company, and the commission rates that are given to agents for sophisticated products and unit linked products are 20-30 times more than on a whole life policy.

I wonder why? Maybe cos our profit margins are WAAAAY higher on those products.
If a product is complicated it is probably not worth it unless it actually specifically matches your life requirements across different stages in your life, and even then it is probably not worth it given all the huge charges.

Gullible investors are shoved their throat in with products with so called "guaranteed" returns" plus earnings from the portfolio.
Do you think any company would not price for taking risk? They would not only price for risk but add a huge profit margin on it.
Profits of insurance companies are nowadays mostly determined by how many unit linked policies they can sell allowing them to cross subsidise. If you cant sell enough of that crap to idiots you will fall out of the competition. That is why regulators are making it more and more difficult to create complex products, and make it harder to sell them and dont give permission for the products now after the level of customer dissatisfaction in the past.

I was just warning OP about such products. No need to be so patronising because i used very informal language in describing the stuff to OP in the shortest way possible

 

[YOLOisonlyprinciple]

Also just for more on the topic....

https://www.dimensional.com/famafrench/essays/luck-versus-skill-in-mutual-fund-performance.aspx

Here is a summary of a research paper by Eugene Fama, with a link to the paper itself. Fama won the Nobel prize in Economics in 2013, and is a longtime proponent of the efficient market hypothesis. Interestingly, Robert Shiller was a co-recipient of the prize that year, and he does not believe in efficient markets.
tldr of the paper: The distribution of returns of actively managed stock mutual funds over the period 1984-2006 are not much different from what you would expect if the funds were assembled randomly. When you account for fees, 97% of actively managed funds were outperformed by indexes, and 3% were about a tie

Simple statistics, OP is better off not investing in the stock market unless hes a genius like Architect


And even if i accept the premise that OP would be able to beat the market by 1% consistently with rigorous study,

IT JuST ISNT WORTH IT to keep upto date with the markets with the small amount of funds OP will manage.

Simple logic, unless OP has a lot of money to manage, the time invested in learning and gathering info is better off spent working on his own profession

 

[Tannhauser]

This is where the key question comes.
Should OP spend the time and effort to study concepts worth years of learning or rather focus on some other investment alternative?

There is a cost to gathering information, how many years of reading do you think it would take OP to be able to actually make accurate investment decisions such that he is able to meet his financial needs better by active investing than passively putting them in a bank?

It's very simple: it's not up to me to decide for him whether he has enough time and willpower to learn about the markets. I'll just lay out stuff I know based on my experience.

 

[smithcommajohn]

Oh what a fun topic and already lots of sparks flying.

I've been investing for about 13 years. I started with a mere $500 with dreams of striking it rich! I purchased some stock picking software for $30 and I was off! You can imagine how that venture worked out.

I've gone through many different investing theories and tried countless different tactics. Some were flops, some were strong. Some were great for a few months, but then lost me thousands. There's something to be said about living through the experience of watching your hard earned money vaporize right on your computer screen... very humbling. It creates a desire for a more robust and stable investment strategy that can withstand the rough, unknown roads of the future. You sacrifice some potential return, but your risk is greatly diminished, which ultimately will become your goal as you get older (not to lose everything you've built).

The best strategies I've used all revolve around setting a particular allocation to multiple assets and rebalancing those assets every fixed amount of time (say quarterly or yearly) or when they get too far away from your desired exposure. You never try to time the market, but are always invested. For instance, my roommate uses this allocation:

30% VTI (US Equities)
20% VWO (Emerging Market Equities)
20% VNQ (US Real Estate)
15% BND (US Total Bond Market)
15% TIP (US Inflation Protected Bonds)

It is a solid allocation that will perform well under most market scenarios. It lacks strong protection against recession or inflation (despite the inflation protected bonds). For this reason it will have strong years when the economy is strong, but will have potentially large drawdowns when things turn sour. It is an allocation mix he feels comfortable with, and that's a key ingredient.

There are a million different ideas on asset allocation that I won't bother to share, but most are solid as long as they fit your comfort zone.