Ask HN: playin' the stocks game
41 comments
As someone who once worked for a hedge fund, please allow me to give you some words of advice:
- what advantage do you think you will have over others? Unless you have friends in high places and plan to do insider trading (which is very illegal), you will be one more amateur playing against the professionals in the banks and hedge funds. The pros work at least 12 hours a day and have years of experience. They are also better connected than you. So... what advantage do you think you have? If you can't answer this simple question, I advise you to choose a game where you have an advantage.
- if you think I am being too pessimistic and defeatist, do read Prof. Larry Harris' paper The Winners and Losers of the Zero-Sum Game: The Origins of Trading Profits, Price Efficiency and Market Liquidity at http://www-rcf.usc.edu/~lharris/ABSTRACT/Zerosum.htm
- be ready to lose your $2000 (like someone else mentioned before) and accept it as a "price" to pay to learn something about investing.
- brokers are crooks. All of them. They will "rape" you whenever they have a chance.
- don't invest in stocks, invest in yourself. If you are on HN, I assume you like to write code. Investing $2000 in an idea you might have will likely yield better dividends in the long term.
I am not trying to be pedantic or anything. I am only trying to put things in perspective. Everybody would like to make money in the stock market, but few manage to do it... and the ones who do manage to make money consistently over the years (and within the law) most likely have years and years of experience and hard work under their belts.
- what advantage do you think you will have over others? Unless you have friends in high places and plan to do insider trading (which is very illegal), you will be one more amateur playing against the professionals in the banks and hedge funds. The pros work at least 12 hours a day and have years of experience. They are also better connected than you. So... what advantage do you think you have? If you can't answer this simple question, I advise you to choose a game where you have an advantage.
- if you think I am being too pessimistic and defeatist, do read Prof. Larry Harris' paper The Winners and Losers of the Zero-Sum Game: The Origins of Trading Profits, Price Efficiency and Market Liquidity at http://www-rcf.usc.edu/~lharris/ABSTRACT/Zerosum.htm
- be ready to lose your $2000 (like someone else mentioned before) and accept it as a "price" to pay to learn something about investing.
- brokers are crooks. All of them. They will "rape" you whenever they have a chance.
- don't invest in stocks, invest in yourself. If you are on HN, I assume you like to write code. Investing $2000 in an idea you might have will likely yield better dividends in the long term.
I am not trying to be pedantic or anything. I am only trying to put things in perspective. Everybody would like to make money in the stock market, but few manage to do it... and the ones who do manage to make money consistently over the years (and within the law) most likely have years and years of experience and hard work under their belts.
Your post is premised on the stock market being a zero-sum game; for every winner there must be a loser. That is a false premise. Public ownership is a way for companies to raise needed capital in exchange for a share of their future. That's win-win. If you try to beat the market, then your success requires someone else's failure.
So just buy an index fund, and hold on. You will make more money long-term than you would in just about any other asset class.
So just buy an index fund, and hold on. You will make more money long-term than you would in just about any other asset class.
David,
I do agree with you that there are win-win opportunities in the stock market. Investing in index funds (though plain vanilla they might be) is indeed better than having one's money rotting in a checkings account.
A few friends of mine decided to invest in small caps when they were still in college. In the first couple of months they doubled their money. Then they lost it all. If one does have a genuine passion for trading and investing then, by all means, keep trading and investing!!! If one is looking for fast cash, there are easier ways of making money... and there are more fun ways of going thru college than looking at stock quotes on a bunch of LCD screens.
I do agree with you that there are win-win opportunities in the stock market. Investing in index funds (though plain vanilla they might be) is indeed better than having one's money rotting in a checkings account.
A few friends of mine decided to invest in small caps when they were still in college. In the first couple of months they doubled their money. Then they lost it all. If one does have a genuine passion for trading and investing then, by all means, keep trading and investing!!! If one is looking for fast cash, there are easier ways of making money... and there are more fun ways of going thru college than looking at stock quotes on a bunch of LCD screens.
It sounds like your friends tried to beat the market, so their experience is not applicable to my advice. Nor is the need to spend your time looking at stock quotes on LCD screens.
David,
I don't know what your definition of "beating the market" is. What my friends did was to try to find undervalued small caps by looking at the fundamentals. In that sense, what they were doing was more "investing" than "trading". It worked really well for a while, then one of the companies failed to bring a product to the market on time and the stock took a nose dive. Well, the lesson to learn is that due diligence is a wonderful thing. In the arrogance of youth, these guys thought that looking at P/E ratios and other such figures would make them rich. They lost some money, but they're wiser now ;-)
I don't know what your definition of "beating the market" is. What my friends did was to try to find undervalued small caps by looking at the fundamentals. In that sense, what they were doing was more "investing" than "trading". It worked really well for a while, then one of the companies failed to bring a product to the market on time and the stock took a nose dive. Well, the lesson to learn is that due diligence is a wonderful thing. In the arrogance of youth, these guys thought that looking at P/E ratios and other such figures would make them rich. They lost some money, but they're wiser now ;-)
By beating the market, I mean trying to outperform, say, the S&P 500 by identifying underpriced stocks and buying them (and also, by implication, staying away from overpriced stocks).
> don't invest in stocks, invest in yourself
QFT. Unless you are trying to do market-timing (day trading) with penny stocks, your investments aren't going to be liquid enough and they aren't going to return enough to significantly increase that $2000 in a reasonable amount of time.
Day trading in penny stocks is significantly risky. I did it in college once with $3k. I was up to $9k after a month or so, then managed to lose it all in the next couple months. Your luck is probably just as good playing slot machines, and it's probably actually better playing blackjack. Most penny stocks are penny stocks for a reason (they're crappy companies).
You'd do better to spend the $2000 and, more importantly all that wasted time, working on your idea and seeking out investors (if you really need more money).
I'm willing to bet that for a reasonable amount of time, nine times out of ten, it will be easier to get someone to invest $10k in you than it will be to turn $2k into $10k on the market.
QFT. Unless you are trying to do market-timing (day trading) with penny stocks, your investments aren't going to be liquid enough and they aren't going to return enough to significantly increase that $2000 in a reasonable amount of time.
Day trading in penny stocks is significantly risky. I did it in college once with $3k. I was up to $9k after a month or so, then managed to lose it all in the next couple months. Your luck is probably just as good playing slot machines, and it's probably actually better playing blackjack. Most penny stocks are penny stocks for a reason (they're crappy companies).
You'd do better to spend the $2000 and, more importantly all that wasted time, working on your idea and seeking out investors (if you really need more money).
I'm willing to bet that for a reasonable amount of time, nine times out of ten, it will be easier to get someone to invest $10k in you than it will be to turn $2k into $10k on the market.
I have this theory that small transaction size actually confers a small advantage. You never have to worry about having enough orders on the other side of the transaction, thus you can do any transaction at the lowest price offered. Whereas big bid orders are basically the average price of the N lowest offer prices. I have no facts or experience on this, just a theory.
In other words there may be profitable techniques that are impossible for the big boys to use, simply because they can't be bothered with tiny investments.
Also, I thought you could eliminate transaction costs using a broker like zecco. Such a broker might invalidate my above theory though, if it were true.
In other words there may be profitable techniques that are impossible for the big boys to use, simply because they can't be bothered with tiny investments.
Also, I thought you could eliminate transaction costs using a broker like zecco. Such a broker might invalidate my above theory though, if it were true.
The problem is "small" in your definition is at least in the thousands of shares, probably more in the hundreds of thousands of shares in anything liquid. It's true that mutual funds have a hard time moving in and out of the market quickly, but you're competing against traders who will happily do 1000 share trades all day long.
Hmmmm. You are probably right. I still wonder if there might be some advantage in only making small investments, such that the strategy is worthless for investors with money, but not worthless to you.
Suppose you do think you have an advantage - like, you have a PhD in math, you have some clever trading algorithm, and it trades well on paper under what you think are realistic assumptions. Your advantage is, I don't know, that you don't trade on emotion so you do less stupid stuff (I've never traded and have no plans to). Then what?
There are way too many hedge funds building trading systems. Some know what they are doing, but many don't. Trading algorithms are important, but choosing a financial instrument which one understands well and other people understand not-so-well is also critical.
Personally, I think that stocks are too simple. Many people understand them reasonably well. Microsoft's stock is not that different from GM's stock, though Microsoft builds software and GM builds cars. Bonds are more complex. Commodities are even more complex: trading crude oil is not the same as trading sugar or corn. Structured products are probably the most complex of all (not even the banks know how to price them), which leaves room for the small guys to dream of making a profit.
Quoting Paul Graham ( http://www.paulgraham.com/wealth.html ):
"Suppose you are a little, nimble guy being chased by a big, fat, bully. You open a door and find yourself in a staircase. Do you go up or down? I say up. The bully can probably run downstairs as fast as you can. Going upstairs his bulk will be more of a disadvantage. Running upstairs is hard for you but even harder for him."
In my most humble opinion, this applies not only in the start-up arena, but also for small investors up against the big banks and hedge funds. Banks are famous for excruciatingly painful bureaucracy, which makes them slow to react to the market sometimes. Banks typically trade large volumes, which works against them. If there's an edge one can exploit is to trade instruments which one understands very well with people who do not understand them all that well.
Personally, I think that stocks are too simple. Many people understand them reasonably well. Microsoft's stock is not that different from GM's stock, though Microsoft builds software and GM builds cars. Bonds are more complex. Commodities are even more complex: trading crude oil is not the same as trading sugar or corn. Structured products are probably the most complex of all (not even the banks know how to price them), which leaves room for the small guys to dream of making a profit.
Quoting Paul Graham ( http://www.paulgraham.com/wealth.html ):
"Suppose you are a little, nimble guy being chased by a big, fat, bully. You open a door and find yourself in a staircase. Do you go up or down? I say up. The bully can probably run downstairs as fast as you can. Going upstairs his bulk will be more of a disadvantage. Running upstairs is hard for you but even harder for him."
In my most humble opinion, this applies not only in the start-up arena, but also for small investors up against the big banks and hedge funds. Banks are famous for excruciatingly painful bureaucracy, which makes them slow to react to the market sometimes. Banks typically trade large volumes, which works against them. If there's an edge one can exploit is to trade instruments which one understands very well with people who do not understand them all that well.
The "few" who manage to make money in the stock market are the ones who buy when the market is down and sell when it's up. It's as simple as that.
The difficulty is knowing when the market is down enough for you to make money before you're forced out of the market because you need the money.
I don't know if that moment is now, but the pros who work 12 hours on it apparently don't know either. Otherwise they wouldn't be in trouble now.
So, let me ask you a different question. What makes you think that kyro would do worse than the pros who lost entire banks by getting in at the top?
I'm not saying he should put money in the stock market, but humbleness before those awesome pros that he would be up against is not a good reason to stay out.
And by the way, even if you view the market as a zero sum game (which it is not, but that's another debate), you forget one thing: Many pros are forced to sell right now. They are forced to lose because of margin calls, redemptions, minimum capital requirements, etc.
So it's not necessarily the admirable wisdom of the pros you are up against right now. They are on the floor. Their hands are tied. They have no choice but to sell to you knowing it's not to their advantage in the long run.
If you are 100% in cash and don't need the money within the next 2 years and you don't have to meet margin calls, redemptions or capital requirements, you win, no matter how smart you are compared to the pros.
The difficulty is knowing when the market is down enough for you to make money before you're forced out of the market because you need the money.
I don't know if that moment is now, but the pros who work 12 hours on it apparently don't know either. Otherwise they wouldn't be in trouble now.
So, let me ask you a different question. What makes you think that kyro would do worse than the pros who lost entire banks by getting in at the top?
I'm not saying he should put money in the stock market, but humbleness before those awesome pros that he would be up against is not a good reason to stay out.
And by the way, even if you view the market as a zero sum game (which it is not, but that's another debate), you forget one thing: Many pros are forced to sell right now. They are forced to lose because of margin calls, redemptions, minimum capital requirements, etc.
So it's not necessarily the admirable wisdom of the pros you are up against right now. They are on the floor. Their hands are tied. They have no choice but to sell to you knowing it's not to their advantage in the long run.
If you are 100% in cash and don't need the money within the next 2 years and you don't have to meet margin calls, redemptions or capital requirements, you win, no matter how smart you are compared to the pros.
"The "few" who manage to make money in the stock market are the ones who buy when the market is down and sell when it's up."
Not necessarily in that order ;-)
"the pros who work 12 hours on it apparently don't know either. Otherwise they wouldn't be in trouble now."
Not quite true. I was referring to the stock market. The current crisis was not caused by stocks, but my collaterized debt obligations and other arcane financial products which no one knows how to price.
"I'm not saying he should put money in the stock market, but humbleness before those awesome pros that he would be up against is not a good reason to stay out."
I don't like stocks as an investment, so maybe I am biased. I have known so many people who have tried to make a fast buck in the stock market and lost it all, that maybe I am too pessimistic.
It's not my money, so Kyro should do whatever he feels like. However, I think some realism is always desirable. But then, it's just $2000. That's peanuts. It's not like one's entire life will be doomed if one loses $2000, right?
Not necessarily in that order ;-)
"the pros who work 12 hours on it apparently don't know either. Otherwise they wouldn't be in trouble now."
Not quite true. I was referring to the stock market. The current crisis was not caused by stocks, but my collaterized debt obligations and other arcane financial products which no one knows how to price.
"I'm not saying he should put money in the stock market, but humbleness before those awesome pros that he would be up against is not a good reason to stay out."
I don't like stocks as an investment, so maybe I am biased. I have known so many people who have tried to make a fast buck in the stock market and lost it all, that maybe I am too pessimistic.
It's not my money, so Kyro should do whatever he feels like. However, I think some realism is always desirable. But then, it's just $2000. That's peanuts. It's not like one's entire life will be doomed if one loses $2000, right?
There's a lot of people out there that invest without any prior knowledge at all, I wouldn't doubt that many of them don't even realise how much there is to stock trading. I have known someone that put down £30k without understanding even the basics, and obviously they lost it all. I don't think you have to beat the pro's, you just have to beat the idiots, and be blessed with some luck.
I agree with other comments, you have to be ready to lose the money, hopefully in exchange for knowledge. If you can't afford to throw the money away, don't risk it. But you never know until you try..
I agree with other comments, you have to be ready to lose the money, hopefully in exchange for knowledge. If you can't afford to throw the money away, don't risk it. But you never know until you try..
I agree with what you say, but at some point it's a good idea to buy stocks.
1) If you buy a range of dividend stocks you have vary good odds of making money over the long term. Just not a lot of money.
2) Always trade at least 1k or the transaction costs are going to kill you.
3) Time is on your side. 2,000 * 1.05 ^ (65 - 21) = 17,000, but paying taxes on this every year is going to bite you.
4) Mutual funds have a worse return than just buying stocks, but the transaction costs are less harsh so if your just in the market for a few years go with an index fund.
1) If you buy a range of dividend stocks you have vary good odds of making money over the long term. Just not a lot of money.
2) Always trade at least 1k or the transaction costs are going to kill you.
3) Time is on your side. 2,000 * 1.05 ^ (65 - 21) = 17,000, but paying taxes on this every year is going to bite you.
4) Mutual funds have a worse return than just buying stocks, but the transaction costs are less harsh so if your just in the market for a few years go with an index fund.
If you buy a range of dividend stocks you have vary good odds of making money over the long term. Just not a lot of money.
That's nice until they cut their dividend. Which should be happening in the next 6 months in weak sectors.
That's nice until they cut their dividend. Which should be happening in the next 6 months in weak sectors.
- I agree you don't have any advantage. On the other hand the meltdown has already happened, so the prices have been corrected already.
- On the other hand, using the stock-market by investing for the long-term is the biggest crap someone can sell you. There are better ways to invest for the long term, assuming you have more money.
- $2000 may be a lot to you, but it's not a lot of money. So assuming you are a fast learner, want high returns and you have the risk gene, I would recommend learn forex instead. You will learn a lot more in 6 months than what you will learn investing for the stock-market. You will probably lost at least 50% of your capital but you can't learn if you don't burn real money.
- On the other hand, using the stock-market by investing for the long-term is the biggest crap someone can sell you. There are better ways to invest for the long term, assuming you have more money.
- $2000 may be a lot to you, but it's not a lot of money. So assuming you are a fast learner, want high returns and you have the risk gene, I would recommend learn forex instead. You will learn a lot more in 6 months than what you will learn investing for the stock-market. You will probably lost at least 50% of your capital but you can't learn if you don't burn real money.
(I mean all of this in terms of making an extra few percent - not making 2k into 200 million)
I think you have the advantage of timing. Being a casual investor you can leave $ as cash until an opportunity arises. You don't need to invest in this current landslide until the smoke clears, big firms and anyone who has already lost money is already committed (few will cut their losses).
You also have the luxury of just needing to choose one or two good companies. Drop the $2000 in Microsoft in the early days and you would be a rich man. Take that lesson to today, and maybe you think RIMM is oversold and will be the dominant mobile player for the next 10 years. You put your chips there, and not spread out over 5 mobile stocks.
I realize those two things are very difficult to do (timing and selection), but I do think certain individuals can do it better than the rest of the market.
My biggest point though: Don't waste ANY time in the market until you have enough money so that the difference between 3% returns and 5% is meaningful. 2K + the market == a waste of your time, as others have suggested invest that into yourself.
I think you have the advantage of timing. Being a casual investor you can leave $ as cash until an opportunity arises. You don't need to invest in this current landslide until the smoke clears, big firms and anyone who has already lost money is already committed (few will cut their losses).
You also have the luxury of just needing to choose one or two good companies. Drop the $2000 in Microsoft in the early days and you would be a rich man. Take that lesson to today, and maybe you think RIMM is oversold and will be the dominant mobile player for the next 10 years. You put your chips there, and not spread out over 5 mobile stocks.
I realize those two things are very difficult to do (timing and selection), but I do think certain individuals can do it better than the rest of the market.
My biggest point though: Don't waste ANY time in the market until you have enough money so that the difference between 3% returns and 5% is meaningful. 2K + the market == a waste of your time, as others have suggested invest that into yourself.
>- I agree you don't have any advantage. On the other hand the meltdown has already happened, so the prices have been corrected already.
A couple of summers ago someone could just have easily said: "on the other hand, house prices have ballooned, so the massive undervaluations in the housing market have been corrected already"
You are arbitrarily calling a bottom without any justification other than an efficient market hypothesis, which, given recent volatility, is hard to put forward.
A couple of summers ago someone could just have easily said: "on the other hand, house prices have ballooned, so the massive undervaluations in the housing market have been corrected already"
You are arbitrarily calling a bottom without any justification other than an efficient market hypothesis, which, given recent volatility, is hard to put forward.
I am not in position to compare the two. But, the housing market was growing globally and so fast that the it was obvious it is artificial.
However, if you said that, yeah that's the answer you actually got.
"arbitrarily calling a bottom without any justification other than an efficient market hypothesis"
the deal is that you should not make predictions on what the outcome you need to be. Rather, correct you predictions and adjust your investments.
However, if you said that, yeah that's the answer you actually got.
"arbitrarily calling a bottom without any justification other than an efficient market hypothesis"
the deal is that you should not make predictions on what the outcome you need to be. Rather, correct you predictions and adjust your investments.
As I remember, there was only one major player who realised it. I think this is the definition of non-obvious.
If it was so obvious that is was artificial, then you would have taken the bet.
If it was so obvious that is was artificial, then you would have taken the bet.
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Expect to lose your $2000. I'm not trying to dissuade you -- investing is a skill, and if it only costs $2000 to learn it, you've done great. If you're not afraid to lose your capital, you'll be much better positioned to take calculated risks.
Be aware of commissions. If you have only $2000, you will have to engage in fewer, more profitable trades -- otherwise commissions will completely erode your profits. Let's say it costs $10 to make a round-trip buy/sell trade. That's already 0.5% of your capital right there. If you do 10 trades a year, you're starting off with an annual return of -5%.
Traditional stock picking really isn't my thing. It's nearly impossible to have an informational advantage. The professionals can barely beat their benchmark on a regular basis. It just doesn't make sense to play the stock picking game unless you have a credible reason to believe that you have an edge over the competition.
A great place to hang out is www.nuclearphynance.com. It's the best message board for quant finance. Lurk there for a while and learn about the computational and quantitative side of finance. Traditional stock picking isn't really related to hacking, but there are sides of finance that are.
Be aware of commissions. If you have only $2000, you will have to engage in fewer, more profitable trades -- otherwise commissions will completely erode your profits. Let's say it costs $10 to make a round-trip buy/sell trade. That's already 0.5% of your capital right there. If you do 10 trades a year, you're starting off with an annual return of -5%.
Traditional stock picking really isn't my thing. It's nearly impossible to have an informational advantage. The professionals can barely beat their benchmark on a regular basis. It just doesn't make sense to play the stock picking game unless you have a credible reason to believe that you have an edge over the competition.
A great place to hang out is www.nuclearphynance.com. It's the best message board for quant finance. Lurk there for a while and learn about the computational and quantitative side of finance. Traditional stock picking isn't really related to hacking, but there are sides of finance that are.
Well, as far as informational advantage, all company related information seems to be public - balance sheets, conference calls, etc. Are you referring to information that deals with the second to second fluctuations of stock prices due to sell-offs and fund activity?
Are there any services that help to narrow the informational gap between common investors and professional managers?
Are there any services that help to narrow the informational gap between common investors and professional managers?
If there are, everyone has access to the information, neutralizing it's utility to you. A few things you might want to read:
http://www.wallstreetselfdefensemanual.com/the_wall_street_s... http://www.sanfranmag.com/story/best-investment-advice-youll...
http://www.wallstreetselfdefensemanual.com/the_wall_street_s... http://www.sanfranmag.com/story/best-investment-advice-youll...
The only real advantage open to you is a better understanding of the industry than most investors. EX: Buying dell in 1995, the market is booming and they have a good reputation so you do the math and think they are undervalued.
About the commissions, Zecco is an online broker which gives the first 10 trades (one way) every month for free.
Zecco is an online broker which gives the first 10 trades (one way) every month for free.
Zecco (Zero Cost) sounds like a good brokerage option for low-cost ($4.50 for trades that are not free) stock-trading, as long as customer service is not a priority. http://en.wikipedia.org/wiki/Zecco.com
Another poster also mentioned Zecco in this thread. http://news.ycombinator.com/item?id=441256
Zecco (Zero Cost) sounds like a good brokerage option for low-cost ($4.50 for trades that are not free) stock-trading, as long as customer service is not a priority. http://en.wikipedia.org/wiki/Zecco.com
Another poster also mentioned Zecco in this thread. http://news.ycombinator.com/item?id=441256
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With $2,000, the best investment you can make is purchasing quality, non-perishable dry goods in bulk as you spot them on sale.
That's not sarcasm. You'll be eating and wearing out your stuff one way or another and buying a year's worth of rice, grass seed, socks, underwear, cat litter, detergent, toothpaste, etc. when you spot it on sale could shave 20%+ off your living expenses.
So, a greater than 20% return. No risk, no taxes, and no commission paid. You really can't do better than that to put an extra $500 in your pocket two years from now.
That's not sarcasm. You'll be eating and wearing out your stuff one way or another and buying a year's worth of rice, grass seed, socks, underwear, cat litter, detergent, toothpaste, etc. when you spot it on sale could shave 20%+ off your living expenses.
So, a greater than 20% return. No risk, no taxes, and no commission paid. You really can't do better than that to put an extra $500 in your pocket two years from now.
Risk of theft, fire and cost of storage.
(Might still be a good idea.)
(Might still be a good idea.)
You get a gold star for pedantry but if those risks aren't already covered by your home/apartment insurance, that should be the first thing you purchase.
If you don't have enough space to store extra rice and underwear, you're unlikely to have sufficient assets to invest in the first place.
If you don't have enough space to store extra rice and underwear, you're unlikely to have sufficient assets to invest in the first place.
Ok, the most important risk I see in practise is that you will move and it's cumbersome to carry around stuff.
This is an interesting idea..but keep in mind that you're locking yourself into a particular brand of each of the products. If you suddenly find that you hate the rice, toothpaste and underwear, you're out of luck.
First of all, ignore Jim Cramer!! Stay as far away from him as possible. The little bits of truth he speaks are not worth wading through the coin tosses, just stay away.
Next, when you're trying to figure out which stocks to buy, forget about the stocks. Don't look to PE's, and all the other ratios to figure out where the market is going.
Look at the world around you. Look at where the /world/ is going. Which things are going to be hot 20 years from now? Those are the things that are going to be your biggest wins. You only need one or two or three really big winners to set you for life and you have many years to find them.
Don't look at the latest headlines to decide where to put your money. You may make money trading stocks, buying at $22 and selling at $26, it is possible and that is very likely to happen.
But that is not the goal. Four dollars is not the goal. Four million dollars is the goal and that takes years and years.
So, take your time. Don't invest any real dollars for a year. Take the dollars you would invest and put them into books and education and paper trading. I know it sounds lame and where's the fun in that, but if fun is what you are looking for, go to vegas. Poker is more exciting and easier to figure out how to win and you can make a lot of money with a $2,000 bank roll if you play your cards right.
If you are just absolutely itching to put that money into the market, look in to index funds. Index funds are easily managed funds that don't cost a lot of money to keep running but are still diversified.
Put your money into one of those, like buy the QQQQ or something -- IT MAY CRASH right after you buy it, the point isn't to make money, the point is to pay attention. Pay attention to the short term swings in the market, but don't buy or sell based on them.
Look at the fundamentals of the entire market to decide when to make big moves. Make little moves on little time frames, big moves on big time frames.
For example, you could have looked at the markets a couple years back and known that the future didn't look so hot. You probably didn't know when everything was going to collapse, but you knew the fundamentals weren't looking very good. Okay, so then you might want to tend toward market underweight.
Anyway, lots of useless advice summed up in a couple words: Don't get trigger happy. Use your head. Practice makes perfect. Stocks are not a get rich quick scheme.
Next, when you're trying to figure out which stocks to buy, forget about the stocks. Don't look to PE's, and all the other ratios to figure out where the market is going.
Look at the world around you. Look at where the /world/ is going. Which things are going to be hot 20 years from now? Those are the things that are going to be your biggest wins. You only need one or two or three really big winners to set you for life and you have many years to find them.
Don't look at the latest headlines to decide where to put your money. You may make money trading stocks, buying at $22 and selling at $26, it is possible and that is very likely to happen.
But that is not the goal. Four dollars is not the goal. Four million dollars is the goal and that takes years and years.
So, take your time. Don't invest any real dollars for a year. Take the dollars you would invest and put them into books and education and paper trading. I know it sounds lame and where's the fun in that, but if fun is what you are looking for, go to vegas. Poker is more exciting and easier to figure out how to win and you can make a lot of money with a $2,000 bank roll if you play your cards right.
If you are just absolutely itching to put that money into the market, look in to index funds. Index funds are easily managed funds that don't cost a lot of money to keep running but are still diversified.
Put your money into one of those, like buy the QQQQ or something -- IT MAY CRASH right after you buy it, the point isn't to make money, the point is to pay attention. Pay attention to the short term swings in the market, but don't buy or sell based on them.
Look at the fundamentals of the entire market to decide when to make big moves. Make little moves on little time frames, big moves on big time frames.
For example, you could have looked at the markets a couple years back and known that the future didn't look so hot. You probably didn't know when everything was going to collapse, but you knew the fundamentals weren't looking very good. Okay, so then you might want to tend toward market underweight.
Anyway, lots of useless advice summed up in a couple words: Don't get trigger happy. Use your head. Practice makes perfect. Stocks are not a get rich quick scheme.
My favorite posts and sites:
Mark Cuban's post on stocks: http://blogmaverick.com/2008/09/08/talking-stocks-and-money/
A blog of a hedge fund trader in Japan: http://nihoncassandra.blogspot.com
A blog of a hedge fund trader in London: http://macro-man.blogspot.com/
Reminices of a stock operator - written in the 1920's, everything he says still applies today.
If you really want to understand both the economy and stocks, try doing this search in google: site:blogs.cfr.org/setser/ mencius moldbug and read every comment by Mencius.
Finally, I recommend a short comment I made about stocks and investing here: http://www.newmogul.com/item?id=2587
I was a huge fan of the book "A Random Walk Down Wall St" when I first read it. But now I believe that it is seriously misguided. The stock market is a far different beast than it was in 1970.
Mark Cuban's post on stocks: http://blogmaverick.com/2008/09/08/talking-stocks-and-money/
A blog of a hedge fund trader in Japan: http://nihoncassandra.blogspot.com
A blog of a hedge fund trader in London: http://macro-man.blogspot.com/
Reminices of a stock operator - written in the 1920's, everything he says still applies today.
If you really want to understand both the economy and stocks, try doing this search in google: site:blogs.cfr.org/setser/ mencius moldbug and read every comment by Mencius.
Finally, I recommend a short comment I made about stocks and investing here: http://www.newmogul.com/item?id=2587
I was a huge fan of the book "A Random Walk Down Wall St" when I first read it. But now I believe that it is seriously misguided. The stock market is a far different beast than it was in 1970.
Index funds. As a broad generalization, index funds are superior to managed funds due to higher long-term returns and far lower fees.
As another broad generalization, you can have higher returns than index funds (aka the market) only at the cost of increased risk.
As another broad generalization, you can have higher returns than index funds (aka the market) only at the cost of increased risk.
+1 I'd recommend reading The Boglehead's Guide to Investing. And checking out the forums over here: http://www.bogleheads.org/ Amazingly intelligent discussion going on.
I recall reading somewhere that most pro traders can't even beat the common index funds.
Well, I think about 75% of mutual funds underperform market index funds that charge fractions of the fees. And those are managed by pros with years and years of training and experience.
It's a tough world for the individual. Yes, the risk is higher, but the reward is also higher.
One of the first things to learn is your own risk tolerance. That's key.
It's a tough world for the individual. Yes, the risk is higher, but the reward is also higher.
One of the first things to learn is your own risk tolerance. That's key.
I would absolutely recommend reading "A Random Walk Down Wall Street" by Burton Malkiel. Its a great introduction to the theory of efficient markets.
Also, "Fooled by Randomness"
How can you believe the efficient market theory after the events of October 2008? The stock market may be unpredictable, but it is far from rational. IMHO, the analysis "A Random Walk Down Wall St" does not really understand the nature of the modern stock market (although reading it is better than listening to Jim Cramer).
The efficient market hypothesis says that you cannot predict stock returns using past prices and indicators; future price movements are due to news. Since news are unpredictable (by definition), returns are random.
In October 2008 there were some pretty shocking news and the market went down. I don't see how that invalidates the hypothesis.
EMH might have its weaknesses, and it might be even seriously flawed. But it's not invalidated because there was a crash or because people do "irrational" things, unless this irrationality is predictable.
(I believe the definition of "news" must be a bit wide for the hypothesis to work. If a big investor changes his mind about his risk tolerance and decides to sell a big chunk of stock, this is "news".)
In October 2008 there were some pretty shocking news and the market went down. I don't see how that invalidates the hypothesis.
EMH might have its weaknesses, and it might be even seriously flawed. But it's not invalidated because there was a crash or because people do "irrational" things, unless this irrationality is predictable.
(I believe the definition of "news" must be a bit wide for the hypothesis to work. If a big investor changes his mind about his risk tolerance and decides to sell a big chunk of stock, this is "news".)
It's not the crash that invalidates it, it's the extreme variance. At one point, the S&P had two swings of 10% in one day. These kinds of swings were common, and they often happened without any shocking news arriving in between the swings.
Since the mid-1980's, stocks have traded as collectibles, not as cash flows. Thus the price of stocks is not based on fundamentals, but on game theory. The stock market is a coordination game with massive feedback loops in it.
Since the mid-1980's, stocks have traded as collectibles, not as cash flows. Thus the price of stocks is not based on fundamentals, but on game theory. The stock market is a coordination game with massive feedback loops in it.
Just for the sake of clarity, my post didn't go so far as to endorse the efficient market hypothesis as 100% valid. I do however think it is fundamental to have an understanding of the basic precepts before diving in the market.
I would agree that the market is not purely efficient (in the EMH sense). But I don't think the inefficiencies are things that an individual investor with $2000 can reliably make money on.
EMT assumes an auction of rational buyers and sellers.
I would also highly recommend reading a biography of Warren Buffett. I just read "The Snowball", but there's also a shorter one out now as well.
For me, Warren Buffett and Charlie Munger's investment advice resonates the most. You could start here:
http://ycombinator.com/munger.html
Also, before buying mutual funds, read this:
http://www.sanfranmag.com/story/best-investment-advice-youll...
http://ycombinator.com/munger.html
Also, before buying mutual funds, read this:
http://www.sanfranmag.com/story/best-investment-advice-youll...
Benjamin Graham's The Intelligent Investor is a classic you should probably read. Burton Malkiel's Random Walk Down Wall Street was also interesting. I hear that Hull's Options Futures and Other Derivatives is a good intro to the more mathematically sophisticated instruments, but I haven't read it myself.
Save your money and spend it on something useful instead.
Or buy a newspaper stock section blown up to wall-size, a monkey, and some darts.
But seriously, Google "survivorship bias".
The ones selling advice are doing so because they were the ones lucky enough to survive and smart enough to realize that selling advice is more predictably profitable than playing the market.
Or buy a newspaper stock section blown up to wall-size, a monkey, and some darts.
But seriously, Google "survivorship bias".
The ones selling advice are doing so because they were the ones lucky enough to survive and smart enough to realize that selling advice is more predictably profitable than playing the market.
The ones selling advice are doing so because they were the ones lucky enough to survive and smart enough to realize that selling advice is more predictably profitable than playing the market.
Don't be so quick to judge. There are plenty of guys out there that trade their own money as well as have services on the side. The investment service field is lucrative to proven traders because it is much less volatile and risky than their current proffestion.
Brian Shannon is one example (alphatrends.net). He sells books and seminars but he also sticks his neck out there and actually admits when he's wrong.
Don't be so quick to judge. There are plenty of guys out there that trade their own money as well as have services on the side. The investment service field is lucrative to proven traders because it is much less volatile and risky than their current proffestion.
Brian Shannon is one example (alphatrends.net). He sells books and seminars but he also sticks his neck out there and actually admits when he's wrong.
The nickel version of A Random Walk Down Wall Street (which many folks here have recommended) is on Philip Greenspun's site:
http://philip.greenspun.com/materialism/money
I'd like to call out one small part of that essay:
"In every office there is at least one sorry loser checking the market every ten minutes, going home at night to read financial reports, running charts, and buying software to manage his complex portfolio. If he were a managing a $10 billion mutual fund, perhaps this effort would be worth it. But to try to beat the index by 2% with a portfolio of $50,000? That's $1,000 extra/year. Even assuming that he can get that extra 2%, he would have earned far more per hour working the night shift at the local 7-Eleven. Your time is valuable. If you must be greedy, then be greedy and smart and take a consulting job. Or enjoy the extra time with your friends and family. Don't waste it trying to beat the market."
http://philip.greenspun.com/materialism/money
I'd like to call out one small part of that essay:
"In every office there is at least one sorry loser checking the market every ten minutes, going home at night to read financial reports, running charts, and buying software to manage his complex portfolio. If he were a managing a $10 billion mutual fund, perhaps this effort would be worth it. But to try to beat the index by 2% with a portfolio of $50,000? That's $1,000 extra/year. Even assuming that he can get that extra 2%, he would have earned far more per hour working the night shift at the local 7-Eleven. Your time is valuable. If you must be greedy, then be greedy and smart and take a consulting job. Or enjoy the extra time with your friends and family. Don't waste it trying to beat the market."
Avoid individual stocks. Without insider knowledge, an individual is basically gambling when they invest in individual companies. Try finding a fund that provides good returns, and let a professional who has hundreds of millions of dollars in leverage and much better insider knowledge make the specific decisions.
The other key is to look abroad, especially in emerging markets right now. That, and Chinese infrastructure (i.e., airports).
The other key is to look abroad, especially in emerging markets right now. That, and Chinese infrastructure (i.e., airports).
> Without insider knowledge
> Try finding a fund that provides good returns
Based on what, exactly?
> Try finding a fund that provides good returns
Based on what, exactly?
Today there are so many ways you can "practice" trading I'd recommend using a stock market game before jumping in. You will make many mistakes in trading; might as well make them on a simulator.
http://vse.marketwatch.com/Game/Homepage.aspx
The people saying "be prepared to lose it all" are crazy. You only need to be prepared to loose it all if you're undertaking a really risky strategy.
Of course this depends on your goals. If you're just picking individual stocks based on thin information with little industry knowledge and hopes to make a quick buck, then, yeah be prepared to lose it all.
If you are trying to enter the market for the first time with a long-term portfolio strategy, you're doing it wrong if you must also prepare to lose it all.
http://vse.marketwatch.com/Game/Homepage.aspx
The people saying "be prepared to lose it all" are crazy. You only need to be prepared to loose it all if you're undertaking a really risky strategy.
Of course this depends on your goals. If you're just picking individual stocks based on thin information with little industry knowledge and hopes to make a quick buck, then, yeah be prepared to lose it all.
If you are trying to enter the market for the first time with a long-term portfolio strategy, you're doing it wrong if you must also prepare to lose it all.
One more thing... +1 for the people suggesting to read stuff by Warren Buffet and doing index funds. Long-term, buy-and-hold, diversified investing is the best way to go.
Read "The Intelligent Investor". It was written many years ago and is still relevant today (it's actually scary how history seems to repeat itself). Regarding fees, note that commissions are not the only costs to transactions. Remember the bid/ask spread and that as a small investor you will be taken advantage of.
Long term is the way to go, IMHO. It is nearly impossible to predict short term price movements. Also, forget the efficient market hypotheses; if the SP500 can go up 5% one day and down 5% the next it's obviously bogus. You can count on the average stock owner to be either overly optimistic or overly pessimistic (and not just a little bit). Do you homework first and keep your head.
Find companies with business models you can understand: how are they making revenue, what are their costs, what are their risks? Use discounted cash flows (i.e. NPV) to find a fair market price (P/E is good rough estimate). Be very conservative when doing this, especially with regards to expected EPS and growth. Double digit growth cannot be maintained and generally high growth companies are overvalued. Most libraries have S&P reports that you can study for free (good for EPS data although take it with a grain of salt). Some discount brokers also offer stock reports. Note that analysis recommendations are usually bogus but it doesn't hurt to take note.
Index funds are a good way to diversity but watch out for fees (I like Vanguard, especially their ETFs) and too much portfolio turnover (some are just badly designed). However, it's my opinion that you can do better than the indexes with a little common sense (see above) and if you can stomach the extra risk. Stick to large cap stocks because they are more liquid and less susceptible to insider information. It doesn't hurt to look at insider activity (although note the effects of stock options).
$2000 is not much money, probably not enough to start messing with individual stocks. I would stick it low fee, value ETF and forget about it. $10,000 is probably a more reasonable starting amount, say 25% in high-grade bonds, 25% in a index fund, and 50% in individual stocks of your choosing (say 2 or 3).
Long term is the way to go, IMHO. It is nearly impossible to predict short term price movements. Also, forget the efficient market hypotheses; if the SP500 can go up 5% one day and down 5% the next it's obviously bogus. You can count on the average stock owner to be either overly optimistic or overly pessimistic (and not just a little bit). Do you homework first and keep your head.
Find companies with business models you can understand: how are they making revenue, what are their costs, what are their risks? Use discounted cash flows (i.e. NPV) to find a fair market price (P/E is good rough estimate). Be very conservative when doing this, especially with regards to expected EPS and growth. Double digit growth cannot be maintained and generally high growth companies are overvalued. Most libraries have S&P reports that you can study for free (good for EPS data although take it with a grain of salt). Some discount brokers also offer stock reports. Note that analysis recommendations are usually bogus but it doesn't hurt to take note.
Index funds are a good way to diversity but watch out for fees (I like Vanguard, especially their ETFs) and too much portfolio turnover (some are just badly designed). However, it's my opinion that you can do better than the indexes with a little common sense (see above) and if you can stomach the extra risk. Stick to large cap stocks because they are more liquid and less susceptible to insider information. It doesn't hurt to look at insider activity (although note the effects of stock options).
$2000 is not much money, probably not enough to start messing with individual stocks. I would stick it low fee, value ETF and forget about it. $10,000 is probably a more reasonable starting amount, say 25% in high-grade bonds, 25% in a index fund, and 50% in individual stocks of your choosing (say 2 or 3).
You might want to try using the free Stock Market Game UpDown for a few weeks/months to practice investing:
http://www.updown.com/?_refer=36311
They give you $1 million in play money to invest, but you actually make real money based on your performance (no minimum transfer amount -- I've made a whooping $0.82 so far, but I can withdraw it if I want).
http://www.updown.com/?_refer=36311
They give you $1 million in play money to invest, but you actually make real money based on your performance (no minimum transfer amount -- I've made a whooping $0.82 so far, but I can withdraw it if I want).
$2000 really isn't enough to "play the market". As the other comments have suggested there is too much stacked against you.
If you really want to try your hand, I'd pick 1 moderately risky stock with a shot at long-term (5-7 years) surprise growth. There is a high probably your $2000 will become $200, but that probability exists almost universally.
Personally, if I was going to bet a $2000 chunk, I would throw it at Ford stock today (F). This is based on the fact that I used to work there (FSIC), still know several people in the company, and have a belief that they have a solid long-term strategy. There is a high probability that they'll run out of money before they can fully enact that strategy, but if they do, that $2.50 stock will easily be $25 in 7 years. Or $0. That's the fun of trying to make money on individual stock trades :)
In 5 years, you'll either have a decent chunk of money, or nothing. Neither outcome is life-changing anyway.
If you really want to try your hand, I'd pick 1 moderately risky stock with a shot at long-term (5-7 years) surprise growth. There is a high probably your $2000 will become $200, but that probability exists almost universally.
Personally, if I was going to bet a $2000 chunk, I would throw it at Ford stock today (F). This is based on the fact that I used to work there (FSIC), still know several people in the company, and have a belief that they have a solid long-term strategy. There is a high probability that they'll run out of money before they can fully enact that strategy, but if they do, that $2.50 stock will easily be $25 in 7 years. Or $0. That's the fun of trying to make money on individual stock trades :)
In 5 years, you'll either have a decent chunk of money, or nothing. Neither outcome is life-changing anyway.
I run a stock options website (investingwithoptions.com) and am known as one of the better options guys out there.
2k won't get you far in terms of trading. You should probably look into passive investing. You will get much larger returns investing in yourself than trying to speculate on the market.
If you do want to speculate, you might want to look into index verticals. They limit your risk (50-150 loss max ) and have less comission vs trading stock ($3 vs $10). You'll at least lose money more slowly. And your delta risk initially isn't a lot so you can unwind a position with much less loss early than if you were to get into futures/stock.
Me personally I trade options using technical and sentimental analysis, which is heresy around these "effecient market" places.
Oh, and don't listen to Cramer or CNBC. They're asshats.
I've got a pretty decent blogroll built up on my site with bloggers that risk their own money for a living, so that's a good place to start.
2k won't get you far in terms of trading. You should probably look into passive investing. You will get much larger returns investing in yourself than trying to speculate on the market.
If you do want to speculate, you might want to look into index verticals. They limit your risk (50-150 loss max ) and have less comission vs trading stock ($3 vs $10). You'll at least lose money more slowly. And your delta risk initially isn't a lot so you can unwind a position with much less loss early than if you were to get into futures/stock.
Me personally I trade options using technical and sentimental analysis, which is heresy around these "effecient market" places.
Oh, and don't listen to Cramer or CNBC. They're asshats.
I've got a pretty decent blogroll built up on my site with bloggers that risk their own money for a living, so that's a good place to start.
The market isn't irrational - people are. Learn about psychology, sociology ad behavioral economics and you'll have an edge.
Here's a nobel prize lecture on behavioral economics to get you started: http://nobelprize.org/nobel_prizes/economics/laureates/2002/
And another really important tip: Make sure you can afford to lose all the money you put in.
Here's a nobel prize lecture on behavioral economics to get you started: http://nobelprize.org/nobel_prizes/economics/laureates/2002/
And another really important tip: Make sure you can afford to lose all the money you put in.
This is advice that people rarely take, and I'd probably ignore... but I'd recommend investing with a fake portfolio to start (there are "fantasy" investment sites that make this easy).
Making money is important - but I'd also recommend that you invest in things you believe in.
Making money is important - but I'd also recommend that you invest in things you believe in.
"Past returns are not an indicator of future performance." It would be very easy to be caught in an upswing in some market you're investing in--be it US technology in 2000 / 2006, or Czech railroads in 2009, or whatever--and be stunned when they dive when you start playing for real money. Investing in things one believes in is dangerous advice. Believing is important in many things in hacker culture; investing in public companies can't be one of them. You need more solid evidence, not just faith.
and be stunned when they dive when you start playing for real money
So you're saying practice makes you less prepared to invest for real? Don't follow this logic at all.
What it is good for is understanding the mechanics of the market. There is a lot more to it than buy/sell - even for simple investors are reporting periods, dividends, options, funds, exchange rates, interest rates, etc.
Practice lets you get a feel for those events and how they drive the market and your investing.
You need more solid evidence, not just faith.
When I say believe in, I mean something that fits your world view... Not that you (simply) believe will make money.
If you want to invest purely to make money, that's fine too - I find I'm more successful when I invest in areas that are closer to my own interests/world-view/whatever you want to call it.
So you're saying practice makes you less prepared to invest for real? Don't follow this logic at all.
What it is good for is understanding the mechanics of the market. There is a lot more to it than buy/sell - even for simple investors are reporting periods, dividends, options, funds, exchange rates, interest rates, etc.
Practice lets you get a feel for those events and how they drive the market and your investing.
You need more solid evidence, not just faith.
When I say believe in, I mean something that fits your world view... Not that you (simply) believe will make money.
If you want to invest purely to make money, that's fine too - I find I'm more successful when I invest in areas that are closer to my own interests/world-view/whatever you want to call it.
I'm saying that "practice" doesn't affect your preparedness for something that's either intrinsically random (and I mean true-random), or affected by knowledge you don't have but others with tons of capital will. You can fool yourself into thinking you're better prepared, but you're not.
"Getting good" in fantasy stocks is the equivalent of flipping a coin a hundred times, and getting some heads streaks towards the end.
"Getting good" in fantasy stocks is the equivalent of flipping a coin a hundred times, and getting some heads streaks towards the end.
"Getting good" in fantasy stocks is the equivalent of flipping a coin a hundred times, and getting some heads streaks towards the end.
So using real money instead mitigates this random process in some way? That doesn't follow.
I'm not going to get into your characterisation of the market. If you believe it random, then I'll let that influence your own investing... However, investing is still has a lot of technical aspects, and practice does improve your understanding of this.
So using real money instead mitigates this random process in some way? That doesn't follow.
I'm not going to get into your characterisation of the market. If you believe it random, then I'll let that influence your own investing... However, investing is still has a lot of technical aspects, and practice does improve your understanding of this.
Of course real money doesn't "mitigate the random process in some way." You're just more likely to switch to real money if you seem to be doing well as opposed to poorly, and I'm saying that the appearance of doing well is misplaced.
The best advice I've heard about trading is poker advice.
"There's a sucker at every table. If you can't spot him, it's you."
Cycles like the one we're going through really illustrate this. Look at all the suckers who bought 2nd homes in Stockton as an "investment." If you realized this, you bet against that trend, and made money.
"There's a sucker at every table. If you can't spot him, it's you."
Cycles like the one we're going through really illustrate this. Look at all the suckers who bought 2nd homes in Stockton as an "investment." If you realized this, you bet against that trend, and made money.
The sad truth is that there's often a lot of suckers at the table. Spotting the sucker doesn't mean you're not one.
True, but identifying the other sucker means that you know why the other guy is a sucker. If you can constrain your betting to betting against suckers, into their weak spot, its hard not to win. The hard part is being patient enough to avoid competing with the unknowns at the table.
But if your bet was placed as a CDS with Lehman, you actually may not have made money.
To all the naysayers: remember that holding cash is holding a depreciating asset. That 2k is not going to be worth 2k in a year's time. So really by not investing you're taking a guaranteed loss of 3%-15% a year (depending on how pessimistic you are about future inflation) instead of some other possible loss that depends on how risky your make your portfolio.
For what it's worth my suggestion is to put your money in gold (GLD or DGP) or oil (USO, DXO or their variants.)
Edit: oh and of course go with an online discount broker instead of a major bank. You'd have to be insane to do otherwise. I'm in Canada so I use Questrade, and they are phenomenal.
For what it's worth my suggestion is to put your money in gold (GLD or DGP) or oil (USO, DXO or their variants.)
Edit: oh and of course go with an online discount broker instead of a major bank. You'd have to be insane to do otherwise. I'm in Canada so I use Questrade, and they are phenomenal.
http://www.amazon.com/Wall-Street-Self-defense-Manual-Intell...
Summary - buy index funds, keep your costs low, invest for the long term.
Summary - buy index funds, keep your costs low, invest for the long term.
http://news.ycombinator.com/item?id=248469
Some good stuff here.
Some good stuff here.
Here are some things to keep in mind:
- I think that it is best to invest directly in securities (only resorting to index funds if you really must outsource your thinking). You'll learn the most if you make the big decisions.
- Learn how to analyze the public information available. Cash flows. Balance sheets. Income statements. Get an accounting book! Learn about the types of securities and alternatives to equity investing (especially the various kinds of bonds).
- Market prices are based on combination of innumerable emotional and rational reactions to the real value of the companies behind the shares. Only over the long term will the price reflect the real value of these businesses. At any point, the price can be completely outside of reason, so beware of and be ready to take advantage of the stupidity of crowds.
- Invest in types of businesses that you can understand, or plan on spending lots of time researching "in the field". Really focus on a few. When I was buying shares of Nabisco, I was spending late nights in the cookie aisle at Vons. When I started buying Apple, I spent serious time at their first toe-hold at CompUSA and later at their stores. I recently spent time at the Crocs stand at the mall to evaluate this company.
- Learn the different investment mental models and build one for yourself. Graham. Buffett. Munger. Lynch. Fisher.
- Learn about related fields. Psychology. Macroeconomics. Patent law. Whatever is important to industries that you are going to focus on.
- Keep investing. When you are 40 or 50 years old you might be half-good at it.
- I think that it is best to invest directly in securities (only resorting to index funds if you really must outsource your thinking). You'll learn the most if you make the big decisions.
- Learn how to analyze the public information available. Cash flows. Balance sheets. Income statements. Get an accounting book! Learn about the types of securities and alternatives to equity investing (especially the various kinds of bonds).
- Market prices are based on combination of innumerable emotional and rational reactions to the real value of the companies behind the shares. Only over the long term will the price reflect the real value of these businesses. At any point, the price can be completely outside of reason, so beware of and be ready to take advantage of the stupidity of crowds.
- Invest in types of businesses that you can understand, or plan on spending lots of time researching "in the field". Really focus on a few. When I was buying shares of Nabisco, I was spending late nights in the cookie aisle at Vons. When I started buying Apple, I spent serious time at their first toe-hold at CompUSA and later at their stores. I recently spent time at the Crocs stand at the mall to evaluate this company.
- Learn the different investment mental models and build one for yourself. Graham. Buffett. Munger. Lynch. Fisher.
- Learn about related fields. Psychology. Macroeconomics. Patent law. Whatever is important to industries that you are going to focus on.
- Keep investing. When you are 40 or 50 years old you might be half-good at it.
Being a complete beginner, what resources would you
recommend to help lay the basic foundation?
The major thing I've learnt is the value of cash in terms of its flexibility. I now think about cash as being analogous to having a flexible option, whereas if you're locked into a self-imposed rule where you only sell on certain sorts of gain (e.g. purchase price plus 20%) then you lose flexibility that is valuable. Definitely on the bright side - at the time my family and accountant were advising me to buy a house and a get a huge mortgage. I'm in a far strong position than I would have been if I'd done that. I think that it is a poor decision for young, unattached people to buy houses to live in on mortgage because it limits their options to follow career opportunities and locks them into significant debt.
I just started reading Andrew Tobias's book, "The Only Investment Guide You'll Ever Need", and so far it looks like it will be good.
End of the first chapter:
"There are, in fact, very few ways to get rich quick. Fewer sill that are legal. Here's one: Take $5000 (borrow it if you have to), place it on 22 at the nearest roulette table, and win $175,000. Don't laugh. Many complicated schemes, if they were stripped of their trappings and somehow reduced to their underlying odds, would not be much less risky. It's the trappings - the story, the pitch - that obscure the odds and persuade people to ante up the $5000 they'd never dream of betting at roulette."
He talks about how the book is about seeing the forest through the trees. You can learn all you want about a certain type of investment, but what you really need to know is whether you should be involved in that investment in the first place.
"For example: It is a fact that 90% or more of the people who play the commodities game get burned. I submit that you have now read all you need ever read about commodities."
End of the first chapter:
"There are, in fact, very few ways to get rich quick. Fewer sill that are legal. Here's one: Take $5000 (borrow it if you have to), place it on 22 at the nearest roulette table, and win $175,000. Don't laugh. Many complicated schemes, if they were stripped of their trappings and somehow reduced to their underlying odds, would not be much less risky. It's the trappings - the story, the pitch - that obscure the odds and persuade people to ante up the $5000 they'd never dream of betting at roulette."
He talks about how the book is about seeing the forest through the trees. You can learn all you want about a certain type of investment, but what you really need to know is whether you should be involved in that investment in the first place.
"For example: It is a fact that 90% or more of the people who play the commodities game get burned. I submit that you have now read all you need ever read about commodities."
It will be a great education for you into how markets work. I know it opened my eyes widely when I started playing around the same age. It will completely change you.
Couple of quick things. Don't listen to a word Cramer has to say. It is all in volume, earnings per share, FUTURE earnings per share, and ratio. Also, markets can be irrational. And no matter how smart you are there is enough FUD to cloud your decision.
Expect to lose a good portion of that to start but it will be one of the best classes you ever paid for.
With such low money and bad margins the odds are stacked against you but it is worth it for the awareness that you will gain with market insights.
See this: http://www.youtube.com/watch?v=6jwEwlZnSFY
In the end if you want a good chunk to be completely low fee and almost guaranteed just invest in index funds, now is a perfect time. Wait 5 years and they will be up quite a bit with usually a less than 1% fee.
Couple of quick things. Don't listen to a word Cramer has to say. It is all in volume, earnings per share, FUTURE earnings per share, and ratio. Also, markets can be irrational. And no matter how smart you are there is enough FUD to cloud your decision.
Expect to lose a good portion of that to start but it will be one of the best classes you ever paid for.
With such low money and bad margins the odds are stacked against you but it is worth it for the awareness that you will gain with market insights.
See this: http://www.youtube.com/watch?v=6jwEwlZnSFY
In the end if you want a good chunk to be completely low fee and almost guaranteed just invest in index funds, now is a perfect time. Wait 5 years and they will be up quite a bit with usually a less than 1% fee.
step 1) please forget anything you read from Jim Cramer
step 2) read The Black Swan by Taleb
step 3) make an account at caps.fool.com
step 4) get your score above 80
step 5) never invest more than 2% of your capital in any investment
step 6) figure out how to profit from your capital given rule #5
step 7) if you've figured out rule #6 you're set for life
step 2) read The Black Swan by Taleb
step 3) make an account at caps.fool.com
step 4) get your score above 80
step 5) never invest more than 2% of your capital in any investment
step 6) figure out how to profit from your capital given rule #5
step 7) if you've figured out rule #6 you're set for life
Play on paper first. Pick a stock, pretend you bought N shares at X dollars today. Then see what happens. When you "sell" be sure to subtract transaction fees and short term capital gains tax from the profit. So play on paper for a month or two and see if you really are a market clairvoyant.
Anyone can profit in a rising market and claim they have a "system" for doing it. If 500 people go over Niagra Falls in barrells, about 200 survive. Then those 200 go over again, and 80 survive. Then those 80 go over again, then the last 30 survivors write books about how to survive going over Niagra Falls in a barrell. Take their advice with a grain of salt.
Anyone can profit in a rising market and claim they have a "system" for doing it. If 500 people go over Niagra Falls in barrells, about 200 survive. Then those 200 go over again, and 80 survive. Then those 80 go over again, then the last 30 survivors write books about how to survive going over Niagra Falls in a barrell. Take their advice with a grain of salt.
Here, save yourself some money, use it as others have mentioned to invest in yourself.
If you're doing it to learn, there's no reason to do it under fire.
I'll +1 to the other advice here: go fantasy to learn. They're real numbers, so the educational value is the same. You can think rationally without getting as emotionally attached to the money, so you'll learn better. (Hopefully you won't go with real money until you've learned to keep a clear head)
Most importantly, you'll know when you're actually good enough to do well in the market -- when you're doing better than your competition over a long period of time. That will tell you when it's skill instead of luck.
If you're doing it to learn, there's no reason to do it under fire.
I'll +1 to the other advice here: go fantasy to learn. They're real numbers, so the educational value is the same. You can think rationally without getting as emotionally attached to the money, so you'll learn better. (Hopefully you won't go with real money until you've learned to keep a clear head)
Most importantly, you'll know when you're actually good enough to do well in the market -- when you're doing better than your competition over a long period of time. That will tell you when it's skill instead of luck.
Read this: http://ycombinator.com/munger.html
as well as the rest of the yc library (click on the library link at the bottom right of the front page).
as well as the rest of the yc library (click on the library link at the bottom right of the front page).
Seems to be a lot of people here who have a sound and rational knowledge of this game as the OP imagined there would be. I have a question and would be very grateful if someone could answer.
I have a good reason to believe that a relatively small Chinese company will be bought over by a massive US company this year. being a total newb, would it be feasible for me to buy shares in this company easily so that I can profit from them when it is bought? someone suggested sharebuilder.com. Anyone ever use them?
I have a good reason to believe that a relatively small Chinese company will be bought over by a massive US company this year. being a total newb, would it be feasible for me to buy shares in this company easily so that I can profit from them when it is bought? someone suggested sharebuilder.com. Anyone ever use them?
I've never invested a penny in stocks, but my friend has and has his ups and downs..but is currently down..about $13,000 (he is your age). I highly recommend you do as others have mentioned and INVEST IN YOURSELF, not someone elses business. But if you insist.. I recommend you NOT be like every other "average investor" and have a read at what tim sykes has to say about it all ... http://timothysykes.com/
Lots of good advice in this thread.
In addition, understand risk management. You don't have enough cash to diversify across stocks (and time, buying in stages) to really be effective. An index fund is probably your best bet.
That said, if you want to take a lot of risk, look into options trading. Deep in the money calls are a relatively low risk way to succeed. But the learning curve for options is steep.
In addition, understand risk management. You don't have enough cash to diversify across stocks (and time, buying in stages) to really be effective. An index fund is probably your best bet.
That said, if you want to take a lot of risk, look into options trading. Deep in the money calls are a relatively low risk way to succeed. But the learning curve for options is steep.
The only way to win in stocks is to invest in value and hold long. I would suggest just going in on a leveraged index ETF and just forget about for 5 years. I bet you'll get around a 20% return.
I'm reading so many negative comments. If he's smart and interested in stocks, perhaps he can make money. What if Warren Buffet had posted an ask-HN before starting his career?
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Unless you want to do this full time, put it in a index fund.
why all the pessimistic comments? invest that $2000 in a 401 or roth low-risk fund and you will likely get good returns in 50 years.
Do not "play the stocks game" if you think it's a game. The point of investing is to make money. Don't invest in any company unless you have valid reasons to believe the company will go up in value in whatever time frame you're looking for results. And this should be true every week, or you should sell when you don't feel comfortable with the stock any longer. Because the way you feel, so will other investors, and if for whatever reason they don't feel comfortable, they will pull their money, so you might as well react on that feeling first. If the stock continues its devaluation, then it was a good call by you, if the stock actually gets more valuable, then you still might feel good about leaving it since it might now be even more likely to drop now at its higher price. Don't invest in stock simply because you don't know what else to do with the money. And don't invest money you might need in the next six months; the point is to keep money but make logical bets from time to time on companies when you feel you have a much larger informational advantage than most everybody else, using money you won't need in the near future. The point is not to lose money, though if you do lose a bit, it won't be tomorrow's mortgage payment.
The most important thing to realize is that the best thing you could with the money is to put it in a savings account and try to release lots of software or web apps for feedback and practice in running a business. Your salary and job opportunities will increase, as well as give you a chance to make money on the side, as well, pay for retirement, and a small runway for you to go full time if you want to take your ideas further. Because with stocks, you're buying companies, not pieces of paper, and finding a company that returns 2x or 3x the investment will be hard to do at the scale of companies listed on NASDAQ, and a micro-cap company where you have enough knowledge or control would be hard to find either. But if you invest your time towards creating things, you'll raise the worth of your skills (or at least, remain competitive and diversified), get "free" business lessons from your experience, and may be able to make thousands of dollars on the side per year or month, on top of that, as a bonus. This is almost a guaranteed investment. And if you could use some of the money you saved up to start a company and figure out the accounting behind it, so the only thing you have to worry about is creating stuff, then you'll be basically set for life. Why?
Because as someone trying to run a business, as well as someone who follows the latest in technology, you'll be in a better position than almost any other investor regarding knowing when to invest in tech companies. On top of that, I can imagine that at some point you could even be a seed investor in companies that are not even on the stock exchange. You will also be the go-to guy at your company. Finally, your company might even become profitable enough for you to go full-time or worth enough to somebody that they'll pay you five, six, or maybe even seven figures for it.
Investing is not gambling. And you're paying $7-14 a trade, so it's probably better to stick with 5 companies or so, which helps to diversify, and if you have to sell your whole position to buy a better one, you can sell all of it for just that fee, instead of trying to sell a bunch of different ones for $7-14 each.
Don't invest in companies you wouldn't buy from. Invest in companies that seem well run and on the upward trend, that at the same time, you feel that other people, once they find out how good it is in the next few months, will invest in as well, and therefore you would make your money back and then some, based on lots of new people learning about the company and buying their product and increasing their earnings, as well as the influx of buyers of their stock, sending the price of it up by way of more means than one.
Finally, the trends of the last 40 years are irrelevant to what will happen in the next 40. This is 100% true. Investing is not a tax, and you should not treat it as such (i.e. it leaves your bank account, and if it comes back to help you in any way, then that's great! No, it's not how this works.)
The most important thing to realize is that the best thing you could with the money is to put it in a savings account and try to release lots of software or web apps for feedback and practice in running a business. Your salary and job opportunities will increase, as well as give you a chance to make money on the side, as well, pay for retirement, and a small runway for you to go full time if you want to take your ideas further. Because with stocks, you're buying companies, not pieces of paper, and finding a company that returns 2x or 3x the investment will be hard to do at the scale of companies listed on NASDAQ, and a micro-cap company where you have enough knowledge or control would be hard to find either. But if you invest your time towards creating things, you'll raise the worth of your skills (or at least, remain competitive and diversified), get "free" business lessons from your experience, and may be able to make thousands of dollars on the side per year or month, on top of that, as a bonus. This is almost a guaranteed investment. And if you could use some of the money you saved up to start a company and figure out the accounting behind it, so the only thing you have to worry about is creating stuff, then you'll be basically set for life. Why?
Because as someone trying to run a business, as well as someone who follows the latest in technology, you'll be in a better position than almost any other investor regarding knowing when to invest in tech companies. On top of that, I can imagine that at some point you could even be a seed investor in companies that are not even on the stock exchange. You will also be the go-to guy at your company. Finally, your company might even become profitable enough for you to go full-time or worth enough to somebody that they'll pay you five, six, or maybe even seven figures for it.
Investing is not gambling. And you're paying $7-14 a trade, so it's probably better to stick with 5 companies or so, which helps to diversify, and if you have to sell your whole position to buy a better one, you can sell all of it for just that fee, instead of trying to sell a bunch of different ones for $7-14 each.
Don't invest in companies you wouldn't buy from. Invest in companies that seem well run and on the upward trend, that at the same time, you feel that other people, once they find out how good it is in the next few months, will invest in as well, and therefore you would make your money back and then some, based on lots of new people learning about the company and buying their product and increasing their earnings, as well as the influx of buyers of their stock, sending the price of it up by way of more means than one.
Finally, the trends of the last 40 years are irrelevant to what will happen in the next 40. This is 100% true. Investing is not a tax, and you should not treat it as such (i.e. it leaves your bank account, and if it comes back to help you in any way, then that's great! No, it's not how this works.)
Oh, it's a game all right. The points are dollars. You want to make as many dollars as possible by playing the game right. The hard part is figuring out the rules. Because a lot of people don't know and they still get paid a lot of money to tell the world the wrong ones.
>> Oh, it's a game all right. You want to make as many dollars as possible by playing the game right.
No, you don't. You want to make as many dollars as possible regardless of what you're doing, be it trading stocks or otherwise. But with trading, you're risking what you already have, so you want to invest, and not confuse the word investing with gambling. And with that, it's entirely possible that not investing in the stock market whatsoever may be your best option throughout your whole life, if you're a software developer. If you're not one, then try to run a business in a different area to learn about the way things work, while saving your money to make a very reasonable bet on a few bets, not feeling like you have to have your money tied in the stock markets just because other people do.
Now, if we knew that the stock market in general would go up 5-15% on average every year for the next 40 years, that would be different, and I would buy an index fund at the very minimum. But we do not know what will happen, nor can we even slightly base our financial decisions on what happened before. That would not be investing, that would be time machine traveling or being hopeful things will work out. And as software developers, we have more control over more things such that running one's own tech business while learning about new developments will put us in the right mindset to understand and evaluate the rare great buys in the stock market correctly, as well as how consumers think based on having first hand experience running a company oneself.
And true investing is not just putting money into "the stock market" void every month, but actually following developments and researching every week for at least an hour a week per stock (this is actually Cramer's advice.) And you want to have 5 stocks to diversify (Cramer's advice.) So with those 5 hours a week, could you not create and maintain a web app, or two or three? Have fun reading Hacker News like you normally might do, sure, whether you invest in stock or not. But just take the time you would spend researching and discussing the companies you hold (as well as new companies you might be interested in) and take that time to actually develop software. In either case, you might only make a few hundred or thousand dollars a year profit. That alone shows you might as well be investing in yourself. But that's not all!
With creating your own software, you learned new skills, kept current ones sharp, created a portfolio, became confident in yourself, and all of this may raise your salary by $20,000-$50,000 a year and work the same amount of hours, be confident in pursuing contracting opportunities based on the evidence you can create stuff, sell off various web apps you created, even for just a few thousand, and establish a reputation. So those hundred to thousand dollars a year, or any money made, or even a loss of $200-$500 a year due to web hosting and such and zero profit, can easily return ten, twenty, or thirty thousand dollars for a 21 year old, more than anything else, in just one year.
But with "investing" as a 21 year old, making a hundred or thousand dollars a year is about the best you could do. In fact, it is possible to lose the entire investment, as well. So the net return might be negative (e.g. you'd be better off not putting money in the stock market.) Subtract account fees as well. And now, subtract all that research you did, and how many hours you spent on it, at let's say $10-$30 an hour. And subtract the lost opportunity cost of being able to have used that time to create anything, anything at all for experience and other reasons I mentioned previously! Subtract the stress and worry!
Let's go nuts here. Even if you were guaranteed not to lose money you invest in the stock market, and you turn your $2,000 into $4,000, and let's say you did it by luck so you spent zero hours researching anything and just left your money in the account, investing the time and money towards furthering your own education is just a much better use of resources for a 21 year old, even in the best case scenario here.
And, as he mentioned he has debts, he should just try to pay them off. If the debt is at 7% for college, 15% credit card, and other, pay those off first!
No, you don't. You want to make as many dollars as possible regardless of what you're doing, be it trading stocks or otherwise. But with trading, you're risking what you already have, so you want to invest, and not confuse the word investing with gambling. And with that, it's entirely possible that not investing in the stock market whatsoever may be your best option throughout your whole life, if you're a software developer. If you're not one, then try to run a business in a different area to learn about the way things work, while saving your money to make a very reasonable bet on a few bets, not feeling like you have to have your money tied in the stock markets just because other people do.
Now, if we knew that the stock market in general would go up 5-15% on average every year for the next 40 years, that would be different, and I would buy an index fund at the very minimum. But we do not know what will happen, nor can we even slightly base our financial decisions on what happened before. That would not be investing, that would be time machine traveling or being hopeful things will work out. And as software developers, we have more control over more things such that running one's own tech business while learning about new developments will put us in the right mindset to understand and evaluate the rare great buys in the stock market correctly, as well as how consumers think based on having first hand experience running a company oneself.
And true investing is not just putting money into "the stock market" void every month, but actually following developments and researching every week for at least an hour a week per stock (this is actually Cramer's advice.) And you want to have 5 stocks to diversify (Cramer's advice.) So with those 5 hours a week, could you not create and maintain a web app, or two or three? Have fun reading Hacker News like you normally might do, sure, whether you invest in stock or not. But just take the time you would spend researching and discussing the companies you hold (as well as new companies you might be interested in) and take that time to actually develop software. In either case, you might only make a few hundred or thousand dollars a year profit. That alone shows you might as well be investing in yourself. But that's not all!
With creating your own software, you learned new skills, kept current ones sharp, created a portfolio, became confident in yourself, and all of this may raise your salary by $20,000-$50,000 a year and work the same amount of hours, be confident in pursuing contracting opportunities based on the evidence you can create stuff, sell off various web apps you created, even for just a few thousand, and establish a reputation. So those hundred to thousand dollars a year, or any money made, or even a loss of $200-$500 a year due to web hosting and such and zero profit, can easily return ten, twenty, or thirty thousand dollars for a 21 year old, more than anything else, in just one year.
But with "investing" as a 21 year old, making a hundred or thousand dollars a year is about the best you could do. In fact, it is possible to lose the entire investment, as well. So the net return might be negative (e.g. you'd be better off not putting money in the stock market.) Subtract account fees as well. And now, subtract all that research you did, and how many hours you spent on it, at let's say $10-$30 an hour. And subtract the lost opportunity cost of being able to have used that time to create anything, anything at all for experience and other reasons I mentioned previously! Subtract the stress and worry!
Let's go nuts here. Even if you were guaranteed not to lose money you invest in the stock market, and you turn your $2,000 into $4,000, and let's say you did it by luck so you spent zero hours researching anything and just left your money in the account, investing the time and money towards furthering your own education is just a much better use of resources for a 21 year old, even in the best case scenario here.
And, as he mentioned he has debts, he should just try to pay them off. If the debt is at 7% for college, 15% credit card, and other, pay those off first!
Definitely go straight for the debt, that's sure money!
I agree with you, definitely on the same page. I wish I could say more right now, but I gotta run. Anyway, point being, education first.
Yes, go build a software system to help you manage a lifetime of trading. It's a life long job, not something you go do for 5 years. You may get so good at it you want to take that software and sell it and make tons of money so you can make tons of tons of more money when you return to the market in 3 years or 5 years or whenever you want to return focus to it.
Money is a life long game. Not a sort term game. There's a lot more money to be made in other facets of life than there is to be made in stocks over the short term. Right now, I wouldn't even bother with stocks to be honest. I have some random index funds, fairly diversified and some retirement money, but other than that I'm all cash.
And I'm not recommending that for anyone, just saying that's where I am, just to be on the up and up.
But 100% cash isn't right for everyone right now and it may turn out to be the wrong decision, everyone has to decide for him or herself where their money should be to maintain a certain level of happiness and vision toward the future.
A long lived low stress life has a value too.
I agree with you, definitely on the same page. I wish I could say more right now, but I gotta run. Anyway, point being, education first.
Yes, go build a software system to help you manage a lifetime of trading. It's a life long job, not something you go do for 5 years. You may get so good at it you want to take that software and sell it and make tons of money so you can make tons of tons of more money when you return to the market in 3 years or 5 years or whenever you want to return focus to it.
Money is a life long game. Not a sort term game. There's a lot more money to be made in other facets of life than there is to be made in stocks over the short term. Right now, I wouldn't even bother with stocks to be honest. I have some random index funds, fairly diversified and some retirement money, but other than that I'm all cash.
And I'm not recommending that for anyone, just saying that's where I am, just to be on the up and up.
But 100% cash isn't right for everyone right now and it may turn out to be the wrong decision, everyone has to decide for him or herself where their money should be to maintain a certain level of happiness and vision toward the future.
A long lived low stress life has a value too.
Buy AAPL long.
I just finished reading 'Real Money,' by Jim Cramer, where he outlines some of the basics of stock investing - Multiples, P/E ratio, dividends, yields, etc. I'm not sure if I've attained sufficient knowledge to jump into stocks, or whether I should do a bit more reading on the field.
Being a complete beginner, what resources would you recommend to help lay the basic foundation? And after I've obtained enough information, what are the initial steps do you suggest I take? What tools do you use? Suggestions of brokers? How's the market treated you? What kind of 'investor' are you - a trader or more long term?
I think it'd be interesting to hear the hacker's guide to investing, although often times the market is wildly irrational - a trait most of you hackers lack from what I've read here.
So, everything from suggested investment methods to tools you use to keep track of what's happening.
Thanks all.