I invest in 75% index funds, because of Random Walk Down Wall Street and all the related writing on the subject, and 25% individual stocks, largely for entertainment value. It's like WoW but much more time efficient.
Approximately 50% of my liquid net worth is Chipotle. I bought back in 2006/2007 and just held.
My other individual picks include Bank of America (yeah, ouch), Microsoft, and Nintendo. Chipotle more than pays for the shellacking I took on all the rest. It is ultimately irrelevant though as I still have 25 ~ 30 years before I'll start selling anything.
The thing about investing in individual companies is that you're not betting on whether that company will grow or not. You're betting on whether the company will grow more than investment professionals expect it to.
I have, consistently (over 10 years) invested in individual companies and beat the market, but I found that it just wasn't worth the time. So now I put my money in index funds.
By the way: the biggest predictor of your returns is not which individual stocks you invest in, but your asset allocation-i.e., the percent of your money that's in stocks, bonds, etc. If you want to invest I would first learn about asset allocation before trying to pick individual companies.
I'd say the advantage the individual investor has over the investment professional, is that the professional has a time-frame of 1-3 years. So a lot of a stock's price reflects how the company is expected to grow/pay out over that period.
If you are willing to take a longer term view, asking what's this company going to be doing in 10-20 years, and how is it priced relative to that, then I think you've got a much better chance to beat the market (see Buffet for example)
You certainly have advantages and disadvantages. I could say a lot about the different situations professionals and individuals are in, and I'd be happy to share any thoughts if you're interested. That said, I'd like to point out two things:
1. Most individuals do consistently worse than the market (so do most mutual funds, actually)
2. Most of Buffett's major successes, especially the early ones, have had nothing to do with his predictions of how a company would perform in the future. They were based on the difference between a company's current assets vs. its current stock price. Eg one of his major successes was in buying shares of Sanborn Map company when Sanborn had assets of $65 per share, but shares only cost $45 each [1].
It's still possible to invest using this method-known as value investing-but it's much harder today. The reason is that information is much more freely available. Eg in the Sanborn example above, it took Buffett a significant amount of research to find Sanborn and to realize that they were undervalued. Today all of that information is available to anyone online.
Index funds. You can't beat the market consistently. Maybe you can get lucky for awhile, but if you're relying on that, might as well go to Vegas and have more fun at it.
I can't agree more. There are studies that show exactly what you describe. Also note: The stock market is extremely irrational and chaotic... people have a tendency to think they know better than the average. One study did do an experiment that went like this:
They asked (I don't have the exact numbers at hand) 1000 people to answer the following question:
Do you think that you are better informed about the companies that stocks you hold than the average stock holder who also invests in the same company.
In a rational/non-chaotic market about 50% would say "yes" and 50% would say "no". If I remember correctly 90% said "yes" and only 10% said "no". When you buy stocks you should be aware of that because I think its very important to know...
Seriously though, of course the average investor cannot beat the market, it doesn't mean it isn't possible for an individual to do so, or that it is all down to chance.
One approach is to focus on small companies.
Most active funds will not invest here (it is not worth the time when they would only be able to invest a tiny fraction of their funds).
As such these companies tend to be under-researched (not necessarily the same as under-valued though), so if you're willing to put in some leg-work and a lot of patience, there can be some good opportunities.
I've been using betterment for (non 401k) index fund exposure. They'll help guide your investment strategy, rebalance between funds automatically and allow you to shift between stocks and bonds (both indexes) as you please.
I trade Forex as a hobby. I find it fascinating to learn about an entirely different industry, yet in many ways see similarities with software development.
I've started a blog where I'm going to detail more of my trades and thoughts. To start with, I'm doing a short interview series with established financial traders about their day-to-day work, if anyone is interested: http://trading.martinrue.com
I trade Forex as well, and after a couple of years of unsuccessful manual discretionary trading I've moved into automated trading. Unfortunately the tools available for building a trading robot are ridiculously primitive when compared to what I've access to in my day job, but I do hope someday of making enough money to live from my trading.
Yep, it's been a bit of a hobby of mine for the last year or so. I wish I'd started 10 years ago - compound interest is great, and the sooner you get into it, the greater your time multiple.
Index funds are an easy, conservative, way to get it. They also require the least time. Vanguard seems to make the best products here - money in VTI, VWO and BND will give you a nice balanced portfolio.
But you can beat the market - the key is that you must be patient, not swayed by opinion, or market trends, and spend a lot of time looking into business fundamentals.
I'd advise staying pretty liquid in the short term. It looks likely that there'll be another large correction in the short term as we see another wave of potential sovereign defaults. When everyone is panicking is the best time to buy.
I've been sticking money into the market for the better part of 20 years now.
Initially it was how you got incredibly rich incredibly fast (my YHOO, for instance, went up 70% during the first three days that I held it). Then for a short period it transformed into a source of immense sorrow and despair. Then for several years it was just a convenient way to dispose of any excess salary that was left lying around at the end of the month.
Now it's back to being the way you turn the $XX,000 you put in today into the $YYY,000 you'll get back out in twenty years. Index funds (as discussed everywhere else in this thread) will pretty much do that for you without you ever having to think about it.
Taleb is not a source of investing advice at all - he merely illustrates his philosophy with examples from finance as it's something he's more than familiar with.
I'll rephrase for hassy. "investing" is for suckers. the only people making any money in the market are professional traders who aren't at all making decisions based on "trends" or "fundamentals".
see: dynamic hedging by nasim taleb--a book that sits on many professional traders desks in which taleb makes more than a few points about trading.
> I continually hear stories (friends of friends, of course) of people hitting it big and wonder if I just don't get it.
For every hitting it big, there is an opposite (and often larger) story of losing it big. Often by the same people -- except they are happy to tell you about their wins and don't talk so much about the losses.
It's not even a zero sum game -- the fees and spreads ("friction") are non-trivial.
I'll worry about it when I have it. But my current thinking is along the lines of: 10-20% in highly speculative stuff (much more so than stocks) and the rest in super-safe stuff (much safer than stocks).
what's more speculative, and what's safer than stocks? If you're looking for low volatility, bonds are often touted as 'safer' - but look at how safe they've been over the last decade.
There's a risk/reward balance in every asset, I don't think ruling out stocks based on the perception that they're risky is necessarily wise.
Anything else is illegal, as my wife works in finance (HFT). Unlike congress, employees of trading firms and their families are forbidden from trading any instrument related to what their firm does.
I have invested in the stock market for about 1 year. Initially, I used options to leverage what little money I had and blew up my account. I learned three important lessons, of which I had read more than once prior to, but they are as follows:
1. Do not try to predict the market. Follow it. To be more specific, and less "duh", invest in securities that show (from a speculative standpoint) the potential to continue to move in a direction, but with "smart" money behind it. This brings me to 2.
2. It takes money to make money. This is not to say that it is impossible to turn $1,000 into $1M, just a lot less probable. When you are following the "smart" money, you are playing the game and the game is based on probability. The more money you have to invest, the more potential candidates you can hold. By cutting losses short and riding out the winners, you can make a considerable amount of money. Discipline and money management are the key here. Being right or wrong is not the way to look at investing; I tend to say, "I held the stocks that made me a profit, and sold the ones that didn't."
3. You will lose money, you will be in the wrong security and the worst time, and you will 2nd guess a great investment. It will happen over and over. You have to be mentally prepared to look past this. You have to be objective and you have to discipline your mind to treat loses as a necessary part of the game.
Well, to actually answer the question, I am invested in BAC, PFE, GE, and VZ. All of which are for testing purposes for a new strategy that makes us of technical analysis over a long(er) term.
I realize my knowledge is minimal, but I hope it helps.
I have never been a fan of buying stock given the 1/3 probability of making money (you only make money when your stock goes up and lose money when the particular stock has no movement or declines in value). In my opinion derivatives present a better alternative and I am particularly fond of stock options, which can be used for either speculation (bet on the performance of a company) or as a safety net on your long positions (like an insurance policy). With options you can make money when the market goes up, down or sideways based on your position. Something to consider, is that your exposure with stock options tends to be a fraction of what it would be if buying the underlying stock. Your exposure is limited (you can only lose as much money as you paid for the contracts) and your upside is "theoretically" unlimited.
If you are interested in learning about it. make sure to grab McMillan's "Option as an Strategic Investment"
http://www.amazon.com/Options-Strategic-Investment-Lawrence-...
I invest and do well with it. However, that came with a high price of "learning". I do not recommend that the average joe just buy into random stocks hoping for the best. Yes, people have made a lot of money doing that - however, far more people have lost a lot of money doing it. Fooled by Randomness by Nassim Nicholas Taleb is a great read. If you want entertainment value to invest in something like activision blizzard with disposable income, go for it. All in all, I'd invest in bond-funds in about 1 year from now for the long haul. FTBAX, for example, has a tax-free annualized yield of about 7%. If you are really looking for aggressive growth, go jump into an equity position in a promising startup that doesn't know their value. Watching companies like Microsoft and Amazon IPO and grow 100x just doesn't happen as VCs are getting all their returns from that actual IPO and not the growth post-IPO.
Do yourself a favour; invest in an index. Don't play the stock picking game. The human mind works against you; everyone is convinced that they can beat the market. If it's even a skill (and it doesn't seem to be) it's a vanishingly rare one even among investment professionals. It's very tempting to think that you could be the next Warren Buffet, but honestly, you're about as likely to get a gold medal in the next Olympics...without training. Resist that rabbit hole!
Having said that, here's some tips if you're going to try and pick stocks anyhow:
0) Don't listen to any tips you see on the internet, including these. If they're actually any good (and not just part of a pump n' dump scam), they'll already have been taken by everyone else. (Honestly you're probably better off shorting anything you see recommended in a public forum.)
1) Pick investments that are likely to go up and down at different times. If you want to invest in an oil company, also invest in an airline; they often go up and down opposite each other. (Note: Again, any obvious tip like this has been exploited to the point that it's no longer helpful. See para 1, above.)
2) Your career is also an investment. Don't, for the love of god, invest in the company you work for. In fact, don't invest in any company that is likely to go under around the time you get fired. Work for Amazon? Invest in Barnes & Noble. Or anyone else you can think of that might do well if Amazon does poorly, and visa versa. And make sure to toss some money at foreign investments; if your country does poorly, maybe some other country will do well.
3) Spread investments out as broadly as possibly. Don't be stupid and say "hey, the whole market can't go down at once!". It can! But it's less likely than a single stock going down, and this is a numbers game. There's never ever a sure thing, but if you can just be a tiny bit smarter than everyone else, it'll pay off in the very long term. (The easiest way to spread investments out is an index. See para 1, above.)
4) And don't just spread your investments across an industry, or a stock market. Try and split investments across multiple asset classes. Stocks, bonds, commodities, foreign stocks, etc. (Via multiple indexes. See para 1, above.)
5) Fees will kill you. Anything with active management is more expensive than its worth. Yes, all active management, no matter how good their track record. At a micro level, past performance is no predictor of future results, and at a macro level past performance is actually negatively correlated. A very common pattern is to do better and better until you do so badly that it wipes out every gain you've ever made (e.g., the entire hedge fund sector when the financial crisis hit). (In other words, see para 1, above.)
6) On a similar note, don't be too active in managing your investments yourself. Reacting to every little dip and spike will waste your time and attention, rack up huge fees, and guarantee bad results. Once you've figured out your strategy (hopefully involving index funds), figure out how much you can save per paycheck, and just do that, with as much automation as possible. Maybe your strategy is "save 20% of every paycheck, with 2/3 going into an S&P 500 index, 1/6 into foreign stocks, and 1/6 in commodities". That may be a terrible strategy, but it doesn't matter if you can just stick to it, and (this is important) don't check to see if it's working for at least a decade.
7) Individual investors persistently WAY underperform benchmarks, because of timing issues. They will hear some hype about a stock, or an asset class, or the idea of investing, and they'll enter the market at or near the peak. Then when things go pear shaped they'll panic and exit, locking in their losses. It's routine for "the market" to have a higher return than the average investor gets; often much higher. Unless you want to lose all your money, don't follow the herd. Your best bet is to just leave your investmens alone (in an index fund) and don't even look at them. If you can't bring yourself to do that, then be as contrarian as possible. If everyone is talking about how awesome gold ETFs are, or the growth potential of tech stocks, get OUT. On the other hand, if a sector crashes, buy!
8) Finally, one more bonus tip: Go for passively managed index funds. (But if you really want to pick stocks, go for ones with low volatility.)
Let me summarize: diversify, hedge, minimize expenses. All good advise but this isn't so much about making money as avoiding losses.
You've done a good job at highlighting that investing isn't as simple as picking stocks and buying them. That's a fool's errand. Instead, it's understanding the risks you're undertaking (and mitigating them), eliminating emotion from your decisions (but understanding how emotion affects the market), knowing when to exit a trade, and most importantly, having a plan and sticking to it.
I worked in a FAMOUS PRIVATE BANK once. We used to get the business heads to come and speak to us about their area. One week it was the head of fund management.
"We do this type of fund, and that type of fund... But that's just for the clients. If it's your own money buy Index Trackers."
Index funds are wise, but remember that when you invest in the S&P you're investing in the US and in the dollar. Take a look at iShares funds, you may want to consider in which countries and currencies you want to store your money.
I believe wholeheartedly in Mark Cuban's advice here:
"The first step to getting rich is having cash available. You arent saving for retirement. You are saving for the moment you need cash. Buy and hold is a sucker’s game for you. This market is a perfect example. Right at the very moment when cash creates unbelievable opportunity, those who followed the buy and hold strategy have no cash."
Yes, I dipped my toe in recently. Because the market has been a bull over the last few months, I have made money. Yet, I worry that my success gives me false confidence in I know what I'm doing. I also devote time to just watching the numbers. And, like watching twitter, I recognize it's not very healthy or constructive.
Yes. I split my investment between low risk, good dividend blue chip stocks (National Grid, Tesco, BP), fixed income preference shares (NWBD, SAN) and smaller, high risk companies.
Current favourite that might interest the HN crowd is:
Monitise (MONI.L): Run backend systems on which on a lot of mobile banking and payment systems operate. Growing really quickly, and recently bought Clairmail, a US based company doing much the same. Wouldn't be surprised to see a NASDAQ listing in the next couple of years.
- easily invest in the whole market through index ETFs
- no need to do the research and choose which stocks or funds to buy
- automatic deposit set up to seamlessly transfer money every month from my checking into my betterment account and have every dollar invested (no need to worry about shares)
- automatic rebalancing
- no minimum balances/deposits, no holding periods, money is easily accessible and can be withdrawn at any time without penalties
If you work in the tech industry it probably makes sense not to invest in it. If there's a tech crash that damages your employability then you don't want it to damage your investment portfolio as well.
Take a mature industry - what are the sources of potential upside?
Growth, more customers, perhaps from new geographies/product categories
Efficiency improvements and thence profitability
Occasionally new product innovation.
Being a mature industry though, the chance of a break out innovation, that changes the face of the industry, is low. So your growth path for the industry tends to be tied to GDP growth in the end.
With tech though, you can have a revolutionary product, which doesn't do it by redistributing power, but by increasing the share of the pie for everyone.
And while doing this, tech still keeps the possibility of growth through diversification/geographical expansion AND efficiency improvements which will be discovered over time.
Sorry I am a bit tired, so I may not have made the most educational of responses.
Tech has moats. Tech is probably the least regulated global industry -- in absurd countries like India, tech companies thrive in spite of bureaucracy. In highly unstable places like Israel, tech companies can compete too. I suspect Africa will have tech as a #3 segment (after extractive mining and some kinds of (relatively destructive) agriculture).
Aviation is kind of the diametric opposite of this -- heavily regulated, capital intensive, and exposed to commodities and union labor.
I don't invest exclusively in tech, but I understand tech better than most other sectors, so I feel more comfortable with individual stock picking. I do index funds in most other segments (with the exception of oil, which I also understand, and transport/logistics). I do index funds for S&P 500, international, MCSI 3000, and specific other sectors.
What is the best tool for testing things like this (are there big datasets available for public stock markets?)
From everything I've seen, beta for tech stocks has been positive for basically all of the past 40 years, and S&P has been up by a lot, so yes, tech stocks did well. That doesn't really say it did better than other sectors individually, but better than average.
Trains also had huge amounts of skull duggery going on, at a time where pump and dump scams involved people physically forging fake shares and selling them on the market to destroy the price of said stock.
Plus railways are cap intensive as well - tech investment comparatively is far lower, with a greater pay off.
If you think there is no monkey business in tech... well, I've got a bridge you can invest in:-)
I think that tech is certainly a growth sector, but does that translate into buying into stocks in the whole sector and coming out ahead? There is some pretty vicious competition, no? DEC, SGI, Yahoo, Altavista, Wang Laboratories, Commodore International... the list of companies that once flew high and then tanked is fairly long.
The question with AAPL is really do you think smartphones and tablets, as product segments unto themselves, have reached market saturation? I think we'll still see massive increases in the sheer number of smartphones and tablets sold, and I think AAPL will manage to retain a significant (not necessarily a majority) market share.
You also have to consider if you think apple could continue to keep their margins in an established tablet market, and a smartphone market approaching 'good enough' like that of PCs today, and whether consumers will continue to accept a 'walled garden' as tablets become primary computing devices.
E: I'd like to clarify I'm including stuff like no USB ports in walled garden.
This next statement is probably going to get me nuked, but:
I think people have accepted the walled garden model and they like it.
In a perverse way, their success is partly because of the PC era itself. The lowered expectations people have of computational devices from windows makes. Having something that "Just works" such a blessing, for such a ridiculous portion of all consumers, that their "walled garden" translates into "sanctuary" for most human beings.
IF in the future mature market, other tablets have also reached a stage where "it just works", then its an even playing field.
At that point,the walled garden will be just another field to walk between.
Many people feel the same way as you do, which means the information is very likely already in the current share price. Buying APPL stock today implies that you think apple will to better than current expectations, not current apple market share, etc...
But due to their relatively low P/E, they don't even need to grow that much to still be worth. Their current P/E is not forecasting a huge growth in the next years.
It's not the same for, say Amazon. They'll need to earn 5x more to get back in the "standard zone". So investors seem to think Amazon still has a huge growth forward.
I mentioned index funds somewhere else in the thread; possibly worth noting that if you invest in, e.g., a normal S&P500 fund, then you're de facto investing quite a lot in AAPL since it's going to be weighted by market capitalization.
If that's worrying, you can find "equal weighted" funds, that use the same funds as the index but weight everything equally -- essentially betting against AAPL and XOM in favor of slightly smaller companies. I offer no opinion as to whether that's a good idea or not.
Approximately 50% of my liquid net worth is Chipotle. I bought back in 2006/2007 and just held.
My other individual picks include Bank of America (yeah, ouch), Microsoft, and Nintendo. Chipotle more than pays for the shellacking I took on all the rest. It is ultimately irrelevant though as I still have 25 ~ 30 years before I'll start selling anything.