Ask HN: How to start learning about investments?
104 comments
Some books that I read and found useful. These are mostly older books that have withstood numerous market cycles. Even if you decide to branch out, these are a good base to start from.
1. “Random Walk Down Wall Street” to understand index funds and why they generally outperform.
2. “Common Stocks and Uncommon Profits” for a general understanding of how to choose stocks (and companies) for the long-term
3. “The Intelligent Investor” for understanding the some of the human challenges of investing.
If you’re short on time and don’t want to make this a hobby, read #1.
1. “Random Walk Down Wall Street” to understand index funds and why they generally outperform.
2. “Common Stocks and Uncommon Profits” for a general understanding of how to choose stocks (and companies) for the long-term
3. “The Intelligent Investor” for understanding the some of the human challenges of investing.
If you’re short on time and don’t want to make this a hobby, read #1.
> 1. “Random Walk Down Wall Street” to understand index funds and why they generally outperform.
Some of the simple logic/arithmetic behind passive funds versus active funds:
* https://web.stanford.edu/~wfsharpe/art/active/active.htm
The author has an Economics Nobel:
* https://en.wikipedia.org/wiki/William_F._Sharpe
* https://www.nobelprize.org/prizes/economic-sciences/1990/sum...
Some of the simple logic/arithmetic behind passive funds versus active funds:
* https://web.stanford.edu/~wfsharpe/art/active/active.htm
The author has an Economics Nobel:
* https://en.wikipedia.org/wiki/William_F._Sharpe
* https://www.nobelprize.org/prizes/economic-sciences/1990/sum...
>If you’re short on time and don’t want to make this a hobby, read #1
I am kind of trying to make it a hobby, that's why I want to learn.
Thank you for recommendations!
I am kind of trying to make it a hobby, that's why I want to learn.
Thank you for recommendations!
The Bogleheads' Guide To Investing is the best book to understanding investing, too. https://archive.org/details/the-bogleheads-guide-to-investin...
Put spare money every now and then into VOO or VT or similar and forget. No knowledge needed and time investment is like a few minutes of your time a month/quarter/year. Squeezing more alpha than that and not losing it, properly done (i.e. not gambling), is at least a part-time job. Chances are you'll do better putting that time into your own career.
True. People really underestimate the "alpha" of spending less and saving more.
This, and also earning more. Many people here are in tech, and the salaries can be insane.
Exactly. If you're in tech, you should be shooting first of all for $500k TC today than $500k pnl, the former is way easier (luck aspect aside). No point in thinking about active investing until you have like 7 figures of own capital to manage.
Learning about it isn't hard. Assuming you are good with numbers and logics. Especially value investing.
Read a few good books. A few will do. The Intelligent Investor or books from Peter Lynch and Warren Buffet if you want to keep it short. You can ignore all the others. Have a understanding of how business in different industries works. They all have some specialities, but from a high level overview they aren't all that different. And you will soon realise 95% of the internet have no clue how business works.
And that's it. Then 99.999% of Investment is an exercise of patient and emotion. Which experience in life suggest to me is something that can not be taught. You will have to go through your own emotional rollercoaster to learn it.
Oh. Ignore all mainstream media report, much like the internet 99% of them are junk, and by the time they reach mainstream media they are already late. ( Look at Lumber pricing in the past 12 months and mainstream media on Lumber reports to get an idea )
Finally nearly all comment and opinion on investment are rubbish. Even Warren Buffett could be wrong. That is including this comment you are reading. Make your own investment path and judgement.
Read a few good books. A few will do. The Intelligent Investor or books from Peter Lynch and Warren Buffet if you want to keep it short. You can ignore all the others. Have a understanding of how business in different industries works. They all have some specialities, but from a high level overview they aren't all that different. And you will soon realise 95% of the internet have no clue how business works.
And that's it. Then 99.999% of Investment is an exercise of patient and emotion. Which experience in life suggest to me is something that can not be taught. You will have to go through your own emotional rollercoaster to learn it.
Oh. Ignore all mainstream media report, much like the internet 99% of them are junk, and by the time they reach mainstream media they are already late. ( Look at Lumber pricing in the past 12 months and mainstream media on Lumber reports to get an idea )
Finally nearly all comment and opinion on investment are rubbish. Even Warren Buffett could be wrong. That is including this comment you are reading. Make your own investment path and judgement.
> Especially value investing.
Value investing had a long stretch of lower returns than other strategies:
* https://theirrelevantinvestor.com/2018/01/24/whats-wrong-wit...
If "99.999% of Investment is an exercise of patient and emotion", then I think most people would be hard pressed to see 'sub-optimal' results on a strategy for a decade and manage to stick with it.
Value investing had a long stretch of lower returns than other strategies:
* https://theirrelevantinvestor.com/2018/01/24/whats-wrong-wit...
If "99.999% of Investment is an exercise of patient and emotion", then I think most people would be hard pressed to see 'sub-optimal' results on a strategy for a decade and manage to stick with it.
>Unfortunately there was no definitive answer as to whether value is better than growth. I was not able to detect any clear trend; the results depended on the time period under analysis.
https://seekingalpha.com/article/1491372-value-versus-growth...
https://seekingalpha.com/article/1491372-value-versus-growth...
Very sound advices. The financial press seems good to analize a fact after it's done and do post mortems. But observing investors and businesses seems more valuable.
Go to Bogleheads https://www.bogleheads.org/wiki/Getting_started. There is an active forum https://www.bogleheads.org/forum/index.php . Bogleheads is named after Jack Bogle, the late founder of the Vanguard family of funds and a champion of stock index funds. Bogleheads is not the place to learn about crypto or FX trading. They generally advise against non-traditional investments.
I would start with bogleheads. I also always recommend people start with bogleheads and learning about 3 fund investing.
However I feel they are slightly too conservative especially if you are young. If you are following their bond advise right now you are getting crushed for no good reason, and Warren Buffet would be the first to point this out.
But still, having the majority of money in a total market fund is sort of a “no brainer”, and reading this will explain why.
However I feel they are slightly too conservative especially if you are young. If you are following their bond advise right now you are getting crushed for no good reason, and Warren Buffet would be the first to point this out.
But still, having the majority of money in a total market fund is sort of a “no brainer”, and reading this will explain why.
Thank you!
After learning for years, I settled on Jack Bogle's reversion to the mean, and put 75% of the money in VOO, and 25% I do stock picking.
I check this stuff once a month (I'm not in the US, can't have admiral shares), and than forget about it.
I check this stuff once a month (I'm not in the US, can't have admiral shares), and than forget about it.
> There are sites like investopedia but they seem generic and articles aren't well connected with each other.
You'll see this theme repeated throughout your investment learning. Investing is a huge space with hundreds of different 'instruments', the thing that has gotten me the most comfortable is just time and exposure to all of the different aspects.
I think in the beginning you need a choose a path and deep dive into it. I would start with your immediate goals, which sounds like to find somewhere relatively safe to park your money till you're ready for more active investing. In addition to BogleHeads I would explore Vanguards ETF offerings here https://investor.vanguard.com/mutual-funds/list#/etf/asset-c... .
Periodicals are also a fun way to learn , Barrons is good, WSJ. I'd read these cover to cover the first few months.
Good luck have fun!
You'll see this theme repeated throughout your investment learning. Investing is a huge space with hundreds of different 'instruments', the thing that has gotten me the most comfortable is just time and exposure to all of the different aspects.
I think in the beginning you need a choose a path and deep dive into it. I would start with your immediate goals, which sounds like to find somewhere relatively safe to park your money till you're ready for more active investing. In addition to BogleHeads I would explore Vanguards ETF offerings here https://investor.vanguard.com/mutual-funds/list#/etf/asset-c... .
Periodicals are also a fun way to learn , Barrons is good, WSJ. I'd read these cover to cover the first few months.
Good luck have fun!
Thank you!
Through your journey, try to find meaning in these quotes.
When I first heard them, they sounded reasonable, but I didn’t know if they were just folksy wisdom or hard truths. I tried to resolve which is what. They are all hard truths.
1. You can’t stand to see your neighbor getting rich. You know you’re smarter than he is and he’s doing these things and he’s getting rich
2. The stock market can remain irrational longer than you can remain solvent
3. I recommend the S&P 500 index fund (from a money manager)
4. The most important quality for an investor is temperament, not intellect
5. I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.
6. If a bird in the hand is worth two in the bush, the question becomes: When?
When I first heard them, they sounded reasonable, but I didn’t know if they were just folksy wisdom or hard truths. I tried to resolve which is what. They are all hard truths.
1. You can’t stand to see your neighbor getting rich. You know you’re smarter than he is and he’s doing these things and he’s getting rich
2. The stock market can remain irrational longer than you can remain solvent
3. I recommend the S&P 500 index fund (from a money manager)
4. The most important quality for an investor is temperament, not intellect
5. I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.
6. If a bird in the hand is worth two in the bush, the question becomes: When?
Financial koans. Fascinating. I feel enlightened already.
> You can’t stand to see your neighbor getting rich. You know you’re smarter than he is and he’s doing these things and he’s getting rich
This is the only one I don't understand.
This is the only one I don't understand.
[deleted]
So good poker players have more success than analytical guys?
Poker players not necessarily.
The point is that the market has been going up in the long term for as long as there's been a market. So you're better off just investing and forgetting about it rather than investing made from your feelings.
The point is that the market has been going up in the long term for as long as there's been a market. So you're better off just investing and forgetting about it rather than investing made from your feelings.
> I want to start investing some money and before doing it I want to learn how to do it.
Start with reading two books:
* https://en.wikipedia.org/wiki/The_Index_Card (more US specific)
* Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (Second Edition) by Andrew Hallam (author is a Canadian ex-pat, but the advice is general/international)
For reasons why you should (probably) not invest in individual stocks see:
* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
It was originally written in 1973 and still relevant (new editions cover fads that have come and gone since the original publication).
Start with reading two books:
* https://en.wikipedia.org/wiki/The_Index_Card (more US specific)
* Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (Second Edition) by Andrew Hallam (author is a Canadian ex-pat, but the advice is general/international)
For reasons why you should (probably) not invest in individual stocks see:
* https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
It was originally written in 1973 and still relevant (new editions cover fads that have come and gone since the original publication).
Thanks! Even if I don't live in US I want to invest in US market because it is better studied and seems more solid.
By "US specific" he talks about things like 401(k)s and (Roth) IRAs, which are tax-sheltered retirement accounts. As a Canadian, I would translate that to an RRSP. Not sure what you would use.
Note that while investing in the US (and internationally) isn't a bad thing, have some portion of your portfolio in your home country/currency generally helps to reduce volatility:
> In each market we examined, our analysis indicated that volatility was reduced most with an allocation to international equities of between 35% and 55%. While this observation may help investors determine the appropriate mix of domestic and international equities, volatility reduction is not the only factor to consider.
* https://personal.vanguard.com/pdf/ISGGEB_042021_Online.pdf
* https://www.morningstar.ca/ca/news/206577/home-country-bias-...
* https://en.wikipedia.org/wiki/Equity_home_bias_puzzle
* https://www.investopedia.com/terms/h/home-country-bias.asp
Note that while investing in the US (and internationally) isn't a bad thing, have some portion of your portfolio in your home country/currency generally helps to reduce volatility:
> In each market we examined, our analysis indicated that volatility was reduced most with an allocation to international equities of between 35% and 55%. While this observation may help investors determine the appropriate mix of domestic and international equities, volatility reduction is not the only factor to consider.
* https://personal.vanguard.com/pdf/ISGGEB_042021_Online.pdf
* https://www.morningstar.ca/ca/news/206577/home-country-bias-...
* https://en.wikipedia.org/wiki/Equity_home_bias_puzzle
* https://www.investopedia.com/terms/h/home-country-bias.asp
The first thing to understand is that in your first 5-10 years of investing, you will do worse, probably much worse, than simply investing in a broad index.
Investing, seen as a skill, is pretty unique in being in that you need to become better than most of the others for it to even make sense. You don't need to be better than the median plumber to make good money as a plumber for example.
So if you just want to "learn about investing" in order to make money, I would not bother, unless you want to make this your full time job for the next decade or so.
But every one should learn about economics and the financial system, regardless. I would recommend introductory courses from The Teaching Company/Great Courses. Or indeed a mooc like Coursera, they have some excellent material, not sure why you want to avoid that.
Investing, seen as a skill, is pretty unique in being in that you need to become better than most of the others for it to even make sense. You don't need to be better than the median plumber to make good money as a plumber for example.
So if you just want to "learn about investing" in order to make money, I would not bother, unless you want to make this your full time job for the next decade or so.
But every one should learn about economics and the financial system, regardless. I would recommend introductory courses from The Teaching Company/Great Courses. Or indeed a mooc like Coursera, they have some excellent material, not sure why you want to avoid that.
Thanks!
I do not want to avoid MOOC, it's just that I haven't seen there the kind of stuff I am after.
I also consider buying an index as investing, maybe it is a good stating point.
I do believe I will make mistakes and I want to avoid the huge ones. Doing some learning will at least help avoid going only on the gut instinct and what I read in the press.
I don't plan to make a job from it but I want to get at a better level of understanding the markets and their mechanism than I am now which is zero.
I do not want to avoid MOOC, it's just that I haven't seen there the kind of stuff I am after.
I also consider buying an index as investing, maybe it is a good stating point.
I do believe I will make mistakes and I want to avoid the huge ones. Doing some learning will at least help avoid going only on the gut instinct and what I read in the press.
I don't plan to make a job from it but I want to get at a better level of understanding the markets and their mechanism than I am now which is zero.
[deleted]
Stay away from active investing. I run a fintech investing app and the only investments I have are whatever my 401k is doing. I don't know and don't care about anything else the market is doing.
Why? It consumes you. When you're actively investing you become a slave to CNBC, futures charts, and 1 minute tickers. You'll start waking up at 4am to watch the premarket. You'll spend an inordinate amount of time chasing returns that, in all likelihood, will end up less than tracking the market, to the detriment of your family, health, and career.
Why? It consumes you. When you're actively investing you become a slave to CNBC, futures charts, and 1 minute tickers. You'll start waking up at 4am to watch the premarket. You'll spend an inordinate amount of time chasing returns that, in all likelihood, will end up less than tracking the market, to the detriment of your family, health, and career.
Keep this in mind as you are learning:
- people trying to sell you stuff will say things like “if you believe X has the potential to become the next dominant investment trend…”, because they make money on selling you speculative advice that is essentially worthless
- when people say “the market”, they generally mean broadly diversified indexes like the S&P 500
- no one can beat the market over time with any continued success, and anyone claiming to be able to do that for you wouldn’t need your money to make gains for themselves
- whatever you invest in, pay super close attention to the fees, because the higher the fees, the lower your returns will be
- internalize the phrase “time in the market beats timing the market”, and learn what it really means
- If the only thing you ever did was invest in a total market index fund with low fees, you’ll probably be pretty happy with the results over time
- people trying to sell you stuff will say things like “if you believe X has the potential to become the next dominant investment trend…”, because they make money on selling you speculative advice that is essentially worthless
- when people say “the market”, they generally mean broadly diversified indexes like the S&P 500
- no one can beat the market over time with any continued success, and anyone claiming to be able to do that for you wouldn’t need your money to make gains for themselves
- whatever you invest in, pay super close attention to the fees, because the higher the fees, the lower your returns will be
- internalize the phrase “time in the market beats timing the market”, and learn what it really means
- If the only thing you ever did was invest in a total market index fund with low fees, you’ll probably be pretty happy with the results over time
People absolutely beat the market over time. The investment world when they say no one beats the market, are referring to investment managers moving billions of dollars. As a regular guy, you can. It’s sad to see this terrible advice repeated ad nauseam
Doesn't the investment world say something like "no one can beat the market forever?"
Of course some people can win sometimes. But to do it consistently is a different story. You have to have some kind of edge: being faster (unlikely), smarter (unlikely), or access to information other people don't have (also unlikely).
Or do you really think the average guy can do better than the market, and why or how?
Of course some people can win sometimes. But to do it consistently is a different story. You have to have some kind of edge: being faster (unlikely), smarter (unlikely), or access to information other people don't have (also unlikely).
Or do you really think the average guy can do better than the market, and why or how?
No. Stop it with this mentality. When managing a small portfolio, < 5 million dollars, you can be very agile in how you invest. Small hedge funds in NYC with less than 10 million under management regularly make 50-100% a year. It’s not a controversial opinion. It’s just that the financial industry has pushed this narrative as a way to sell index fund products. Completely diversifying your investments is a terrible way to make money. Warren buffet himself says this all the time. Source is I used to work in finance in NYC
I'm intrigued.
1. How is a regular guy going to achieve the same results as a hedge fund with a 10 million dollar portfolio?
2. Regarding Buffett's quote, do you mean "diversification is protection against ignorance?" I think his point is that if you have special knowledge you can take a concentrated position in a stock, but that for the regular guy, diversification is a hedge. Since most stocks underperform and most gains are from a small fraction of stocks, his quote seems to make sense.
1. How is a regular guy going to achieve the same results as a hedge fund with a 10 million dollar portfolio?
2. Regarding Buffett's quote, do you mean "diversification is protection against ignorance?" I think his point is that if you have special knowledge you can take a concentrated position in a stock, but that for the regular guy, diversification is a hedge. Since most stocks underperform and most gains are from a small fraction of stocks, his quote seems to make sense.
>How is a regular guy going to achieve the same results as a hedge fund with a 10 million dollar portfolio?
Maybe by finding a well managed small fund and buying into it?
Maybe by finding a well managed small fund and buying into it?
> Maybe by finding a well managed small fund and buying into it?
Just because a fund manager is good now, does not mean they'll be good in the future. It's the same situation as with stocks: how do you know when to jump ship?
Further, over longer periods of time, most fund managers don't beat the market average:
* https://www.ifa.com/articles/despite_brief_reprieve_2018_spi...
And just because a few funds do manage to beat the average, it's hard to tell that they are ahead of time. Over the last 40-50 years (in the US) there have been some that have had excellent results—for a while. Until they didn't ("Chasing Top Fund Managers"):
* https://www.youtube.com/watch?v=p6HrepdLSu4 (18m34s)
* https://rationalreminder.ca/podcast/136 (topic starts at ~15m)
Plenty of peer-reviewed papers at the bottom of that second (podcast) link.
Just because a fund manager is good now, does not mean they'll be good in the future. It's the same situation as with stocks: how do you know when to jump ship?
Further, over longer periods of time, most fund managers don't beat the market average:
* https://www.ifa.com/articles/despite_brief_reprieve_2018_spi...
And just because a few funds do manage to beat the average, it's hard to tell that they are ahead of time. Over the last 40-50 years (in the US) there have been some that have had excellent results—for a while. Until they didn't ("Chasing Top Fund Managers"):
* https://www.youtube.com/watch?v=p6HrepdLSu4 (18m34s)
* https://rationalreminder.ca/podcast/136 (topic starts at ~15m)
Plenty of peer-reviewed papers at the bottom of that second (podcast) link.
> When managing a small portfolio, < 5 million dollars, you can be very agile in how you invest.
Most stocks suck:
> We study long-run shareholder outcomes for over 64,000 global common stocks during the January 1990 to December 2020 period. We document that the majority, 55.2% of U.S. stocks and 57.4% of non-U.S. stocks, underperform one-month U.S. Treasury bills in terms of compound returns over the full sample. Focusing on aggregate shareholder outcomes, we find that the top-performing 2.4% of firms account for all of the $US 75.7 trillion in net global stock market wealth creation from 1990 to December 2020. Outside the US, 1.41% of firms account for the $US 30.7 trillion in net wealth creation.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251
> Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable both to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly-diversified active strategies most often underperform market averages.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447
What are the odds that you manage to pick those few stocks that produce those returns? How much effort does a person have to put in to find these stocks? How much time to do that that is not spent (a) working a full-time job, (b) spending time with friends and family, (c) perhaps having a non-investing hobby? And do that over decades to build (e.g.) their retirement fund, and then another few decades (again) to protect their retirement nest egg.
Perhaps someone can beat the market, but what is the trade-off versus accepting "only" market returns by investing in a total market fund?
Most stocks suck:
> We study long-run shareholder outcomes for over 64,000 global common stocks during the January 1990 to December 2020 period. We document that the majority, 55.2% of U.S. stocks and 57.4% of non-U.S. stocks, underperform one-month U.S. Treasury bills in terms of compound returns over the full sample. Focusing on aggregate shareholder outcomes, we find that the top-performing 2.4% of firms account for all of the $US 75.7 trillion in net global stock market wealth creation from 1990 to December 2020. Outside the US, 1.41% of firms account for the $US 30.7 trillion in net wealth creation.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251
> Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable both to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly-diversified active strategies most often underperform market averages.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447
What are the odds that you manage to pick those few stocks that produce those returns? How much effort does a person have to put in to find these stocks? How much time to do that that is not spent (a) working a full-time job, (b) spending time with friends and family, (c) perhaps having a non-investing hobby? And do that over decades to build (e.g.) their retirement fund, and then another few decades (again) to protect their retirement nest egg.
Perhaps someone can beat the market, but what is the trade-off versus accepting "only" market returns by investing in a total market fund?
Dude I’m too busy to argue with you, I literally used to regularly interact with people making these returns. Yes it’s hard and it’s a full time job. But it happens all the time, academic research is worthless. Accepting index returns basically means keeping up with inflation, and “getting rich” at 70 years old. If that’s what your aim is in life then sure, go for it
> Dude I’m too busy to argue with you, I literally used to regularly interact with people making these returns.
I don't doubt that many people have managed to accomplish good returns. But you have to do it for the ~30 years to build a nest egg for (e.g.) retirement, and then another 20-30 years post-retirement to preserve said nest egg.
But there's a huge problem:
> Instead, I am going to argue that you shouldn’t pick stocks because of the existential dilemma of doing so. The existential dilemma is simple—how do you know if you are good at picking individual stocks? In most domains, the amount of time it takes to judge whether someone has skill in that domain is relatively short.
> For example, any competent basketball coach could tell you whether someone was skilled at shooting within the course of 10 minutes. Yes, it’s possible to get lucky and make a bunch of shots early on, but eventually they will trend toward their actual shooting percentage. The same is true in a technical field like computer programming. Within a short period of time, a good programmer would be able to tell if someone doesn’t know what they are talking about. […]
> But, what about stock picking? How long would it take to determine if someone is a good stock picker?
> An hour? A week? A year?
> Try multiple years, and even then you still may not know for sure. The issue is that causality is harder to determine with stock picking than with other domains. When you shoot a basketball or write a computer program, the result comes immediately after the action. The ball goes in the hoop or it doesn’t. The program runs correctly or it doesn’t. But, with stock picking, you make a decision now and have to wait for it to pay off. The feedback loop can take years.
[…]
> Just imagine how nerve-racking this must be when [temporary underperformance] finally happens. Yes, you had skill in the past, but what about now? Is your underperformance a normal lull that even the best investors experience, or have you lost your touch? Of course, losing your touch in any endeavor isn’t easy, but it’s so much harder when you don’t know if you have lost it.
* https://ofdollarsanddata.com/why-you-shouldnt-pick-individua...
If people think they'll be able to meet their goals picking stocks successfully for several decades, they are free to try. But in my estimation the odds are not on their side. I prefer to play the odds. ¯\_(ツ)_/¯
> Accepting index returns basically means keeping up with inflation […]
Inflation has been <3% over the last ten years in the US. The S&P 500 (for one) has returned much more than that on an annual basis. Even with the 'Lost Decade' of the S&P 500 in the 2000s, simply having 20% bonds (and perhaps rebalancing) would have been sufficient to overcome inflation.
I don't doubt that many people have managed to accomplish good returns. But you have to do it for the ~30 years to build a nest egg for (e.g.) retirement, and then another 20-30 years post-retirement to preserve said nest egg.
But there's a huge problem:
> Instead, I am going to argue that you shouldn’t pick stocks because of the existential dilemma of doing so. The existential dilemma is simple—how do you know if you are good at picking individual stocks? In most domains, the amount of time it takes to judge whether someone has skill in that domain is relatively short.
> For example, any competent basketball coach could tell you whether someone was skilled at shooting within the course of 10 minutes. Yes, it’s possible to get lucky and make a bunch of shots early on, but eventually they will trend toward their actual shooting percentage. The same is true in a technical field like computer programming. Within a short period of time, a good programmer would be able to tell if someone doesn’t know what they are talking about. […]
> But, what about stock picking? How long would it take to determine if someone is a good stock picker?
> An hour? A week? A year?
> Try multiple years, and even then you still may not know for sure. The issue is that causality is harder to determine with stock picking than with other domains. When you shoot a basketball or write a computer program, the result comes immediately after the action. The ball goes in the hoop or it doesn’t. The program runs correctly or it doesn’t. But, with stock picking, you make a decision now and have to wait for it to pay off. The feedback loop can take years.
[…]
> Just imagine how nerve-racking this must be when [temporary underperformance] finally happens. Yes, you had skill in the past, but what about now? Is your underperformance a normal lull that even the best investors experience, or have you lost your touch? Of course, losing your touch in any endeavor isn’t easy, but it’s so much harder when you don’t know if you have lost it.
* https://ofdollarsanddata.com/why-you-shouldnt-pick-individua...
If people think they'll be able to meet their goals picking stocks successfully for several decades, they are free to try. But in my estimation the odds are not on their side. I prefer to play the odds. ¯\_(ツ)_/¯
> Accepting index returns basically means keeping up with inflation […]
Inflation has been <3% over the last ten years in the US. The S&P 500 (for one) has returned much more than that on an annual basis. Even with the 'Lost Decade' of the S&P 500 in the 2000s, simply having 20% bonds (and perhaps rebalancing) would have been sufficient to overcome inflation.
Since when was investing the simple act of vanilla stock picking? And I don’t care what the government reports as inflation. Your problem is you don’t actually understand investing from a professional and practical point of view, it’s very different behind closed doors in the real world.
I also thought that it was more that nobody offering active management beats the market after their fees are taken into account.
People who beat the market are lucky.
I know more than one person who has been "lucky" in that way remarkably consistently for decades. At some point you start to ask if they are making their own luck.
These are all people who have no-nonsense investing strategies. They don't do anything weird or controversial. They typically look for value and fundamentals and they make their biggest gains simply by buying or selling at a good time by recognising something important before the market.
An example I always remember one of them giving me was a company that made building materials. During an exceptionally wet summer a lot of building work stopped because sites were washed out. Stocks in the big homebuilders had fallen heavily and this smaller supplier had tracked them down. However it fell so far that its price-to-book ratio was less than 1. (Roughly speaking that means the cost to buy a share is less than what that share would be worth if you could distribute the current value of the tangible business assets to the shareholders.) My friend invested and after the bad weather passed, trade returned to normal levels, the stock price corrected, and they had made a very good return over a few months.
These are all people who have no-nonsense investing strategies. They don't do anything weird or controversial. They typically look for value and fundamentals and they make their biggest gains simply by buying or selling at a good time by recognising something important before the market.
An example I always remember one of them giving me was a company that made building materials. During an exceptionally wet summer a lot of building work stopped because sites were washed out. Stocks in the big homebuilders had fallen heavily and this smaller supplier had tracked them down. However it fell so far that its price-to-book ratio was less than 1. (Roughly speaking that means the cost to buy a share is less than what that share would be worth if you could distribute the current value of the tangible business assets to the shareholders.) My friend invested and after the bad weather passed, trade returned to normal levels, the stock price corrected, and they had made a very good return over a few months.
No, the fact is: there is too little objective data to know about either side in the retail sense.
And the objective data that is there says that 1% of day traders out perform the market in the shanghai stock exchange (I could misremember).
The point is we have too little data to know almost anything.
I am on my phone no time for source finding.
And the objective data that is there says that 1% of day traders out perform the market in the shanghai stock exchange (I could misremember).
The point is we have too little data to know almost anything.
I am on my phone no time for source finding.
> And the objective data that is there says that 1% of day traders out perform the market in the shanghai stock exchange (I could misremember).
What are the odds that you are of those 1%? (Hint: you're probably not in that group.)
Given that I have >20 years until retirement, what are the odds that I will be in that 1% for all of that time?
Further most stocks suck:
> We study long-run shareholder outcomes for over 64,000 global common stocks during the January 1990 to December 2020 period. We document that the majority, 55.2% of U.S. stocks and 57.4% of non-U.S. stocks, underperform one-month U.S. Treasury bills in terms of compound returns over the full sample. Focusing on aggregate shareholder outcomes, we find that the top-performing 2.4% of firms account for all of the $US 75.7 trillion in net global stock market wealth creation from 1990 to December 2020. Outside the US, 1.41% of firms account for the $US 30.7 trillion in net wealth creation.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251
> Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable both to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly-diversified active strategies most often underperform market averages.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447
What are the odds that you manage to pick those few stocks that produce those returns?
What are the odds that you are of those 1%? (Hint: you're probably not in that group.)
Given that I have >20 years until retirement, what are the odds that I will be in that 1% for all of that time?
Further most stocks suck:
> We study long-run shareholder outcomes for over 64,000 global common stocks during the January 1990 to December 2020 period. We document that the majority, 55.2% of U.S. stocks and 57.4% of non-U.S. stocks, underperform one-month U.S. Treasury bills in terms of compound returns over the full sample. Focusing on aggregate shareholder outcomes, we find that the top-performing 2.4% of firms account for all of the $US 75.7 trillion in net global stock market wealth creation from 1990 to December 2020. Outside the US, 1.41% of firms account for the $US 30.7 trillion in net wealth creation.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3710251
> Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries. When stated in terms of lifetime dollar wealth creation, the best-performing four percent of listed companies explain the net gain for the entire U.S. stock market since 1926, as other stocks collectively matched Treasury bills. These results highlight the important role of positive skewness in the distribution of individual stock returns, attributable both to skewness in monthly returns and to the effects of compounding. The results help to explain why poorly-diversified active strategies most often underperform market averages.
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447
What are the odds that you manage to pick those few stocks that produce those returns?
>What are the odds that you manage to pick those few stocks that produce those returns?
Aren't most of those stocks the best performers of each industry? Can you fail by buying FAANG?
Aren't most of those stocks the best performers of each industry? Can you fail by buying FAANG?
Investing in technology can bite you if you invest at the wrong time:
* https://www.pwlcapital.com/investing-technological-revolutio...
* https://en.wikipedia.org/wiki/Technological_Revolutions_and_...
AMZN dropped 90% after the Dot Com Bubble burst. TSLA in the last five years:
> In the past 5 years, there were drawdowns of 30%, 50%, -60% and -35%. This stock was down 60% in 2020! It’s up a cool 1000%+ since then.
> And the crazy thing is there were plenty of Tesla shareholders who did hold on for the entire ride. They were true believers in the face of relentless negativity about the company and its founder.
> Kudos to them.
* https://awealthofcommonsense.com/2021/10/the-10-most-dangero...
Do you have the mental fortitude to hang on during those times? How do you know when you're wrong?
> The first has to do with stock picking. Mr. Housel points out that most public companies are duds, a few do well, and a handful become extraordinary winners that drive the vast majority of the stock market’s returns. He cites data from the Russell 3000 Index that shows, since 1980, forty percent of all Russell 3000 stock components lost at least 70% of their value and never recovered.
* https://boomerandecho.com/weekend-reading-the-psychology-of-...
* Housel's book: https://www.goodreads.com/en/book/show/41881472-the-psycholo...
* https://awealthofcommonsense.com/2014/09/stocks-dont-come-ba...
FAANG may be great stocks—right now. But there are plenty of stocks that used to be great as well:
> Exxon Mobil replaced by a software stock after 92 years in the Dow is a ‘sign of the times’
* https://www.cnbc.com/2020/08/25/exxon-mobil-replaced-by-a-so...
When do you know when a stock you've pick that used to be good stops being good? IBM, AT&T, and GM were in the Top 10 of companies on the S&P 500 for decades: how are they doing now? How do you know when to jump ship?
* https://www.dimensional.com/us-en/insights/large-and-in-char...
AAPL didn't do very well in the 1990s: when would have dropped them? When should you have picked them up? (After the (in)famous Microsoft investment perhaps?)
Further, just because investing in a company on its way up may be give you good returns, does that still apply once it is at the top?
> But as massive as these behemoths became, that has not necessarily made them good long-term investments. For each decade starting 1930, 1940, 1950, and so on through 2010, the 10 largest companies at the start of the decade have made up, on average, 23.6% of the U.S. stock market. But, in the decade that followed, the average annual return of those 10 largest companies has trailed the market by an annualized 1.51% on average.
* https://www.pwlcapital.com/are-the-largest-large-cap-growth-...
Investing in the "top companies" was a fad in the past—and returns weren't necessary that good over the long-term:
* https://en.wikipedia.org/wiki/Nifty_Fifty
Owning the best stocks is hard:
* https://awealthofcommonsense.com/2021/03/owning-the-best-sto...
* https://www.pwlcapital.com/investing-technological-revolutio...
* https://en.wikipedia.org/wiki/Technological_Revolutions_and_...
AMZN dropped 90% after the Dot Com Bubble burst. TSLA in the last five years:
> In the past 5 years, there were drawdowns of 30%, 50%, -60% and -35%. This stock was down 60% in 2020! It’s up a cool 1000%+ since then.
> And the crazy thing is there were plenty of Tesla shareholders who did hold on for the entire ride. They were true believers in the face of relentless negativity about the company and its founder.
> Kudos to them.
* https://awealthofcommonsense.com/2021/10/the-10-most-dangero...
Do you have the mental fortitude to hang on during those times? How do you know when you're wrong?
> The first has to do with stock picking. Mr. Housel points out that most public companies are duds, a few do well, and a handful become extraordinary winners that drive the vast majority of the stock market’s returns. He cites data from the Russell 3000 Index that shows, since 1980, forty percent of all Russell 3000 stock components lost at least 70% of their value and never recovered.
* https://boomerandecho.com/weekend-reading-the-psychology-of-...
* Housel's book: https://www.goodreads.com/en/book/show/41881472-the-psycholo...
* https://awealthofcommonsense.com/2014/09/stocks-dont-come-ba...
FAANG may be great stocks—right now. But there are plenty of stocks that used to be great as well:
> Exxon Mobil replaced by a software stock after 92 years in the Dow is a ‘sign of the times’
* https://www.cnbc.com/2020/08/25/exxon-mobil-replaced-by-a-so...
When do you know when a stock you've pick that used to be good stops being good? IBM, AT&T, and GM were in the Top 10 of companies on the S&P 500 for decades: how are they doing now? How do you know when to jump ship?
* https://www.dimensional.com/us-en/insights/large-and-in-char...
AAPL didn't do very well in the 1990s: when would have dropped them? When should you have picked them up? (After the (in)famous Microsoft investment perhaps?)
Further, just because investing in a company on its way up may be give you good returns, does that still apply once it is at the top?
> But as massive as these behemoths became, that has not necessarily made them good long-term investments. For each decade starting 1930, 1940, 1950, and so on through 2010, the 10 largest companies at the start of the decade have made up, on average, 23.6% of the U.S. stock market. But, in the decade that followed, the average annual return of those 10 largest companies has trailed the market by an annualized 1.51% on average.
* https://www.pwlcapital.com/are-the-largest-large-cap-growth-...
Investing in the "top companies" was a fad in the past—and returns weren't necessary that good over the long-term:
* https://en.wikipedia.org/wiki/Nifty_Fifty
Owning the best stocks is hard:
* https://awealthofcommonsense.com/2021/03/owning-the-best-sto...
Stocks don't go magically go up all the time. When earnings slow down, the stock stops being seen as a growth stock, and the share price stays flat or goes down. Generally speaking anyway.
Edit: I am a bit sad that I got downvoted. What's wrong with a contrarian opinion? I'm not suggesting we should all pick stocks. I'm saying there's not enough data to know conclusively that one couldn't outperform the market.
> What are the odds that you are of those 1%? (Hint: you're probably not in that group.)
Again, this was research on day trading (for which I didn't supply the source, sorry for that). It was not about buying and holding with at least for a 5 year horizon. That's what I meant with we have too little data. Day trading is not investing.
> What are the odds that you manage to pick those few stocks that produce those returns?
As I've learned with poker: only play on tables where you see fish. Which translates to: only play games that you are sure that you can win. The hard part is to not enter any games that you're not fully sure about of winning. And yes, there are not many games that you can win at all. But when you see one, you go at it aggressive and win. It's easier to say than to do it (based on my poker experience).
I'm not saying that people can beat the market. But I still believe even after all this that it's hard to say that people aren't beating the market. We need data of actual accounts over long time horizons. IMO that's the only way that question can be answered. Unfortunately, that's unrealistic since it's a feature that the stock market is anonymous and private to other market participants.
I feel there's a feedback loop going on where everyone echoes each other that you can't beat the market. And I feel that echo is stronger than the actual evidence. Don't get me wrong, the evidence that I see is quite compelling. But it isn't foolproof and it has many gaps. It's about as compelling as the efficient market hypothesis. Yes, in general markets are efficient, but why does it take 5 to 15 minutes for information to be incorporated into a stable price? That means if you'd trade at minute 2, you're almost guaranteed to make money [2]. I don't have sources for this, but these are my observations. This is even more true in the crypto markets where academics are saying that markets aren't fully efficient.
The only thing I can say with regards to the whole "you can't outperform the market" rhetoric is this: if you want to invest safely, then don't try to outperform the market. There is enough research that it's a dangerous endeavour. So is starting a startup (from a financial standpoint). However, that doesn't mean it's impossible to outperform the market, or create a great financially successful startup for that matter.
[1] According to Graham, he mentions it in his book The Intelligent Investor.
[2] Every time when I look at day price information and see a news event priced in, I notice it takes at least 5 minutes in many cases. It's never instant.
> What are the odds that you are of those 1%? (Hint: you're probably not in that group.)
Again, this was research on day trading (for which I didn't supply the source, sorry for that). It was not about buying and holding with at least for a 5 year horizon. That's what I meant with we have too little data. Day trading is not investing.
> What are the odds that you manage to pick those few stocks that produce those returns?
As I've learned with poker: only play on tables where you see fish. Which translates to: only play games that you are sure that you can win. The hard part is to not enter any games that you're not fully sure about of winning. And yes, there are not many games that you can win at all. But when you see one, you go at it aggressive and win. It's easier to say than to do it (based on my poker experience).
I'm not saying that people can beat the market. But I still believe even after all this that it's hard to say that people aren't beating the market. We need data of actual accounts over long time horizons. IMO that's the only way that question can be answered. Unfortunately, that's unrealistic since it's a feature that the stock market is anonymous and private to other market participants.
I feel there's a feedback loop going on where everyone echoes each other that you can't beat the market. And I feel that echo is stronger than the actual evidence. Don't get me wrong, the evidence that I see is quite compelling. But it isn't foolproof and it has many gaps. It's about as compelling as the efficient market hypothesis. Yes, in general markets are efficient, but why does it take 5 to 15 minutes for information to be incorporated into a stable price? That means if you'd trade at minute 2, you're almost guaranteed to make money [2]. I don't have sources for this, but these are my observations. This is even more true in the crypto markets where academics are saying that markets aren't fully efficient.
The only thing I can say with regards to the whole "you can't outperform the market" rhetoric is this: if you want to invest safely, then don't try to outperform the market. There is enough research that it's a dangerous endeavour. So is starting a startup (from a financial standpoint). However, that doesn't mean it's impossible to outperform the market, or create a great financially successful startup for that matter.
[1] According to Graham, he mentions it in his book The Intelligent Investor.
[2] Every time when I look at day price information and see a news event priced in, I notice it takes at least 5 minutes in many cases. It's never instant.
[deleted]
Thank you! I don't plan to beat the market. At first my plans are to not lose too much. After that to win more often than I lose.
I am not a great poker player, but since I got better than the average I am winning more often than I lose while playing poker and that is enough for me.
So if I will correctly evaluate my chances in more than 50% of cases, at least I won't be losing.
Maybe investing in a passive index fund is better as a long term strategy and I might buy some with 90% of my money while still trying my chance at buying stocks with the other 10%.
I am not a great poker player, but since I got better than the average I am winning more often than I lose while playing poker and that is enough for me.
So if I will correctly evaluate my chances in more than 50% of cases, at least I won't be losing.
Maybe investing in a passive index fund is better as a long term strategy and I might buy some with 90% of my money while still trying my chance at buying stocks with the other 10%.
Technically, beating the market should be like being in the top 50 percentile of your class. The reason most big funds fail to do this is because they need to overcome the fees they charge, to match the market.
If you are investing yourself, you won't have the fees to overcome. You do need to be a bit careful around trading costs and taxes. Luck can play a huge factor too. If you have domain expertise in a specific sector, your chances of outperforming the market may go up a bit. You may be able to identify with greater certainty an opportunity to invest in a company that others haven't yet noticed. This can only happen with small companies. With bigger companies, it's hard for some outsider to possess some information that others don't have.
It's also a fine strategy, IMO, to invest in indexes and then focus your time on what you can do best or enjoy that time the way you see fit (for a few people, the latter can indeed be investing)
If you are investing yourself, you won't have the fees to overcome. You do need to be a bit careful around trading costs and taxes. Luck can play a huge factor too. If you have domain expertise in a specific sector, your chances of outperforming the market may go up a bit. You may be able to identify with greater certainty an opportunity to invest in a company that others haven't yet noticed. This can only happen with small companies. With bigger companies, it's hard for some outsider to possess some information that others don't have.
It's also a fine strategy, IMO, to invest in indexes and then focus your time on what you can do best or enjoy that time the way you see fit (for a few people, the latter can indeed be investing)
>being in the top 50 percentile of your class
But will you do better long term than a passive index fund?
But will you do better long term than a passive index fund?
Not easy, unless you have an ability to identify opportunities that others don't have (such as applying your domain knowledge on a new trend, as I mentioned). You may do better than the market (market == passive index fund == averages) sometime, and worse some other time. And over a long time, you may just end up matching the market, minus any fees. With a passive index fund, the fees will be tiny.
You’ve got some good recommendations here. To them, I’ll add: don’t procrastinate endlessly. Find a plan that seems reasonable and start now.
If you want to keep learning, feel free, but I’d set a date no later than Jan 31, 2022 to have made your first investment according to the plan.
If you want to keep learning, feel free, but I’d set a date no later than Jan 31, 2022 to have made your first investment according to the plan.
But what if the next years will be different from the past years? What if we are reaching a point where the system breaks for good? My procrastinator brain likes to put some existential dread out there. Can I just answer it with "if it will break we will be fucked anyway"?
I think that in any scenario where society continues that owning shares of important companies will be economically valuable.
To that end, I think most people want a “get rich slowly” strategy where, rather than gamble on the next Dogecoin, you buy broad-based indexes (or other mutual fund make ups) regularly and sustained over a long period. “Time in the market beats timing the market.”
If that’s not enough, read up on the worst market timer: https://awealthofcommonsense.com/2014/02/worlds-worst-market...
There’s no guarantee that we’ll continue to see low double-digit gains. I’m personally modeling my retirement on a 5% real return CAGR (close to half of the historical, long-run average) and any actual returns over that mean that I will work longer than I strictly had to and become a head-start to my kids.
To that end, I think most people want a “get rich slowly” strategy where, rather than gamble on the next Dogecoin, you buy broad-based indexes (or other mutual fund make ups) regularly and sustained over a long period. “Time in the market beats timing the market.”
If that’s not enough, read up on the worst market timer: https://awealthofcommonsense.com/2014/02/worlds-worst-market...
There’s no guarantee that we’ll continue to see low double-digit gains. I’m personally modeling my retirement on a 5% real return CAGR (close to half of the historical, long-run average) and any actual returns over that mean that I will work longer than I strictly had to and become a head-start to my kids.
But from that 5% you have to subtract the inflation rate.
Thank you
Buy some VOO every month. Keep doing it. Don’t look at prices for the next few decades.
Depends on your goals really.
If you want to become proficient in personal asset management, read Bogleheads.
Personally, my goal is to earn a CPA and CFA. Yes it’s credentialism, but it can’t hurt to have other than the time it takes to get the work experience.
If you want to become proficient in personal asset management, read Bogleheads.
Personally, my goal is to earn a CPA and CFA. Yes it’s credentialism, but it can’t hurt to have other than the time it takes to get the work experience.
Read any of William Bernstein's books. The Investor's Manifesto is a good one.
If you don't want to engage in the emotional rollercoaster of price, it's a good idea to set your investments on autopilot--have your broker automatically buy a certain amount each month without having to think about it. Don't touch it! (Except for rebalancing)
If you don't want to engage in the emotional rollercoaster of price, it's a good idea to set your investments on autopilot--have your broker automatically buy a certain amount each month without having to think about it. Don't touch it! (Except for rebalancing)
Thanks!
Study the teachings of Warren Buffett and Charlie Munger.
There is a Reddit community for that: r/brkb
https://old.reddit.com/r/brkb/
Understand the concept of intrinsic value (versus market price).
Think of shares as "part of a business".
Watch the professionals at Berkshire Hathaway: what are they doing today?
There is a Reddit community for that: r/brkb
https://old.reddit.com/r/brkb/
Understand the concept of intrinsic value (versus market price).
Think of shares as "part of a business".
Watch the professionals at Berkshire Hathaway: what are they doing today?
Thank you!
You can start by subscribing to newsletters that can give you some exposure to all these topics and you can learn at your own pace. WSJ newsletters are pretty good. I run a stock market newsletter targeted for casual and beginner investors https://bullish.email
Thanks!
I'd start with a couple of great books you should be able to get from the library:
* The Four Pillars of Investing: https://www.amazon.com/Four-Pillars-Investing-Building-Portfolio-ebook/dp/B0041842TW
* Are You a Stock or a Bond: https://www.amazon.com/Are-You-Stock-Bond-Financial/dp/0133115291
* A Random Walk Down Wall Street: https://www.amazon.com/Random-Walk-Down-Wall-Street/dp/0393358380
* The first step is to identify your risk tolerance and goals. That's way more important that the specific vehicles of investing.
* Unless you are a professional investor, it is highly unlikely you'll beat the professionals (and not likely even then) so broad diversification is a good idea.Thanks!
I’ve read all of the popular books. Rich Dad Poor Dad. The Intelligent Investor. Books about Buffett. But what stick in my mind is 1) The Little Book of Behavioral Investing and 2) Zero To One. The latter is not an investing book per se, but the ideas in it have been worth seven figures to me so far.
first learn from the GOATs: Warren Buffet, Peter Thiel, and my personal favorite Peter Lynch. (feel free to extend this list in the comments)
then for technical, how-to details, you just need to read & apply. for most people (ie. not someone who plans doing finance for a living, as a job) you don't need to learn a whole lot about every financial instrument. learn some info about what is out there, make your choice and let your investments sit as long as possible.
most no-brainer investment strategy is roughly 30% S&P 500, 30% in FAANG, 20% your choice (e.g. higher risk such as crypto, business, etc), <10% living expanses, remaining 10% - have fun. (house, car, vacation...)
then for technical, how-to details, you just need to read & apply. for most people (ie. not someone who plans doing finance for a living, as a job) you don't need to learn a whole lot about every financial instrument. learn some info about what is out there, make your choice and let your investments sit as long as possible.
most no-brainer investment strategy is roughly 30% S&P 500, 30% in FAANG, 20% your choice (e.g. higher risk such as crypto, business, etc), <10% living expanses, remaining 10% - have fun. (house, car, vacation...)
What are you trying to get money for? If it’s retirement, you could do a lot worse than a low-fee target retirement date fund.
I live in Europe so we have pension funds.
I just want to better my financial situation somehow. By keeping the money in a bank account I loose. Also, learning about financial market seems interesting.
If I will be able to have a return of 10% yearly at some point, I will be super happy.
I just want to better my financial situation somehow. By keeping the money in a bank account I loose. Also, learning about financial market seems interesting.
If I will be able to have a return of 10% yearly at some point, I will be super happy.
As others have mentioned, Boggleheads.
Personally I would recommend the following, especially if you're more concerned with retirement than investments:
1. The Simple Path to Wealth (or just listen to the author get interviewed on the following podcasts):
A. Afford Anything
B. Bigger Pockets Money Podcast
C. Radical Personal Finance
2. Mr. Money Mustache
Personally I would recommend the following, especially if you're more concerned with retirement than investments:
1. The Simple Path to Wealth (or just listen to the author get interviewed on the following podcasts):
A. Afford Anything
B. Bigger Pockets Money Podcast
C. Radical Personal Finance
2. Mr. Money Mustache
Thank you!
I wrote a post about this that you should find useful:
https://ivans.io/investing-starter-kit/
https://ivans.io/investing-starter-kit/
Thanks for all comments, it's helpful.
Is there a sort of a digital playground for financial instruments?
I would like to simulate some strategies, construct some virtual portfolios of stocks, mutual funds, ETFs and observe after one year how well each strategy did.
Is there a sort of a digital playground for financial instruments?
I would like to simulate some strategies, construct some virtual portfolios of stocks, mutual funds, ETFs and observe after one year how well each strategy did.
The search term is "paper trade". Many online brokers offer this. It's good to know the mechanics of how to create and submit orders before you try it with real money. You can also find apps for that which aren't tied to a broker.
You don't have to wait a full year if you use a "backtest", which works on historical data. There's software for that as well. Beware of future knowledge overfitting to noise though.
Ultimately, it's best to analyze the historical data directly first, to prove the edge was there, before running a backtest.
Training your intuition is a bad strategy. Markets are more random than you think they are, and this is becoming more true over time as markets become more efficient. You need a system.
You don't have to wait a full year if you use a "backtest", which works on historical data. There's software for that as well. Beware of future knowledge overfitting to noise though.
Ultimately, it's best to analyze the historical data directly first, to prove the edge was there, before running a backtest.
Training your intuition is a bad strategy. Markets are more random than you think they are, and this is becoming more true over time as markets become more efficient. You need a system.
Interactive Brokers supports paper trading through their desktop client. They have a programmable API and support the most kinds of financial instruments across standard online retail brokers
Great, thank you!
The general advice is to buy an index fund because over a long period of time the market will rise.
But what if I buy before a bear period? I will be stuck there 10 years just to recover my money and another 10 years to make some returns.
But what if I buy before a bear period? I will be stuck there 10 years just to recover my money and another 10 years to make some returns.
Whatever you do, don't jump out at the bottom! You have to hold on and ride it out. However, it is prudent to reduce exposure a bit when volatility is too high. See "Kelly Criterion" for how to calculate this. Inverse volatility weighting is usually sensible for this reason.
You can guard against left tail risk with insurance. See the VXTH index and the SWAN ETF for good strategies here. Don't buy too much insurance, or you can't make money.
You can also think of your future salary as a kind of bond in your portfolio that you can't sell. Seen in that light, the optimal balance is probably using some leverage, even if that means risking a total wipeout early on in your career.
You can guard against left tail risk with insurance. See the VXTH index and the SWAN ETF for good strategies here. Don't buy too much insurance, or you can't make money.
You can also think of your future salary as a kind of bond in your portfolio that you can't sell. Seen in that light, the optimal balance is probably using some leverage, even if that means risking a total wipeout early on in your career.
I feel like when playing poker is easier to assess the risks and rewards. But that might be because I am a total beginner.
> But what if I buy before a bear period?
The story of “Bob”, the world’s worst market timer, only buying at the peaks:
* https://awealthofcommonsense.com/2014/02/worlds-worst-market...
Don't try to figure out when the dip will occur, just sitting with cash on the sidelines in the meantime. Buying a little every month is generally the best strategy most of us should use:
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
> I will be stuck there 10 years just to recover my money and another 10 years to make some returns.
For the US at least, things generally don't take too long to recover (Great Depression notwithstanding):
* https://awealthofcommonsense.com/2020/03/how-long-does-it-ta...
* https://awealthofcommonsense.com/2021/07/how-long-does-it-ta...
If you're saving for retirement, then you actually want it to go down (occasionally): that means your monthly contribution can buy more for that month. Then once you're near retirement you move your portfolio to something more a conservative leaning so the swings don't effect you as much.
The story of “Bob”, the world’s worst market timer, only buying at the peaks:
* https://awealthofcommonsense.com/2014/02/worlds-worst-market...
Don't try to figure out when the dip will occur, just sitting with cash on the sidelines in the meantime. Buying a little every month is generally the best strategy most of us should use:
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
> I will be stuck there 10 years just to recover my money and another 10 years to make some returns.
For the US at least, things generally don't take too long to recover (Great Depression notwithstanding):
* https://awealthofcommonsense.com/2020/03/how-long-does-it-ta...
* https://awealthofcommonsense.com/2021/07/how-long-does-it-ta...
If you're saving for retirement, then you actually want it to go down (occasionally): that means your monthly contribution can buy more for that month. Then once you're near retirement you move your portfolio to something more a conservative leaning so the swings don't effect you as much.
For that to play out: are you planning one doing one enormous index fund purchase and never investing again?
If you’re talking IRA, we’ll you could have only put in $6k. Market dumps and the following year you can put in another $6k at a much lower price per share.
If you’re talking IRA, we’ll you could have only put in $6k. Market dumps and the following year you can put in another $6k at a much lower price per share.
John Oliver had a great bit on retirement plans [1] if you're interested in passive investing. I've pretty much only followed this advice since 2016, with minor changes accounting for my personal situation. My Vanguard portfolio has tracked the market, which means my annualized rate of return is about 12%, at an expense ratio of .1% (how much I pay in fees of that original 12%.) Of course that won't last forever, but it's a good balance of risk and return. A bank account usually pays around .25-1% a year.
Active investors, on average, do as well as passive investors, but incur greater costs. [2] I only "actively invest" for fun, and as a way of connecting with my friends and family who also enjoy the stock market casino.
[1] https://www.youtube.com/watch?v=gvZSpET11ZY
[2] Warren Buffett's side of https://longbets.org/362/
Active investors, on average, do as well as passive investors, but incur greater costs. [2] I only "actively invest" for fun, and as a way of connecting with my friends and family who also enjoy the stock market casino.
[1] https://www.youtube.com/watch?v=gvZSpET11ZY
[2] Warren Buffett's side of https://longbets.org/362/
Your strategy sounds great. Thanks.
Even if you don't win 12% all the time, long term it might be great. Even 8% is good over a long period.
Besides learning about "investing", I would also recommend you take a step back and look at your relationship with money generally. I recommend The Psychology of Money by Morgan Housel as a good start:
> Timeless lessons on wealth, greed, and happiness doing well with money isn’t necessarily about what you know. It’s about how you behave. And behavior is hard to teach, even to really smart people. How to manage money, invest it, and make business decisions are typically considered to involve a lot of mathematical calculations, where data and formulae tell us exactly what to do. But in the real world, people don’t make financial decisions on a spreadsheet. They make them at the dinner table, or in a meeting room, where personal history, your unique view of the world, ego, pride, marketing, and odd incentives are scrambled together. In the psychology of money, the author shares 19 short stories exploring the strange ways people think about money and teaches you how to make better sense of one of life’s most important matters.
* https://www.goodreads.com/en/book/show/41881472-the-psycholo...
Money is a 'tool' that you should use in your life to accomplish particular goals. Interview with the author:
* https://www.youtube.com/watch?v=NSaRb-iFwPA
* https://rationalreminder.ca/podcast/128
Another good book on "non-financial investing":
> From why we should place more value on social and human capital, we look into why financial planning has a profound impact on how you manage your investments. We touch on direct indexing, the relationship between money and happiness, and the unexpected yet incredible perspectives that came from giving advisors a license to tell their stories.
* https://www.youtube.com/watch?v=1wxTVjHLqwM
* https://rationalreminder.ca/podcast/126
* https://www.amazon.com/How-Invest-My-Money-Finance/dp/085719...
> Timeless lessons on wealth, greed, and happiness doing well with money isn’t necessarily about what you know. It’s about how you behave. And behavior is hard to teach, even to really smart people. How to manage money, invest it, and make business decisions are typically considered to involve a lot of mathematical calculations, where data and formulae tell us exactly what to do. But in the real world, people don’t make financial decisions on a spreadsheet. They make them at the dinner table, or in a meeting room, where personal history, your unique view of the world, ego, pride, marketing, and odd incentives are scrambled together. In the psychology of money, the author shares 19 short stories exploring the strange ways people think about money and teaches you how to make better sense of one of life’s most important matters.
* https://www.goodreads.com/en/book/show/41881472-the-psycholo...
Money is a 'tool' that you should use in your life to accomplish particular goals. Interview with the author:
* https://www.youtube.com/watch?v=NSaRb-iFwPA
* https://rationalreminder.ca/podcast/128
Another good book on "non-financial investing":
> From why we should place more value on social and human capital, we look into why financial planning has a profound impact on how you manage your investments. We touch on direct indexing, the relationship between money and happiness, and the unexpected yet incredible perspectives that came from giving advisors a license to tell their stories.
* https://www.youtube.com/watch?v=1wxTVjHLqwM
* https://rationalreminder.ca/podcast/126
* https://www.amazon.com/How-Invest-My-Money-Finance/dp/085719...
You think you are diversified, but how much do you have on RED.
There are a lot of junk resources that just want to sell you things and are a waste of time. It takes a certain level of expertise just to find competent teachers. But I'll try to briefly summarize what I wish I had known when I started.
~80% of this game is showing up. (Pareto Principle.) Wealthfront, Betterment, or a target-date mutual fund is way better for growth than a bank account. Start there if you don't have a better idea.
If you want to be more aggressive, averaging 15-30% growth per year is not unrealistic. E.g. PSLDX alone has averaged 17.39% since inception in 2007, but it also had a 50% drawdown in that time. Some years are better, some worse. But that's one fund. You can do even better than this if you know what you are doing (e.g. https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...). See also, Nassim Taleb’s Barbell.
To play this game well, you need an edge. See Expected Returns (https://www.goodreads.com/book/show/10982323-expected-return...), a classic. The easy edge is "risk premium", but there are others. Edges are not that secret. Search https://ssrn.com for more ideas. When analyzing, beware that any monkey can optimize a backtest. The idea is to find a persistent edge, not overfit to past noise.
You also need risk management so you don't lose money too fast. You have to tolerate some volatility, but control risks. You can lose money by
1. oversizing bets (see "Kelly Criterion", also borrowing costs),
2. trading too frequently (bid-ask spread, commissions, fees, especially for mutual funds),
3. being on the wrong side of an actual edge, usually by buying too much insurance / fighting the risk premium,
4. and paying taxes and penalties (retirement accounts, beware insider trading, etc.).
If you can limit these, the remaining market noise is as likely to work for you as against you. It washes out. See my LessWrong series for more detail, starting with https://www.lesswrong.com/posts/rPe6b7MCxaK8ZzYdC/you-need-m... Also, stop-loss orders suck; puts are better.
At 15-30%, you can double your money every four years or so. Paying the 10% penalty for early withdrawal from a traditional IRA is worth it for tax-free growth if you can compound for even a few years, so put as much in as you possibly can as soon as you possibly can. You can and should contribute some directly, but most will come from rolling a 401(k). The annual limit there is currently $58k if under age 50 and your plan allows after-tax contributions. If retiring early, don't contribute to Roth (you don't get to keep as much up front), but do convert to them after you stop earning and are in a lower bracket. I can't know your exact financial situation, please talk to a professional about this stuff.
~80% of this game is showing up. (Pareto Principle.) Wealthfront, Betterment, or a target-date mutual fund is way better for growth than a bank account. Start there if you don't have a better idea.
If you want to be more aggressive, averaging 15-30% growth per year is not unrealistic. E.g. PSLDX alone has averaged 17.39% since inception in 2007, but it also had a 50% drawdown in that time. Some years are better, some worse. But that's one fund. You can do even better than this if you know what you are doing (e.g. https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...). See also, Nassim Taleb’s Barbell.
To play this game well, you need an edge. See Expected Returns (https://www.goodreads.com/book/show/10982323-expected-return...), a classic. The easy edge is "risk premium", but there are others. Edges are not that secret. Search https://ssrn.com for more ideas. When analyzing, beware that any monkey can optimize a backtest. The idea is to find a persistent edge, not overfit to past noise.
You also need risk management so you don't lose money too fast. You have to tolerate some volatility, but control risks. You can lose money by
1. oversizing bets (see "Kelly Criterion", also borrowing costs),
2. trading too frequently (bid-ask spread, commissions, fees, especially for mutual funds),
3. being on the wrong side of an actual edge, usually by buying too much insurance / fighting the risk premium,
4. and paying taxes and penalties (retirement accounts, beware insider trading, etc.).
If you can limit these, the remaining market noise is as likely to work for you as against you. It washes out. See my LessWrong series for more detail, starting with https://www.lesswrong.com/posts/rPe6b7MCxaK8ZzYdC/you-need-m... Also, stop-loss orders suck; puts are better.
At 15-30%, you can double your money every four years or so. Paying the 10% penalty for early withdrawal from a traditional IRA is worth it for tax-free growth if you can compound for even a few years, so put as much in as you possibly can as soon as you possibly can. You can and should contribute some directly, but most will come from rolling a 401(k). The annual limit there is currently $58k if under age 50 and your plan allows after-tax contributions. If retiring early, don't contribute to Roth (you don't get to keep as much up front), but do convert to them after you stop earning and are in a lower bracket. I can't know your exact financial situation, please talk to a professional about this stuff.
Thank you! I am not from US so no 401k.
15%-30% seems huge to me. Isn't the risks big compared to buying an index fund?
15%-30% seems huge to me. Isn't the risks big compared to buying an index fund?
I don't know tax laws in other countries, sorry. Some of them have similar tax-sheltered retirement accounts though.
The 15-30% is if you're being very aggressive (but not reckless) with leverage. You wouldn't get that much in Wealthfront's default portfolio, or a target-date mutual fund, for example. That's also on average over time; some years will return much more than 30%, and some will lose money, and, of course, past performance can't guarantee future results. Broad market conditions could shift enough to invalidate any strategy. But you can do better than index funds. Compare PSLDX to SPY over the same period: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...
Notice that they both had ~50% drawdowns, bottoming around 2009, but PSLDX was not that much worse, and grew faster afterwards. SPY also had a slightly worse worst year. PSLDX had significantly more volatility, but the returns more than made up for it, giving it a better Sharpe ratio than SPY. So not only are the absolute risks comparable, but the higher Sharpe means that if you leverage PSLDX down to SPY's volatility (by keeping a 17% cash balance), the drawdown was smaller and the return is still higher than SPY at ~15% instead of ~11%.
The 15-30% is if you're being very aggressive (but not reckless) with leverage. You wouldn't get that much in Wealthfront's default portfolio, or a target-date mutual fund, for example. That's also on average over time; some years will return much more than 30%, and some will lose money, and, of course, past performance can't guarantee future results. Broad market conditions could shift enough to invalidate any strategy. But you can do better than index funds. Compare PSLDX to SPY over the same period: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...
Notice that they both had ~50% drawdowns, bottoming around 2009, but PSLDX was not that much worse, and grew faster afterwards. SPY also had a slightly worse worst year. PSLDX had significantly more volatility, but the returns more than made up for it, giving it a better Sharpe ratio than SPY. So not only are the absolute risks comparable, but the higher Sharpe means that if you leverage PSLDX down to SPY's volatility (by keeping a 17% cash balance), the drawdown was smaller and the return is still higher than SPY at ~15% instead of ~11%.
Skin in the game is the start. Don’t read, don’t research first. This will give you about a year of procrastination being an intellectual and probably textbook overthinker.
But some stock, start there then answer your own questions.
Don’t start backward. Don’t even read or “follow the legend”. How many who have read Buffet and have become rich like him? None. Forge your own path.
Or join wallstreetbet, superstonk, etc. Don’t look down on them. They probably teach you more than a finance college degree does. Don’t want cnbc, bloomberg tv. Skip all that.
I think I will be mostly downvoted but it’s important to skip the extra steps that end up being a strap. Then you waste 5 years of your life while some kid getting rich in a year because they reject dogmas and all the unnecessary talking.
Long story short, just start investing.
But some stock, start there then answer your own questions.
Don’t start backward. Don’t even read or “follow the legend”. How many who have read Buffet and have become rich like him? None. Forge your own path.
Or join wallstreetbet, superstonk, etc. Don’t look down on them. They probably teach you more than a finance college degree does. Don’t want cnbc, bloomberg tv. Skip all that.
I think I will be mostly downvoted but it’s important to skip the extra steps that end up being a strap. Then you waste 5 years of your life while some kid getting rich in a year because they reject dogmas and all the unnecessary talking.
Long story short, just start investing.
This is not good advice because WSB and superstonks generally advocate making highly speculative trades which are highly likely to result in losses.
I would recommend Bogleheads[0], especially the wiki. It's not sexy but that's the point, they advocate getting rich slowly by investing in a few diversified funds and then forgetting about it.
[0]: https://www.bogleheads.org/
I would recommend Bogleheads[0], especially the wiki. It's not sexy but that's the point, they advocate getting rich slowly by investing in a few diversified funds and then forgetting about it.
[0]: https://www.bogleheads.org/
Nassim Taleb’s Barbell strategy has really changed my thinking on this. In a nutshell, you put 85-90% of your portfolio in super conservative low-risk investments that at least beat inflation, 10-15% in aggressive speculation with very high potential payoffs (like WSB short squeezes), and nothing in the middle!
Why? Black Swans. Taleb says:
"If you know that you are vulnerable to prediction errors, and accept that most risk measures are flawed, then your strategy is to be as hyper-conservative and hyper-aggressive as you can be, instead of being mildly aggressive or conservative."
The "moderate middle" isn't as safe as you think it is, thus, it's not compensating you enough for the risk. The conservative side of the barbell will protect you from a negative black swan, and the aggressive side will expose you to positive ones.
Why? Black Swans. Taleb says:
"If you know that you are vulnerable to prediction errors, and accept that most risk measures are flawed, then your strategy is to be as hyper-conservative and hyper-aggressive as you can be, instead of being mildly aggressive or conservative."
The "moderate middle" isn't as safe as you think it is, thus, it's not compensating you enough for the risk. The conservative side of the barbell will protect you from a negative black swan, and the aggressive side will expose you to positive ones.
Can you give an example of what you'd learn from wallstreetbets or superstonk that you wouldn't learn from more main stream channels that would make you a better investor?
I follow those channels almost daily and I'm not sure I've learned anything of value from them that would make me a better investor.
I follow those channels almost daily and I'm not sure I've learned anything of value from them that would make me a better investor.
Thank you!
I want to start investing some money and before doing it I want to learn how to do it.
I don't plan to get super rich by doing this but to improve my financial situation.
What I want is to learn how not to lose money and being able to correctly asses the risks and rewards.
There are sites like investopedia but they seem generic and articles aren't well connected with each other.
I don't expect to have a learning path or certificates or nanodegrees or even complete tutorials like on Udemy, Coursera or Udacity.
But I want a way to have some structured information.
So where do you suggest I can start? How to find good materials that I can learn from? How to structure the information and do a learning plan?