Fog Creek Software
Discussion Board




Investing Money In Companies

I dont know much about investing and
I wanted to know if any of you here have got a portfolios of shares.

Is it hard to follow up(when to sell/when to buy/when to keep) the portfolio ?
Can it be worth to be a small investor ?
Is there any good book for wanabe investor?
Is it worth it ? (I'm sure Warren Buffer will say it's definetly worth it!)

FairLight
Thursday, October 30, 2003

Do we go to investing boards and ask about programming?

Goto The Motley Fool and ask the experts: http://www.fool.com/

RocketJeff
Thursday, October 30, 2003

www.realmoney.com

You gotta pay for it, but most material things in life are not free.

nat ersoz
Thursday, October 30, 2003

buy spdrs or diamonds traded on the amex. They are SP500 and DowJones indexes and traded like shares. You open a discount stock account and buy the shares and forget. There is no way you will beat the market. Most if not all mutual fund managers do not beat the market over more than a few years. Even the managers that get "guru" status probably do not beat the market if you really look at absolute returns. For example, I start with $100, then make $100 profit, then lose $100...depending on how you calculate returns I could be up 50%. Also, do not buy mutual funds; look at the cost. Over course, if you are trying to gamble and get rich then put all your eggs in one basket and leverage the hell out of your position.

Tom Vu
Thursday, October 30, 2003

A Random Walk Down Wall Street
http://www.amazon.com/exec/obidos/tg/detail/-/0393057828

"The eternal truth of this updated investment classic, originally published in 1973, is simple: you can't beat the market."

"The million-copy bestseller, now fully up-to-date and ready for post-dot-com investors.

Using the dot-com crash as an object lesson in how not to manage your portfolio, here is the best-selling, gimmick-free, irreverent, and vastly informative guide to navigating the turbulence of the market and managing investments with confidence. "

or Why you shouldn't invest in individual companies, and should get a broad index tied, no-load portfolio.

Also... if you want to invest some money, just jump in. You might do it 'wrong' at first, but sometimes doing it wrong is better experience than all the advice you can get from tech geeks.

www.MarkTAW.com
Thursday, October 30, 2003

I might be a software engineer by trade, but my domain is investment finance.  I have seen a lot silly stuff out there in the 5 years I've spent in this industry, but I am now reading the Mathematician Plays the Stockmarket by John Allen Paulos, which is written for the layman.

http://tinyurl.com/t3ea (amazon)

I love it!  It is really a straight up discussion of the market, and cuts through a lot of the bull.  In my opinion unless you spend a LOT of time researching and are willing bet a little, just head over to:

www.ishares.com 

and pick up some index funds.  Buy 60% wilshire 5000 40% lehman ag and you'll probably beat most of the "professionals" out there. 

If you want some real analytical tools then head over to www.styleadvisor.com.  Kelly will be glad to sell you our software which is guaranteed to make any investment look sexy ; )

christopher baus (www.summitsage.com)
Thursday, October 30, 2003

One more comment on this topic.  I think the main thing that makes investing hard is that it goes against our basic instincts.  In 1999 everyone and their aunt sally was getting in on the market.  Most, including myself, didn't understand what they were getting into.  You really couldn't have picked a worse time to get into the market than 1999.

But last year, almost 3 years since the boom went bust, nobody wanted anything to do with the market.  One of my newer co-workers who is a really intelligent guy thought it was a bad investment, because the "the market was sucking right now." 

Well if you had gotten in last year you would have done yourself a huge favor.  The odd thing is everyone is piling into what appears to be the next bubble, real estate. 

Generally you should be thinking about getting in when everyone else is getting out, and getting out when everyone else is getting in.  That is extremely difficult for a lot of people to do. 

As programmers who work in black and white, it is difficult to understand a system that is a vague as the stock market.  You want to understand it, pretend there is some logic, but the truth of the matter is in the short term there is no logic.  You just have to assume that in 20 years the market will be higher than it is now, but how much higher, you don't know.  All in all that is not a bad assumption if you consider how capitalism works.  It is about creating value, and not destroying it.  Certainly the destruction happens from time to time, but that is not the trend.  .

... omit discussion on why shorting is stupid...

christopher baus (www.summitsage.com)
Thursday, October 30, 2003

Another vote for Random walk down Wall Street.

This has got to be one of the best entry level books into the world of finance.

Tapiwa
Friday, October 31, 2003


>You really couldn't have picked a worse time to
>get into the market than 1999.

I got into the S&P 500 in early March of 2000.

No, Seriously, I did ...

Matt H.
Friday, October 31, 2003

Long-only portfolios are too risky. Read books about constructing market neutral portfolios. Using short-selling, you can hedge away a lot of the systematic risk of the market (i.e. if you short a dollar for every dollar of stock you purchase, it's still possible to make a profit if the S&P 500 tanks). The downside to these strategies is that they typically underperform if the market goes up like a rocket as it did in the late nineties.

P.S. I would also recommend that you read my book if you want to understand how to measure the risk in your portfolio.

William Sharpe
Friday, October 31, 2003

I also started investing around March 2000, but because I dollar-cost-averaged on the way down, I'm now ahead!  (Dollar cost averaging means that you invest equal dollar amounts regularly.  That means that you minimize the risk that you buy at the maximum.  This strategy should also be applied when selling.)

I estimate that if you regularly invest in an index fund, you're doing better than 98% of all investors.

Anonymous
Friday, October 31, 2003

" (Dollar cost averaging means that you invest equal dollar amounts regularly.  That means that you minimize the risk that you buy at the maximum.  This strategy should also be applied when selling.)"

No. Dollar cost averaging means adding to a losing position. Say you buy 1 at $100 then the price goes to $90 and you have a $10 loser, so you dollar cost average and buy 1 at $90. This puts your portfolio at an average cost of $95 a share. Dollar cost averaging is a terrible approach unless you have unlimited cash and prices can go below zero. When you have a loser you get rid of it; not add to it. Essentially, dollar cost averaging is a martingale system where you hope for double or nothing to get even.

Tom Vu
Friday, October 31, 2003

Andrew Tobias' book, "The Only Investment Guide You'll Ever Need" is also a great read. Not only does it have great advice (to cut to the chase, it's also index funds), but it's funny as hell too.

> When you have a loser you get rid of it; not add to it.

So every time a stock goes down, you should sell it? What kind of advice is that?

> you're doing better than 98% of all investors.

Where did that 98% number come from? I'd say you'll do better than most of the investors who play the market (ie, buy individual stocks).

> Read books about constructing market neutral portfolios.

Doesn't that mean you'll have to buy and sell a lot more often? No wonder financial advisors love this sort of thing.

The index fund idea is a lot simpler: just buy and hold. Only two transactions fees (one to buy in, one to liquidate), and very low fund management fees (since all they do is watch the index).

Anything else you do simply has to perform much better, because it starts from behind (ie, you pay more fees up front and thus have less to invest).

Portabella
Friday, October 31, 2003

Dollar cost averaging explained:

You decide you're going to invest $1000 per month.

You invest $1000 per month in the S&P 500 index fund, no matter what the price.

This is better than investing $12000 all at once, because you lower the risk that you buy at the worst time.  You also lower the risk that you will buy at the best time.

You also need to take into account transaction fees.  If you pay a $100 transaction fee, you may be better off going with $3000 every 3 months or $6000 every 6 months.  But good index funds (Vanguard) have very low transaction fees.

The idea is that you can't predict the market ahead of time.

The same principle applies for individual stocks.  Say I want to invest $10000 in XYZ.  I can put in $10000 all at once.  Or, I can invest $5000, wait 3-6 months, and then invest another $5000 if the price has gone down.  For an individual stock, I limit it to two puchases.  That is, if it goes down again, I don't buy anymore.

Basically, dollar cost averaging protects you from short-term market fluctations.  The idea is that, as an individual, you really can't predict them.

You also use that idea in selling.  Suppose I want to unload 1000 shares of XYZ.  Rather than selling all at once, I may sell 500 now and wait 3-6 months and sell the other 500.

Anonymous
Friday, October 31, 2003

The 98% figure is a personal estimate, based on what I read and conversations with other people.

Anonymous
Friday, October 31, 2003

William Sharpe,

I'm sure you aren't THE William Sharpe, but anyway, Market neutral investing is mostly a fallacy.  Deriavatives only allow you to move risk around, and not eliminate it.  A lot derivative schemes work fine until some unexpected event occurs and then they blow up spectacularily (like loose 800% in a couple days spectacular).  Not to use the cliche example, but Long Term Capital ring a bell?  This one reason why the JPM stock was so beat up last year.  There was a lot speculation that their gold hedge book was about to blow.  I bought the stock at the time assuming that if it did blow that it would be the end of the financial system as we know it and I'd have bigger problems than the money I lost on the investment.

As Buffet says derivatives are financial WMDs.  I believe him.

There is one market neutral strategy that even the likes of Warren Buffet use, and that is Merger Arbitrage.  I do own the Merger fund (MERFX) which uses this strategy to some extent, but they also have long only holdings as well.  Buffet considers well researched merger arbitrage to be a cash alternative.

Here's a brief definition of the strategy:
http://www.investopedia.com/terms/m/mergerarbitrage.asp

Some Hedge funds like to beef up their returns with leverage.  Which works great until the deal falls apart and they loose the said %800. 

The other thing to keep in mind here is taxes.  If you are investing for the long term the best thing you can do is setup a retirement account.  If you have a 401k and haven't maxed it out yet, I'd do that before buying Yahoo stock on margin.  Also if a fund is throwing off a lot of capital gains, like Merger, then holding it outside of a retirement account costs you every year when they pay out the gain.

Somebody mentioned that with indexes you can buy and hold forever, never selling.  This isn't totally true.  You often need to rebalance.  Had you followed an indexing scheme with annual rebalancing between stocks and bonds in the 90s and early 2000s you would have made a killing.  When growth was up and value and bonds were down, disciplined rebalancing would have forced you into bonds and value.  This is one way to force yourself to sell when everyone else is buying, and buy when everyone else is selling.  Had you started doing this in 90 you'd probably be retired by now, and not worried a bit about these for loops and if statements.

christopher baus (www.summitsage.com)
Friday, October 31, 2003

You can rebalance AND have a long-term buy-and-hold strategy.

If you are a net investor, and you are overallocated to stock, all your new investments go to bonds.

If you are withdrawing from your investments, and you are overallocated to stock, all your sales should come from your stock holdings, leaving your bond holdings untouched.

Anonymous
Friday, October 31, 2003

I have heard hedge funds compared to the "Martingale" system of gambling.  I.e., you have a high probability of a small return, and a small chance of losing everything.

Here is "Martingale".  You have a 50-50 odds bet, like playing "Black" on a roulette wheel.  Your actual odds of winning are only 18/38, because of the 0 and 00 spaces which are neither red nor black.  You bet $1.  If you win, you have $1 in profit.  If you lose, now you bet $2.  You keep doubling your bet until you have your $1 profit.  The casino has a maximum betting limit, and so eventually you hit a run of losses and go broke.

However, if the hedge fund had positive expectation investments, maybe they are taking 50-50 odds with a 20/38 chance of winning.  In that case, the Martingale strategy will be positive expectation.

So it really comes down to whether or not each individual investment has positive expectation or negative expectation, and whether you have enough assets to survive a run of bad luck.

Anonymous
Friday, October 31, 2003

In real life the casinos prevent the "Martingale" system from working by imposing house limits.  If you have a string of bad luck you could hit the house limit and then you are done.  The house cleans up, pays for our roads, and schools, and all is good.  The Martingale system only works 100% if your assets and the casinos approach infinity, and there is no house limit.  An unlikely scenario.  You could determine the probability of winning before hitting the house limit, and you best believe the casino has already dont that.  I suspect it is far less than 50/50 depending on the table limit.  By the time you hit the limit you've got a lot money on the table, and you should be prepared to lose.

I live in Nevada and make most of my money off of market gambling, both in my job, and through the low taxes provided by the casinos.  My feeling is just have to be on the right side of the game.  (Ie I don't gamble, but I collect money from gambler's indirectly).

Institutional investors gamble a little bit.  Pensions funds can get away with it as long as they are "style" correct.  What that means is they can buy funds that are a certain style, say large growth, but managers can pick any large growth stocks. 

Microsoft is a large growth stock, but the fund manager isn't required to buy Microsoft for instance.  Instead they load up on Intel.  They are bettting that Intel will out perform Microsoft, but this is ok according the pension fund since they are both Large Growth stocks.  The pension funds bet that the fund money mangers will pick the best large growth stocks.  That works out ok, but it probably isn't the best use of their money, as often times the manager picks wrong and under performs the index

My employeer basically makes money by keeping the fund manager honest (those like Fidelity, Vanguard, etc.).  When a fund says they are large growth they aren't buying emerging market stocks to try to amp their returns.  Changing the type of investment the fund makes in is general considered bad, and is labeled style drift.  This might work in retail, but in the institutional market it could get you fired.

If I was pension a manager, I would move all my assets to indexes, fire most of my analysts and sleep easy at night knowing that I did the best that could be expected, while saving the pension participants a lot of money.  I would easily be worth a six figure salary because I would have saved at least that in fees.  It would also keep the interests aligned with participants, and not Putnam's fund managers for example.  I wouldn't care how good ole boy their sales people are.

christopher baus (www.summitsage.com)
Friday, October 31, 2003

>> When you have a loser you get rid of it; not add to it.

>So every time a stock goes down, you should sell it? What kind of advice is that?

You don't get rid a stock just because it goes down, but you do get rid of it if it's a loser. Look at the outstanding positions of futures clearing firms. They are almost all losers. Most people hold on to there losing investments and get rid of there winners.

>What kind of advice is that?

It's free advice and what I believe. Also, don't listen to financial advisors, analysts, or brokers they are the capital market equivalent of an ERP consultant. 

Tom Vu
Friday, October 31, 2003

> You don't get rid a stock just because it goes down, but you do get rid of it if it's a loser.

Sounds great, provided that you can tell winners from losers. From what you just said, it can't be that winners go up while losers go down; it must be some expectation of how the stock will perform in the future.

If you read "A Random Walk", that proposition sounds dubious: you're essentially saying that you can beat the market.

Portabella
Saturday, November 01, 2003

>If you read "A Random Walk", that proposition sounds dubious: you're essentially saying that you can beat the market.

I was talking more about trading than long term investing. As I stated before buy SPDRs and forget. As far as "Random Walk", people fall back on that because they keep losing money. So instead of taking responsibilty for their own loses they either blame others or find data that justifies their loses.

Tom Vu
Saturday, November 01, 2003

*  Recent Topics

*  Fog Creek Home