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Uptown . Nov 03 2008 19:07. Posts 3557 | | |
While I don't know many people here, my perception is that people here are driven, smart and quite savvy. Most of you will eventually be in a position to seriously consider investing your hard earned money (be it through poker or other means) into stocks/bonds/real estate/etc.
I recall that the very reason I was compelled to spend more time here was tenbagger's excellent advice on basic investment principals here when I was bored and looking for stuff to read. Because it's something I think everyone should take a look at, I'll copy it here:
| | I've seen firsthand many people get burned so I'm gonna take some time to write a lengthy post about investing for the LP community. While I don't claim to a Warren Buffett, I have an inside perspective that I think will be valuable to anyone who wants to get started in investing.
I very strongly advise against active management for the average investor. Many of the so-called "expert" investors, much of their success can be attributed to luck. Also, if you are selecting a basket of a dozen or so stocks with your 20K, regardless of how well it is diversified, you are still taking on a significant amount of risk in trying to beat the market. The stock market has historically returned about 8% over the long term, buy a mix of spiders, QQQs and some foreign ETFs and be happy with the 8%.
There are many people who think they are financial gurus or have a gambling streak in them and try to pick select stocks to outperform the overall market. Many of them are disillusioned into thinking that it was their "skill" when their picks do well and poor luck when it goes poorly. It is similar to the psychology of fishes in poker. Just like in poker, there are people in investing with an edge that are +EV in their actions. Here is an overview of the players in the market and their poker equivalents in ( ).
- Big successful hedge funds - SAC, Medallion, Moore Capital, etc. These funds have billions of dollars under management and have produced great results for many years. They employ an army of math geeks like bigballs, physics PhDs, etc. to create models that I couldn't even begin to understand. They guard their strategies so well that no one really knows how they do it, but it is pretty obvious by their consistently amazing results that they have a significant edge. (Phil Ivey, new school phenoms)
- Prop trading desks @ major wall street firms - These guys have access to so much more info than the average investor. There is no question that a bunch of insider trading goes on everywhere, but these guys have access to information that isn't considered "inside info" but still is not available to the average investor. By being on the front lines they are the first to hear things and can act before the general public. (Doyle Brunson, old school powerhouse)
- Mutual funds, investement boutiques, etc. - While I think most of these "qualitiative" guys are BS and underperform the market, there are some that consistently produce great results to the point where one must acknowledge their edge. Typical things that they do to get an edge will be to have finance whizzes scour the financial statements, send secret shoppers to the businesses to evaluate them, meet with the CEO/board to discuss business plans, etc. These are things that the average individual investor cannot do because of constraints on time and resources. (Naz, Rek, profitable, but not near the level of the guys above)
- Hotshot individual investor - They read the journal and yahoo finance and think that they have some secret formula when in fact they are getting the same info that the rest of the world already knows and what the big boys already knew few days ago. All the information available to them is public information and in fact these guys often will rely on biased information put out by third parties. They know what P/E and beta is, but they don't realize that everyone else knows that basic stuff too. I hear stories of how well so and so did in the market. Well, the truth is most people did well in the 80s and 90s. That is because the market as a whole did extremely well. You could've bought basic blue chips in the 80s and made a killing. They mistakenly attribute their good fortune to invest in a bull market as a sign of their investing prowess. (Standard marginal winning player at low limits, will make some money but will generally overestimate their skill. Knows the basics and that is enough to eek out a small amount of +EV, but only because of the mass presence of fishes...I admit that I am at this level in poker, although the difference is that I know that I am very mediocre in poker.)
- Average guy who knows nothing about investing - He'll let a broker handle his money where the broker will do everything in his power to maximize his commissions. Or he'll put money into the hot mutual fund that did well last year that will suck this year and pay a fat sales charge and hefty annual fees. After some bad investments and a ton of churning, they will curse investing forever and stick their fortune in savings accounts/CDs and possibly some treasuries. (Fish, donkey)
Let me add that there are some people out there that know nothing about investing that hook up with very good financial advisors/brokers/investment advisors and end up as a winner. These people are usually rich and/or very lucky. There are also people out there that did fairly well but still underperformed the overall market during the bull market years because they paid too much in fees/commissions.
If you get a referral from someone you trust about a financial advisor/broker/investment advisor, then go for it. Just keep in mind that most of them are glorified salesman and will look out for their own interests over yours. The only way for you to really know if they are looking out for you is to be knowledgeable yourself. If you are not an expert, and you don't want to gamble, and you don't have an advisor that you trust, then do not pick out stocks on your own. It is -EV and although you may get lucky, that is exactly what it is. Odds are against you outperforming the market and you are taking on a lot of unnecessary risk. Keep in mind that you are playing the stock market game against the likes of the investing equivalent of phil ivey. You may make 7% when the market makes 8%, that is still a loss of 1% compared to the overall market. People will often focus in on the absolute returns rather than relative to the overall market. They will be happy about their 7% gain when in fact they could've taken the safer route of an ETF or index fund and made more while taking less risk. Most people are not experts, do not want to gamble with their savings and do not have an advisor that they really trust. If you fall into that category buy ETFs or index funds with no loads and low fees. That way, you guarantee that your investing performance will track the overall performance of the market. You will never make a killing, but you won't be a fish either. To make my final poker analogy, it is someone like me who isn't that great at poker eeking out 4ptbb/100 at NL50/100 rather than trying to take on NL 2000. My bankroll will never be in jeopardy and I will consistently make a small profit. Know your limitations and play only when it is +EV. |
What I want to inform you is that when you DO get to a position where putting money into a money manager, to actually negotiate your fee %age down. If they're not budging, take your money elsewhere! It is very possible to negotiate rates lower than 1% if the sum of money you are putting in with them is large enough.
And even if you don't have that kind of cash right now, many if not most of you will have it in say ~10 years time. Now it might be tricky because you shouldn't be putting all of the funds going into managers into one dude, but just remember that their fees are negotiable!
edit: If you want to see how significant a change from say 1.5% to 0.7% management fee is HUGE! Just a simple excel sheet will show you that assuming 6% growth, in 20 years will be a difference of 200k! (but you guys probably knew that already <3)
edit2: I actually made the graph I refer to above but imageshack doesn't like me  . Oh, just found out there's more tenbagger gems I should be copying here from that thread (seriously guys, just read the thread, it's definitely enlightening for the vast majority of us)
| | On December 11 2006 12:22 TenBagger wrote:
Google is a great company and their profits are growing exponentially. They have a bright future because they dominate the online advertising market which is also growing exponentially. But everyone already knows this. And as a result, the stock of google has already been pushed up very high.
Just to put things in perspective, let's take a look at, P/E, also known as price to earnings ratio. If I own a store that makes 100K in profit a year and I sell it to you for 500K, then the P/E would be 5. It would take you 5 years to make back your investment and that is assuming that profits stay level. The historical average P/E for US equities is somewhere around 15. Google has a P/E ratio of over 60. To put things VERY simply, that means that people are fairly certain that Google will increase their profits x4 and this expectation is already built in to the price of Google's stock. So over the long run, even if google doubles their earnings, that would most likely lead to a drop in the stock price because it will fall short of expectations that are already built in to the current price.
The average person will say invest in google, not because they fully understand the valuations and because they think the stock will outperform, but rather because they think it is a good company. I'll compare this to someone starting out in poker, looking down at AJo in the BB and choosing to go allin, even though there has been a raise, a reraise and a rereraise push allin before him. This is an extreme example but it illustrates the point that while AJ is a very good hand, the circumstances may render that hand worthless. The person with an edge in poker will be able to determine what these circumstances are while the fish will evaluate the strength of AQ in a vacuum. Likewise, google is a GREAT company, but for anyone to invest in it and have it be +EV, they will need to evaluate the many other variables. If you are not evaluating all these other variables and circumstances, well then you are basically the investing equivalent of a fish that will push AJo in the situation I highlighted above.
5.5 million shares of Google are traded on an average day. Thousands if not tens of thousands of "players" are making their bets on google and deciding to buy or sell based upon their reasoning and analysis. As I mentioned in my previous old post, many of these "players" are very sophisticated investors making their decisions based on a lot more information and better information than what is available to any one of us. If you are buying google purely based on the fact that "it's the hot stock" and "I think internet search will grow exponentially", you are operating with less information and are at a disadvantage.
This is not to say that I think google is a bad investment. It may be a great investment, but I just don't know. The fact is that I am certain that I have less information at my disposal to make this determination than the majority of the players that are trading the 5.5 million shares per day. I think if I put time and effort into it, I may work myself into a position where it is a slightly +EV proposition,neutral or slighly -EV. I'll be ahead of the investing donks, but I'll be way behind the hedge funds and prop desks. However, if I make this investment without any additional research or information, this is definitely a losing play over the long run. And just like in poker, don't be results oriented.
The collective wisdom of many people who have traded 5.5 million shares have determined that $485 is currently the fair price for a single share of google. Ask yourself if you have any reason to believe that your assessment has an edge against the collective wisdom of all these people. Do these people not know my secret that google is awesome?
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| | On December 11 2006 13:29 TenBagger wrote:
Show nested quote +
On December 11 2006 10:47 meatcity wrote:
Ok so say I have money sitting in mutual funds. The fee to get the money in them was pretty substantial. I know very little about investing. Should I get out of the mutual funds and look to invest in hedge funds. Also, isn't the minimum amount required to invest in a hedge fund like half a million or something rediculous or am I completely off? |
"The fee to get the money in them was pretty substantial."
That was your first and biggest mistake. Let me briefly go over the pricing structure of mutual funds.
There is something called a load also known as a sales charge. This is money that goes straight into the broker's pocket. Typical sales charge would be 5%. That means if you invest 10K, then really you are investing only 9500 and your broker will take 500. It may have been unaviodable in the past, when the industry was less efficient and there was less competition. But there is absolutely no reason why anyone should pay a load/sales charge to purchase a mutual fund. No fund or broker is worth this fee, especially when there are many other funds that are equal that do not charge a load.
Second thing to consider is the annual operating expense. This includes the management fee, 12b1 fees, and other miscellaneous fees. For example if the fund's annual operating expense was 1% and you had 10K in the fund, they will deduct 100 from you balance every year. This expense is the main reason why I advocate passive management (ETFs and index funds).
ETFs and index funds have extremely low operating expenses, usually less than .5%. This is because there is very little work involved in running the fund. They don't need to hire a bunch of suits to pick stocks, because the fund will automatically buy the stocks in a certain index. For example, if u buy a QQQ, you buy the stocks in the Nasdaq 100. When the Nasdaq added google to the Nasdaq 100, the QQQ automatically bought shares in google. There was no manager that needed to make that decision, it just followed whatever the Nasdaq decided for their Nasdaq 100 index.
Actively traded funds on the other hand have people that try to outperform the indexes. For example, if you buy a regular technology mutual fund, it will most likely be benchmarked to the Nasdaq 100. A manager is selectively picking stocks and putting together a portfolio that he or she feels will outperform the Nasdaq 100. It is no easy task to beat the index, but it becomes that much harder when you account for the operating expense fees.
The expense ratio of the QQQ is .20%. Compare that to the AllianceBernstein Global tech Fund. It has an expense ratio of 1.66%. That means that they need to outperform the Nasdaq 100 by 1.46% every year just to break even. It is my opinion that the most managers of mutual funds do not have enough of an edge against the market as a whole to justify their fees.
Finally, regarding hedge funds. Hedge funds are limited by law to accredited investors. Basically, an accredited investor is a corporate entity such as a bank or investment company or a wealthy individual. Also, most hedge funds have very steep minimum investment requirements, often over 500K. You can get around this by investing in a fund of funds or a similar vehicle which basically resells smaller chunks of hedge fund investments to smaller investors. However, consider that you will now pay two layers of fees, one by the original hedge fund and a second fee by the fund of funds. Also, hedge funds have astronomical fees, 2 and 20 is the standard rate. That means 2% annual fee and 20% of any investment gain. Very successful hedge funds like SAC charge something really ridiculous like 5 and 50. I wouldn't mind paying those kinda fees to have someone like steven cohen or james simons managing my money because those guys have proven that they are worth it year after year. But then again, those guys wouldn't even take our money, even if we had millions. I would not pay anything close to that to someone unproven and I certainly wouldn't pay another layer of fees to someone that is just repackaging it for me.
Basically, forget about hedge funds unless you have millions to invest. Then you can start to consider them. These hedge fund investment vehicles for small investors are a huge ripoff.
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| Half Pot! | Last edit: 03/11/2008 19:24 |
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eightfourO United States. Nov 03 2008 19:10. Posts 820 | | |
| | On November 03 2008 18:07 Uptown wrote:
While I don't know many people here, my perception is that people here are driven, smart and quite savvy. |
lol i am an example of the opposite, obv. |
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| I am a god damn Rootin Tootin Shootin Cowboy!! | |
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lachlan Australia. Nov 03 2008 19:25. Posts 6991 | | |
do u think i could barter some fees down even if its only 10 grand all up? i dont want to piss off the lady since she knows my parents and they recommended her to me lol
but for all i know they could be fish and like tenbagger said, just be happy that they are up over the last 10 yrs |
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JYang United States. Nov 03 2008 20:03. Posts 2669 | | |
a lot of stuff is really generalized yes
its just like an average guy telling people that u can't make much $ off poker and its mostly luck and shit.
i respect tenbagger but this looks like a good comparison.
this is the same shit with poker, with dedication and the willingness to learn and improve, u do have and will trade with an edge.
i dont like having other people manage my money though.
and with the secret derivative and black box quantom investing crap, its the same shit that created this financial mess today.
im a student of technical analysis and thats my edge for now. and i continue to learn. |
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JYang United States. Nov 03 2008 20:11. Posts 2669 | | |
im going to quote from my favorite 2+2 post, its what got me very interested into the market... poker and trading has so much in common.
This is a common argument against Day Trading – it’s impossible to make a profit because the market is efficient, and even if it wasn’t, you’re competing against people who are much smarter then you. Some, however, should be heeding the advice, as the skill set and mental attitude they possess is not high enough to be able to trade profitably. Just because something is extremely difficult, and takes a huge degree of understanding, doesn’t mean Day Trading is some sort of scam. Although it may be advertised like a scam, it’s really no different to poker. Poker promises great riches to the talented player prepared to take risks. If you think about how a layman views and rationalises poker, and ask them for how they ‘beat’ the game, you’ll hear baseless theory, often built on results orientated finds from anecdotal experience. Day Trading is no different; the theory and skill gap between the top traders and the rest is startling (but not unexpected).
http://forumserver.twoplustwo.com/30/...ng/my-guide-day-trading-v1-0-a-75338/ |
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lachlan Australia. Nov 03 2008 20:23. Posts 6991 | | |
| | On November 03 2008 19:11 JYang wrote:
im going to quote from my favorite 2+2 post, its what got me very interested into the market... poker and trading has so much in common.
This is a common argument against Day Trading – it’s impossible to make a profit because the market is efficient, and even if it wasn’t, you’re competing against people who are much smarter then you. Some, however, should be heeding the advice, as the skill set and mental attitude they possess is not high enough to be able to trade profitably. Just because something is extremely difficult, and takes a huge degree of understanding, doesn’t mean Day Trading is some sort of scam. Although it may be advertised like a scam, it’s really no different to poker. Poker promises great riches to the talented player prepared to take risks. If you think about how a layman views and rationalises poker, and ask them for how they ‘beat’ the game, you’ll hear baseless theory, often built on results orientated finds from anecdotal experience. Day Trading is no different; the theory and skill gap between the top traders and the rest is startling (but not unexpected).
http://forumserver.twoplustwo.com/30/...ng/my-guide-day-trading-v1-0-a-75338/ |
trading fish  ur making warren buffet rich  |
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JYang United States. Nov 03 2008 20:29. Posts 2669 | | |
| | On November 03 2008 19:23 lachlan wrote:
Show nested quote +
On November 03 2008 19:11 JYang wrote:
im going to quote from my favorite 2+2 post, its what got me very interested into the market... poker and trading has so much in common.
This is a common argument against Day Trading – it’s impossible to make a profit because the market is efficient, and even if it wasn’t, you’re competing against people who are much smarter then you. Some, however, should be heeding the advice, as the skill set and mental attitude they possess is not high enough to be able to trade profitably. Just because something is extremely difficult, and takes a huge degree of understanding, doesn’t mean Day Trading is some sort of scam. Although it may be advertised like a scam, it’s really no different to poker. Poker promises great riches to the talented player prepared to take risks. If you think about how a layman views and rationalises poker, and ask them for how they ‘beat’ the game, you’ll hear baseless theory, often built on results orientated finds from anecdotal experience. Day Trading is no different; the theory and skill gap between the top traders and the rest is startling (but not unexpected).
http://forumserver.twoplustwo.com/30/...ng/my-guide-day-trading-v1-0-a-75338/ |
trading fish ur making warren buffet rich
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ya, i switched to geico |
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TenBagger United States. Nov 03 2008 20:30. Posts 2018 | | |
| | On November 03 2008 19:03 JYang wrote:
a lot of stuff is really generalized yes
its just like an average guy telling people that u can't make much $ off poker and its mostly luck and shit.
i respect tenbagger but this looks like a good comparison.
this is the same shit with poker, with dedication and the willingness to learn and improve, u do have and will trade with an edge.
i dont like having other people manage my money though.
and with the secret derivative and black box quantom investing crap, its the same shit that created this financial mess today.
im a student of technical analysis and thats my edge for now. and i continue to learn. |
JYang, the difference between the two is that an average investor buying and holding for the long term in the stock market will make money while the average online poker player loses money. But remember that you can make money and still underperform the overall market. When I say someone is a dog in the market, they may still come out ahead over the long term, but just not as much as the overall market.
There is a reason why a majority of mutual funds underperform the markets when factoring in fees.
There is a reason why something like 95% of day traders lose in the long term (again factoring in commissions)
There is a reason why extensive research has shown that the average individual investor's return is inversely related to their trading frequency.
I understand that you are all into trading and as such, you believe that you have a big edge on the market. You compare it to poker where there are tons of fish and the weak tight regs and anyone with discipline and smarts can beat the game soundly. It is nowhere near as easy to beat the stock market. It is a more efficient market with tougher opponents.
Now I'm not saying that you can't beat the market. You could fall into that 5% or so of day traders that actually win in the long term. Just remember that the other 95% of day traders that lose though are also saying that they are "students of technical analysis".
Also, I would like to point out that making it sound easy and that everyone can do it is actually very misleading. People will read you blog and be like oh the dude made 100% or watever, I can do it too. But the fact is that it isn't easy. In fact the odds are stacked against you outperforming the market and many professionals can't do it consistently. So if you are a casual amatuer that isn't going to invest the signifacant amounts of time and energy to gain the expertise required to gain an edge, what makes you think that you are +EV to outperform the market?
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TenBagger United States. Nov 03 2008 20:34. Posts 2018 | | |
| | On November 03 2008 19:11 JYang wrote:
im going to quote from my favorite 2+2 post, its what got me very interested into the market... poker and trading has so much in common.
This is a common argument against Day Trading – it’s impossible to make a profit because the market is efficient, and even if it wasn’t, you’re competing against people who are much smarter then you. Some, however, should be heeding the advice, as the skill set and mental attitude they possess is not high enough to be able to trade profitably. Just because something is extremely difficult, and takes a huge degree of understanding, doesn’t mean Day Trading is some sort of scam. Although it may be advertised like a scam, it’s really no different to poker. Poker promises great riches to the talented player prepared to take risks. If you think about how a layman views and rationalises poker, and ask them for how they ‘beat’ the game, you’ll hear baseless theory, often built on results orientated finds from anecdotal experience. Day Trading is no different; the theory and skill gap between the top traders and the rest is startling (but not unexpected).
http://forumserver.twoplustwo.com/30/...ng/my-guide-day-trading-v1-0-a-75338/ |
I'll generally agree with this. But I think day trading is a tougher game in that the overall markets have less fish, the percentage of winners is smaller and it is harder to attain the necessary levels of skill and experience necessary to beat the game. |
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JYang United States. Nov 03 2008 20:43. Posts 2669 | | |
| | On November 03 2008 19:34 TenBagger wrote:
Show nested quote +
On November 03 2008 19:11 JYang wrote:
im going to quote from my favorite 2+2 post, its what got me very interested into the market... poker and trading has so much in common.
This is a common argument against Day Trading – it’s impossible to make a profit because the market is efficient, and even if it wasn’t, you’re competing against people who are much smarter then you. Some, however, should be heeding the advice, as the skill set and mental attitude they possess is not high enough to be able to trade profitably. Just because something is extremely difficult, and takes a huge degree of understanding, doesn’t mean Day Trading is some sort of scam. Although it may be advertised like a scam, it’s really no different to poker. Poker promises great riches to the talented player prepared to take risks. If you think about how a layman views and rationalises poker, and ask them for how they ‘beat’ the game, you’ll hear baseless theory, often built on results orientated finds from anecdotal experience. Day Trading is no different; the theory and skill gap between the top traders and the rest is startling (but not unexpected).
http://forumserver.twoplustwo.com/30/...ng/my-guide-day-trading-v1-0-a-75338/ |
I'll generally agree with this. But I think day trading is a tougher game in that the overall markets have less fish, the percentage of winners is smaller and it is harder to attain the necessary levels of skill and experience necessary to beat the game.
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well it always have to start with it depends. while resulted oriented studies shown that most day traders make the most $ on the 2nd phase of a bull market. like right after a bear market and companies are just reportin good stuff to interest ppl.
well if ur patient enough then u can just wait for those patterns and day trade stocks with high volume and reliable reconciliation patterns. sorry i have to throw some random wall street bs in here but if u want more info on those patterns read www.tradermike.net lol.
right now i think the hot shit is like retracement patterns. like the thing on my blog. basically a company went on a freefall and its time to bounce back more. since people have bias and luv to like average down their shits. and like people will think that dis is cheap and shit when its valued so much like few months ago. i think this pattern give VERY good odds right now. obviously things can change very fast in the future.
i dont day trade but my time frame is very small, no more than 1 month. |
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JYang United States. Nov 03 2008 20:44. Posts 2669 | | | |
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| | Last edit: 03/11/2008 20:45 |
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JYang United States. Nov 03 2008 20:50. Posts 2669 | | |
i actually think like long term trading is more skillful.
like damn u gotta wait years to see if a position or a plan works?
lol that's gotta be a ton of patience required. |
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JoeDeertay United States. Nov 08 2008 13:03. Posts 1730 | | |
Thaler vs. Fama <==> JYang vs. TenBagger
fyp |
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| Variance has a big brother named doomswitch. - edzwoo | |
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