Stocks & Investing

[mykonian]

Don't do stocks, m'kay. Well, don't go in it with hopes of getting rich quick, I should say. If you can find some good long-term investments you'll be fine, but the game is pretty rigged against amateur traders. Don't get greedy, is all I'm saying.

people with 401k to play with don't really care about this. They could lose half and not feel it.

Also, commodities don't make money, they hold it. I think if you accept that you are a small slow stupid player, you wouldn't want to put your money on a game where the odds are even.

[mykonian]

people with 401k to play with don't really care about this. They could lose half and not feel it.

401(k) does not mean $ 401 000

How did you know?

[mykonian]

Eh, I work in a casino. A game where the odds are even sounds pretty attractive.

Companies make profit, dividents are paid out. That's an influx of money into the system. Bonds pay out interest, paid from the profits companies make. Similar story. If you are just speculating, you are fighting an uphill battle. For one, you win by trading properly. Other people are professionals, they do it better. They are with more, they are smarter, they are or have computers on the floor. And after that, you still have to pay provision. Money going out of the system. It's a game where the odds are against you.

If you are small, stupid and slow, trading seems like a poor choice. You could hope for a winning game by buying and holding a piece that does generate money.

[mykonian]

Also... wait. no. $401,000 is not nearly enough to "lose half and not feel it."

You could live 10 years off that without giving up any luxuries. 20 years if you are saving it up. I don't know how you have to live before 200k becomes "too little".

I'm guessing you are living the American dream?

[mykonian]

Also... wait. no. $401,000 is not nearly enough to "lose half and not feel it."

You could live 10 years off that without giving up any luxuries. 20 years if you are saving it up. I don't know how you have to live before 200k becomes "too little".

And you could live for 40 years in Bangladesh! But just subjecting the money to your own current living standard is hardly sufficient. The claim that you wouldn't have to give up luxuries is laughable, really. And why a 10 year horizon is the goal? I don't know.

I took the dutch bureau of statistics "normal" income, as well as the minimum. Dutch standards can't be the worst. After that, it was simple division? The (large) numbers of money mean so little unless you need them, so it's easier to put them into things a person can understand. For example years you can live comfortably off such a sum.

[mykonian]

I was working from $40k pre tax, 10 years for that imaginary 400k. Minimum was roughly $20k (for ease of maths), ending up at 20.

[mykonian]

as long as you have enough, why bother caring?

[mykonian]

I wanted to necro this thread just to point something out to people and point out why you'd invest in low cost index funds rather than pick what you think is going to be super great. The TLDR is you don't know. But longer version is this:

If when this thread started you invested 10,000 in an S&P 500 index fund you'd have about $11,570 right now or $12,134 if you reinvested your dividends. To be clear, that's a huge return over a 2 year period and I wouldn't expect it in the future. But it's still there.

If you had invested $10,000 in Medical Marijuana, the company we talked about on page 1, you'd have $1,250 right now. So obviously this is somewhat flawed: he was saying he was putting in $300ish at a shot it might go to the moon. But he still would have lost $250 doing that. That's a pretty nice meal!

I mean, I'm sure people here realize this. I've invested part of my savings when the interest dropped the way it did, but when the worst of the crisis seemed past. Think I was slightly ahead of the curve there compared to other individuals. Either way, I've got pretty much the same guidelines as everybody, to reduce the feeling that you are gambling. Because these are gambles against people who look in your cards, you don't win out. The example you took there, is something the opening poster would invest on based on name and their view on the changes of law. A big fun looks at the numbers, has a couple of lawyers/historians having a far better idea about how politics works, and they make the same decision. You are going to lose out somehow.

So yeah, guidelines I've learned and follow have been kind of common knowledge:

Do spread, if the money pool isn't too big (like mine) that means you'll be spreading around sectors mostly in stead of companies, but indexes are a good option too.
Women are better at (private) investing because they in general don't try to beat the game by trading as much as men. So settle down and invest like a girl. No sense in spending fee if on average you don't get much gain out of it.
Do take your time. You aren't going to figure out who's going to be the big thing 2 years in. You could know that every 10 years you go through an economic cycles. If you have money you don't need in 10 years, your time will come.
Stay away from leveraging tools. They increase the risk. These can be as complicated as turbo's or the likes (where you buy it for part of the money, the bank supplies the rest for a little fee, you take all the risk/all the profit), or as simple as financials. They risk significantly as the indeces do, drop more harshly as the indeces drop.
Stick with your strategy. An extension of taking your time, when you have figured out a way how you think you can do your investing properly, it still won't be clean sailing. Figure out for yourself, what and at what kind of price you want to buy, when you want to sell (be that to take the loss, or cash out), and stick with it. It's easy to get carried away by opinions, having a preset plan to fall back on will make you trade calmer and reduce your risk.
Don't ignore divident. This was the big one for me. Professional traders need to make the money now, they buy and sell every day. The price of the stock (value+potential) is everything, the actual revenue is less important than the possibility of growth. For a retirement fund or something however, that save 3% over the cost to buy some stocks or more really does not sound so bad when your savings account gives sub 1%. High divident means less potential (so the traders didn't drive the prize up), so don't get greedy. But a company that sits there, makes the same money every year, and gives 3% over stock cost to it's shareholders is a fine investment.
Do spread (2): stocks aren't the only option, they are amongst the riskier options, and are difficult to really understand. Bonds require some simple math to figure out the worth, but are much more a known quantatity. Perpetuals are an in between option, but here, moreso than with other products, you need to read the prospectus. Treat them like stocks, you take the same risk, but your value depends heavily on the state of the global interest. Real estate, (this gets as stupid as solar panels on your roof, parents just did as an investment and the return I can calculate off that is significant, but rather save) if it's available, is a way to have part of the investment in a more safe place. Nothing wrong with putting a portion of your investing money in places where you run less risk to lose it all, using only a small part to go for the risky stuff (like stocks in a technological company)

[mykonian]

An alternative to the high effort suggestion you've posted that will almost certainly beat it over the long run is to invest in index funds and bond funds, altering the balance as you get nearer to retirement. Although I can't speak to any tax implications somewhere like the Netherlands.

Situation is similar in the Netherlands. I just wanted the responsibility.

[mykonian]

You could use options to cover off your risk on stock with a little math and effort. It comes at an efficiency cost but occasionally can be the right decision. Probably not for use by us though.

[mykonian]

is the graph including dividend/interest, zor?

[mykonian]

Neat! I had never really looked at it like this, compared individual holdings to the market (they underperform because I tend to sit in low potential stocks, bonds), or holdings compared to other stocks/bonds in a similar sector to find out if I got the right one (nope). The goal always has been to make a certain percentage over the invested money pre tax yearly (because I get it returned anyway, don't make too much money), which so far I've managed. Given I can't look back more than 1.5 years in terms of trades, I don't know my trading result over all time. My last update was 2015, when I cashed in on some stocks, and looked to reinvest. This thread reminded me I was supposed to look at one of them, which turned out to be a bad risk (I knew I should stay away from financials, even after the crisis), a risk I'm getting bailed out of at some cost, given they are being taken over. I don't think that's enough to put my total trading result in the negative, if I do some rough mental math. On the other hand, it's never going to beat much more than a couple of percent over the total sum over all years: compared to interest and divident it doesn't really matter much.

After some looking around I found a similar graph for my investments, given the tables for it it did include returns on the holdings. I could get it for the previous year as well (I beat the market there! by half a percent, mostly because it wasnt a brilliant year and I am being conservative).



Now this doesn't look too bad (given I know the bad risk is going to be taken out for next years), but that's also because I got to cut off the start of this year. This year, the market climbed at a slightly slower pace, while my holdings drop. The ones that pull me down I'm not super worried about, given the news that caused it. They tend to be stable, and none of the news implied they wouldn't be for the next 5-10 years, and they pay well otherwise anyway. Still. Might promise an interesting year

[mykonian]

Largely, yes. A steel company which is foreign which happens to write at least partially on the Dutch stock market. And most of them have worldly concerns, none are really local.

ATM considering to make this my biannual update to reconsider how Im positioned, because over time the bonds I had ran out or got bought up, so I should investigate what's available there someday. As far as I can tell to hit my goal I'll end up with perpetuals at which point you are quite close to taking the same risk as you would with stocks, but at least your return is set, and also your risk is slightly less connected to the fate of the company as long as they are more or less healthy, and much more to whatever the global interest rate does. Which is next to dropping oil prices one of my bigger risk factors anyway, in stocks as well, so that's something to keep in mind. The benefit is that you can calculate the return and have more set rules on how they behave.

It's rather in the middle of the night but this thread inspired me, so I'm making shortlists. Pure bonds are probably not a real consideration (only one semi candidate so far). Otherwise there's a trader in agricultural goods that I don't know how I missed previously that is interesting, a semiconductor producer that I should double check and I'm pretty sure I don't want to look at a building company, bc iirc they were bad news beforehand in stocks as candidates. In perpetuals there's a whole list of candidates, at which point I actually need to have a close look at prospectuses. The first ones had a 10 year condition that they'd reconsider the interest rate based on a fixed amount compared to state bonds: no wonder they'd look good right now. A couple of well paying years, then you drop to a safe but unsatisfying level for 10 years.

But that's stuff that I should do when I'm actually awake, make lists, catch up with the news and actually understand how prizes are formed, and what risks I'm taking for something that looks "good".

[mykonian]

Could, but not really looking for abstraction. I could look through trackers and honestly have no clue what I'm doing. To a point I may go through their rules and get some understanding what they mean, and still I'd feel out of touch. Also the goal of them is a bit different.

I can go through year reports and prospectuses of individual products and actually make sense out of it, and it makes me feel I have a much better handle on things, if it goes wrong there's nobody to blame but me. It allows me to stick to a certain strategy, as you could perhaps read in the post with the graph, trading isn't really the key, to the point that well over half of the current investments I bought hoping I could sell them at the same price at the end of the run. If I end up using a tracker to spread, in stead of portioning my money myself, my intention would be to follow the movement of the market, while I'm just here trying to beat the interest rate I could get at a bank. Of that result graph, the ~8% end result is made out of divident and a little bit of interest for roundabout 5%. The rest was as far as I could tell was oil price speculation. Which goes up and goes down at the start of this year. It'll have gone up and down a lot in the next 10 years. The idea is to ignore that mostly. A trackers goal is to follow it.

Does that make sense?

[mykonian]

in general annuities aren't a great option as an investment tool. They can be an okay way (though still pretty bad) to assure a regular fixed income, but it's basically lending an institution money and having them pay you your own money back.

I do hope you aren't talking about life insurance here, but going for the general term of securities that pay out at a regular basis.

In that case you are somewhat exaggerating. Put it like this, suppose you were in control of a very large sum of money, say as a bank or insurer. You'd have all knowledge you could want about all the markets, to the point you can somewhat write down the expected value of every kind of investment over time. Now to maximise your investment, you'd balance your investment proportionally to those expected values. It sounds simple etc, but there's actually some pretty neat maths who write that down as an optimum. Now you have so much money to spend, what you buy actually affects the prices on the market, meaning your balance is the price at which the market settles.

So say stocks aren't looking too hot. In the crisis for example. Then the interest bonds offer arent looking too bad. Hell, gold, which creates no money, might not even look too bad. If the prize of bonds rise, the effective interest drops, till you are looking at your formula again and the expected values of resulting interest and expected values of what your stocks are going to do are balanced once more. Or in other words, the fact that for your average not too long running corporate bond (say, 5 years) you can expect somewhere in the range of 1.5 to 2 percent as interest, means that if you want to be paid better you incur a risk as well (for which you want to be paid), and apparently stocks are still looking pretty bleak, or money would have fled the saver option and effective interests would rise.

Meaning that if you want to beat state bonds (around 0%), you have to know what in effect they are paying you for. A corporate bond that pays 2% is just there bc there's the tiniest chance the company defaults or skips on interest dates (is that cumulative y/n? things to consider). If the promised interest is above that, perhaps they are struggling, perhaps bond is longer running so there's a larger risk of rising interest rates (meaning the price will adjust at your loss). If you are looking at stocks, do they pay regular divident at a high (say 5%) rate, is this then detrimental to the companies growth as it's leaking money it could be reinvesting? If it's not paying dividents, does this mean the company is going to grow sufficiently in the next year with that investment to make your stocks' piece of the pie be part of a sufficiently big pie that you make say, 8% to make it worth that risk? The less they pay out in comparison to the price of the stock, the more promise the company is supposed to have. Not to mention that you also could have a look at how big that pie actually is, the smaller the pie, the less you are getting for your investment, the faster it'd have to grow to catch up because you are taking an additional risk buying a slice of a small pie.

Now that stuff is all settled at a price formed by institutional investors, who need their money to do something for them, and they'll get the best return if they spread it evenly proportionally to how much they expect to get from it. Like you aren't going to beat traders, you aren't going to beat these guys, they know more, they have computers running simulations. Their prices are going to be ballpark right. The question you are left to answer is how much risk you want to be paid for.

[mykonian]

That the value of whatever paper you buy is based in the money it represents, and the security it has, and that in general the market sorts itself out in such a way that it's pretty balanced w/e option you go for.

Tax wise it's similar. Divident and Interest are treated as a form of income, of which 15% is for the state, and after a law change this goes for stock divident now as well, that used to be popular for this very reason. Trading results are untaxed, you are just taxed over total value you own as a person. If your goal is to avoid tax, the issue is you are going to be forced to judge the potential of companies. Because however you turn it, buying a share in a company means you'll want to see money from it, or you want the promise of money to be recieved to be passed on to the person you sell it to. You are buying something valuable, you are buying a tiny part of a profit making machine. It's a silly looking argument, but you know they won't pay divident yet if you pull that argument into ridiculousness, if they were never going to pay out any money, you'd have bought a worthless piece of paper and they'd be laughing at you. That you could have some of the profit is what makes shares valuable.

Then, the ones that pay out regularly are easier to oversee, easier to predict, grow less fast or barely at all, and are less dependent on news in their sector. A news item about you name w/e tech company could make a huge impact on their projected profit for 3-5 years, while something that buys and sells cabbages every year.. well there might be a poor harvest, but that's about it. You are paying a price in risk if you look for stocks with more potential. Now that price may very well be worth it to you, but you have to be aware it's there.

There are two problems here: first, you're not diversifying for some reason so you're accepting more risk for lower potential gain. Sure, a share COULD be seen as generally safe, but companies -- even large ones -- rise and fall over a long course of time. Eastman Kodak, a former Dow Jones 30 company was at $71 a share in 1982 (35 years ago). It's now at $11. And this can happen to any company at any time.

Eh, diversifying to an extent, without spreading over the index. Also kodak is hardly an example of a safe bet. It's tech. Times change. I know my main risk factors (interest going up substantially and oil price dropping).

So by diversifying -- which is easiest to do through a fund -- offers a similar rate of return (particularly for old-guard dividend paying companies) with far less risk. Betting on one company is ALWAYS a bet it will outperform the market.

At which point, what are you buying? Part of the fund, and part of the expertise of the people who run it. It can probably show you by what rules they buy and sell, some results from the past years and the rest is hidden away from you, at the premium that they are doing the hard work for you. I hope you can see that if you aren't looking to trade up, and you are picking more than a handful of companies, you can actually make a judgement of value yourself, which is just a number in a fund.

Second, there's nothing wrong with tracking the market depending on what your purpose is with your money. If you're saving it with the hopes you get it out in 5 years, you'd be dumb to invest it all in the market. If you want to invest it for the next 40 years, you'd be pretty dumb not to want to track the market to at least some extent.

This is a matter of strategy, and to a certain point outlook. As per above, the majority of the stocks you'd be tracking are promise based. Say I'd track the AEX, that's 4 financials (which are a leverage on the market, meaning I'm not looking for them in general), 4.5 tech (volatile, high promise, not interested). 3 companies who have struggled to get through the crisis and who's are perhaps behind the times (2 printers and a building company), leaving the rest raw material producers, food related, and services, of which were of interest. Similarly for the minor index.

Like, the goal is to be less volatile than the market, with the majority sitting in it's stable sectors and in bonds, only spreading a small portion of the total sum over riskier investments. It's not about maximizing profit. The goal is to minimize risk for a profit I deemed better than acceptable (would that be good?).

[mykonian]

taxwise, similar. I think whatever assets you have are counted as your wealth from a certain point on, but regardless that's not taxed too badly, while dividents/interest are indeed a form of income.

The problem is that you're making a bet that you personally can out-guess investors even as you're asserting you're choosing low-risk stocks.

Yes and no. I'm betting they got it right, and that whatever I buy or sell has no practical influence on the pricing (it doesn't). "They" invest in everything, and set the price for a certain risk, reward and potential. Now there's tons of products to choose from. I have a certain reward I'd like as a goal, never more either. That's a fixed point. After that I want to find the products with the least uncertainty, which also means the least potential. That means you end up with a spread in certain products. None of them are risk free, but by looking for the least volatile you have less potential, but also less risk. As such, I'm not hoping they do better than the investors thought. I'm hoping they do exactly what the investors projected: sit there, pay out money, hold value, be boring. Which has as a downside that they compete with the interest rate.

Another major downside, and frankly "the" major downside, is that if the economy actually does exceptionally well, those very products are totally not interesting, money shifts away to the stocks with potential, interest rate rises. The stocks might come along with a better climate for a small extent (raw materials would, they are cyclical), bonds wouldn't. I don't have any sense for the math of it, but I hope I can balance that risk to break even in the value of the pieces, and collect my divident/interest still. I'd "lose out" on a ton of money compared to a tracker. You could see that as betting against the market (hence the "yes and no"), otoh, I couldn't care less. What I want to beat is my savings account in an as controlled possible fashion, not other people. If I'm betting as you say, I'm happy to lose.

Compared to the funds you showed, I have "lost". Yet, you can't make 7.5% or 10% on average without significant downwards risk. Like ignoring that I don't quite get how they do it while I can look at interest rates, divident history, solvability, operational values etc, the fact that something is offering me 7.5% makes me turn it down, if you get me? It's too much, I'm paying somewhere for that. I know there must be a significant risk there, but yet I can't understand the product.

[mykonian]

You're viewing the economy as a zero-sum game, but it's not. Risk doesn't necessarily increase in direct proportion to potential growth. There's a general curve to the risk/reward proposition.

I don't really get what this means. I get it's not linear. Otoh, there are no freebies. Everything is priced in, and you bet the market works.

Alternatively, you can provide diversification yourself by investing in a ton of stuff, but you have to have significant capital to do that in any effective way, and any sort of transaction costs will likely make that prohibitive.

Yes and no. If you don't trade, the transaction costs are spread out over years. So yeah, this is the route I chose to go ~5 years back. I'm in a limited amount of sectors, not in a limited amount of products, though since I didn't really rebuy bonds too readily I'm behind on that side.

Like, I'm not crazy, lol. I've put aside money I could miss for a decade at the moment I started, I've spread, I've traded a very limited amount. I just really do not like package products, products that change, anything else that makes it opaque, and forget about leverage products, though that's not because they are too complicated. Like, do you know what you are getting into when you invest in a fund? And if yes, how long did it take to read through the prospectus to get that understanding?

[mykonian]

Nah a pure tracker only has questions how they handle cash or stock divident really. They just try to mirror the index, those rules are sort of easy to get, just invest proportionally, given the index measures it that way. You are spreading by size of total shares*price, but what gives. It's not optimal and it's not supposed to be. But the moment a fund is handling money in a certain sector, I wouldn't know what rules are obvious, how they choose their proportions, etc.

[mykonian]

Not sure why the hedge fund link was of use here.