Investing Process - or how to think about investing

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schneier
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Re: Investing Process - or how to think about investing

Post by schneier » Fri Feb 09, 2018 11:20 pm

Mister Imperceptible wrote:
Fri Feb 09, 2018 11:48 am
@schneier

I’m glad to hear you had such excellent results personally, but I think by definition 90% of your money into index funds is not “preservation.” I think Taleb had in mind something super-safe like short term Treasuries for the 90%, because he considers there to be no such thing as “intermediate risk.” I could be wrong, I have yet to read Taleb’s books and have only read excerpts, articles, and quotes (as of yet, the books are on the to-do list).
You are correct. Taleb does advocate for 90% cash or treasuries, and "preservation" was a poor choice of word. At the time I wasn't sure this was going to work out, and didn't want to pay the potential opportunity cost of sitting in cash. I was at the beginning of my FI journey and ready to ride out a bear market if I had to. In hindsight I exposed myself to needless risk by buying equity funds with the 90% saved, but it was at least a fallback investment strategy in case the risky bets led nowhere.

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Tyler9000
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Re: Investing Process - or how to think about investing

Post by Tyler9000 » Sat Feb 10, 2018 1:27 pm

Talking to lots of people about this type of thing, I've come across at least five major categories of risk management in self-directed investing.

The first is an active trader who chooses to get in and out of an investment based on some metric. Some people research performance statistics while others attempt to automate this via things like momentum strategies or limit orders, but the basic idea is the same. Buy low, sell high. Note that even completely uneducated investors dabble in this all the time by outsourcing it to an adviser or fund manager.

The second is an active trader who chooses to play both sides of a trade to manage downside risk. That's where you get things like various options strategies (iron condor, double diagonal, etc) where you can make or lose money based more on magnitude of price movement rather than simply the direction.

The third is an investor, either active or passive, who focuses primarily on dependable income. This can be either via stock dividends, rental income, or loan interest. Some are very active in their income portfolio management, while others are pretty hands-off with high-yield funds or easy-to-Google lists (Dogs of the Dow, Dividend Aristocrats, etc). Either way, investors of this type generally try to ignore any swings in the principal value and prefer to think in terms of regular cash flows.

The fourth is an investor, either active or passive, who makes a decision to manage loss aversion by muting the swings with something low-risk. Think of it as wearing financial earplugs to lower the volume of market noise to a more tolerable range. One example is people who argue for holding large percentages of cash to buffer the risk of the bets they're actively making on high-risk equities. Another is the very popular idea of an equity glide path to ramp down stock index risk with more trustworthy bonds.

The fifth is a passive investor who notices that not all investments are correlated, and by diversifying into very different types of assets that account for different economic conditions you can not only mute losses but also negate them. Think of this as using active noise cancellation instead of earplugs. This is where modern portfolio theory plays, and why things like the Permanent Portfolio are so surprisingly consistent compared to more traditional asset allocations.

I can see the place for all five types depending on your personal investing temperament. Portfolio Charts is designed to help types 4 and 5, although I get lots of requests for automated momentum systems from type 1 index investors and I'm looking into that. Personally, I fall into category five and do my best to explain it to others who might also find it valuable.

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Re: Investing Process - or how to think about investing

Post by Clarice » Sat Feb 10, 2018 7:42 pm

7Wannabe5 wrote:
Thu Feb 08, 2018 4:37 am
Savers are like the kid who still has his chocolate Easter Bunny and now it is September and it is mushy and covered with dust, or similar analogy based on stereotype of Virgin Spinster. IOW, I see a depreciated resource and multiple trading opportunities missed, and my emotional reaction is something like pity and revulsion or even horror at the notion of something being entombed while still alive. Whereas, my mature self-aware response would be to note that it would likely be in alignment with my self-interest to have a Stash in the event that I lose my Roll, or maybe a bigger Roll. Though it seems to me that having a Big Roll is not unlike having a Big Ass. Up to a point it helps you Hustle, but eventually it slows you down. Then when you stop Hustling, you start Dying.
Well, I agree with you up to a point... but what if you don't know what to do? For me and DH it has been no-brainer in the beginning - pay down the mortgage... and then a second mortgage for our rental, so now we have 2 houses. A Jew in me and a daughter of a Holocaust survivor squirms - if you have to run the last thing you'd take with you is a house. And I already ran once. :cry: I have no qualifications for a small pond - wouldn't tell a Princess Barbie from a meat rabbit :lol: ( well, not literally, but...). In the big pond, no matter what I do I'd be listening to "a specialist". My real experience is in healthcare, which makes me very skeptical of specialists. I am not a doctor. I am not even a nurse. I am a speech therapist. However, I've spent last 15 years working in various hospitals, seeing people getting sick, recovering, staying sick, and dying. I know anatomy and physiology; and the medicine is much more experiential and less scientific than most people would like to believe. I feel confidant making the bets for myself - no flu shots, no mammograms, don't know my cholesterol numbers - never asked. I might be wrong, but I've placed my bets knowing perfectly well what I'm doing, in full awareness of both sides of the argument. I lack that ability in the market... so I ordered Economics: Private and Public Choice... but it's well past September and my chocolate Easter Bunny is still gathering dust... ;)

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Eureka
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Re: Investing Process - or how to think about investing

Post by Eureka » Sun Feb 11, 2018 6:19 am

Clarice wrote:
Sat Feb 10, 2018 7:42 pm
no flu shots, no mammograms, don't know my cholesterol numbers - never asked. I might be wrong, but I've placed my bets knowing perfectly well what I'm doing, in full awareness of both sides of the argument. I lack that ability in the market...


This is exactly me, too. Thanks for making this parallel. Looking forward to the day I will be able to make the same kind of aware and individual decisions regarding my investments as I am today regarding my body and my health.

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Sclass
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Re: Investing Process - or how to think about investing

Post by Sclass » Sun Feb 11, 2018 11:12 am

Farm_or wrote:
Thu Feb 08, 2018 10:07 am
I have an analogy to share that might show the method to my madness: hay farming vs investing.
Thanks for this. I really liked it.

I have a bunch of analogies I use from hunting. I was going to post them up but it seemed too far out. Hunting and stock trading involve animal spirits. There’s some commonality when you’re trying to outsmart another living organism to take away its animal capital.

In short I like to plan an ambush preseason. Blinds. Pinchpoints. Anticipation. Recon. The execution is actually a little anticlimactic after all the prep. Click of my mouse or squeeze the trigger. When I’m actually taking the money shot it looks like I’m not doing anything.

Thanks Farm_or.

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Re: Investing Process - or how to think about investing

Post by Farm_or » Mon Feb 12, 2018 9:05 am

I was worried that it wasn't audience appropriate.

I can see how the hunting analogy could be developed too. Risk management, intangible learning, and continuous improvement?

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7Wannabe5
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Re: Investing Process - or how to think about investing

Post by 7Wannabe5 » Mon Feb 12, 2018 10:02 am

Sclass wrote:When I’m actually taking the money shot it looks like I’m not doing anything.
Worthless without pics.
Clarice wrote:I have no qualifications for a small pond - wouldn't tell a Princess Barbie from a meat rabbit
Of course you do. It's just a matter of perspective. For instance, anytime you choose to cook more than enough food to just feed yourself in the moment you are investing as big fish in small pond. You can do a better job of fulfilling the preferences and nutritional needs of your family by cooking yourself instead of just buying popular prepared food, because you have "insider information" about the preferences and nutritional needs of your family. Any context or activity that you spend more time in or on than the average person or any ability you possess more of than the average person constitutes an opportunity for trade for which you possess an edge.

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Sclass
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Re: Investing Process - or how to think about investing

Post by Sclass » Tue Feb 13, 2018 9:06 am

Farm_or wrote:
Mon Feb 12, 2018 9:05 am
I was worried that it wasn't audience appropriate.

I can see how the hunting analogy could be developed too. Risk management, intangible learning, and continuous improvement?
Me too. Farming is good too. It’s amazing how the beginning of banking started with grain storage. Then some genius decided to represent future harvests with paper and started charging interest in kind for lent seed.
7Wannabe5 wrote:
Mon Feb 12, 2018 10:02 am
Sclass wrote:When I’m actually taking the money shot it looks like I’m not doing anything.
Worthless without pics.
:o :lol:

Clarice
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Re: Investing Process - or how to think about investing

Post by Clarice » Tue Feb 13, 2018 12:31 pm

Eureka wrote:
Sun Feb 11, 2018 6:19 am

This is exactly me, too. Thanks for making this parallel. Looking forward to the day I will be able to make the same kind of aware and individual decisions regarding my investments as I am today regarding my body and my health.
@Eureka:
I am glad you see it this way too. In both areas of life you take risks no matter what you do. Going to a specialist by no means absolves you from taking the risks. There is no substitute for your own understanding. While using professional services you have to be acutely aware of the conflict of interest that a specialist has. :roll:
Last edited by Clarice on Tue Feb 13, 2018 12:41 pm, edited 1 time in total.

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Re: Investing Process - or how to think about investing

Post by Clarice » Tue Feb 13, 2018 12:40 pm

7Wannabe5 wrote:
Mon Feb 12, 2018 10:02 am

Of course you do. It's just a matter of perspective. For instance, anytime you choose to cook more than enough food to just feed yourself in the moment you are investing as big fish in small pond. You can do a better job of fulfilling the preferences and nutritional needs of your family by cooking yourself instead of just buying popular prepared food, because you have "insider information" about the preferences and nutritional needs of your family. Any context or activity that you spend more time in or on than the average person or any ability you possess more of than the average person constitutes an opportunity for trade for which you possess an edge.
@7wb5:
It 's an interesting take on investing that has never crossed my mind. For me, cooking from scratch is the baseline while "buying popular prepared food" is an extravagant expense. Both behaviors belong to the lifestyle bucket, not investing bucket. Smart investing has the potential to make one wealthy. Smart coking has the potential to prevent one from being poor.

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Re: Investing Process - or how to think about investing

Post by trfie » Tue Feb 20, 2018 1:25 pm

frommi wrote:
Wed Feb 07, 2018 11:49 pm
suomalainen wrote:
Wed Feb 07, 2018 3:13 pm

@frommi (and maybe also @jacob?) I think you mentioned Buffett doing this in the 60s in the other thread. Aren't those the "cigarette butts" he'd pick up off the ground for a one or two puffs and he said something like Munger was the one who "cured" him of this approach? But you're saying that if you stay small, you're content with one or two puffs? And Munger's "cure" was really only useful in the sense that they went "upmarket" with greater AUM?
Yes, WB had no choice, he had too much money.
This is not really what they meant, it was more of a philosophical difference. Imagine buying a company for $80,000 that was heading toward bankruptcy but could be liquidated for $100,000, versus a company that could be bought for $80,000 because of some market inefficiency and had an intrinsic value of $100,000. These are very different cases. Buffett was initially interested in the former.

It's not only about being "content" with one or two puffs. As there is greater AUM, there is more competition.

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Sclass
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Re: Investing Process - or how to think about investing

Post by Sclass » Sun Feb 25, 2018 12:54 pm

I should start by saying a lot of this depends on the individual. It may or may not work for you. I have several protégés and what I’ve found is I can teach my style but they aren’t always able to replicate my results. A lot depends on temperment.

I’ve tried writing something down here but I keep deleting it because it gets long and sounds stupid. So I thought I’d try some bite sized chunks.

This primarily applies to individual stock selection which is what I do.

First I don’t trade unless I know something other people don’t know. Markets are more or less efficient. I like to find the less efficient ones by acquiring data that is not available to the regular players. In the Internet age this is hard and easy. It’s hard because we are bombarded with a deluge of 24/7 info that is quickly digested by the players. It’s easy in that’s if you do find something outside of the regular info flow you will know something outside the groupthink. It may help or not, but I’m basically saying I need an edge.

A friend asked me why I don’t spend more time on SEC quarterly filings and my reply is everyone else is reading them for me. I skim them to see if anything is really wrong, but if there is anything remarkable it is almost always priced in. They pay Harvard grads good salaries to do this for us.

So I can read income statements and run my discounting software all day long an pretty much come up the consensus price. Because, everyone else can. What I need is something else. So I have some methods for gathering intelligence.

This means talking to people. Reading professional journals. Reading trade magazines. Going to trade shows and talking to sales people. Chatting with friends about the big challenges in their industry. And following my old industry (signal processing hardware). Fake job interviews so I can see the challenges and the team from inside.

I try to make a guess where an industrial trend is going. Very often the sales people know first, certainly they have inklings years before the finance people catch wind of a trend.

I’ll develop a target list of potential buys. Look over the available financials for glaring problems...don’t worry if they are glaring others have already found them.

Then I make a guess. I think this is what turns EMT on its head. When you guess you are actually synthesizing new information that doesn’t exist yet. As time passes it becomes genuine information. It may be bad information or good but it changes the game. At the end of the day when you click “execute” it all comes down to a guess. So at the end of this funnel you kind of reduce the game to a binary decision (buy, hold or sell). Ok, not quite binary.

So this is the part where it comes down to the investor. Do you guess like me? Do you click the mouse (pull the trigger) like me? Do you bleed like me while you sit alone in your blind being slowly eaten by mosquitoes and ticks for a period before you see any game wander down the path? Do you pick off the first young buck or do you wait for the trophy deer that never comes? Do you wait for a hedge fund to invest or do you wait for Yale or Fidelity? You can get varying results depending on how you combine the terms. Remember the hunting analogy? Predictions. Anticipation. Staking. Waiting.

Jim Rogers said it well in one of his books. He always talks about things in terms about winnowing people down. Like, you hold a class and say “how many of you wanna be rich?” Every student, say 100, raises their hand. “You’re gonna lose your friends and that partner you’re with will divorce you.” Half of the hands go down. “You’re gonna work day and night and have no social life. You’ll be lonely and unhappy”. Ten hands are left. “You’re gonna have bad times. You’ll lose half, maybe all your money.” Now only five hands are up. The sad part is maybe two or one of the five will become wealthy.

Jim said of stock research “read the annual report and you are ahead of 50% of the people.(this is sad). Now read a quarterly SEC filing and listen to the entire earnings call from start to finish. Now you’re ahead of 75%. Now go read some trade journals in the area of business. You’re ahead of 80%. Now go to a trade show and speak to the company salespeople about their products, industry and market. Now you’re ahead of 90%.” (Sclass interjection “now get a fake job interview with the company and tour their place. Find out what they’re trying to do or solve when they’re least likely to lie. Now you’re in the 1%”.)

I don’t think Rogers is exaggerating. He rode a motorcycle around the world in the 80s to find nascent markets. Learn something that nobody else knows. Even better, learn something that everyone else thinks is wrong. At the end of the day your goal is to outsmart the other animal spirits and relieve them of their stored capital. It won’t be easy.

Oohh. That’s long. Maybe I should hit delete.

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Re: Investing Process - or how to think about investing

Post by SavingWithBabies » Mon Feb 26, 2018 11:51 am

@Sclass So based on your post, I assume you buy and generally hold until you decide to sell. What prompts selling for you? Does it vary a lot or do you always sell at a certain return? Based on your hold strategy, if I'm reading between the lines correctly and you sometimes go long term even if short term losses, I'd hazard you evaluate selling like holding. Have you ever done a fake interview when deciding on whether to sell?

I'm glad you didn't delete as it was interesting to read and informative.

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Sclass
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Re: Investing Process - or how to think about investing

Post by Sclass » Mon Feb 26, 2018 7:07 pm

I sell for a variety of reasons. Mostly I sell when I no longer want the shares. I’m lousy at selling BTW. I sell to raise money to pay bills. I sell because I don’t think I’m going to make much more money if I stick around. Sometimes I get it right sometimes not. The way I pick my entry I seldomly regret not selling. I more often regret selling.

As silly as it sounds I don’t like to sell because I like to defer taxes. I’d rather keep my money in a compounding asset. Pulling it out means I’ll have to start over. If I have to be alert for the sell signs (like a product line collapse) I’d rather not own the stock in the first place even if it is a rocket today. I learned this on one of my first profitable trades IOMG. Not worth it in the big picture. Even though I made money I couldn’t repeat the process reliably.

I’ve never done a fake interview in a sell scenario. Always when I’m looking to acquire.

What I was trying to get across is I like to know something nobody else knows. At least no other share owners. Salespeople and low level managers don’t count because they don’t hold a lot of stock compared to the disproportionate amount of inside information they unknowingly possess. Fake interviews, fake sales calls, whatever it takes to talk to a soldier on the front line.

Sometimes I’ll get an idea together and it’ll take a long time to come to fruition. Things go sideways or down for awhile before others come around. It can be frustrating waiting for institutional interest. This is where knowing how to bleed is important. It gets even crazier with tightly held family controlled businesses. They don’t always want their stock to go up and they have ways to make it go sideways for extended periods. Some of America’s most valuable businesses are like this. It literally takes a Buffet or Icahn to wring the hidden value out and it is foolhardy for a small investor to think they can make money off their small lots.

This can get really long. Know something nobody else knows or even better, know when everyone else is wrong.

Edit - when a big dog comes in and takes over a small company I own it comes with a feeling of vindication and at the same time it’s robbery. Very often I get pushed out when a big dog figures out the same thing I knew and just takes the business private.

Also, I used to be more conscious of selling/timing when I traded off tips. I can recall investing in F in the 90s and happily dumping the stock at a good price. I bought off an old timer’s tip. I didn’t know why I bought it but I knew why I sold it. The cars sucked. Now that I buy off my own tip I’m much less worried about getting out as long as my original thesis still hold water. When buying off a tip I don’t have an original thesis.

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Re: Investing Process - or how to think about investing

Post by Farm_or » Tue Feb 27, 2018 8:01 am

Way back in my day trading days, I used to follow insider trading. (The legal type.) With the advent of internet, computers, and the timely information, I thought that was a sure thing. Just do what the CFO or CEO does.

There were subscriptions for better timely information, but I simply used their price as the indicator. If it was still good to buy or sell based on the insider action at their price vs market.

Long story short? Didn't work. There were simply too many untold reasons for insider executive buying and selling. Life happens to them too. And you could never discern the timelines that they had in mind.

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Re: Investing Process - or how to think about investing

Post by Smashter » Wed Feb 28, 2018 12:29 pm

jacob wrote:
Wed Feb 07, 2018 11:50 am

Instead they had developed hundreds and hundreds of experiential rules from which they could intuit when to put a position on and how much. The best amongst them were somewhat consciously aware of these rules and capable of changing their behavior and trying the opposite even if it didn't "feel" right to them. They were de facto capable of rewiring their own intuition. This level of mental self-awareness is impressive to say the least.
I was skeptical of this until I had dinner with a friend of mine last night who works at a big NYC hedge fund. He was the star performer last year and is anticipating a big promotion. I had a ton of questions about his process. His answers sounded like he was quoting Jacob's posts in this thread :)

He said he only works a few hours a week. During those hours, he tries to "see the matrix" (his words.) From what I gathered, this was some sort of holistic, hard to define flow state in which he uses rules, feel, timing and data to come up with his ideas.

Other interesting tidbits:

- The absolute prodigies in his business are only right 60% of the time.
- He spends a million dollars on data every year that no regular person would ever have access to, which he deemed "unfair"

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Re: Investing Process - or how to think about investing

Post by IlliniDave » Wed Feb 28, 2018 12:46 pm

Smashter wrote:
Wed Feb 28, 2018 12:29 pm
He said he only works a few hours a week. During those hours, he tries to "see the matrix" (his words.) From what I gathered, this was some sort of holistic, hard to define flow state in which he uses rules, feel, timing and data to come up with his ideas.
I wonder how our distant ancestors would have described the process of reading a random pile of small animal bones, or tea leaves, to augment predicting future events. That sort of semi-divination certainly doesn't sound like something I'm going to successfully pick up as retirement hobby, even if I had $1M/year to buy data with. The more I hear about how beating the market can be accomplished, the happier I am putting on my dumb money t-shirt.

That was an interesting account.

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Re: Investing Process - or how to think about investing

Post by SavingWithBabies » Wed Feb 28, 2018 12:50 pm

@IllniDave I feel the same however I take some comfort in the thought that I'm small enough that I can do well taking "drags off of discarded cigarette butts" to kind of paraphrase one interpretation of what was mentioned in the recent Warren Buffett thread. By that, I mean I'm not trading many millions or billions of dollars like WB or the above mentioned trader so smaller opportunities are of interest whereas they can't give them the time of day. It's only a slight consolation though but it does give me hope.

@Sclass Thanks! Your main point came through loud and clear but I was curious about that aspect of selling. It makes sense

Edit: whoops, I'm distracted. I realized the whole cig butts thing is in this thread :oops:
Last edited by SavingWithBabies on Wed Feb 28, 2018 5:33 pm, edited 2 times in total.

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Re: Investing Process - or how to think about investing

Post by jacob » Wed Feb 28, 2018 1:42 pm

Smashter wrote:
Wed Feb 28, 2018 12:29 pm
I was skeptical of this until I had dinner with a friend of mine last night who works at a big NYC hedge fund. He was the star performer last year and is anticipating a big promotion. I had a ton of questions about his process. His answers sounded like he was quoting Jacob's posts in this thread :)
Funny how that goes, eh? :ugeek:

There is, unfortunately, a huge gap between practitioners and academics in the field of finance. This incidentally is not unusual. Gaps also exists in many trades. Try to find a book about how to find the right pressure regulator for an old gas stove, for example. Or try learning karate from reading a book. In finance, there are academics studying the field in a way that's quite removed from how things are done in practice. I suppose it parallels philosophy in that regard. Try learning karate from people who read books about karate and formalize their knowledge with math. Then you'd describe much of the field of academic finance.

The problem is that it's very hard to intellectualize experiential knowledge. Distilling it into a narrative or a couple of memetic talking points is harder still. Indeed, one might say, the only investment strategies that attain popular adoption are the few where this is possible. "Real estate never goes down. After all, they aren't making more land."

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Re: Investing Process - or how to think about investing

Post by IlliniDave » Wed Feb 28, 2018 2:44 pm

SavingWithBabies wrote:
Wed Feb 28, 2018 12:50 pm
@IllniDave ... It's only a slight consolation though but it does give me hope.
It sounds like it could be fun (despite the metaphor) so long as winning at it (beating the market over the long haul) is not required to put food on my table and keep a roof overhead. It just happens that for me I'd rather cast about for walleyes and pike than discarded butts. If I thought market returns would jeopardize my future I'd just keep working until that was no longer the case. I'm sort of a coward that way. :D I suspect it is also easier when you are getting paid to bet someone else's money rather than betting your own pro bono. Further indication of my cowardice.

I hope you have great success!

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