Investing Process - or how to think about investing

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

Post by 7Wannabe5 » Thu Feb 08, 2018 4:37 am

A saver need security. An investor needs growth. A trader needs diversity or movement. A speculator needs developments or perspective. My temperament is Trader, so sometimes I Invest and sometimes I Speculate, but I usually only Save towards a new Roll or Seed . I don't want to offend, but to me 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.

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Re: Investing Process - or how to think about investing

Post by jennypenny » Thu Feb 08, 2018 6:46 am

@slowtraveler -- Any combination of Wellington funds should be easy enough to track in a spreadsheet. Beyond that there are several places that will let you set up dummy accounts. You could try Seeking Alpha (easy to watch several at once) but any will do. It's good to learn how to track them yourself (like learning how to do your taxes on paper).

One thing I didn't mention is that when I was trying out different approaches, I tracked fees but didn't study the tax implications of the transactions beyond the basic stuff. That was a mistake. The more you make and the more you have in your kitty, the bigger the hit will be if you don't take taxes into account. Poor tax management* can really dent your earnings. Your tax situation can also change which approach is best for you or whether you have to take a different tack with each pot of money.


* Taxes and inflation can wipe out most of your ROI and crush your SWR (using that term as we do on the forum). Managing taxes appropriately and reducing exposure to inflation through ERE/Alpha strategy can have a bigger affect on your returns than your choice of asset allocations. I'm not arguing against learning all you can about investing or saying that your investing choices don't matter. I'm only pointing out that learning how to keep what you've earned through investing is just as important.

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Re: Investing Process - or how to think about investing

Post by IlliniDave » Thu Feb 08, 2018 7:15 am

7Wb5, that is an interesting take. Based on it I see myself as a mix of saver, investor, and speculator, with almost zero trader inclination.

jennypenny, a +1 for "learning how to keep what you've earned through investing is just as important". The "game" has really changed for me in the last few months in terms of my having pretty drastically reformed my portfolio goals. I think it is a good thing to play with some sort of simulation and turn all the knobs to observe what happens. I wrote two versions of my own so that it was dialed precisely into my timeline, but have played around with firecalc and others (though I'm ashamed to admit I have not spent any time with Tyler9000's PV. :oops: ).

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Re: Investing Process - or how to think about investing

Post by Farm_or » 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.

I can consider the farmers almanac, Noah long range weather charts, pay a gypsy to gaze into a crystal ball. I would weigh all those predictions about the same. I know that unexpected anomalies will arise.

Nonetheless, experience has taught me some fundamentals that I can control, but it is a risk. I have developed past experiments to minimize risk, but the learning and constant improvement continues. I can learn a lot from older, more experienced farmers, but they are subject to mother nature's whim too.

To the best of my current ability, I play the hand I've been dealt. I spend on soil analysis, seed, fertilizer, and herbicide. I've developed my own trick to minimize those inputs that lessen my gamble. But there is potential for greater rewards for greater input. And there's potential for lesser rewards for insufficient input. There are too many potential unknowns, so I have to rely on experience and gut feeling to decide how much in is appropriate.

To execute the year requires a balance of art and science. Intuition and mathematics in varying degrees of balance. You can try to follow the calendar, but the average temperature is not the same. The insect activities vary. The rain comes and goes differently. The wind changes. You can try to follow the numbers, but conditions can change. I make the best hay acting on part numbers and part art.

However, I do have failures. I get hay rained on, hay with mold, and hay too dry. Costly failures. But never a failure that sinks me, rather teaches a new lesson that I can apply under similar circumstances next time.

I'm a pretty good score keeper. I make much more profitable hay than discount hay. I look over the fence for comparison. I listen to others for indicators. I'm doing pretty well, but can still improve.

I'm certainly doing better than those that don't pay attention. Those that robotically follow routine. And those who over react to every rain cloud. And especially those that don't sow any crop!

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

Post by SavingWithBabies » Thu Feb 08, 2018 11:00 am

@frommi How small do you go? I once told someone that I tried to trade, at least once, in as many different types of things as I could. So I did buy some penny stocks and trade them for a while. I think I was on a pump and dump and sold during the pump so it worked out fine for me. But that person I was telling was shaking his head -- there is a lot of stigma with penny stocks. Are we talking that small or above penny?

My strategy was investing in my industry (so tech). But now that feels so overpriced and I sold out too early and made some stupid trades a year or two ago. This was all in my smaller account that I'm willing to risk. With my bigger account, it's all at Vanguard in mutual funds. I know I don't know enough yet to invest it without very high risk. On my play account, I'm still holding onto that bad trade and watching it slowly eek it's way back up. I'd trade and go for something better but as I said, in tech, it seems high. But I've also realized this is a failing in my thought process as it could stay high and continue to go high so I might miss out. So my plan is to read the fundamental book list and try again soon.

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

Post by Astra » Thu Feb 08, 2018 11:38 am

The “Tech-Hippies value + growth investing in very specific markets” strategy

Now value vs growth strategies are often presented as opposites. I am convinced that (for certain stocks/markets), they are two sides of the same coin. I specifically invest in companies or areas which I “believe” in. Believing meaning both from an ecological perspective, and that I think they will have a bright future. This includes companies in the biotech and semiconductor industries, organic grocers, producers of windmills, solar panels and bicycle parts, recycling of packaging and bottles, European and Asian railway companies, and more generally all that is associated with water sanitation.

My stocks are “growth type” in that respect that I expect them to grow faster than others, simply because they are entering an entirely new playing field (E-cars), or because the market they’re on isn’t saturated yet (windmills). This generates revenue, cash flow, profits, which get directly funneled into growing the company; therefore these typically don’t pay dividends. These stocks are generally more volatile – risky, but you can often grab them at a great price if you wait your turn.

However, some aspect my portfolio is also more “value type”, as many of these stocks are diamonds in the rough. Companies that are undervalued because their technology is so novel, in a league of its own that the stock market hasn’t gasped its value yet. Or it is still a small company, nobody is sure whether it’s gonna pay off, and upon some discouraging news the stock price plummets since investors lose hope (this is especially prevalent when a biotech/pharma company fails a Phase III trial). In swoops little old me to grab this neat company share at a bargain price. Typical value stocks are big companies paying dividends – but the same principle works with smaller ones (plus there is also some room for growth if your value assessment is right).

How this plays out in real life: I have a watch-list, e.g. stocks I’ve evaluated and decided I “believe in”. Here it helps to have some knowledge of the sector to judge value (in my case biotech, organic farming, engineering to some degree), otherwise plow some quarterly and annual reports. Every now and then I have a look at that list, when I see a stock go below value, I briefly check out why and perhaps buy it (extreme cases here: RNA therapeutics company Alnylam, Vestas Wind Systems, diabetes pump maker Ipsomed; check their graphs to see what I mean). When a stock I’m holding gets to hot or spikes up due to some event, I will sell and maybe rebuy at a later point (Tesla and I have an on-off relationship, also semiconductor-specialists Aixtron and Ricoh, both of which I sold on their peaks). No worries if a stock I bought plummets, then I just hold, wait for recovery and (sometimes) enjoy the dividends. In theory it’s easy, “buy low sell high”, in practice there’s a lot of reading and then doing what feels right - guess that’s the intuition (although I am by no means a pro trader). I have made my mistakes, and bought some stocks that never really recover (looking at you United Natural Foods). Figured out why and learned something from it.

The solace when investing in what you “believe” in is that even when they’re doing badly, you stick with them because you support their general mission (green energy, good food, new therapies…). And when they do well it’s double the joy!

My portfolio structured for maintaining and if possible growing my assets, not for regular payouts. My PhD salary currently covers living costs and taxes, and some extra savings. Once I ERE and live off my investments, I’d have to think about how integrate regular withdrawals.
*Disclaimer* Obviously, I have no formal education in finance (and its terminology). Sicentists in general seem to harbor an aversion towards this dirty money business. Honestly I have no idea what I’m doing, my investment strategy is very “do it yourself and learn from your mistakes”. Emulate at your own risk ;)

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

Post by frommi » Thu Feb 08, 2018 12:35 pm

SavingWithBabies wrote:
Thu Feb 08, 2018 11:00 am
@frommi How small do you go? I once told someone that I tried to trade, at least once, in as many different types of things as I could. So I did buy some penny stocks and trade them for a while. I think I was on a pump and dump and sold during the pump so it worked out fine for me. But that person I was telling was shaking his head -- there is a lot of stigma with penny stocks. Are we talking that small or above penny?
I have no fixed limit to how small. But i don`t buy pump and dumps, just stocks that i get at 50-60% of liquidation value. The smallest right now has a marketcap of 9 million usd.

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

Post by SavingWithBabies » Thu Feb 08, 2018 12:54 pm

@frommi Thanks -- to be clear, I don't know if what I was investing in was pump and dump or not although some articles I read claimed so for that particular stock. When I was talking about it with the other person, it just felt like they dismissed all penny stocks as pump and dump and I was skeptical about that. Mostly because they had such a knee jerk reaction. But as a newbie investor, I wasn't sure what to think. I'm going to go back and do some more research as it was fun researching very small companies (and now with RobinHood, the lack of fees makes it even more interesting although they don't have all exchanges apparently).

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Re: Investing Process - or how to think about investing

Post by schneier » Thu Feb 08, 2018 7:59 pm

I've been lurking the forum for years, hope I can bring something to this discussion :)

After studying and mucking around with trading for years, I settled on a simple "Taleb convexity" style strategy. I would blindly dump 90% of my savings into index funds (mostly for preservation) and use the rest to make small bets with a high payout. Think penny stocks, out-of-the-money options, cryptocurrencies, etc. I didn't expect to be able to pick winners consistently. I didn't need to though. With this payout profile I only had to be right a couple of times to make a profit. Turns out one of these bets was incredibly successful and my FI journey was shortened by 10-15 years.

On one hand luck played a huge role in this outcome and I definitely don't consider myself to be part of the 10% of people who can constantly beat the market. On the other hand I would've never made astronomical returns if all I did was buy index funds.

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Re: Investing Process - or how to think about investing

Post by Mister Imperceptible » 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).

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

Post by Kriegsspiel » Fri Feb 09, 2018 12:10 pm

It depends on what the index is.

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

Post by IlliniDave » Fri Feb 09, 2018 2:05 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).
There are index funds for short-term treasuries, eg VSBXS.

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Re: Investing Process - or how to think about investing

Post by Mister Imperceptible » Fri Feb 09, 2018 4:07 pm

I just wanted to clarify for noobs reading who are not aware of the risk barbell that an index tracking stock returns is not the “90% super safe” as I understood it. 90% into a fund tracking the S&P 500 isn’t super safe. If I am wrong about Taleb’s idea and am revealing how much of a noob I am, please inform me.

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Re: Investing Process - or how to think about investing

Post by jacob » Fri Feb 09, 2018 4:23 pm

Correct...

Except, the Barbell is not really Taleb's idea. Keeping 90% in cash and swinging for the fences with the remaining 10% was a popular risk-management strategy in the 1950-60s. You know you can never lose more than 10%. This was before EMH and MPT redefined "risk" as price-volatility (=L2-standard deviations of down as well as up-moves) rather than "how much do I stand to lose" (=L1 of down-moves only) which makes a lot more sense from a practical perspective.

I suspect that a big reason for this is that L2-norms are mathematically more tractable making it possible to write mathematical finance papers. However, I have never met a person who has lost or gained anything measured in "square-dollars". To wit, under L2, it's worse to lose $2 once than it is to lose $1 thrice.

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Re: Investing Process - or how to think about investing

Post by IlliniDave » Fri Feb 09, 2018 5:22 pm

jacob wrote:
Fri Feb 09, 2018 4:23 pm
However, I have never met a person who has lost or gained anything measured in "square-dollars".
Maybe if they used std dev it would be better :) I agree that equating risk with variance or whatever never sat well with my intuition unless you fold in so-called behavior errors of the sell low-buy high family. To extend your dollar observation, it is worse to gain two dollars once than to lose one dollar three times.

That said, I begin to feel myself wishing for more stability as my day draws near, but I'm not a full-on barbell candidate. In a sense the generic stock/bond portfolio mimics the barbell, just less extreme on both ends and you trade a lot more downside exposure for expectation of a higher probability of doing well on the upside (unless maybe you are an elite stock picker even among the ten percenters or just get lucky in the barbell scenario). But in the spirit of what you said, driving over a cliff is far worse than a bumpy road. To navigate this I'm probably going to wind up going for overkill on the hoard side, despite all my present plans.

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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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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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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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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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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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:

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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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