Noob Investor Asks Noob Questions for the 10,000th time

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Jin+Guice
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Jin+Guice » Mon Aug 27, 2018 12:44 pm

@wood:

Thanks for the specifics this is very helpful. When you say "financial reports" you're referring to those issued by the company itself correct? Are there specific reports you read/ don't read or do you read everything?

@Bankai:

I know what my goals are but I don't know what my strategy should be.

Do you have a good book/ resource outlining the different strategies?

My goal is to be able to take a mini-retirment within the next 10 years and be able to semi-retire within the next 15 years. Here I'm defining semi-retirement as being able to take income from investments while still being on a trajectory to be financially independent at or before "normal" retirement age (I'm currently 31). With my current savings and savings rate I'd be financially independent in ~15 years assuming my savings kept pace with inflation but had no real returns.

wood
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by wood » Mon Aug 27, 2018 3:15 pm

I mean those issued by the company itself yes. Annual reports are a minimum, but they are usually 100+ pages long and I don't read everything. They tend to be repetitive. I browse through them. That being said, I'd be intrigued to read analysis made by other people, especially those focused on financials, because they can provide counterpoints to my own (in my opinion well researched) conclusions. I don't care if the analysis was made by an amateur, forumite, bank or professional analyst; as long as it make sense to me and is based on facts it's worth my while.

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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Generation-X » Mon Sep 03, 2018 3:10 am

Did you know that the stock market rises about 70% of the time? That means 30% of the time, the market is falling.

If one took snap shots of the market at any random point in history, 7 out of 10 times it was rising and 3 out of 10 times it was falling.

No one will find such a positively biased game at any casino in the world. So why not time the market?

The problem is that no one know the future. It is not possible to consistently predict and avoid the 30% of the time when the stock market falls.

It is also not possible to consistently predict the market's best days. Dow returned 6.6% from 1997 to 2011 in 3768 trading days.

But had you missed 40 best trading days during that time, the Dow would have returned -5.8%.**

** Putname Investments, "Don't Miss the Market's Best Days," Investor Education 2011

S&P returned 9.9% in 15 years from 12/31/02 to 12/31/17. But had you missed the 40 best trading days during the 15 years, the S&P would have returend -2.62%.***

*** https://www.putnam.com/literature/pdf/II508.pdf

This is why people like MSK's experience makes a lot of sense:

"Save and invest 30% of after tax income, year in, year out. What you do with the rest does not matter much."

* 30% after tax income limits risk - "Don't put all your eggs in one basket". Keep the 70% each year and risk only what you can afford to lose.

* 30% PER YEAR follows the dollar cost averaging strategy - this strategy only works if the medium of storage moves up on the average. Using history as a guide, this is what the stock market does, rising 7 out of 10 times.

* "The market", whether it's the DOW, S&P 500, Wilshire 5000 or Total world stock index, all offer diversification to not "put all your eggs in one" stock.

The key is being consistent and having patience with a long term horizon.

Being consistent year in and year out is like saving - even a drop in the bucket, given enough time, will fill the bucket.

Having patience with a long term horizon allows for an uninterrupted compounding without missing those 40 best trading days.

Bottom line, if the market dynamics were to somehow change for the worst moving forward, the worst it can be is loss of 30% after tax income per year. Still get to keep 70%.

If there is money left over in the 70% after living expenses, then one can still dabble in individual stocks, real estate, vintage cars, slot machines, etc. -- again, don't put all your eggs in one basket.

There is no risk-free investment. MSK's play book, in essence, is about managing risk because the act of investing is risky.

It limits how much is risked (30% of after tax income per year), it invests in a storage medium with a very low expense of ownership (cost of ownership in index is very low- i.e. VOO .04% per year), it takes a calculated risk on a historically positively biased storage medium (the stock market), it takes advantage of bargains when prices are lower (dollar cost averaging), it takes advantage of compounding (long term horizon) and it uses a storage medium that does not demand too much time from its risk takers.

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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Mister Imperceptible » Mon Sep 03, 2018 9:59 am

@Gen-X

That Putnam link assumes you are missing the best days and yet still absorbing the worst days? Seems like dishonest cherry-picking on their part.

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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Generation-X » Mon Sep 03, 2018 5:14 pm

What both MSK and Putnam are advocating is to avoid market timing and to stay invested with a long term horizon - as market timing may result in missing the market's best days, which aren't many. And the market's best days, which can be as few as 40 days, can make or break the investment return.

In the case of the Dow, what are the chances of catching just one of the best 40 days out of 3768 trading days by market timing? It's about 1% (40/3768). That meant one would have missed 99 times out of 100, trying to catch just one of those 40 best days by market timing in that period.

The act of investing is a risk. The longer one stays in the market, the higher the risk. There is no guarantee of an investment return.

Therefore, one limits the risk by risking only the amount that one can afford to lose. What worked for MSK was 30% of his after tax income. He still kept 70% of his after tax income.

He further reduced risk by choosing an investing medium (stock market) that is historically in his favor, one that goes up 7 times out 10 at any point in history.

By choosing index as a way of participating in the stock market, he further reduced risk by spreading his eggs into multiple baskets (companies, i.e. stocks), rather than a single basket (company).

He further limited risk of lower return by choosing index to control what it costs to participate in the market to absolute minimum. Cost of commissions of owning 30 (Dow) or 500 (S&P) or let alone 5000 (Wilshire) individual stocks can become very expensive, especially when keeping the cost of buying or selling stocks (commissions) to less than 1% - at a typical $5 commission to buy stocks, one would need to buy $500 worth of stocks in a single company to keep the commission to 1%. But since one must also sell, to keep the $10 in commission to both buy and sell a stock to 1%, one would then be required to buy $1000 worth of stocks in a single company. Multiply this by 30 companies (Dow) would mean $30,000, by 500 companies (S&P) would mean $500,000 and by 5000 companies (Wilshire) would mean $5,000,000 of stock purchases to keep the commission at 1%. In contrast, VOO's commission is 0.04% per year. Using median income of 59K at 15% tax rate and taking 30% of after tax income and investing with an assumption of 10% market return each year, the break even point between purchasing individual stocks at $10 commission round trip vs. index at 0.04% expense ratio is as follows: Dow 30 ($300)- about 8.5 years. S&P 500 ($5000)- about 25.5 years. Wilshire 5000 ($50,000)- about 46.5 years.

While limiting risk, he added leverage by dollar cost averaging (buying year in year out, consistently, which buys more stocks during the market dips when stocks are cheaper) and compounding (long term horizon of preferably > 30 years).

So MSK's play book is a limited risk, leveraged gain attempt at investing that does not take too much time and is pretty much on auto pilot.

It relies on historical observation that on the average, the market moves up more than it moves down, and given long enough time (>30 years), generally comes out ahead.

What it does require is a long exposure to market risk (> 30 years) and consistency (30% after tax income contributed year in year out).

Clearly, the 30% can be adjusted per risk tolerance as to what one is willing to lose per year - i.e. 10%, 15%, 20% etc. with an understanding that less leverage equals less return when the market performs.

The beautiful thing about MSK's approach is that while this is left on auto-pilot, one can pursue to their heart's content and chase individual stocks, real estate, vintage cars, slot machines, etc. with the remaining 70% of income, on what's left after living expenses.

To quote MSK: "Save and invest 30% of after tax income, today onwards. That's what matters, the rest are just details that you can analyse ad nauseam over the next 3 decades "

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Bankai
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Bankai » Mon Sep 03, 2018 5:47 pm

Generation-X wrote:
Mon Sep 03, 2018 5:14 pm
And the market's best days, which can be as few as 40 days, can make or break the investment return.

In the case of the Dow, what are the chances of catching just one of the best 40 days out of 3768 trading days by market timing? It's about 1% (40/3768). That meant one would have missed 99 times out of 100, trying to catch just one of those 40 best days by market timing in that period.
I can construct an argument that by timing the market and avoiding the worst 40 days one can greatly increase investment return. And it makes about the same sense. What they conveniently omitted is the fact that the best market days usually follow the worst ones - i.e. period Sep-Dec 2008 had multiple 4%+ moves in both ways. By 'timing' the market and going cash one would avoid both and could potentially come up on top by going back in after the market started going up again for a few months.

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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Generation-X » Mon Sep 03, 2018 5:59 pm

Bankai wrote:
Mon Sep 03, 2018 5:47 pm
I can construct an argument that by timing the market and avoiding the worst 40 days one can greatly increase investment return. And it makes about the same sense. What they conveniently omitted is the fact that the best market days usually follow the worst ones - i.e. period Sep-Dec 2008 had multiple 4%+ moves in both ways. By 'timing' the market and going cash one would avoid both and could potentially come up on top by going back in after the market started going up again for a few months.
No one can predict the future and that's why we take the risk. If everyone knew which were the best 40 days or the worst 40 days of the market in the next 15 years, then everyone would be rich.

I can give you better odds by limiting it to the next 2 years. Let me know which 40 days in the next 504 trading days would be the best days and worst days I will be sure to invest my entire half million dollars net worth for a guaranteed profit. :)

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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Bankai » Mon Sep 03, 2018 6:30 pm

It might very well be that the market is impossible to time on a consistent basis. My point was against arguing for this by using cherry-picked data and ignoring the context.

Also, I could give you the exact days but this would not do any good to you - getting into habit of buying on tips from strangers online you'd eventually lose it all :)

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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Generation-X » Mon Sep 03, 2018 6:55 pm

Bankai wrote:
Mon Sep 03, 2018 6:30 pm
It might very well be that the market is impossible to time on a consistent basis. My point was against arguing for this by using cherry-picked data and ignoring the context.

Also, I could give you the exact days but this would not do any good to you - getting into habit of buying on tips from strangers online you'd eventually lose it all :)
That may be :)

MSK's play book is an illustration of an investing approach that limits risk and adds leverage while not time consuming and easy to manage for the OP to consider.

It points out the constraints, the risks and why. I believe the OP is looking at an individual stock selection, which is much harder and not necessarily with better results in terms of market return. Predicting the future can not be reliably done, even from strangers online :)

And the nice thing about it is that OP can implement both approaches at the same time, because it is inherently risk limiting (30%). This would again, be spreading risk by not putting all your eggs in one basket (or method of investing).

Thanks for proving the point.

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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Jin+Guice » Fri Sep 07, 2018 1:44 pm

@Generation-X:

MSK is only saving 30% of his income though right, he spends the other 70%. So he is going with a 100% index investment strategy in invest funds, no? Maybe I'm misremebering or reading it incorrectly?


I just saw @MI's anti-index investing thread pop back up and I think we may be asking the same thing. I imagine a lot of people on here have this same question.

When I say I'm a noob investor I mean I know enough to realize I know nothing. I've read through a lot of old threads on this forum, the book and the blog. Aside from constant arguing about whether buy and hold works or not the basic theme is that it takes time and effort to develop an investment strategy. This is because it involves a certain level of understanding and no one can tell anyone how to do this, just like no one can tell you how to play guitar. However, it is possible to tell someone how to start learning how to play guitar.

A lot of people are recommending the curriculum: http://earlyretirementextreme.com/start ... sting.html

Has anyone completed this? Do you agree that this is a good starting point? What did you do after this?


I'm still working my way through the resources in this post, thanks again for sharing them. If anyone has any other good resources please continue to share.

In the OP, when I said I don't want to read financial statements, I didn't mean I'm not willing to if that's what it takes. I want to know enough to know what I have to read so I can minimize this. I was also trying to encourage informed left-field strategies like:
7Wannabe5 wrote:
Wed Feb 07, 2018 6:31 am
You could buy timber land, Barbie Princess dolls in original packaging, meat rabbits, and silver. IOW, there might be markets in which it is possible to gain enough expertise to make 10% on $50,000 in the same amount of time/effort you would have to invest to make 5% on $100,000 in the stock market as reflected in the index. Jacob has an IQ above 160, so he can be a big fish in a big pool. Other people who would need to study 3 or 4X as hard/long as Jacob to still not quite get it, might be better off exploring local or niche markets. For instance, I doubt you would have to worry about players of Jacob's caliber showing up at a Barbie Swap/Meet in Kenosha, Wisconsin.

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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Generation-X » Fri Sep 07, 2018 6:38 pm

Jin+Guice wrote:
Fri Sep 07, 2018 1:44 pm
@Generation-X:

MSK is only saving 30% of his income though right, he spends the other 70%. So he is going with a 100% index investment strategy in invest funds, no? Maybe I'm misremebering or reading it incorrectly?
Finding a direction - What next?

Post by flyby » Wed Nov 22, 2017 10:58 pm
New learner here with basic knowledge, just finishing the Bogelheads Guide and pondering my future of investing, having a difficult time on deciding where to go next. Quick base line on where I am at and what I am doing,

Just turned 29, married with one child. Mostly single income family with my wife’s small supplemental income on the side from a home business (very little now with a newborn at home). We live in a rural and low cost of living part of the country, bringing in a gross 115k household. Currently maxing 2 Roth IRAs, with my employer 401k at 10% total after match. They just opened up a Roth 401k option which I am moving to (Vanguard 2055 funds for now). Current retirement accounts come to 105k. We do have a 6 month emergency fund. We live fairly modestly but love to travel and I have an expensive aviation habit as well that will soak up a good deal of spare fun money. Hence why we keep a very modest home (below 100k) and lower cost vehicles to enjoy the other areas of life. Only debt load is a 11k vehicle note at 2.9% and 38k left on the house. We intend to have no more debt load than that until we decide to upgrade in home, where we will be rid of any other notes and keep mortgage only debt.

I feel I need to be more aggressive in investing and strategy. I am at a point I feel I need to find an edge to get ahead with more creative investing. I however don’t want to dive into something to regret it. There’s a lot of bait out there for people wanting to get ahead. What will this be? Stay the course and keep investing early and often on the course i am already going? Taking a step back and asking the experienced minds....


Re: Finding a direction - What next?

Post by msk » Sat Nov 25, 2017 3:14 am
Too much paralysis by analysis. Just open a brokerage account (Interactive Brokers is my current favorite), fill out all your tax advantaged opportunities, use your surplus savings to purchase VT (Vanguard Total World) and then spend more time analysing and contemplating what next, how to fine tune, 3 ETFs, etc. Pity, you just missed a ludicrously good, irrationally exuberant stock market year (up 20+%!) while awaiting revelation. Revelation ain't coming. Save and invest 30% of after tax income, year in, year out. What you do with the rest does not matter much. I just worked out what you can look forward to, if the next 50 years is similar to the past 50, totally invested in the SP 500 from age 30 and a $50k income:

Mediocre careers with your incomes just keeping up with inflation: you can retire at age 57 with a Net Worth of $2.5 million
Average careers with your incomes rising at 1% p.a. above inflation: you can retire at age 60 with a Net Worth of $3.8 million
Good careers with incomes rising at 2% p.a. above inflation: you can retire at age 64 with a Net Worth of $6.7 million

I define free-to-retire-age at a point when your Net Worth = 25xIncomex0.7 (since you no longer have to save and invest that 30%). It comes later with better careers since your income rises much higher, but in all cases you do not need to drop your standard of living an iota upon retirement. Save and invest 30% of after tax income, today onwards. That's what matters, the rest are just details that you can analyse ad nauseam over the next 3 decades


https://www.bogleheads.org/forum/viewto ... 0#p3633022

********************************************************************************************************

First time investor looking to jump in market but apprehensive with record highs

Post by metfan99 » Tue Nov 21, 2017 9:30 am
Hi all,

I am a new Boglehead. I was tempted to work with a financial planner, but read repeatedly that it would make more financial sense to go at it alone with the infinite wisdom of friends and this board. My wife and I bought our "forever home" and want to enter the market. We stockpiled a good bunch of money (about $360k), and want to prudently enter the market. We are concerned about entering at all-time highs, but obviously want to make our money grow. We both work for the government, and have a young child with expensive day care costs, so we really are counting on that $360k to be our means to grow money, and pay for things like home renovations down the way. Would appreciate any advice on how to proceed with investments. Would dollar cost averaging over a period of time make sense? Below are some details about us. Any advice on asset allocation, any particular stock or bond funds that would make sense,and how much we should enter at a time would be very much appreciated! We also want to build a 529 fund for our daughter, I know everyone says retirement funding is most important, but the college planning is quite important to us too.

- we are both in our mid-30s
- mortgage of $550K (very high property taxes of $21k), 3.5%
- each have approximately $145K in a TSP lifecycle fund, we each contribute $7,800 per year Roth
- $360k currently in a 1.1% money market (want to keep 60k of that for emergency fund but invest the rest)
- $5k in Utah Vanguard 529 plan (contribute $500 per month towards it)
- we want to be able to create long term savings, but also have some accessible money for things like kitchen renovation in next 3-5 years
- for now we could probably save an additional $10k per year, but if we have a second child, we'll break even living off salaries

Thanks so much!

Re: First time investor looking to jump in market but apprehensive with record highs

Post by msk » Tue Nov 21, 2017 10:15 am
I lived by these rules-of-thumb since my student days, retired early at 55, now at 73. Your life trajectory will be different, but these rules did well by me, currently at 8 figures NW:

1. Save and invest 30% of after tax income. Payment of principal on a home mortgage counts, but not interest.
2. Never buy a house worth more than 3x annual income, or 2.5x joint income. You may afford the monthly payments but expensive homes carry expensive maintenance commitments, be it landscaping or air conditioning.
3. Never acquire a car (or cars if multiple), by purchase or lease, worth more than 6 months income.

The most important one is 1. If you practise that diligently you never have to think of when you are jumping in, timing, since your investments in subsequent years will be much larger than your initial buy into the stock market. The stock market is almost always at its highest, so trying to time it is a toss up, with you as the probable loser. If the stock market makes you terribly nervous, perhaps you can repay some of that large mortgage. It'll 'earn' you an interest rate higher than bonds, and unless you have been very unlucky in choosing your home, its value ought to keep up with inflation, perhaps even rise beyond that, possibly even well beyond inflation in a HCOL area. IMHO there is no such thing as a forever home in your 30s. If you satisfy 1. above you will almost certainly be much wealthier in your late 40s than you are now, and probably will wish to upgrade... Anyway, I have always considered paying off the mortgage on my home as a high priority, if only for the feeling of security. Keeping a lot of cash aside for possible renovations, etc. is IMHO a waste of investment time. Fund the renovations from next year's 30% savings, or the following years'...

https://www.bogleheads.org/forum/viewtopic.php?t=232788



The act of investing is a risk. The longer one stays in the market, the higher the risk. There is no guarantee of an investment return.

Therefore, one limits the risk by risking only the amount that one can afford to lose.
What worked for MSK was 30% of his after tax income. He still kept 70% of his after tax income.

So MSK's play book is a limited risk, leveraged gain attempt at investing that does not take too much time and is pretty much on auto pilot.

It relies on historical observation that on the average, the market moves up more than it moves down, and given long enough time (>30 years), generally comes out ahead.

What it does require is a long exposure to market risk (> 30 years) and consistency (30% after tax income contributed year in year out).

To quote MSK: "Save and invest 30% of after tax income, today onwards. That's what matters, the rest are just details that you can analyse ad nauseam over the next 3 decades "

*** Note that currently, the stock market is highest it has ever been in history. Everyone knows it will fall some time. But what no one can tell you, is WHEN, BY HOW MUCH and WHEN WILL IT BOUNCE BACK AGAIN after falling. Because no one knows the future.

Why bet the farm? Investing is a risk. There is no guarantee of an investment return. What MSK has supposedly experienced is that, for him, risking just 30% of his after tax income each year, year in and year out and staying invested for 50 years has worked out for him.

Time is your greatest asset. Be consistent and be patient with an investment horizon that's > 30 years. Risk what you can afford to lose.

Jin+Guice wrote:
Fri Sep 07, 2018 1:44 pm

A lot of people are recommending the curriculum: http://earlyretirementextreme.com/start ... sting.html

Has anyone completed this? Do you agree that this is a good starting point? What did you do after this?
IMHO, it takes a life time to get a sense of investing in the stock market (and then some). The books listed are textbooks for undergraduate course in finance and the like and will provide the basics.

Best way to learn is by doing - there is nothing like experience. Problem is, it will be a full time job. And experience costs money because mistakes usually mean losing money. One may experience losses for years before becoming profitable.

There are additional skills that one must be competent in than just buying or selling stocks in order to make investment profitable. In addition to ample hours spent in research and analysis, being able to manage money, taking risks and controlling emotions will be critical - not something one learns by taking classes in college nor can they be learned overnight. You will meet yourself in the process.

You will also become intimate with IRS rules and filing taxes - because they affect investment returns. By the time you get this far, you will probably know most, if not all, of the stock tickers listed in the s&p500.

And before you can do any of these things, first you must learn to become a saver and have enough cash to invest with. Else have a stable income that provides enough spare cash after living expenses. After all, investing is an act of forgoing and delaying present consumption and taking chances for possible future gains.

It will be a lot of work. No guarantee that success will be proportional to time spent in the process. There is a reason why index investing is advocated for most people.

Are you truly prepared for this?

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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Jin+Guice » Sat Sep 08, 2018 6:42 pm

@Generation-X: Thanks for your continued responses to my investment questions.
Generation-X wrote:
Fri Sep 07, 2018 6:38 pm

It will be a lot of work. No guarantee that success will be proportional to time spent in the process. There is a reason why index investing is advocated for most people.

Are you truly prepared for this?
This is a question I've asked myself before. This is why I initially liked indexing and currently index. The problem I see with this, and which has been expressed many times on this forum, is if I'm trying to retire extremely early, stashing all of my cash in an index fund with 0 understanding is a poor choice. This basically means I'm expecting to derive all of my income from a process I don't understand at all.

I read a large part of your journal. You don't seem to index? Perhaps you've executed or are executing the process you're warning against? What did you do? How did you learn?

Surely you're aware of the criticisms of index investing. Do you advocate blindly piling money into an index fund without understanding the mechanisms? How do you feel about the record high stock market? I'm sure MSK would tell me to keep DCAing 30% of my income into the storm forever, what would you tell me?

The other option I see in the naive realm is simply holding cash or a cash equivalent. With interest rates in the toilet I'm not confident cash equivalents are keeping up with inflation. Do you think this is a worse method than indexing?

When you say things like "You will meet yourself in the process" you make me want to learn how to invest. When you say something like "You will read a lot of 10-ks" you make me want eat my foot. I may be willing to eat my foot to meet myself.

It is true that I am looking for the easy way out. However, Jacob's blog posts on the subject and reading this forum have convinced me that "punting" on my eventual source of income is, perhaps, a bad idea. Generation-X, what would you recommend doing in my position, given what I have shared. Some additional information which may or may not be pertinent, I have a high savings rate (>50%, currently) and low expenditures.

Like it or not, I'm not going to follow one strangers advice on the internet. You strike as a thoughtful and well-informed individual so I will certainly consider it.

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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by trfie » Sat Sep 08, 2018 7:42 pm

Jin+Guice wrote:
Sun Aug 26, 2018 5:00 pm
What exactly do y'all look at when you're thinking about buying an individual stock? Does anyone do any sort of analysis on index investing or are y'all passive as I am now? How do you decide what asset classes outside of stocks to hold and how do you decide when to buy them?
Index investing, as most persons use the term, is by definition passive. I'll repeat the same advice I gave before - read Burton Malkiel's book. If you don't understand index investing, how can you make arguments or choose another strategy that goes against it?

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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Jin+Guice » Sat Sep 08, 2018 8:40 pm

@trfie: Are you referring to A Random Walk Down Wall Street? I've read this book. I've read Benjamin Graham's Intelligent Investor. I haven't read many other investment books. I've read all of Jacob's blog posts about investing. I've read all of MMMs blog post about investing. I've read summaries of EMH. I've read other blog posts linked to in other threads and am working my way through the blog posts/ blogs linked to in this thread. I have an econ masters and have taken a class in finance before. Perhaps I've made myself out to be more of a complete noob than I actually am. I would still say I'm a noob. I know enough to know that I don't know what I'm doing.

By analysis on index investing I meant timing index funds not simply DCAing.

This is my understanding of the argument for indexing: The efficient market hypothesis asserts that financial markets already contain all information and are priced accurately. New information is immediately reflected in the price and only large professional institutional investors with the fastest technology have any hope of profiting from price corrections, because this is how fast they happen. Investing with one of these professionals is unwise because it is 1) difficult to tell if the investor is one of the extremely rare managers who beat the average or just lucky and 2) all funds charge high fees. If exposure to an asset class is desired it is best to buy an index which passively (to reduce costs as much as possible) tracks that asset and by definition earn the average return. Because it is impossible to predict which direction the market is heading dollar cost averaging should be employed. The U.S. stock market has historically increased in the long run due to an expanding economy, so simply buying an index tracking this is the smartest bet for the average small investor. Bonds are historically uncorrelated with stocks so to counterbalance stocks a bond fund should be purchased.

I realize the last 2 sentences are not necessarily part of the plan, but this is the most common advice I've seen. Other variations on this theme are the Browne's Permanent Portfolio and Tyler9000's Golden Butterfly. These are more sophisticated variations on the theme above that seek to preserve as much expected return as possible while minimizing volatility.

I put that shit in blue to highlight that this isn't me expressing a belief it's me explaining my understanding of a concept because I know indexing is controversial around here.

Does anyone not think this is an adequate description of a buy and hold index strategy? If not can you explain it better or point me to a resource that does?

The point of this post is not to be like, JK actually I'm a total investment baller, nor is it meant to directed at one person. I'm trying to demonstrate that I understand (or at least think I understand) a passive index investing strategy*. I appreciate everyone's responses but I don't think reading more about passive index investing is going to be very informative at this point. I know some of you follow this strategy, think it's great and may not want me to go off course. I'm trying to expand my knowledge of investing because it's an important part of ERE. I'm not saying I'm definitely going to abandon passive index investing (again, this is my current strategy) and I'm not saying I'm going to keep it.

*I know it's a subtle difference but I am still learning about different asset classes, so resources such as Tyler9000s blog are super helpful. I don't understand what the point of owning gold is yet.

Mister Imperceptible
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Mister Imperceptible » Sun Sep 09, 2018 1:16 am

@Jin+Guice

The point of owning gold is that it goes up in nominal price when bubbles in stocks and real estate are revealed for what they are. We are currently in such a bubble, and are awaiting the curtain to be drawn.

Huge amounts of debt begin to collapse, because everyone has borrowed from Peter to pay Paul, and now all the Peters want to collect, simultaneously. Of course, the money to pay Peter doesn’t exist, it is revealed that everyone was full of shit, and none of the investments being made with borrowed money were actually creating any real wealth. Individuals and firms begin to sell assets, which drive prices down, and everyone who had used those assets as collateral, must also sell, and you get a vicious loop of deflation and collapse. The central banks, having created these messes with easy lending policies and creating money out of thin air, are forced to.....create still more money out of thin air. If you happen to own 10 gold coins, they do not become anything more than 10 gold coins. However, if previously there were $10 trillion dollars in existence, and now there are $20 trillion dollars in existence, those gold coins are worth “double” in nominal terms, because the supply of gold is relatively fixed compared to an exploding money supply. Gold hasn’t “gone up,” it has merely stayed the same, while stocks and real estate (and indeed even the real value of your cash) adjust suddenly and violently downward. This is confusing because we have been brought up to look at everything through the lens of “dollars” when what a “dollar” is, is less and less all the time.

I highly encourage you to check out the “Swiss Vote on Fractional Reserve Banking” thread. Or, read the works of the Austrian economists, Mises, Rothbard, Hayek.

Here are some links:

http://austrian-library.s3-website-us-e ... Market.pdf

https://mises.org/sites/default/files/T ... tion_2.pdf

http://edelweissjournal.com/

https://seekingalpha.com/article/417754 ... er-meeting

viewtopic.php?f=3&t=1323&start=1320#p173467

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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Generation-X » Sun Sep 09, 2018 5:23 pm

Jin+Guice wrote:
Sat Sep 08, 2018 6:42 pm
I read a large part of your journal. You don't seem to index? Perhaps you've executed or are executing the process you're warning against? What did you do? How did you learn?
I started index in the latter part of 1999. Stopped in 2001, then started back up again in 2006. Swore it off in 2009. Hindsight being 20/20, I should have been retired already had I stayed the course - in mere 20 years nonetheless.

But I was young and did not have the patience nor the foresight to look beyond only the next few years. This is what I learned about myself. And I will not be making the same mistakes again :)

The observations in earlier posts are what I learned from this experience of 20 years. I wasn't copying anybody.

I have already started indexing again this year, but in small amounts. I have adopted some variations* on the surface that exihibit elements of market timing but it's actually risk management. It's still vanilla indexing.

I am also engaged in multiple other investment strategies in parallel - value investing (stock picking), swing trading and dividend growth or combinations thereof.

Jin+Guice wrote:
Sat Sep 08, 2018 6:42 pm
Surely you're aware of the criticisms of index investing. Do you advocate blindly piling money into an index fund without understanding the mechanisms? How do you feel about the record high stock market? I'm sure MSK would tell me to keep DCAing 30% of my income into the storm forever, what would you tell me?

The other option I see in the naive realm is simply holding cash or a cash equivalent. With interest rates in the toilet I'm not confident cash equivalents are keeping up with inflation. Do you think this is a worse method than indexing?
Since I already covered the mechanisms of index in earlier posts, I will address the remaining questions. The record high stock market in my opinion, is a opportunity of a lifetime for those willing to take advantage of it.

For a swing trader, this is a once in a lifetime opportunity to profit from its downfall. For a value investor, this is a once in a lifetime opportunity to buy quality companies on the cheap as it rebounds.

For the dividend growth investor, this will be an opportunity to weed out and keep the companies that are resilient. For indexers, this is a time of leverage. However, all these opportunities are moot without any cash to execute them with.

A stable income is the bedrock that underlies everything. For those of us that work, income is what's at risk the most during times of opportunity. So the next best thing, is to have spare cash - and preferably lots of it.

For the index that I just started, I will not bother to look at it for the next 30 years. Fortunately, this will have a much younger beneficiary. The 30% is arbitrary - what is the percentage that one can afford to lose?

Jin+Guice wrote:
Sat Sep 08, 2018 6:42 pm
When you say things like "You will meet yourself in the process" you make me want to learn how to invest. When you say something like "You will read a lot of 10-ks" you make me want eat my foot. I may be willing to eat my foot to meet myself.

It is true that I am looking for the easy way out. However, Jacob's blog posts on the subject and reading this forum have convinced me that "punting" on my eventual source of income is, perhaps, a bad idea. Generation-X, what would you recommend doing in my position, given what I have shared. Some additional information which may or may not be pertinent, I have a high savings rate (>50%, currently) and low expenditures.

Like it or not, I'm not going to follow one strangers advice on the internet. You strike as a thoughtful and well-informed individual so I will certainly consider it.
What's your ultimate goal? Will winning the lottery change your mind about investing and early retirement?

I ask because after many years spent thinking about investing and early retirement, and watching the net worth grow, I realize that if anything has changed at all, it is that now, I can be made quite content with very little material things or money than before.

So having net worth of 100k versus 600k has made very little difference in my life. I'm of the opinion that having more money will not change anyone's life that drastically because that has been my experience.

Heck, I still think about college days when a bunch of us would go out and do crazy and silly things and yet we were as happy as we could be, even though we were all broke and didn't have a penny to our names.

I ask, because investing for me has literally been like this quote - "Enjoy the journey, not the destination."

So perhaps a better question may be: what is causing you to hasten your journey?




*Indexing is cheap, easy and doesn't take that much time. What's not to like? I am more worried about not taking any action, waiting for a revelation. Time, once lost, is lost forever - and investment gains follow time.

If indexing is wrong moving forward, then I lost a bit of money. If it's right, then with luck I may follow the footsteps of those like MSK. There are no guarantees. It's the greater fool theory. Do you think real estate is any better? Value investing? No one knows the future - in pretty much ANYTHING.

So if risk must be taken for reward and no one can predict the future outcome, then why not play the game that has the PROBABILITY*** in one's favor but risk only what one can afford to lose? Around 5%-15% range of my income is in index per year.

As the length of the bull market gets longer and longer, approaching the tail end of the normal curve where probability of bull market continuing is not likely**, I tend to stick to the 5% side.

This is like managing bet size playing blackjack when the count is not in my favor. As market dumps, I plan to stick to the 15% side.

**"market life-expectancy profiles" pp 131-136 of Trader Vic II by Vic Sperandeo.

*** If one does not buy any lottery ticket to participate in the lottery, then it is a CERTAINTY that one will not win. But if at least few tickets are purchased, then the probability of winning is 1 in hundred million plus, or much less than 0.00000001 percent chance of winning. Not nearly as good as 7 out of 10 or 70%. In engineering, we approximate 0.00000001 and call it zero. This is the reason why I do not buy a lottery ticket and instead index.

Mister Imperceptible
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Mister Imperceptible » Sun Sep 09, 2018 8:38 pm

There is something of managed risk in what Gen-X is saying that compares to the Larry Portfolio.

https://portfoliocharts.com/portfolio/larry-portfolio/

The idea being that you isolate equity risk to about 30% of your portfolio. Historically, 25-40% of your portfolio has been optimal from a risk-adjusted standpoint. That’s why the Permanent Portfolio has 25% in stocks, and Tyler9k’s Golden Butterfly has 40% in stocks, and one of the most popular actively managed funds, Vanguard’s Wellesley, has had a stock allocation of around 35%.

https://investor.vanguard.com/mutual-fu ... file/VWINX

Where I think the Larry Portfolio and the Wellesley Fund fall short in the current QE/ZIRP/negative real interest rate environment, is that stocks and bonds, which were previously uncorrelated, now appear correlated. Bond rates were ridiculously high in the early 1980’s, after Volcker had hiked rates continuously to halt the inflation that came with the end of the gold standard. Since the early 1980’s, any stock market crisis could be mitigated by dropping rates (“refinance the debts”). Now bond rates have been up against the lower zero bound for some time, which necessitated QE. If bond rates go up, bye bye stock market. Look up the “Taper Tantrum” in 2013. Bernanke said he was going to “taper” purchase of bonds (QE), everyone was losing their shit. We are in unchartered territory and what has always worked in the past won’t necessarily work in the future. Bonds look to me look especially lousy because the value of cash and fixed income is being destroyed by inflation. In this bizarro world, I like gold mostly because I don’t like anything else.

You have to make a play somewhere. Gen-X has his way. I have a modest rental property. I also have a strong contrarian bent. What is everyone else doing? I want to do the opposite. You want a blend of upside and safety. Stocks and bonds are expensive right now, so upside is low and downside is very big. Gold is two-thirds off its all time high and could benefit very nicely from a crash. That’s where I’m making a concentrated bet. Won’t necessarily work, but I’d rather do that than follow the herd.

Even Dr. Fisker can’t give you advice because no one knows what is going to happen. Go back and look at the Investments Trade Log back in 2011, 2012. The Permanent Portfolio was all the rage and the stock market would be tanking any minute. Now in 2018 that stock market is at all time highs and gold is a dog of an investment, according to everyone. Get the idea?

We’re all stumbling in the dark. No one strategy, investment, or portfolio is sacrosanct. Make bets with the best limited information you have. Make sure you have a cash buffer. Try in every instance to have a margin of safety, both in the macro with regards to all your funds, and in the micro with respect to a particular investment. Take heed of what Gen-X says about his experiences getting into and out of the market. Never panic.

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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Mister Imperceptible » Sun Sep 09, 2018 9:50 pm

Another consideration. Like me you are an early accumulator. In an up market, you will likely be able to continuously find gainful employment. I get hit up on LinkedIn all the time by recruiters. Even if my current employment did not continue, as long as the market is doing well, I should have no problem finding another job. I’m less concerned about how my investments are earning, because I’m contributing earned income faster than my investments can return appreciation and income.

If the market tanks, I lose my job, and am unable to find another one, is exactly when I would want cash and gold.

Your investment portfolio does not exist in a vacuum.

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Jin+Guice
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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Jin+Guice » Sun Sep 16, 2018 10:23 pm

Generation-X wrote:
Sun Sep 09, 2018 5:23 pm
The record high stock market in my opinion, is a opportunity of a lifetime for those willing to take advantage of it.

For a swing trader, this is a once in a lifetime opportunity to profit from its downfall. For a value investor, this is a once in a lifetime opportunity to buy quality companies on the cheap as it rebounds.

For the dividend growth investor, this will be an opportunity to weed out and keep the companies that are resilient. For indexers, this is a time of leverage.
I agree that the record high should be an opportunity, my problem is I don't know enough to know how to take advantage of it. I don't even know what a swing trader is or what you mean by "for indexers, this is a time of leverage." Record highs aren't great for indexers who are still buying, assuming that a crash will come. Are you currently still buying index funds or are you stacking cash?
Generation-X wrote:
Sun Sep 09, 2018 5:23 pm
What's your ultimate goal? Will winning the lottery change your mind about investing and early retirement?

I ask because after many years spent thinking about investing and early retirement, and watching the net worth grow, I realize that if anything has changed at all, it is that now, I can be made quite content with very little material things or money than before.

So having net worth of 100k versus 600k has made very little difference in my life. I'm of the opinion that having more money will not change anyone's life that drastically because that has been my experience.

Heck, I still think about college days when a bunch of us would go out and do crazy and silly things and yet we were as happy as we could be, even though we were all broke and didn't have a penny to our names.

I ask, because investing for me has literally been like this quote - "Enjoy the journey, not the destination."

So perhaps a better question may be: what is causing you to hasten your journey?
I want to learn about investing because I'd like to have the freedom that comes from earning some or all of my income passively. I'm currently working a job I don't like that pays a lot and has a lot of flexibility to stack cash. I'm not sure this is the right decision. I'm especially not sure if risking it in pursuit of growing it is the right decision. Winning the lottery would change my mind, I'd be much more concerned with capital preservation, which I feel is much easier to do.

I am already very frugal, I'm a noob investor but I'm not a noob to frugality. I agree that having few material wants will always trump a high net worth or investment skills. I want to learn how to invest to increase my freedom. Once we start accumulating money investment is a game we are forced to play, due to inflation. Why not play it well?

Thanks for your lengthy replies and taking an interest in my investing journey. I've been thinking about your responses all week.

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Re: Noob Investor Asks Noob Questions for the 10,000th time

Post by Jin+Guice » Sun Sep 16, 2018 10:30 pm

@MI

I realize no one can tell me what to do and no one knows the future. However, Jacob and the more advanced investors seem very confident in there ability to turn capital of several hundreds of thousands of dollars into several thousand dollars annually. When I read the posts they write it's like they are speaking a different language.

As for employment, I'm pretty employable. I have 3 employable skills and multiple income streams currently. Sometimes I ask myself why I'm putting up with a job I dislike to accumulate when I don't know what I'm doing with investments, and I could just live off of my air bnb income and side hustles.

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