Investing Process - or how to think about investing

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

Post by frommi »

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. But as jacob mentioned there are inefficiencies everywhere in the market, even a company as huge as Apple was mispriced in 2013. You just have to be open where to find them. Last week i made an option bet on a company where the options traded at a 100% implied volatility (and historically the stock was much less volatile). I was able to set up a trade where i make money regardless if the stock goes up 25% or down 90% in the next 6 months. Based on the probability distribution for these type of stocks this was a bet with a 75-80% success rate and i got 1:1 odds for that. (So my max risk is as high as my max win). Sometimes it just hits you with a bat in the eye that that can`t be efficient.

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

Post by frommi »

IlliniDave wrote:
Wed Feb 07, 2018 6:47 pm
jennypenny, I'm impressed that you can do that. Whenever I've tried to do the same my reptile brain sniffs out that it's a simulation making it too easy to be dispassionate and make it all like a mathematical homework problem. On Monday I "lost" enough money to buy a fishing boat, a trailer, and a high mileage used pickup to haul them around with. I didn't panic (actually didn't even know until after markets were closed), but all I could think about the rest of the night was "It's easy to be calm now while I have a paycheck coming in ..."
The funny thing is that i absolutely hate to lose money and thats the reason i will not be able to just invest in an index fund and call it a day. Knowing it is overvalued and than seeing it crash 50% would absolutely kill my confidence and my self esteem. Thats why i was always looking for ways to hedge my bets and take as little risk as possible even if it lowers my performance.

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

Post by Sclass »

Good luck with this.

I tried to write some stuff down but I wasn’t too happy with it. I’m not sure following other successful peoples’ techniques actually works. That is, I suspect in many instances while emulating perfect technique you’ll still screw up because it comes down to individual personalities or constitutions.

I read a lot of books in my early days by the big names of the 80s and 90s and consequently went on to lose most of my money. The good thing is I didn’t run away and I tried to learn from my lashings. This gave rise to a constantly evolving hunting technique I use to invest.

What is common to others’ methods is: research + analysis which results in a best guess and finally a bet sized on the confidence of the inputs. The power of the guess is what turns the whole game on its head. You are dealing with information that is not freely distributed at that point.

You can look at the problem upside down. What do 90% of the players do? Start by not doing that.

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

Post by slowtraveler »

@JP
What portfolio simulator would you recommend for a fairly complex but and hold portfolio?

I want to try 5 portfolios-

1) Half Wellesley half Wellington

2) A third Wellesley, a third s&p500 (buy each component in equal weight and make no subsequent changes, reinvest all dividends directly back into stock it was distributed from) and the last third international stock market (do same equal buy"" for top 500 components.)

3) No Wellesley but half and half of the stock components in (2).

4) Same as (2) but vtiax and vtsax instead.

5) Same as (3) but vtiax and vtsax instead.

Ideally I'd be able to upload an Excel of these trades to save the tedious work of simulating several thousand purchases.

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

Post by IlliniDave »

frommi wrote:
Thu Feb 08, 2018 1:08 am
The funny thing is that i absolutely hate to lose money and thats the reason i will not be able to just invest in an index fund and call it a day. Knowing it is overvalued and than seeing it crash 50% would absolutely kill my confidence and my self esteem. Thats why i was always looking for ways to hedge my bets and take as little risk as possible even if it lowers my performance.
I know exactly how you feel! But I've come to accept that it's part of it. An excess of confidence is arguably a trait that does not suit 'amateur' investors very well.

My belief is that risk and reward are, in the general sense, inextricably linked--investment return is the payment we get for putting our money at risk. I'm highly skeptical when I hear claims/promises of low risk and relatively high return. Lowering expected return for the sake of lowered risk is a valid approach to things if the conditions and/or a person's temperament warrant it. It's the path I'm presently on. I would suggest you think of it more as "stocks (or whatever) are overvalued", rather than "index funds are overvalued". Owning index funds is fine, but it's become clear to me that sometimes people lose sight of what it is they are actually buying when it comes to index funds.

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Re: Investing Process - or how to think about investing

Post by 7Wannabe5 »

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

Post by jennypenny »

@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.

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

Post by IlliniDave »

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 »

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 »

@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.

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

Post by Astra »

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 »

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 »

@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).

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

Post by schneier »

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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Mister Imperceptible
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Re: Investing Process - or how to think about investing

Post by Mister Imperceptible »

@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).

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

Post by Kriegsspiel »

It depends on what the index is.

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

Post by IlliniDave »

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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Mister Imperceptible
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Re: Investing Process - or how to think about investing

Post by Mister Imperceptible »

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 »

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.

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

Post by IlliniDave »

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.

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