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Investing Challenge

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Would anyone here be interested in a little game? It's a new year, 2010, and it might be fun to see who can make the most money by December 31, 2010. :)

We would use play money of course. We can do that by using trading software. I like the internet broker thinkorswim. They have pretty low fees if you eventually decide you want use real money.

Even though it seems like you have to actually deposit money with them, just go through the sign up process as if you were serious, but only download the software. You have to go through (part of) the sign up process to get the software. Then when you have it downloaded, open it, and you'll see an option to use "papermoney". Choose that, and you're ready to go.

The interface looks confusing as hell, but you get the hang of it quickly. They have these awesome videos that explain the software, just go to support > software support, and click "launch thinkdesktop's learning center". Then just watch everything.

So anyone want to do this? It will be very educational. :) You'll be forced to keep up with news, and you'll inadvertently learn a lot about the financial markets, plus the knowledge gained will allow you to protect your real wealth better.

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I'd like to have a crack at this. Can you post some basic guidelines as to how we should go about it - kinda like investing for beginners? Otherwise I'm liable to pick the stocks with the coolest-sounding names, just like betting on horses. :)

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I'd like to have a crack at this. Can you post some basic guidelines as to how we should go about it - kinda like investing for beginners? Otherwise I'm liable to pick the stocks with the coolest-sounding names, just like betting on horses. :)

First I'll say that day trading doesn't work. In other words, actively managed portfolios tend to perform less on average than similar passively managed portfolios. People who have never invested before might be shocked to hear this, because there's always that stereotypical wall street conception of high-falutin' businessmen pouring over charts and graphs, making split second decisions over the phone or whatever. And yes, people do trade like this, and yes, some people are very successful at it.

This is essentially the debate over whether or not the financial markets are efficient. Whether or not it is possible to consistently and systematically beat the market.

When I say "beat the market" that means, being able to beat a broad index. You can invest in indices, like the s&p 500 in the US.

http://www.icmarc.org/xp/rc/marketview/chart/2008/20080502SP500HistoricalReturns.html

Historically the s&p 500 has returned about 10% / year. So you can invest in an index mutual fund (I forgot what they call mutual funds in the UK, unit trusts I think?) that attempts to match, say, the s&p 500, and you will get a return of about 10% (on average) on that investment.

Another way to think about the efficient markets debate, and I'm sure you've heard this at one point ... 2 economists are walking down a street, and one of them spots a $20 bill in the street. He says, "Hey look! A free $20 is lying over there." The other one says that can't be a $20 bill because someone would have picked it up already.

I don't think I told that adage quite right, but that's essentially it lol. It's trying to say that stock prices reflect all available information and there is no way to "beat" others significantly.

I highly recommend the yale lectures on the financial markets. The lecturer is robert shiller who is a prominent economist in behavioral finance.

Definitely watch lectures: 2, 4, 6, 9. David Swensen is the portfolio manager for yale, and he says some valuable things.

http://oyc.yale.edu/economics/financial-markets/content/sessions.html

It seems obvious that neither extreme is correct. The markets are most certainly not efficient, and neither are the markets totally volatile. The best answer is probably, the markets are weakly efficient.

When an investor tries to forecast an economy, and make a decision based on that prediction, that is called "market timing", which is related to the efficient markets debate. It's controversial of course, and it's hard for me to give my opinion on it, because I think part of the problem with the debate about efficient markets, and market timing is a poor definition of what constitutes the short term, the intermediate term, and the long term.

There is no doubting that day traders, for the most part, do not outperform indices. It gets hazy in the intermediate term, and I think the intermediate term is where the money is made. I can't explain it well.

Maybe I shouldn't say this since I'm not a rich, successful investor, but I think people that make money in the financial markets understand: their psychology, and the psychology of the market. Understanding the psychology of the market is hard enough, but understanding your own psychology as a participant in the market is even harder.

I would recommend George Soros' speech at MIT: http://www.sharpeinvesting.com/2007/08/george-soros-theory-of-reflexivity-mit-speech.html . It made my head hurt, so maybe you wanna read that later. -__-; He talks about his "theory of reflexivity" which he believes has been the primary reason he got so rich lol.

George Soros is more than an investor, he's also psychologist.

Anyway, so yes, I do think that market timing and "hot stock chasing" and what-not will destroy your wealth, and there is plenty of academic research to back this up. The problem is what constitutes a market timing decision, and what constitutes "chasing a hot investment".

Don't ever listen to e-newsletters. Do not listen to that Mad Money guy Jim Cramer on CNBC. Actually, don't listen to anybody else. If you want to trust your money with someone else, trust them to lose it for you.

I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two.

I've learned that market timing can ruin you.

Believing in the ability of market timers is the equivalent of believing astrologers predict the future.

I'm not going to write a guide, but I'll just give resources and say what I think is absolutely important.

Essential stuff to read about (terms may be different in your country):

  • Know what you're buying - Read about what a mutual fund is, a hedge fund, an ETF (exchange traded fund), what is a stock?, what is a bond?, what is a commodity?, what is a futures contract?, what is a stock option? Read about government securities. etc.
  • Know how major macroeconomic conditions affect the above. If the central bank in your country raises interest rates, what happens to stocks? If the central bank in another country raises interest rates, what happens to your stocks now? How do commodities react? How does consistently high inflation affect bonds? What about deflation? How are corporate bonds different from government bonds in terms of how they behave when macroeconomic conditions change? How do tax cuts affect investor decisions? Tax increases? What about government deficits. If government deficits continue to rise rapidly, how will investors respond, and how should you adjust your portfolio accordingly?
  • Know about currencies. This one is hard... probably the hardest. The FOREX (foreign exchange) market is so confusing. Nonetheless, the currency market, where people buy and sell purchasing power, is powerful, it's destroyed economies before. Investors themselves nearly destroyed Thailand during the Asian financial crisis of the 90s by short selling Thai currency in a single day. The "carry trade" killed Iceland. Maybe read about currencies a lot later. I don't understand them myself really, so don't ask me. Fluctuating purchasing power, like the yen appreciating against the dollar affects the financial markets massively, so it's important to know about...

Other random stuff to read about: fundamental analysis vs. technical analysis, asset allocation, diversification, trading strategies (hedging etc.), understand how trading actually works (how placing an order works, understanding what a stop/limit is, understand what it means for a bond to be called).

That should give you reading material for the next few months lol.

www.investopedia.com <<< Where I first started learning, best website ever. There's seriously like everything there, about everything. Go to tutorials, then go to beginners. Start reading.

www.seekingalpha.com <<< No words here. Best investor community on the internets.

www.tradingeconomics.com <<< Has economic indicators for you to look at and some news.

Actually that's pretty much it. I also lurk at denninger's site. You can lurk on his forum. www.tickerforum.org

I've also read a few books, I have a school economics textbook that I read occasionally.

Financial terms will be a big hurdle. Actually I think that's where most of the confusion comes from. Investopedia.com has a nice financial dictionary with EVERYTHING. So when you run across a term that might be as simple as "capital", you can look it up on investopedia.

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Not sure if I'll be able to join in the challenge this way, but I recently joined a spread betting website and was given

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