Buy into VTSMX, the total market index fund, or VFINX, the S&P 500 index fund. If you have trouble picking, flip a coin; they’re very similar funds.
Second Option:
Go to Sharebuilder.com and open an account. They shouldn’t require a significant starting balance, but might.
Sign up for automatic investing to take advantage of dollar cost averaging.
Buy VFINX or VTSMX.
Third option:
List out what you know about a company.
List out what the market knows about that company.
If your knowledge is better than the market’s, then proceed. Otherwise (including if you don’t know how much the market knows), go to option 1.
Go to your bank and read about their brokerage accounts. If the fees aren’t excessive (check Sharebuilder and other banks and stuff like etrade), open a brokerage account, or go to option 2 and open a Sharebuilder account.
Transfer money to your brokerage account.
Plan out your trades: under what conditions will you buy a stock? (not “the price now is ok” but “if it’s less than $60 I think it’s worthwhile.”) Under what conditions will you sell a stock? This is mostly a restatement of steps 1 and 2, but it’s nice to have these numbers for every individual stock.
Execute trades; the interface should be straightforward.
The last option is very rarely a good idea. You cannot pick good stocks- good stocks do not exist. What exists are good companies and good opportunities. Companies that everyone knows are good- like Apple- are rarely good opportunities, but sometimes the company is so good that it’s worth buying at a premium. I’m up 9x on Netflix over 4 years, even though I bought it at a fairly high price, because I recognized that it was going to reshape its industry and eat Blockbuster’s lunch. I’m up 50% on BP because I was able to identify the point of maximum pessimism and buy then. That’s 2 significant winners over the last 4-5 years of active investing. I’m in the black overall only because of how awesome Netflix was; there’s a lot of stocks I bought that lost a bunch or merely tread water. I now take the opportunity approach seriously.
The moral of the story is that you should hunt opportunities where you have something the market lacks, and then bet big on those opportunities. If you don’t have any more knowledge than the market, bet on the market as a whole in an index fund. I had more foresight than the market as a whole when it came to Netflix (but not to many other things I bought) and a sterner stomach than the market when it came to BP, but without that edge I’m not comfortable betting on anything but that the general trend of the market is up.
(You can still lose when you’ve got an edge- one of my friends called the tech bubble and shorted the market, but was early by a few months and lost quite a bit of money- but it’s the best and most consistent way to win.)
The last time I looked, VFINX had better historical performance than VTSMX. I don’t know if that is still true / what periods that was true for, but the difference between the two shouldn’t be that large. I personally hold both, and consider either a fine choice.
I don’t pay much attention to historical performance. If one segment of the market has been doing better than the market as a whole, that doesn’t mean that it will keep it up. And looking at the data here, VTSMX seems to have actually done very slightly better than the S&P 500 since it was created in 1992.
I’ve invested in the Vanguard Total Stock Market Index (VTSMX) since that comes closer to betting on the market as a whole. It’s closer to the ideal of diversifying as much as possible, spreading your investment evenly across the whole market rather than concentrating it in particular companies, sectors, or segments of the market. The S&P 500 only covers about 75% of the US stock market and is concentrated in larger companies, while the Total Stock Market Index fund is based on an index (MSCI US Broad Market Index) which covers over 99% of the US stock market and matches the market’s balance between large, medium, and small companies.
I agree that the difference between the two index funds isn’t large. Investing in the Total Stock Market Index (VTSMX) is basically equivalent to putting three quarters of your money in an S&P 500 index (like VFINX) and putting the other quarter of your money in an index of the rest of the US stock market (excluding the S&P 500). And even that last quarter is highly correlated with the S&P 500.
I’ve edited it in to the original post, though with a significantly more terse description of it than this comment tree. I do want option one to be as simple as possible :P
I have a related question about buying stocks. Suppose (for example) that I knew with 100% certainty that the global demand for home robotics would grow tenfold in the next decade.
If this was the only information that I had that wasn’t generally known, is there any action I could take based on this information to reliably make money from the stock market (at least over the next ten years)?
Suppose (for example) that I knew with 100% certainty that the global demand for home robotics would grow tenfold in the next decade.
If you have 100% confidence in something, you then logically should go for maximum leverage, regardless of the risk, and so stock up on derivatives, like options and futures, rather than buy and hold stocks or indices.
But of course people are generally poorly calibrated, so someone who thinks they are 100% right will probably be wrong half the time.
So, from a time savings perspective you would want a fund that specializes in home robotics. If one of those exists, though, that suggests that your knowledge isn’t as unique as you’d like.
What I would probably do is find a news website for home robotics producers- a trade magazine is what used to fill this niche, and might still do so- to have a good idea of how relative companies are doing. This looks like a promising place to start, but that gets you as informed as similar investors, and you’d like to be more informed.
Then, try to keep a portfolio that’s fairly balanced in all noteworthy home robotics companies. I’d probably go the ‘buy and hold’ route- try and keep your portfolio roughly apportioned relative to market share by buying up shares of companies underrepresented in your portfolio every month. This is the ‘indexing’ approach- basically, you trust that the home robotics market as a whole will go up, and that the market is better at predicting who will go up than you will.
If you’re more confident in your ability to predict trends, you want to hold companies relative to their expected market share at the end of your trading period- to use an old example, the first strategy would have you holding lots of Blockbuster and some Netflix and the second strategy would have you holding lots of Netflix and some Blockbuster.
There is a giant obstacle here, though, which is that a large part of the stock price is determined by the financials of the company, which take a relatively large investment of time and energy to understand. If you’re indexing, you basically offload this work to other investors; if you do it yourself, you can have a decent idea of what the companies are worth on the books, and then adjust by your estimate of how well they’ll do in the near future.
If I was keeping my porfolio indexed to the market, wouldn’t I be selling Blockbuster shares each month as Blockbuster lost market share? Why would I end up holding lots of Blockbuster?
I apologize, I was unclear; I’m recommending ‘buy and hold indexing’ where you correct imbalances by buying the stocks you have less of with new investment income, rather than correcting imbalances by selling stocks you have too much of to buy stocks you have too little of. This is a good way to invest for individual investors who have a constant influx of investment funds and who pay trading fees that are a large percentage of their order sizes.
If you have a large pool of capital that you begin with, or you want to actively manage money you’ve already invested, then you may want to actively correct imbalances. It’s helpful to work out the expected value of a rebalancing trade, and make sure that’s larger than the fees you pay (and you may decide to only rebalance once it gets above some larger threshold). Here, you do end up with mostly Netflix- but you bought a lot of Blockbuster when it was expensive, and sold it when it was cheap, whereas the projection investor who knew that Netflix was going to worth 30 times what Blockbuster would be would have put 3% of their money into Blockbuster and 97% into Netflix, and so the majority of their current shares would come from when they put a lot of money into cheap Netflix stock. I haven’t heard about that sort of projection investing playing well with rebalancing- and if I remember correctly, it was designed for allocating a large pool which you have complete access to, rather than doing dollar cost averaging with a constant income stream.
Perhaps buying stock in companies that make microchips? Those home robotics companies are going to be spending a fair amount on microchips to fuel their growth...
Buy Google—if home robotics turns into a thing they’ll probably be running it, whether because they set a bunch of geniuses on the problem or they bought out the company that first started making these robots.
More seriously, I suppose you might be able to extrapolate some other information from that—for example, human servants would be even less useful, and materials/services used to produce robots might become more valuable.
they bought out the company that first started making these robots.
In this case, if you’re one of the people that bought into the company before Google bought it, you can make quite a bit more than if you bought into Google, just like it would have been better to buy into Kiva than to buy into Amazon. This often requires being a venture capitalist or angel investor, though.
Knowledge that domestic robots will be a bigger thing than other people expect doesn’t translate into having comparative advantage at producing domestic robots.
The failure rates for new businesses are closely linked to the tendency of entrepreneurs to try solving problems people don’t actually care about. If you actually had the certainty that Raoul589 implies, your success rate would be way higher.
Well, okay, that also assumes that you’re competent enough to run a business, which I suppose many people aren’t. Also Raoul might not actually know anything about making robots. So yeah, that makes sense, gwern.
Certainty is irrelevant, even if you are certain you still have serious problems making any use of this knowledge; there is no convenient stock named RBTS you can just buy 500 shares of and let it appreciate.
Example: in retrospect, we know for certain that a great many people wanted computers, operating systems, social networks etc—but the history of computer / operating system / social networks are strewn with flaming rubble. Suppose you knew in 2000 that “in 2010, the founder of the most successful social network will be worth >$10b”; just how useful is this knowledge, really? Do you have the capital to hang out a VC shingle and throw multi-million-dollar investments at every social media thing that comes along until finally in 2010 you know for sure that Facebook was the winning ticket? I doubt it.
Suppose that you are literally certain (you’re not just 100% confident, you actually have special perfect information) about the future tenfold growth in demand for home robotics. Are you claiming that there is literally no way of using this information to reliably extract money from the stock market? This surprises me.
Would you expect Vaniver’s indexing to at least reliably turn a profit? Would you expect it to turn a large profit?
Are you claiming that there is literally no way of using this information to reliably extract money from the stock market? This surprises me.
I’ll reuse my example: if you knew for certain that Facebook would be as huge as it was, what stocks, exactly, would you have invested in, pre-IPO, to capture gains from its growth? Remember, you don’t know anything else, like that Google will go up from its IPO, you don’t know anything about Apple being a huge success—all you know is that some social network will some day exist and will grow hugely. The best I can think of would be to sell any Murdoch stock you owned when you heard they were buying MySpace, but offhand I’m not sure that Murdoch didn’t just stagnate rather than drop as MySpace increasingly turned out to be a writeoff. In the hypothetical that you didn’t know the name of the company, you might’ve bought up a bunch of Google stock hoping that Orkut would be the winner, but while that would’ve been a decent investment (yay!) it would have had nothing to do with Orkut (awww!); illustrating the problem with highly illiquid markets in some areas...
Would you expect Vaniver’s indexing to at least reliably turn a profit? Would you expect it to turn a large profit?
Depends on the specifics. Suppose the home robotic growth were concentrated in a single private company which exploded into the billions of annual revenue and took away the market share of all the others, forcing them to go bankrupt or merge or shrink. Home robotics will have increased—keikaku doori! - yet Vaniver’s fund suffered huge losses or gone bankrupt (reindex when one of the robotics companies suffers share price collapses? Reindex into what, exactly? Another one of the doomed firms?). Then after the time period elapses and your special knowledge has become public knowledge, the robotics company goes public, and by EMH shares become a normal gamble where you could lose money as easily as make it.
(Is this an impossibly rare scenario? Well, it sounds a lot like Facebook, actually! They grew fast, roflstomped a bunch of other social networks, there was no way to invest in them or related businesses before the IPO, and post-IPO, I believe investors have done the opposite of profit.)
In case it’s not clear: I’m not trying to contradict you; I am trying to get advice from you.
Suppose that you got a mysterious note from the future telling you that the demand for home-robotics will increase tenfold in the next decade, and you know this note to be totally reliable. You know nothing else that is not publicly known. What would you do next?
Do more research. Is this even nonpublic knowledge at all? The world economy grows at something like 2% a year, labor costs generally seem to go up, prices of computers and robotics usually falls… Do industry projections expect to grow their sales by <25% a year?
If so, I might spend some of my hypothetical money on whatever the best approximation to a robotics index fund I can find, as the best of a bunch of bad choices. (Checking a few random entries in Wikipedia, maybe a fifth of the companies are publicly traded, so… that will be a pretty small index.) But I wouldn’t be really surprised if in 10 years, I had not outperformed the general market.
I’d advise finding a market bottleneck, like ColTan mining. You’ll see any technology that can replace tantalum capacitors from further away than you’ll manage to see software or design shifts.
By “you know this note to be totally reliable” I assume you mean you have a fair idea how it got there (eg you just built a time portal. with the intention of sending through financial advice, and a hand, bearing the same tattoo you have, pushed through with the note) and not that you’re psychic and literally know things with 100% certainty? IOW you have a high probability estimate that it’s genuine, but not an infinitely high one (seems more realistic and applicable if nothing else.)
How to Buy Stocks
Note: This is just nuts and bolts. Any terminology you may need can be found on Investopedia.
Have a bank/checking account
Sign up with any of the many online stock brokerage sites(ScottTrade, Ameritrade, Sharebuilder,etc.)
Send the broker an initial deposit of funds. (You’ll require your routing and account numbers. You have to transfer funds to the broker, who needs this money to purchase your stocks.) The usual minimum is $2000 but can be as little as $500.00.
In trade section, you’ll need to input the company’s stock symbol, #of shares to be bought, and the order type.
Click Review order and double check you’ve made the right selections.
Finalize order.
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I’ve been investing in stocks (occasionally) and mutual funds (consistently) for about thirty years, and I endorse Vaniver’s advice heartily. I think overall, I’m up on stocks, due to doing most of my stock investing in cyclical stocks that I can buy and sell repeatedly over the course of many years. This has worked for me with both SGI and Cypress, which I repeatedly bought at low prices and sold at high prices. If you try this and find that you’re not buying low and selling high, then you should stick to mutual funds and a buy-and-hold strategy. I’ve dabbled in other stocks where I thought I knew something and could time it, but few of those have turned out well. Happily, I knew I was dabbling, and kept the amounts low, so I got a valuable less for a relatively low price.
Mostly, I invest in mutual funds. I have subscribed to a newsletter that specializes in rating No Load funds (there are a couple). This gives me a monthly opportunity to review the performance of the funds I’m invested in, so I can tell when they stop being in the top performers and roll my money over to a different investment.
I record the monthly performance of each of my investments in a spreadsheet (used to be a paper notebook). The newsletter tells me which quintile the performance is in compared to the fund’s peers. I highlight 1st and 2nd quintile in green, and 5th quintile in red. When the number of reds gets to be high compared to the greens, I look for a different fund with better recent performance. The commercials always say “past performance is no guarantee of future returns”, but it’s the only indication you can use. Most of the time performance is consistent over periods of a few years, so you have to look back a year or so when evaluating, and monitor continuing performance in a consistent way.
This whole process takes far more attention than most people are willing to put into it (a few hours a month on an on-going basis, and several hours every six months or so when choosing new investents), and few investors do even as well as the rate of growth of the broad market. That’s why investing in the S&P 500 or an even broader market index is a good idea. If you put your money in a broad index and let it sit, you’ll do better than 3⁄4 of investors.
Vanguard is only one decent brokerage. I personally use Schwab, but there are several others with reasonable prices.
I’m in the black overall only because of how awesome Netflix was; there’s a lot of stocks I bought that lost a bunch or merely tread water. I now take the opportunity approach seriously.
Did you beat the SAP500 or are you only in the black?
Did you beat the SAP500 or are you only in the black?
For this time period, it turns out that which comparison you make doesn’t matter- the S&P 500 was about the same when I started investing in 2006 and when I wrote this comment in 2011. Since I wrote this comment, the majority of my money has been in index funds (I sold BP after I owned it for a year to lock in the 50% gain while avoiding the tax hit for short-term trading), so comparisons to the index funds I’m holding don’t seem particularly enlightening. The primary investment decision I’ve made since then in dollar terms—not investing in Bitcoin when I first seriously considered it because of laziness—turned out to be a huge mistake (but still a retrospective validation of the opportunity approach).
My addition to the Third Option would be: if you know something’s a good company, wait until a cyclical (but fundamentally extraneous to the company’s business prospects) market downturn and buy it while everything is crashing. You almost definitely won’t hit buy while the share price is bottoming out, but once the market recovers and the economy overall continues growing, you will probably get good value for your purchase.
(Of course, this depends on you being cash-flush enough to invest countercyclically! Most people can’t do this, because most people are going to be in personal cash crunches exactly when the market or economy overall goes down.)
My addition to the Third Option would be: if you know something’s a good company, wait until a cyclical (but fundamentally extraneous to the company’s business prospects) market downturn and buy it while everything is crashing.
I think this is basically wrong, because opportunities are time-sensitive. If a company is undervalued now, it’s not obvious it will remain undervalued until the next cyclical downturn, and you pass up on the benefits of any market correction in the valuation of the undervalued company.
I do agree that it makes sense to invest countercyclically (where you have more of your wealth in stocks when you think the stock market is undervalued, and more of your wealth in cash / CDs / etc. when you think the stock market is overvalued), but determining whether the stock market as a whole is undervalued or overvalued is a difficult task, and it takes planning and forethought to ensure you are not cash crunched when the economy dips (which you should do now).
I also think that correctly pricing downturn risks is a subset of correctly pricing shocks in general. How much damage will the oil spill actually do to BP? How much damage will Jobs’s death do to Apple? How much damage will Buffet’s death do to Berkshire Hathaway? How much damage will a general economic downturn do to Apple?
I’m pessimistic on Apple’s prospects without Jobs, because of what I know about his management style, but time will tell how that turns out. I’m optimistic about BRK’s prospects without Buffet, again because of what I know about his management style—and so if the market dips significantly when they take his pulse again, I’ll buy BRK (like I bought BP when the market overestimated the damage). And here we’re in the same sort of situation- if you think that BRK is will grow in both the short-term and long-term, but there’s an upcoming predictable dip (Buffet’s death), do you wait for the predictable dip to buy, just buy now, or split some funds out to buy now and other funds to wait for the dip?
I think this is basically wrong, because opportunities are time-sensitive. If a company is undervalued now, it’s not obvious it will remain undervalued until the next cyclical downturn, and you pass up on the benefits of any market correction in the valuation of the undervalued company.
Disagree. The point is not to pick out undervalued stocks, but to ride the cycles.
If you want to ride the cycles, shouldn’t you just market-time the broad index of your choice? Picking “undervalued” companies to ride the cycles implies that you have two skills (which, I think, are mostly orthogonal) -- the stock-picking skill and the market-timing skill.
My addition to the Third Option would be: if you know something’s a good company, wait until a cyclical (but fundamentally extraneous to the company’s business prospects) market downturn and buy it while everything is crashing.
This assumes that you can generally beat the market by buying stocks when you think there a market downturn and selling them when you think the market as a whole is high. This assumes that the efficient market hypothesis is wrong on a fundamental level.
Well, the Efficient Market Hypothesis is wrong on a fundamental level—its stated conditions for market efficiency often fail to prevail in the real world. Panics are one of those times, and being more rational than other people is not a free lunch, but in fact a Substantial Effort for Good Return Lunch.
(I’ve seen one paper actually proving, rather humorously, that EMH is completely true IFF P = NP.)
How to Buy Stocks
First Option:
Acquire at least $3,000 in a checking account, and grab your account number and routing number. (It’s written on the bottom of your checks.)
Go to Vanguard.com and open an account.
Buy into VTSMX, the total market index fund, or VFINX, the S&P 500 index fund. If you have trouble picking, flip a coin; they’re very similar funds.
Second Option:
Go to Sharebuilder.com and open an account. They shouldn’t require a significant starting balance, but might.
Sign up for automatic investing to take advantage of dollar cost averaging.
Buy VFINX or VTSMX.
Third option:
List out what you know about a company.
List out what the market knows about that company.
If your knowledge is better than the market’s, then proceed. Otherwise (including if you don’t know how much the market knows), go to option 1.
Go to your bank and read about their brokerage accounts. If the fees aren’t excessive (check Sharebuilder and other banks and stuff like etrade), open a brokerage account, or go to option 2 and open a Sharebuilder account.
Transfer money to your brokerage account.
Plan out your trades: under what conditions will you buy a stock? (not “the price now is ok” but “if it’s less than $60 I think it’s worthwhile.”) Under what conditions will you sell a stock? This is mostly a restatement of steps 1 and 2, but it’s nice to have these numbers for every individual stock.
Execute trades; the interface should be straightforward.
The last option is very rarely a good idea. You cannot pick good stocks- good stocks do not exist. What exists are good companies and good opportunities. Companies that everyone knows are good- like Apple- are rarely good opportunities, but sometimes the company is so good that it’s worth buying at a premium. I’m up 9x on Netflix over 4 years, even though I bought it at a fairly high price, because I recognized that it was going to reshape its industry and eat Blockbuster’s lunch. I’m up 50% on BP because I was able to identify the point of maximum pessimism and buy then. That’s 2 significant winners over the last 4-5 years of active investing. I’m in the black overall only because of how awesome Netflix was; there’s a lot of stocks I bought that lost a bunch or merely tread water. I now take the opportunity approach seriously.
The moral of the story is that you should hunt opportunities where you have something the market lacks, and then bet big on those opportunities. If you don’t have any more knowledge than the market, bet on the market as a whole in an index fund. I had more foresight than the market as a whole when it came to Netflix (but not to many other things I bought) and a sterner stomach than the market when it came to BP, but without that edge I’m not comfortable betting on anything but that the general trend of the market is up.
(You can still lose when you’ve got an edge- one of my friends called the tech bubble and shorted the market, but was early by a few months and lost quite a bit of money- but it’s the best and most consistent way to win.)
Why the S&P index (VFINX) and not the Total Stock Market Index (VTSMX), which has broader coverage and the same expense ratio?
The last time I looked, VFINX had better historical performance than VTSMX. I don’t know if that is still true / what periods that was true for, but the difference between the two shouldn’t be that large. I personally hold both, and consider either a fine choice.
I don’t pay much attention to historical performance. If one segment of the market has been doing better than the market as a whole, that doesn’t mean that it will keep it up. And looking at the data here, VTSMX seems to have actually done very slightly better than the S&P 500 since it was created in 1992.
I’ve invested in the Vanguard Total Stock Market Index (VTSMX) since that comes closer to betting on the market as a whole. It’s closer to the ideal of diversifying as much as possible, spreading your investment evenly across the whole market rather than concentrating it in particular companies, sectors, or segments of the market. The S&P 500 only covers about 75% of the US stock market and is concentrated in larger companies, while the Total Stock Market Index fund is based on an index (MSCI US Broad Market Index) which covers over 99% of the US stock market and matches the market’s balance between large, medium, and small companies.
I agree that the difference between the two index funds isn’t large. Investing in the Total Stock Market Index (VTSMX) is basically equivalent to putting three quarters of your money in an S&P 500 index (like VFINX) and putting the other quarter of your money in an index of the rest of the US stock market (excluding the S&P 500). And even that last quarter is highly correlated with the S&P 500.
I’ve edited it in to the original post, though with a significantly more terse description of it than this comment tree. I do want option one to be as simple as possible :P
I have a related question about buying stocks. Suppose (for example) that I knew with 100% certainty that the global demand for home robotics would grow tenfold in the next decade.
If this was the only information that I had that wasn’t generally known, is there any action I could take based on this information to reliably make money from the stock market (at least over the next ten years)?
If you have 100% confidence in something, you then logically should go for maximum leverage, regardless of the risk, and so stock up on derivatives, like options and futures, rather than buy and hold stocks or indices.
But of course people are generally poorly calibrated, so someone who thinks they are 100% right will probably be wrong half the time.
So, from a time savings perspective you would want a fund that specializes in home robotics. If one of those exists, though, that suggests that your knowledge isn’t as unique as you’d like.
What I would probably do is find a news website for home robotics producers- a trade magazine is what used to fill this niche, and might still do so- to have a good idea of how relative companies are doing. This looks like a promising place to start, but that gets you as informed as similar investors, and you’d like to be more informed.
Then, try to keep a portfolio that’s fairly balanced in all noteworthy home robotics companies. I’d probably go the ‘buy and hold’ route- try and keep your portfolio roughly apportioned relative to market share by buying up shares of companies underrepresented in your portfolio every month. This is the ‘indexing’ approach- basically, you trust that the home robotics market as a whole will go up, and that the market is better at predicting who will go up than you will.
If you’re more confident in your ability to predict trends, you want to hold companies relative to their expected market share at the end of your trading period- to use an old example, the first strategy would have you holding lots of Blockbuster and some Netflix and the second strategy would have you holding lots of Netflix and some Blockbuster.
There is a giant obstacle here, though, which is that a large part of the stock price is determined by the financials of the company, which take a relatively large investment of time and energy to understand. If you’re indexing, you basically offload this work to other investors; if you do it yourself, you can have a decent idea of what the companies are worth on the books, and then adjust by your estimate of how well they’ll do in the near future.
If I was keeping my porfolio indexed to the market, wouldn’t I be selling Blockbuster shares each month as Blockbuster lost market share? Why would I end up holding lots of Blockbuster?
I apologize, I was unclear; I’m recommending ‘buy and hold indexing’ where you correct imbalances by buying the stocks you have less of with new investment income, rather than correcting imbalances by selling stocks you have too much of to buy stocks you have too little of. This is a good way to invest for individual investors who have a constant influx of investment funds and who pay trading fees that are a large percentage of their order sizes.
If you have a large pool of capital that you begin with, or you want to actively manage money you’ve already invested, then you may want to actively correct imbalances. It’s helpful to work out the expected value of a rebalancing trade, and make sure that’s larger than the fees you pay (and you may decide to only rebalance once it gets above some larger threshold). Here, you do end up with mostly Netflix- but you bought a lot of Blockbuster when it was expensive, and sold it when it was cheap, whereas the projection investor who knew that Netflix was going to worth 30 times what Blockbuster would be would have put 3% of their money into Blockbuster and 97% into Netflix, and so the majority of their current shares would come from when they put a lot of money into cheap Netflix stock. I haven’t heard about that sort of projection investing playing well with rebalancing- and if I remember correctly, it was designed for allocating a large pool which you have complete access to, rather than doing dollar cost averaging with a constant income stream.
At a guess, I’d say you should buy stock in companies working on home robotics.
Right. Is there no more sophisticated strategy though?
Perhaps buying stock in companies that make microchips? Those home robotics companies are going to be spending a fair amount on microchips to fuel their growth...
Buy Google—if home robotics turns into a thing they’ll probably be running it, whether because they set a bunch of geniuses on the problem or they bought out the company that first started making these robots.
More seriously, I suppose you might be able to extrapolate some other information from that—for example, human servants would be even less useful, and materials/services used to produce robots might become more valuable.
In this case, if you’re one of the people that bought into the company before Google bought it, you can make quite a bit more than if you bought into Google, just like it would have been better to buy into Kiva than to buy into Amazon. This often requires being a venture capitalist or angel investor, though.
I suppose buy Google is a less sophisticated strategy, at that. As well as a joke.
Start a company developing domestic robots and make a success of it. Then (optionally) take it public.
Knowledge that domestic robots will be a bigger thing than other people expect doesn’t translate into having comparative advantage at producing domestic robots.
Given the failure rates for new businesses, that doesn’t sound like a very reliable strategy.
The failure rates for new businesses are closely linked to the tendency of entrepreneurs to try solving problems people don’t actually care about. If you actually had the certainty that Raoul589 implies, your success rate would be way higher.
Well, okay, that also assumes that you’re competent enough to run a business, which I suppose many people aren’t. Also Raoul might not actually know anything about making robots. So yeah, that makes sense, gwern.
Certainty is irrelevant, even if you are certain you still have serious problems making any use of this knowledge; there is no convenient stock named RBTS you can just buy 500 shares of and let it appreciate.
Example: in retrospect, we know for certain that a great many people wanted computers, operating systems, social networks etc—but the history of computer / operating system / social networks are strewn with flaming rubble. Suppose you knew in 2000 that “in 2010, the founder of the most successful social network will be worth >$10b”; just how useful is this knowledge, really? Do you have the capital to hang out a VC shingle and throw multi-million-dollar investments at every social media thing that comes along until finally in 2010 you know for sure that Facebook was the winning ticket? I doubt it.
Ahh good point. I mean, hence the argument to start your own company. But right, you won’t necessarily win.
Suppose that you are literally certain (you’re not just 100% confident, you actually have special perfect information) about the future tenfold growth in demand for home robotics. Are you claiming that there is literally no way of using this information to reliably extract money from the stock market? This surprises me.
Would you expect Vaniver’s indexing to at least reliably turn a profit? Would you expect it to turn a large profit?
I’ll reuse my example: if you knew for certain that Facebook would be as huge as it was, what stocks, exactly, would you have invested in, pre-IPO, to capture gains from its growth? Remember, you don’t know anything else, like that Google will go up from its IPO, you don’t know anything about Apple being a huge success—all you know is that some social network will some day exist and will grow hugely. The best I can think of would be to sell any Murdoch stock you owned when you heard they were buying MySpace, but offhand I’m not sure that Murdoch didn’t just stagnate rather than drop as MySpace increasingly turned out to be a writeoff. In the hypothetical that you didn’t know the name of the company, you might’ve bought up a bunch of Google stock hoping that Orkut would be the winner, but while that would’ve been a decent investment (yay!) it would have had nothing to do with Orkut (awww!); illustrating the problem with highly illiquid markets in some areas...
Depends on the specifics. Suppose the home robotic growth were concentrated in a single private company which exploded into the billions of annual revenue and took away the market share of all the others, forcing them to go bankrupt or merge or shrink. Home robotics will have increased—keikaku doori! - yet Vaniver’s fund suffered huge losses or gone bankrupt (reindex when one of the robotics companies suffers share price collapses? Reindex into what, exactly? Another one of the doomed firms?). Then after the time period elapses and your special knowledge has become public knowledge, the robotics company goes public, and by EMH shares become a normal gamble where you could lose money as easily as make it.
(Is this an impossibly rare scenario? Well, it sounds a lot like Facebook, actually! They grew fast, roflstomped a bunch of other social networks, there was no way to invest in them or related businesses before the IPO, and post-IPO, I believe investors have done the opposite of profit.)
In case it’s not clear: I’m not trying to contradict you; I am trying to get advice from you.
Suppose that you got a mysterious note from the future telling you that the demand for home-robotics will increase tenfold in the next decade, and you know this note to be totally reliable. You know nothing else that is not publicly known. What would you do next?
Do more research. Is this even nonpublic knowledge at all? The world economy grows at something like 2% a year, labor costs generally seem to go up, prices of computers and robotics usually falls… Do industry projections expect to grow their sales by <25% a year?
If so, I might spend some of my hypothetical money on whatever the best approximation to a robotics index fund I can find, as the best of a bunch of bad choices. (Checking a few random entries in Wikipedia, maybe a fifth of the companies are publicly traded, so… that will be a pretty small index.) But I wouldn’t be really surprised if in 10 years, I had not outperformed the general market.
I’d advise finding a market bottleneck, like ColTan mining. You’ll see any technology that can replace tantalum capacitors from further away than you’ll manage to see software or design shifts.
By “you know this note to be totally reliable” I assume you mean you have a fair idea how it got there (eg you just built a time portal. with the intention of sending through financial advice, and a hand, bearing the same tattoo you have, pushed through with the note) and not that you’re psychic and literally know things with 100% certainty? IOW you have a high probability estimate that it’s genuine, but not an infinitely high one (seems more realistic and applicable if nothing else.)
How to Buy Stocks Note: This is just nuts and bolts. Any terminology you may need can be found on Investopedia.
Have a bank/checking account
Sign up with any of the many online stock brokerage sites(ScottTrade, Ameritrade, Sharebuilder,etc.)
Send the broker an initial deposit of funds. (You’ll require your routing and account numbers. You have to transfer funds to the broker, who needs this money to purchase your stocks.) The usual minimum is $2000 but can be as little as $500.00.
In trade section, you’ll need to input the company’s stock symbol, #of shares to be bought, and the order type.
Click Review order and double check you’ve made the right selections.
Finalize order.
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Somehow along the line, there should be a check of: “Can I be sued for insider trading if I make this trade”
I’ve been investing in stocks (occasionally) and mutual funds (consistently) for about thirty years, and I endorse Vaniver’s advice heartily. I think overall, I’m up on stocks, due to doing most of my stock investing in cyclical stocks that I can buy and sell repeatedly over the course of many years. This has worked for me with both SGI and Cypress, which I repeatedly bought at low prices and sold at high prices. If you try this and find that you’re not buying low and selling high, then you should stick to mutual funds and a buy-and-hold strategy. I’ve dabbled in other stocks where I thought I knew something and could time it, but few of those have turned out well. Happily, I knew I was dabbling, and kept the amounts low, so I got a valuable less for a relatively low price.
Mostly, I invest in mutual funds. I have subscribed to a newsletter that specializes in rating No Load funds (there are a couple). This gives me a monthly opportunity to review the performance of the funds I’m invested in, so I can tell when they stop being in the top performers and roll my money over to a different investment.
I record the monthly performance of each of my investments in a spreadsheet (used to be a paper notebook). The newsletter tells me which quintile the performance is in compared to the fund’s peers. I highlight 1st and 2nd quintile in green, and 5th quintile in red. When the number of reds gets to be high compared to the greens, I look for a different fund with better recent performance. The commercials always say “past performance is no guarantee of future returns”, but it’s the only indication you can use. Most of the time performance is consistent over periods of a few years, so you have to look back a year or so when evaluating, and monitor continuing performance in a consistent way.
This whole process takes far more attention than most people are willing to put into it (a few hours a month on an on-going basis, and several hours every six months or so when choosing new investents), and few investors do even as well as the rate of growth of the broad market. That’s why investing in the S&P 500 or an even broader market index is a good idea. If you put your money in a broad index and let it sit, you’ll do better than 3⁄4 of investors.
Vanguard is only one decent brokerage. I personally use Schwab, but there are several others with reasonable prices.
Did you beat the SAP500 or are you only in the black?
For this time period, it turns out that which comparison you make doesn’t matter- the S&P 500 was about the same when I started investing in 2006 and when I wrote this comment in 2011. Since I wrote this comment, the majority of my money has been in index funds (I sold BP after I owned it for a year to lock in the 50% gain while avoiding the tax hit for short-term trading), so comparisons to the index funds I’m holding don’t seem particularly enlightening. The primary investment decision I’ve made since then in dollar terms—not investing in Bitcoin when I first seriously considered it because of laziness—turned out to be a huge mistake (but still a retrospective validation of the opportunity approach).
My addition to the Third Option would be: if you know something’s a good company, wait until a cyclical (but fundamentally extraneous to the company’s business prospects) market downturn and buy it while everything is crashing. You almost definitely won’t hit buy while the share price is bottoming out, but once the market recovers and the economy overall continues growing, you will probably get good value for your purchase.
(Of course, this depends on you being cash-flush enough to invest countercyclically! Most people can’t do this, because most people are going to be in personal cash crunches exactly when the market or economy overall goes down.)
I think this is basically wrong, because opportunities are time-sensitive. If a company is undervalued now, it’s not obvious it will remain undervalued until the next cyclical downturn, and you pass up on the benefits of any market correction in the valuation of the undervalued company.
I do agree that it makes sense to invest countercyclically (where you have more of your wealth in stocks when you think the stock market is undervalued, and more of your wealth in cash / CDs / etc. when you think the stock market is overvalued), but determining whether the stock market as a whole is undervalued or overvalued is a difficult task, and it takes planning and forethought to ensure you are not cash crunched when the economy dips (which you should do now).
I also think that correctly pricing downturn risks is a subset of correctly pricing shocks in general. How much damage will the oil spill actually do to BP? How much damage will Jobs’s death do to Apple? How much damage will Buffet’s death do to Berkshire Hathaway? How much damage will a general economic downturn do to Apple?
I’m pessimistic on Apple’s prospects without Jobs, because of what I know about his management style, but time will tell how that turns out. I’m optimistic about BRK’s prospects without Buffet, again because of what I know about his management style—and so if the market dips significantly when they take his pulse again, I’ll buy BRK (like I bought BP when the market overestimated the damage). And here we’re in the same sort of situation- if you think that BRK is will grow in both the short-term and long-term, but there’s an upcoming predictable dip (Buffet’s death), do you wait for the predictable dip to buy, just buy now, or split some funds out to buy now and other funds to wait for the dip?
Disagree. The point is not to pick out undervalued stocks, but to ride the cycles.
If you want to ride the cycles, shouldn’t you just market-time the broad index of your choice? Picking “undervalued” companies to ride the cycles implies that you have two skills (which, I think, are mostly orthogonal) -- the stock-picking skill and the market-timing skill.
Fair enough, although I would generally say to pick the stock via fundamentals and industry-specific knowledge.
This assumes that you can generally beat the market by buying stocks when you think there a market downturn and selling them when you think the market as a whole is high. This assumes that the efficient market hypothesis is wrong on a fundamental level.
Well, the Efficient Market Hypothesis is wrong on a fundamental level—its stated conditions for market efficiency often fail to prevail in the real world. Panics are one of those times, and being more rational than other people is not a free lunch, but in fact a Substantial Effort for Good Return Lunch.
(I’ve seen one paper actually proving, rather humorously, that EMH is completely true IFF P = NP.)