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A hedge fund analyst explains his stock research process. Full of excellent links to videos, articles, and books. Hopefully my story helps others avoid the mistakes I made self. Last summer I decided to learn about the stock market.
After three months of experimenting, my account was right back where I started, give or take a few bucks. Content with my summer trading, I decided to take a break from the stock market until I graduated college in December. Fast forward to January Not only was I graduated and working a full-time job, but I also had recently learned about:. Calls, puts, strike prices.. I learned what seemed like everything I needed to know, and I felt I was ready to start trading options.
I started by playing the earnings game. Everyone uses NFLX, right? Their earnings are tomorrow.. I made 7X my money off that first trade. Wow, that was easy!! Well for some reason, the more money you have, the more careless you become in my case, at least.
I was very careful in the beginning: When I made money, I would be smart with it! NFLX went down quite a bit one day.. I had bought weekly puts at market open. I made two huge bets that's what I was doing at that point: Third time's the charm I WILL be smart this time! I was somehow able to time the spikes and dips of SPY that day just perfectly. I swore I was done. I had my confidence built back up from my amazing Tuesday, and was extremely cocky and over-confident.
SPY looks like it's heading down. Let's pay off those school loans, baby. Well, SPY didn't go down. And I didn't exit when I should have. I'll get it back.
So here's the moral of the story: Treat every trade as you did your first trade, and don't get sloppy and cocky. Here's my Scottrade 3 month chart if you'd like to see my idiocy. I think one of the reasons I was able to make money is the same reason I lost it all: I should have been way smarter with what I had made, but it is an extremely tough mental game to stay smart once you've made some 'superman' trades.
There is also the opposite end of this thought, too: But then I would have never made the 10K. It all comes down to what you are comfortable with risking, and how disciplined you can be. I really, really need to work on the latter, and need to cool it down on the former.
This is basic gambling sense. Gamble with what you are comfortable losing, not with what you prefer to multiply. This is a great suggestion, and it is exactly the sort of plan I need to follow in the future. The first round of 10K was very, very lucky -- this is true. However, I think I was on to something the second and third 10K rounds, and if I can keep my "gains" strategy in tact while implementing the strategy you mentioned, I should be much, much better off.
I love people who play that game because I see my portfolio rise during earnings and then it settles again. While people are gambling during earnings I'm writing covered calls to you. Go ahead and call my shares away. The gamblers have already pushed me into solid returns and the covered calls are gravy. Oh and if the share price falls I am not too concerned as that option has reduced my cost basis and we'll repeat the story next quarter.
I really need to learn stuff like this I'm fairly low risk tolerance but would like to learn how to invest wisely. Damn I've got a lot of reading to do I borrowed 40k to add a suite to my home. That's a big deal. I have a lot of re-prioritizing that I need to do.
Thing is, I want to learn about investing in all its forms. Funny story on the real estate investing too; I wanted to buy an older 4 bedroom house to fix up and rent out. From all the information I could find, with the current rental market in my city, I would be laughing well, maybe just chuckling all the way to the bank because the rental income on the 3 bedrooms would pay the mortgage and all other costs associated and I'd essentially be living there for free.
But instead my parents hijacked my buying decision I was relying on their help for initial investment and I'm stuck in a condo that will probably see negligible increases, at least compared to that house.
But lesson learned, all I can do is save up money and try again. I'm not so much looking for a huge return, I just want some steady returns I can bank in the long run. You are a smart man. Tried to convince my parents to do something similar but they're convinced it would be too much of a headache. I'm no guru, but I don't necessarily agree with rainman's strategy at least for my tastes. It sounds like he's diversifying to the max, hedging his bets, reducing risk as much as possible while still investing in the stock market.
This isn't always the optimum strategy. A positive EV bet, iterated enough times, will bring in profit guaranteed. Even if the variance is huge. That's exactly what the casinos in Vegas count on. Now obviously no one can say for certain what investment is going to have a certain positive return. Hell you wouldn't be in the stock market at all.
And that's pretty much what you're doing if you hedge hedge hedge all the time. You stymie your returns. I'm not an expert on covered calls but my guess is they have to be at least a somewhat possible stock amount or you'll be paid dingus for them. But I'm still not all-in with the max diversification crowd. They overestimate how many uncorrelated 'N' stocks are needed to limit risk. And yet they often say you need international, each continent, you need every industry, every sector, small cap and large cap growth and value If you have any confidence that one cap, one industry, one continent or multiple will do better than another, than logically you should go in that direction.
Of course if you genuinely and honestly can say that you don't know, then diversify in each. You'd do better in the long run putting your money in a low fee ETF that tracks the entire color index. Actually buying a low fee ETF is basically like investing in the house that owns the roulette wheel. Buying an ETF of all the roulette colors is not an accurate analogy because you are expected to LOSE money over the long run with this trade due to the double zeros and tips paid out to dealers.
I know you were joking, but just wanted to point it out to those who are new to investing that this is the biggest difference between investing and gambling. The stock market is priced in such a way that any new investor is expected to MAKE money over the long term. Casinos are structured in such a way that any new gambler is expected to LOSE money over the long term. You need to qualify this statement. I actually don't need to qualify since it's a true statement in an efficiently functioning market.
Any new investor is expected to make a certain return. The expected return is commensurate with the level of risk he is taking. The longer the holding period, the greater the likelihood he will achieve that return. However, there is no guarantee he will actually make money. It's just an expected return, not an actual return. All investments are valued with an implicit discount rate, which is the expected return an investor should expect proportionate to the risk being taken.More...