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It depends on who you listen to. I spent a good 2 years post college building upon the foundations of finance, accounting (of all its various stripes), monetary

It depends on who you listen to. I spent a good 2 years post college building upon the foundations of finance, accounting (of all its various stripes), monetary theory, international factor movements, quantitative analysis (read: fairly high-level stats), portfolio theory (risk management), etc. Then you have to learn how to read SEC filings (and foreign versions of the SEC filings), what all of them mean, all the nuanced rules that the FASB puts out (in the form of GAAP) and how they differ from the international standards (in the form of IFRS), entire histories of companies down to the intensely nitty-gritty details... The list is basically endless. The worst thing about it is that even after all this, something like 90% of portfolio returns can be attributed to sector allocation, meaning that even if you do think a company is great, they might just be the best answering machine company in an age that is on the cusp of seeing smartphones. This is why you'll often find analysts focus specifically on sectors (or even industries), and only a few companies in them. It takes a lot of time to get enough information about the past, present, and (potential) future of an industry and a company in order to know all the factors to make an educated-enough guess. In short, you can pick 30 stocks at random and you will probably have returns very close to market average returns. The amount of knowledge (and intelligence) required to guess better than other people is so immense, that unless you're going into financial analysis as a career, I'd stick to ETFs or managed portfolios. With an ETF, you can make bets on sectors, countries, or the entire market, all for minimal fees. People much more experienced than yourself will figure out what the best allocation of companies inside that particular ETF is. Still, anything beyond a portfolio that is perfectly correlated with average market returns brings with it increased risk. In other words, the more you screw around on the edges without having the years of experience required to know what you're doing, the greater the chance you'll make higher (or lower) returns than the market.

dinedal 16y ago
Thanks, I'm so green to this I didn't even know what an ETF was! Doing more reading now...
- treeface 16y ago
  No worries! I'm not trying to scare you off, I just want you to be aware of how deep and murky the pool is before you dive in. Ultimately, all of this stuff is really very interesting and fun to learn even if you don't one day make millions off of it. :-]
jroes 16y ago
I just started reading Security Analysis by Dodd & Graham. I heard it was a classic book on investing. Given what you've said, should I bother reading it if picking at random is going to work out better in the end? Have you read it and can make a recommendation as to its usefulness? In the first few chapters they identified the issue of massive amounts of information, but the book still charges on. If you do think it's still worthwhile to continue reading it, do you have any suggestions for some introductory books that can help me understand some of the financial slang they use? :)
- treeface 16y ago
  I've never read Dodd & Graham directly, but have obviously heard lots about it as it is one of the seminal works in investment theory. However, consider this from WP: >However, in the 1970s Graham stopped advocating a careful use of the techniques described in his text in selecting individual stocks, citing the extensive efforts and costs required to generate superior returns in a modern efficient market. Instead, Graham later suggested the use of one or two simple criteria to the investor's entire portfolio, focusing on results of the group rather than on individual securities. Investment theory has come a long, long way since the 1930s. Hell, it's come a long way since the late 90s. In the 80s and 90s, some of the smartest people in the world came up with some fantastically complex algorithms (coupled with their generally high knowledge of global trends in various industries and markets) to generate astronomical returns (look up Long Term Capital Management). Trouble is, Benoit Mandelbrot was right. If you look at any stock chart, you'll see that regardless of the time scale, the ups and downs tend to look very similar. No matter what you won't find a stock market that goes up forever. You won't find a bond market that has high rates forever. You won't find a country that stays in boom times forever. And worst of all, you won't (just by looking at the data) be able to tell when "the big one" is going to hit. LTCM got hosed by the Asian financial crisis of the late 90s, and everyone thought they'd finally found "the formula". So, in short, to distinguish yourself in the stock market, you need to be good at picking companies (this is the very hard part) AND lucky. My brother (against my advice) started putting thousands of dollars into companies like KERX that were trading very cheaply. He got lucky and quadrupled his investment of $20k. I can guarantee you that if he does the same thing 10 more times, he will get destroyed, and bad. Time wins out. It always wins out. You can only get lucky for so long before you have to pick correctly on your knowledge AND have a large pile of money to back up your mistakes (which you will make). For example, my former employer (a $10bil asset manager) dropped tens of millions of client dollars into Enron throughout the year they went from ~$90/share to ~$1/share. Despite their intense research, they still didn't see the fraud coming because there was no real way to know. So they gambled and "averaged down" the cost basis for their Enron position and lost nearly all the money they put in. They did the same thing with Washington Mutual on the way down recently. If I were you, I'd not rely on me for figuring out which books to read. Mine have been mostly editioned texts through college and the CFA texts (which are awesome, but expensive). Search around for finance forums to see what people recommend for the modern novice investor. I can tell you is: never trust what you hear on CNBC (or anybody who speaks on it) and never trust the financial advice/opinions you read on Hacker News (including mine). The people here are mostly programmers who often have silly, oversimplified positions on economic matters, just like most other people in the world. So go ask around...you'll find some good suggestions somewhere.
nathanwdavis 16y ago
There is some evidence that you can beat the overall market by overweighting ETFs that are trending higher or whose relative strength is higher. I created a site ( http://ETFtable.com http://ETFtable.com ) to make doing this pretty easy. Sorry for the plug, but I think it's contextually relevant. Let me know what you think.
- treeface 16y ago
  I put on my skeptical hat when I hear claims like that. I'd have to see extremely solid evidence to believe it. Nice site! Layout is cool. I haven't dabbled too much in ETFs or tools for researching them, so I'll have to pass on any judgment due to a lack of context. Still, I'm sure someone will find some use for it.
  - nathanwdavis 16y ago
    Here are some backtested results of some RS ETF strategies. Specific industry, asset class, and country ETFs just haven't been around long enough to really backtest for long-term out-performance, but these seem to indicate you can beat the overall market with lower drawdowns with an RS ETF strategy: http://etfprophet.com/two-simple-relative-strength-rotation-models/ http://etfprophet.com/two-simple-relative-strength-rotation-... http://www.bpas.com/media/HBT/dent_tactical_r3.pdf http://www.bpas.com/media/HBT/dent_tactical_r3.pdf
    - treeface 16y ago
      Thanks, Nathan. I'll be giving these a look later today!

dinedal 16y ago

Thanks, I'm so green to this I didn't even know what an ETF was! Doing more reading now...

treeface 16y ago
No worries! I'm not trying to scare you off, I just want you to be aware of how deep and murky the pool is before you dive in. Ultimately, all of this stuff is really very interesting and fun to learn even if you don't one day make millions off of it. :-]

jroes 16y ago

I just started reading Security Analysis by Dodd & Graham. I heard it was a classic book on investing. Given what you've said, should I bother reading it if picking at random is going to work out better in the end? Have you read it and can make a recommendation as to its usefulness? In the first few chapters they identified the issue of massive amounts of information, but the book still charges on. If you do think it's still worthwhile to continue reading it, do you have any suggestions for some introductory books that can help me understand some of the financial slang they use? :)

treeface 16y ago
I've never read Dodd & Graham directly, but have obviously heard lots about it as it is one of the seminal works in investment theory. However, consider this from WP: >However, in the 1970s Graham stopped advocating a careful use of the techniques described in his text in selecting individual stocks, citing the extensive efforts and costs required to generate superior returns in a modern efficient market. Instead, Graham later suggested the use of one or two simple criteria to the investor's entire portfolio, focusing on results of the group rather than on individual securities. Investment theory has come a long, long way since the 1930s. Hell, it's come a long way since the late 90s. In the 80s and 90s, some of the smartest people in the world came up with some fantastically complex algorithms (coupled with their generally high knowledge of global trends in various industries and markets) to generate astronomical returns (look up Long Term Capital Management). Trouble is, Benoit Mandelbrot was right. If you look at any stock chart, you'll see that regardless of the time scale, the ups and downs tend to look very similar. No matter what you won't find a stock market that goes up forever. You won't find a bond market that has high rates forever. You won't find a country that stays in boom times forever. And worst of all, you won't (just by looking at the data) be able to tell when "the big one" is going to hit. LTCM got hosed by the Asian financial crisis of the late 90s, and everyone thought they'd finally found "the formula". So, in short, to distinguish yourself in the stock market, you need to be good at picking companies (this is the very hard part) AND lucky. My brother (against my advice) started putting thousands of dollars into companies like KERX that were trading very cheaply. He got lucky and quadrupled his investment of $20k. I can guarantee you that if he does the same thing 10 more times, he will get destroyed, and bad. Time wins out. It always wins out. You can only get lucky for so long before you have to pick correctly on your knowledge AND have a large pile of money to back up your mistakes (which you will make). For example, my former employer (a $10bil asset manager) dropped tens of millions of client dollars into Enron throughout the year they went from ~$90/share to ~$1/share. Despite their intense research, they still didn't see the fraud coming because there was no real way to know. So they gambled and "averaged down" the cost basis for their Enron position and lost nearly all the money they put in. They did the same thing with Washington Mutual on the way down recently. If I were you, I'd not rely on me for figuring out which books to read. Mine have been mostly editioned texts through college and the CFA texts (which are awesome, but expensive). Search around for finance forums to see what people recommend for the modern novice investor. I can tell you is: never trust what you hear on CNBC (or anybody who speaks on it) and never trust the financial advice/opinions you read on Hacker News (including mine). The people here are mostly programmers who often have silly, oversimplified positions on economic matters, just like most other people in the world. So go ask around...you'll find some good suggestions somewhere.

nathanwdavis 16y ago

There is some evidence that you can beat the overall market by overweighting ETFs that are trending higher or whose relative strength is higher. I created a site ( http://ETFtable.com http://ETFtable.com ) to make doing this pretty easy. Sorry for the plug, but I think it's contextually relevant. Let me know what you think.

treeface 16y ago
I put on my skeptical hat when I hear claims like that. I'd have to see extremely solid evidence to believe it. Nice site! Layout is cool. I haven't dabbled too much in ETFs or tools for researching them, so I'll have to pass on any judgment due to a lack of context. Still, I'm sure someone will find some use for it.
- nathanwdavis 16y ago
  Here are some backtested results of some RS ETF strategies. Specific industry, asset class, and country ETFs just haven't been around long enough to really backtest for long-term out-performance, but these seem to indicate you can beat the overall market with lower drawdowns with an RS ETF strategy: http://etfprophet.com/two-simple-relative-strength-rotation-models/ http://etfprophet.com/two-simple-relative-strength-rotation-... http://www.bpas.com/media/HBT/dent_tactical_r3.pdf http://www.bpas.com/media/HBT/dent_tactical_r3.pdf
  - treeface 16y ago
    Thanks, Nathan. I'll be giving these a look later today!