by Mark Lawrence
Mark's Market Blog
Blog Table of Contents
Portfolios & Risk
What is money?
Interest and Growth
Money Utility and Risk
Trade Deficits and Inflation
Distribution of Income
Distribution of Wealth
Zero Coupon Bonds
Reading Bond Pages
Risk & Volatility
About This Site
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|Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. -- Will Rogers|
I've recently decided to take charge of investing my own retirement fund. I'm learning about investing - especially the more advanced topics such as risk, volatility, portfolio theory, and capital asset pricing theory. This is the stuff the "rocket scientists" on Wall Street do. As I'm learning, I'm writing these pages.
It's thought by many that investing means picking winners, feeling good if you do and bad if you don't. In fact investing is a fair bit more complicated than this. Done properly, investing is the science and art of trading off risk against reward. The object is to pick a group of investments that has the strongest likelihood of making money and the least likelihood of losing money. This is not guesswork: there are well known formulas for evaluating risk and predicting reward. The methods described on this page are how most mutual funds are managed, not counting the important trips that are taken to Aspen, Lake Tahoe and Napa Valley to check on the corporate management of possible investments.
There are many theories about trading stocks. Probably the most popular among individuals is called Technical Analysis. This theory says that the future price of the stock can often be predicted based only on the historic price of the stock, paying particular attention to technical indicators which are particular features in the shape of the price history graph. A distant second place among individual investors is called Fundamental Analysis. This theory says that you can judge the value of a company by it's management quality, products and marketing, and projected future revenues. If the stock price is below this value, then the company is a bargain and the price will eventually go up. Both of these theories depend on an assumption, which is that the market makes mistakes in pricing stocks, and you can do better than the market at determining correct pricing. If you think carefully about this assumption, I think you will decide that unless you know a particular company inside out, your chances of regularly beating the market at stock valuation is not very good.
However, relatively little stock is owned or traded by individuals. About two thirds of all stock is now controlled by what are called institutional investors. These are the people who direct the investment policy of mutual funds, pension funds, banks, and insurance companies. These relatively few people, perhaps a few thousand, are responsible for probably 80% of the trading on any given day. These are the people Tom Wolfe called "the Masters of the Universe" in his book The Bonfire of the Vanities. Generally the Masters are making their trade decisions based on a completely different view of the market. They use tools such as risk / earnings analysis, portfolio theory, and capital asset pricing models. Few individual investors have ever heard of these tools, yet these are what is setting the market prices. It seems to me to be a poor strategy to go to battle against these people and be completely unaware of their weapons and tactics.
On this site, we'll explore these techniques in some detail. To the left is a menu of pages. Investing 101 is a primer for
people who are new to investing. This is a quick no-math survey and explanation of your basic investment options. Below these
pages are the advanced topics. Some of these require a bit of math, especially statistics and a small amount of calculus.
Sorry. The advanced topics are the real "meat" of this web site - this lays the theoretical groundwork for all investing. The
sum of the advanced articles is roughly equivalent to the quantitative analysis of investment course in a good MBA program.
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Revised Friday, 09-Sep-2016 14:22:02 CDT