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On investing

On investing in stocks

The sensible financial advice for most people is:

  • put your money into an index fund
  • Through good and bad times, keep buying into that index fund periodically

In the long run the market trends up. Investing in the market, like an S&P index fund, is likely to do better than

  • picking individual stocks
  • hire a money manager

The average growth rate is of an index fund like the S&P500 is about 6-8% per year - depending on where you slice the time when looking back.

However, some people want returns above the market, referred to as chasing alpha.

How do you get more alpha?

There are two options.

  1. Hire someone to do it for you.
  2. Do it yourself.

Option 1 - Hire someone

There are professionals who get paid to manage your money for you. Sometimes, they "can" make you lots of money. Sometimes, they dont'. Either ways, the expertise is paid for.

If you're good at taking money, buying shares in companies which grow and you sell later for a profit, you can charge people a small fee to do the same for them.

If you're really, really, really good, you can charge a bigger fee.

A typical hedge fund fees look something along the lines of … annual fees of x% (e.g. 1%) of assets or y% (e.g. 20%) of investment gains (whichever sum is greater).

No one can predict the future. No matter how good you are, with stocks, there is always the possibility of NOT making money.

You understand "results aren't guaranteed!"

Past performance doesn't guarantee future performance.

In 2008, Warren Buffet made a bet with a hedge fund manager that over a span of 10 years, S&P500 will beat a hand-picked fund. Buffet won!

Option 2 - DIY

Why DIY?

  • No one cares more about your money more than you do.
  • Unlike a professional fund where your portfolio might be managed to meet someone else's KPIs, you can manage your portoflio to meet only your KPIs.

But where do you start?

I think as a DIY or self-directed investor, you need to first spend time identifying your edge. In newspaper land, they call it "an angle", "a view point" to tell the story from.

With investing, you also need an angle, a view point. The stock market is complex with many ways to play; Shorting it, Options, Futures, Crypto, Value investing etc… I think each area comes with it's own nuances and strategies based on investor profile. But I think you must pick an area and go about getting good at it!