Investment Strategy
Raison d’être
My original reason for risking my money for more, and the reason I tell myself, is that the marginal value of losing just about any amount of my money at the moment is negligible. I am fairly austere in my consumption habits and have no big ticket debt. Though, having lots and lots of money would certainly improve my options in life.
History
I am a bad gambler, better and investor. I lost thousands using the Martingale betting strategy which seemed to work on short-time line simulations that I tried, but failed to work in real life. I now understand why it doesn’t work fortunately. I lost thousands on poker, which I’m awful at. Now, I’ve lost thousands on speculating in stocks.
Insight
I understand why I lost money when I gambled. It’s less clear to me now as a speculator. My consistent failure has resigned me to avoid any active management of my money making by investing for the foreseeable future because maybe I’m just a gambler and rationalizing all my irrationality in finance away. I was hoping someone here could help me understand what’s going on?
Strategy
My current stock portfolio is down 6000 dollars. My prior is that I have just been the liquidity in the market. My basic strategy has been buying mainstream stocks whose price has tanked for one reason or another (in the hope of a turnaround, or capitalising on people’s fear causing them to dump the stock below its actual value. And, to buy a few biotech stocks that seem high potential. This is all on the ASX cause it’s a hassle to open accounts to trade internationally:
Performance: underpriced
* BHP Billiton crashed due to low oil and an environmental disaster in brazil
* Slater and Gordan crashed due to getting class action law-suited by its own investors (ironic, since slater and gordan specialises in just that) through its main competitor
* Woolworths crashed due to price war with competitor and weaker profits
Growth: High potential, tractable and neglected
* Bionics limited is putting through some psychiatric medications in trials and I thought it would almost be good philanthropy to sponsor it since it’s quite novel compared to existing treatments
* Integral diagnostics is mainly owned by doctors who own clinics that order the machines so I feel like it’s undervalued by people not connected to it
* Regis healthcare gives me cheap exposure to the aging population market
* Tissue Therapies sounded like it was about a wound healing thing from a superhero comic but turned out to just be some niche diabetic product
* Donfang modern agriculture grows mandarins or oranges in China, and I wanted exposure to China and thought it was interesting that they’re listed on the Australian stock exchange
Portfolio optimization
Outcomes
I’ve either made a significant loss on each of these, over the course of a month, or basically no change in the price. The exception is tissue therapies that I bought ages ago and lost lots on too. I was going for long term appreciation anyway, so maybe things are okay? Help me become stronger! The first stock I picked I did extensive quantitative research on the fundamentals. However, I couldn’t integrate all the information I collated into a single indicator for what decision I should make and I still don’t know what that would look like so I just had to go with my gut. I made a loss anyway despite having found evidence that the team involved were actually quite pathetic because I already did all the research and thought it sad if I didn’t participate (plus shorting seemed to complicating!). I know technical analysis is bullshit, and I don’t see how any inefficiencies in machine learning of stock data that I could replicate in a timely manner with my average brain haven’t already been taken advantage of by existing quants.
Most people do better by investing in an index fund than by picking individual stocks. What makes you think you are different?
It’s not just about expected value (performance), but about risk adjusted performance. Because like I said, the marginal value of normal market returns for me is negligible.
Show some math behind that. Where’s the cutoff between negligible and significant, and why do you think you can beat the market by all that much?
So the cut-off for me would be at around 200,000AUD since I could buy a property in urban Australia outright then. I currently have 20,000AUD.
Actually I hadn’t thought this part through thoroughly. Thanks for findind this flaw! Argh. I would need 1000percent returns on my investment to make that much...
Now my strategy seems absurd. Can you think of anything I can do to make something like that?
I can think of many ways to increase your investment by 10x quickly, as long as you’re willing to accept more than 90% chance to lose it all.
More likely, you’ll need to supplement any investment with labor or other income. Your future earnings are (I hope) much much larger than your current savings.
If you want to buy property the standard way is to take out a loan from a bank.
I don’t think there’s reason to assume that you get better returns in this case for the risk that you take in this case.
I think that’s a fair analysis on further consideration of the comments I’m reading in this thread. If pro fund managers can’t do it, and even they lose to most index funds, what hope do I have?
But the question then remains: how do proprietary trading firms make their money above market rates? Is their only real strategic advantage their marketing and existing cash flows?
There are multiple ways. The most straightforward is luck. There’s high frequency trading. People like Carl Icahn make money by changing company policy. Quants have complex statistical models that sometimes pick up effects based on which they trade that are unknown to other market participants. Some companies are likely illegally trading on insider information.
Consider the possibility that you may be discounting the future too much. Modest returns can add up to quite a lot on a timescale of several years.
(Aside from that, I agree with Protagoras.)
So are you talking about compoound interest on an alternative investment with greater certainty (fixed bank deposit)?
Hmmm. So if I made a modest 6 percent per year on my 20k, I can expect to have 200,000 in 40 years (without added additions). That doesn’t seem to match what a want, but then again that assumes I have zero net addition which I reckon is unlikely.
I get approx. 5000AUD a year from Centrelink, and don’t really spend it so lowers it to 17 years till house. This is an oversimplification since I donate to charity and will probably have a job that makes more money with a lifestyle that costs money but this gives me an upper bound. If instead I can add 10,000AUD per year to my investment I can get to 200k in 10 years which seems like an attractive prospect
the principle barrier to this is that now i have my money tied up in illiquid assets that are longterm in their strategy. If I liquididate now I could be seriously damaging future gains no. Maybe it’s best to wait for those stocks to appreciate then to sell them and place in an index fund (but a fixed deposit account is safer yeah?)
Over the course of a month? The reasons you give for thinking these stocks might go up aren’t things that would reliably manifest in such a short time frame, and the market generally has been down recently. I don’t think what you’ve described here is evidence of much of anything. Probably you’re no good at active investing, because the evidence seems to suggest that nobody is (the winners are just the ones who get lucky), but the reason to think that is because of the general evidence for that, not because of your personal experience over the past month.
Thanks, that reads like a good analysis and good advice to me
If you want to make this a full time job, you can try to beat the market… I wouldn’t bother otherwise.
Consider that you are competing with professionals, and the game is in some sense rigged against you.
To have an edge, you need novel insights/knowledge that allow you to predict some aspects of the future that are not yet priced in.
I think there are senses where the game is rigged in my favour too.
I could just buy former index stocks that fall off the indexes, and take advantage of other such institutional edge cases that may not be efficient for pro’s to capitalise on, no?
Why shouldn’t it be efficient for pro’s to capitalize on the effect? There are likely hedge funds out there that trade on the effect. Those hedge funds have complex computer models to predict which stocks are going to fall in the future of the index. As a result they are going to make the trade days, hours or minutes earlier than you.
The high frequency traders are going to make most of the profit that’s going to be made on the effect.
you said you think stocks will go up; then you gave it a month. wait longer. if they are ASX200 stocks they will go up; that’s what makes them ASX200 stocks. $6000 diascrepancy is a small amount. that could close up in a day or two.
Errr....
No.
ffs. using my words badly. What I meant is that it sounds like he is trying to index. if he is indexing then just like all other funds that index; they index because those things trend upwards. But thank you for taking that out of context and badly.
You are using words badly. The verb “to index” in this context might mean:
investing in something that will provide the returns of an index
replicating an existing index
constructing a new index
Clarity is doing none of these things. What it sounds like he is doing is trying to have a more-or-less diversified portfolio of stocks. But that has nothing to do with indexing.
And that is what my original “no” referred to. It’s still no.
If you interpret “those things” which “trend upwards” as financial assets that (usually, over the long term, are expected to) produce positive returns—in other words, are not zero-sum—then there are whole asset classes like that, for example equity (stocks). All stocks are “things which trend upward”, and it has nothing to do with indexes or indexing.
“Funds that index” are funds which invest in a portfolio that replicates the performance of some index. They do this because there is customer demand for such financial products, not because indexes, and there is a great variety of them, have a particular tendency to trend upward.