After-work Activities: Should you Trade, Invest or Study?

Among the perks of undergraduate living is that you are free to canoodle with spreadsheets.

This spreadsheet attempts to put in absolute dollar terms, the cost of pursuing 3 activities in one's adult life after work hours that doesn't involve liquor, women/men, social activities etc. over 1 year and excludes cost of living.

In this hypothetical case, Mr A Hardy either actively trades with a strict money management strategy, invest for the long haul (i.e. A Long-only investment strategy, but Mr A Hardy believes in careful allocation of funds across portfolios, so he insists on picking his own funds/ stocks/ bonds etc. No shorts or puts or speculative derivatives trading, however) or he can pursue his MSc in Financial Engineering. A course of study which opens doors and earns him the right to climb into a higher tax bracket. (or so he hopes!)

Here's a couple of non-surprising findings.

Trading is ok when one does it for a hobby, but it blows once you do it for a living. Take a look at line (L) of the spreadsheet. By far, investing gives you a much larger share of net wealth, and this is before Cost of Living mind you!

Also note, that these activities are over a 1-year basis. So the negative Net Wealth for Studying Option is amortised over the rest of your remaining life. Furthermore, you make up for that loss by moving into better paying jobs, or earn a higher salary.

Trading, some claim, offers an additional or alternative stream of income. This is true so long as the input less than the output. Consider how much effort,energy and time it takes to maintain one's shareholdings or trading portfolio? If you work in the office, and you work at home, is there space for your family? Is there space for your own interest?

The biggest attraction of getting into trading and investing is the vibrancy of one's after work life. People who are doing stuff with money seem very involved. Its a wee bit like footy lovers. All they seem to do is talk soccer.

It is my personal belief that people who say they trade to become richer are deluded. They trade for the thrill and for the pleasure of seeking something arcane and mystical that has opportunity for wealth. After work traders are modern alchemists.

Expectations Investing - (Sorta like Trading on Fundamentals, except with a fancier name)

URL - http://www.expectationsinvesting.com

Kinda excited about reading this book actually.

From the site:

1. A revolutionary yet common-sense investment approach that reads the market's current expectations and provides the tools to anticipate future expectations.
2. A clearly written book on expectations investing written by valuation experts Alfred Rappaport—author of Creating Shareholder Value—and Michael J. Mauboussin—Chief Investment Strategist at Legg Mason Capital Management-and published by Harvard Business School Press.
3. A web site that serves as a resource for those wishing to learn more about Expectations Investing—and how to apply its powerful analytical tools.

Alright, I'm sold.

DIY Investing or Seek Financial Advisory

I am off the age when peers are starting jobs, earning a decent salary, pursuing their dreams and basically holding a job. Last nite I had dinner with friends who were keen on investing.

Some had the view of doing it alone. Others believed that having a Financial Advisor helps because the advisor acts like a confidante and helps to hold in check speculative urges.

The awkward truths

Financial Planners in Singapore earn a Basic and a Commission based on a stream of future payments from the financial services that you purchase such as Insurance and Funds. That is true.

It is true that they make more money if they have more clients.

It is also true that they'll make more money if they sell more of a certain type of product.

So what?

Your job is to optimize your investment opportunities. In secure long term investment, your biggest enemy is yourself because:

1. You make all the final decisions. Therefore you determine the outcome. (You and the sum of your stupidity and irrational fears.)

2. You spend a lot more time thinking about investment opportunities rather than worrying about possible dangers.

3. You get emotional and irrational when you hear others are doing better than you in Fund/Stock/Investment Idea XYZ. You switch between funds and incur huge transaction costs when ideally you should park your money and let time do its thing.

Therefore Financial planners:

1. Offer you advise and counsel and can help you get up to speed on financial issues sooner.

2. They've got the tools to help you come up with an investment plan in a rational, logical manner which can act as a framework for future planning. (Its nothing more than an Excel spreadsheet based on Annuity calculations that you can download from the Net, but seriously, do you have the time and inclination to study the assumptions and work through the model and figure out why exactly Money has a Time Value and how that affects your returns?)

3. By going through a financial planner in an investment plan, you avoid OVERTRADING which increases the transaction cost of your investments.

Financial planners' advisory role dampens irrational desires to trade when you don't really have to.

After saying all that, if you still want to do it your own way you can start here: fundsupermart.com

Alternatively, you can drop me an email and I'll help you get in touch with a couple of friends who are dead keen on maximizing your wealth without sacrificing your sleep.

Donc.

What I did on the 20th anniversary of the Wall Street Crash of 1987

I stayed away from reading any market related news. I read popsugar.com , slashdot.org and boingboing.net instead. Later, I chatted with my girlfriend and had a cup of coffee. I napped for half an hour. Woke up and thought, this isn't too bad. I took the time to reconsider my investment behaviour and reconsider my options.

I stopped trading a few months ago because I blew up my trading account during the sub-prime crisis. The spillover from that event propagated through the financial system and made a couple of my warrants positions finish worthless.

I had bet big on the warrants of Singaporean banks and Capitaland, largest real estate group on the island. Given the fundamentals, I thought they were safe bets. I was wrong.

When the crisis hit, the stocks wouldn't climb to reflect stronger earnings results due to all the negativity in the US market and prices remained depressed. I had committed funds too early in an attempt to average out the losses but by the time the market had bottomed out, I had invested too much money into each bet to make them good candidates for the ride up again.

Looking back I think I began trading in warrants because I was bored. From my lecture notes, I figure I am what Larry Harris, author of 'Trading & Exchanges' describes as a Utilitarian/ Gambler/ Futile Trader.

I'll admit it. I regret placing those bets. I regret them because I compromised on my ideals. That I won't chase the stock. That I won't play the market's game. That I won't be fooled by my schooling.

The more you know, the more you think you have an edge over everybody else in the trading game. The truth is that I am a nobody with little new information and the cost of gathering every little scrap of information just to make a few trades is too expensive for my taste.

Fund managers can trade because they get paid to do it. Brokers trade because they get paid to do it. They need to be on top of the news, they need to be on the lookout for investment opportunities. Its their job.

I don't have to. I have a life. Its Mine. I have only one life and to waste it all scouring the Net for information, prowling the Forums for a sensing on market sentiments - its just too much.

So on the 20th anniversary of the Wall Street Crash of 1987, I'm relinquishing my dreams of becoming an Active Trader and surrendering myself to the way of the Informed Investor.