Wednesday, June 2, 2021

What I’ve learned about markets

A few have asked so I’m typing this out. Most this information isn’t new, it’s my interpretation of it and what I think is the most valuable. So far, I’ve had success and over 100x ROIs (not crypto) in what’s probably preparation + luck. Not financial advice.

Time in the market > timing the market - most important rule. “You miss 100% of the shots you don’t take.” Stanley Kubrick and Steven Spielberg agreed the hardest part of the job is getting out of the car. The most successful events in the market came down to just a handful of days. If you don’t have some exposure to the market you will miss those parabolic leaps when they do happen. So if you’re not in the market, or don’t have sufficient capital in it, or your cash is “settling” from a day-trade meaning you can’t access it, you’re going to miss out. Individual days of parabolic success are the same for individual stocks, so if you’re not in before the spike you don’t benefit. Investor Rick Rule suggests being down 50% is the price you pay to be up 400 to 500%. Meaning, long term gains require the patience and foresight to withstand the price volatility that is likely to happen before big gains. In short, it’s better to be a stumbling, clumsy investor more often than someone trying to time the market so precisely they are paralyzed by indecision.

Avoid risk of ruin - the second most important thing is simply don’t be over-invested and take controlled risks. You generally shouldn’t have any money in your investment account that you need to take out unless it’s for another investment (house, business) or you’re making enough gains through investments where it’s akin to income. If you are over-invested you may end up taking money out of investments at a loss that you still believe will be profitable in the mid to long term. Try not to invest money you may need for personal use in the short term for this reason. And don’t trade with money you can’t afford to lose is terribly obvious advice. Avoiding risk of ruin seems to be one of the most important aspects of trading. It goes with the saying “Bulls (betting with the market) make money, bears (betting against the market) make money, pigs (dummies who yolo) get slaughtered.” If you receive a million dollar inheritance and YOLO it all into dogecoin at .45 you could double your money but you could also lose 90% of it. Avoiding risk of ruin might be say, putting 95% of it into safe blue chip stocks and only putting $50,000 for a controlled yolo. This way if your brilliant investment idea flops you can recover. Avoiding risk of ruin means you get to keep the lights on and try again.

Pareto’s Principal - this is something I first learned about in Peter Thiel’s Zero to One outlining his success in creating PayPal and investing strategy. Pareto’s Principle is essentially a rule of thumb dictating 80% of results are driven by 20% of the effort. It’s a way of making a calculated diversification strategy. For example he explains when looking into an industry, he will invest in a handful of companies with the idea each company must have enough potential for success to cover the potential losses of the failed companies. This is the same 80/20 strategy. For example, I’m sure cultured meat has huge potential for the future. Many of those companies will fail but if you can bet on the best horses, with the huge upside potential only 20% success could cover your losses and achieve great gains.

Probability - Nassim Taleb pointed out a foolish investor who said he doesn’t mess with stock options because 90% of the time they expire worthless. But he added this means nothing, without knowing what you stand to gain the 10% of the time you do win. If it is weighted with gains in the thousands of percent that has to be part of the equation. Taleb in The Black Swan also talks through the analogy of heads and tails coin flipping, and how that could be imposed upon the stock market if you’re talking about many different investments or stock options priced low enough to hedge against the low probability they will end “in the money.” But unlike a coin flip, even a little bit of knowledge changes the landscape of probability in your favor dramatically.

Psychology & strategy - despite emphasis on the fundamentals the market is too big not to be in large part psychological, which means speculative trading has huge influence on it. You can have gut-feeling traders who make an investment on a news story, then the slightly more informed trader who trades speculating on what those traders will do (e.g. buy the rumor, sell the news), and you can have the super serious fundamentals trader who still have to take speculative trading and rumors into account, and then the high-level hedge fund people who have to navigate and manipulate the entire picture. It’s important to do some mental accounting to have a strategy that works for you and your psychology. Most people are fine with limiting risk to their safe 401ks. Some want to actively invest but can’t handle seeing red day after red day in their trading account, so they need safer investments but also to hope to get in after a dip for a better entry point. Then there’s the people who ride large, violent fluctuations on the high risk, high reward spectrum that are willing to brave near-ruin for a disproportionate gain.

Up/down - calling back to the probability section, the coin flip analogy is important. An investment is essentially always going to be worth more, or less. From there it’s up for an investor to decide which way it’s going and for how long. It’s up or down. This is the case whether the play is entirely speculative or not. This is the case of whether it’s a good company or Enron. This is the case regardless of how good or bad the fundamentals look. You could have something with great fundamentals but where the public sentiment is completely sour and in that case it would be better to short if there’s no catalyst for that opinion to change. A good decision weighs sentiment, speculation, catalysts, due diligence, potential for future earnings, and fundamentals, yet sometimes just one of these can save you time by inching you towards yes or no.

Take the L - “Stonks only go up” is of course a lie. Sure the S&P and major indexes go up, that’s because they trim the losers. And even good stocks don’t go up in a bear market, sometimes for years, so if you need access to that money you end up taking a loss. In stock picks where the information has changed or the catalyst you saw for market gains has been proven wrong, cut losses. Many people fall into the “sunk cost fallacy” and never want to take a loss. -30% can quickly turn into -60%. That’s better off into an investment you believe in.

Paper trading is kinda bs - unless you’re of an age where you have literally no money I believe paper trading to be a waste of time. Even the average Robin Hood trading account of $250 is more worthwhile because of skin in the game. There is no pain in losing imaginary money. Losing or gaining real money is informational and it properly calibrates your brain for risk.

It’s all a pump and dump - nearly everything has the buy low, sell high dynamic. After studying a bit of the financial markets it’s easy to see everything as a pump and dump. In conception you convince your mate you are worthwhile and have resources or childbearing skills. Upon your birth, hospitals artificially inflate fees to gain as much as they can from insurance companies. It’s the nature of salesman and advertisers. Government officials do it with false campaign promises. Colleges exploit the government promises of tuition by requesting more. If the government can’t tax you they can print money to take your labor by devaluing currency. It’s promotion and under-delivering. It happens with hype-beasts. It happens when flippers and scalpers suppress availability to create demand. It’s even in death, as funerals are a traumatic and stressful time and businesses know people aren’t trying to look for a bargain when dealing with the death of a loved one. Of course it’s in the market, so take suggestions with a fair amount of skepticism.

Manipulation - market moving institutional investors and whales can all have a huge influence and create waves to take retail (regular person) money by shorting or funding with tens of millions or billions. Elon Musk probably pumps Dogecoin to distract that his own company’s stock is overvalued. I believe it happens on news organizations like Motley Fool or Seeking Alpha. It happens by regular people on Reddit, Twitter, Investorhub, Facebook groups, Stock Twits, etc. Some try to sell others on the stocks and some are just trying to sell themselves. So not only do you need to do due diligence on your stock, but any person or a company who might wish to exploit it.

Learn to like bleeding - there’s probably a level of intense conviction required to make truly massive market gains. It requires discipline in the form of the lack of emotion in the pain that is losing money. And it is painful, because you’re risking livelihood and future security and above that peace of mind. It’s an unnatural demand but a necessary part of the process. You wouldn’t expect to get good at something without misses. Many live their lives in a poverty and scarcity mindset. It’s a visceral feeling to dismiss that and welcome what comes and try to ride the ups and downs, and why not. Tomorrow I bet the sun comes up but it’s not guaranteed.



Important things that helped, so far

The Art of Thinking Clearly, a book by Rolf Dobelli describing common thinking errors and biases. It’s a great resource probably because he essentially plagiarized, which means you can take the ebook without guilt. It’s to the point and can substantially refine the way you think about things by outlining what to avoid.

Naval Ravikant is a no bullshit entrepreneur and investor. He wrote short and succinct ideas about wealth creation in Twitter threads that were later condensed into a 3.5 hour YouTube video how to get rich, titled in a sexy way but it’s really about responsible wealth creation.

The first 100 pages of the 4-Hour Work Week by Timothy Ferris. That’s when he outlines his best points and shortcuts. The rest didn’t feel equally as important.

If you have more time, the audiobooks of Nassim Taleb, particularly Antifragile and The Black Swan narrated by Joe Ochman. In terms of nonfiction probably among the best books in terms of good ideas per capita.

What I Learned Losing a Million Dollars is a book that is sort of the counter to the stereotypical how I became a billionaire books. You can probably learn more from failure than success but it’s not as sexy.

Zero to One by Peter Thiel explains the story of Paypal and how to invest strategically in a compelling way.

 A Random Walk Down Wall Street for a historical perspective on the market, explaining previous bubbles, hysteria, and index funds.

Comedian Jessa Reed on money and avoiding the poverty mentality.

Keith Gill’s (RoaringKitty) early assessment of $GME, here, well before the pop is great example of value investing and due diligence from a retail(-ish) perspective.

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