Investments

From: Perry E. Metzger (perry@piermont.com)
Date: Wed May 21 1997 - 12:25:25 MDT


> From: Max More <maxmore@primenet.com>
>
> A few of us in So Cal have been meeting to discuss investments. I am very
> interested in helping the development and communication of investment
> wisdom among Extropians. You know the expression: "If you're so smart, how
> come you're not rich?" We should all have a compelling answer... "Just take
> a look at my portfolio, buddy!"

Here are my thoughts.

1) The markets are not perfectly efficient -- perfect efficiency
   requires perfect information transfer. The fact that markets are
   ever shifting, products ever changing, information always taking
   time to diffuse, means they can never be perfectly
   efficient. However, the markets are pretty damn close to efficient
   these days -- efficient enough that things like day trading are a
   risky way to make a living.
2) It is possible to exploit market inefficiencies to make money. I've
   seen people who are just too far out of the statistical spectrum to
   be accidents -- traders like Paul Tudor Jones and Louis
   Bacon. These people are, however, unusual. I've seen far, far more
   people who can't manage to trade their way out of a paper
   bag.
3) The people who are guaranteed a place at the banquet are the casino
   owners. Brokers always get their vig. Traders -- especially
   amateurs -- don't always do so well. In the futures market, friends
   of mine at Refco tell me the average time between opening a futures
   trading account and losing *ALL* your stake is about a year.
4) The people who do manage to make money "trading" rather than
   "investing" are almost inevitably full time professionals who are
   very, very smart -- and even they sometimes "blow up". The author
   of the famous "Memoirs of a Stock Operator", Larry Livingston,
   killed himself a few years after writing his book after losing
   every penny he had.

My advice is therefore this: if you feel like you are drawn to the
securities markets and are young when you start and a risk taker, much
money is to be made from trading. However, you won't find that most of
the people in the Forbes 400 got there this way, and its a dangerous
way to make a living. For every guy that turns out to have the right
combination of tallent and luck, hundreds or thousands lose their
shirts.

On the other hand....

1) Over the long term, the stock market DOES outperform almost all
   other investments -- and outperforms it handsomely.
2) You don't even have to think much to make money in the markets:
   passive investments like buying into an S&P 500 following mutual
   fund do bring their investors excellent returns.
3) Even random portfolios of sufficient size do pretty well in
   general.
4) People who have a slight information edge -- like understanding
   what a high tech company does -- can sometimes get an advantage
   even if they aren't full time investors.

My advice is therefore simple.

If you want to be rich, you have two options:

Option one: get a good job, save as much of your money has you can
bear to starting when you are young, and invest it in mutual funds or
in a diversified porfolio. If you wait long enough, the returns will
be good. The higher paying the job, the more you can afford to
save. Almost everyone can do this and be assured of living comfortably
if you have enough patience. No, it isn't glamorous, and it won't make
you "filthy rich". However, as the toroise and the hare found out,
slow and steady often wins. If you can save 20% or more of your income
and you invest all of it, in ten or twenty years you'll find yourself
with a nice amount of cash.

Option two: start a high growth business. This is the most practical
way to become "filthy rich". It is, however, stressful and not for
everyone -- and not everyone has good ideas.

Combining these strategies is, of course, perfectly reasonable.

Perry



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