Investing - Does a Passive Strategy Help Or Hurt?
I must say that I have no problem with folks buying and holding index funds. Many people have made a lot of money doing it. My problem is when investment advisers say that the ONLY way to make money in the stock market is to buy an index fund or invest “passively”. That simply isn’t true.
The new idea of efficient markets means that no matter what you do, there is no way to beat the stock market…and if you somehow do, it was a matter of chance or luck. It is an idea that is largely harbored in academic circles and it is based on one fundamental idea:
1. Stocks Reflect All Available Information
If stocks reflected all available information, there would be no way to beat the market. Stocks are information sensitive, and so they are priced largely by information. If all information is already available by the time you go to buy a stock, there is no way that you can profit by buying that stock at a specific time (also known as “timing the market”) or by buying one stock over another stock because information is what would give you an “edge” in the market. With all information available, there is no edge. Thus, the only “rational” way to invest is simply to invest in index mutual funds or a collection of stocks that will passively mirror the returns of the stock market as a whole.
The idea rests on a theory that stock prices have one “true” value. There is only one “correct” price and that that price is determined instantaneously by the market. If and as new information becomes available, the price of the stock changes instantly and you can never make any money from it. The stock market is always right. That’s why you can’t beat it (consistently earn higher than average returns or higher than indexed returns).
Debunking The Intrinsic Efficient Market Theory
“Warren Buffet” - that should disprove the “Efficient Market (more…)
This Article was brought to you by:
The Small Futures Account Conundrum
I recently scanned a Commodity Trading Advisor Database to look at minimum account sizes and found minimum account sizes ranging from $25,000 to $5,000,000. I found the typical CTA trading a small minimum account size had a concentrated portfolio, high margin requirements, little money under management, a short track record, high volatility or was trading just options. Diversified trend followers seemed to have minimums that were usually at least $1 Million.
Small accounts in the futures markets (less than $250,000) face a considerable number of challenges not experienced by large accounts. Considering that most commodity futures contracts have face values in the tens or hundreds of thousands of dollars it’s easy to surmise that these contracts were designed for large accounts. However, low margin requirements have long attracted smaller speculators and have been the proverbial “rope to hang one self with”.
Let’s analyze why large accounts may have it easier than small accounts. First, large accounts can afford to trade virtually any opportunity at any time. There are over 100 tradable commodity markets worldwide, and should buy or sell opportunities simultaneously exist in any or all of them a large account can easily afford the margin and exposure to trade them all. It has been said that that when it comes to investing that “diversification is the only free lunch” and large accounts can afford to diversify with impunity. This is in stark contrast to the small account where prudence dictates only having risk and exposure in a limited number of markets simultaneously.
Furthermore, a large account is not restricted from trading contracts whose volatility is relatively high. For example, a London copper trade with a stop loss $14,000 away represents risk of 1.4% in a million dollar account. However, in a $100,000 account this same t (more…)
This Article was brought to you by:
Eight Ways to Raise Money For Investing
When you are new to investing you may have little or no funds with which to invest with. Let’s take a look at several ways to get access to money so you can begin your investment career sooner rather than later.
1. Savings - The old fashioned way like you were told to do as a kid. Remember, all great investors are great savers. If you are not saving money now then you are never going to become wealthy until you start saving. Make sure you pay yourself before you pay anybody else. Simple but powerful words.
2. Sell something - In this modern society we live in where we just have to own the latest of everything. Well the good news about that is that you are bound to have plenty to sell. Put an add in the newspaper or the easiest way, E-Bay. Now the harsh reality, stop spending money on things you don’t need. Wait until you have real wealth then pay cash for them.
3. Tax - Minimize your tax as quickly as possible. The wealthy don’t become so by paying lots of tax. Get yourself a great accountant and get good advice on how to lower your taxable income. There are plenty of ways to do this. Starting a side business is a great idea. Pay your expenses and spend, then pay tax from what is left over. It is much better than being taxed and then spending what is left. This will send you broke, quickly.
4. Income - Tomorrow you are going to see your boss and get that pay rise. However, first you need to get your reasons down on paper why you should get a rise. Write down some good solid reasons why you should get one. If you don’t deserve one then take a long hard look in the mirror. If you can’t do your best working for someone else how are you going to give yourself the best? Be the best that you can regardless of what activity you do and the rewards will come. Ask for 10% extra. If you don’t get it but you know you are worth it, then ge (more…)
This Article was brought to you by:
Teach Me Options Trading
Options are contracts that give the holders the right to buy or sell a certain number of underlying assets for a predetermined price. With options, you can use a relatively small amount of capital to start trading in the stock market. Unlike futures which can expose you to unlimited losses, option holders can feel secured that their maximum loss is capped.
Options give you the RIGHT but NOT THE OBLIGATION to buy or sell an asset at the exercise price (strike price), if the market goes against you, you can simply choose not to exercise the options, the maximum loss to holding an option contract is the price you paid for the options itself. You don’t suffer any more losses than that. Options are very effective in terms of risk management. That’s why so many institutional investors such as hedge funds engaged in options trading.
There are two types of options: CALL and PUT. A CALL gives you the right to buy and PUT gives you the right to sell. When the stock market goes up, as a CALL option holder you may buy stocks at the strike price (lower than the market price) specified in the contract, and immediately sell the stocks in the market to lock in the profit. When the market goes down, as a PUT option holder you can sell your stocks at a fixed, predetermined price. You are therefore protected from a stock market crash.
Exchange traded options are guaranteed against default and are regulated at the federal level. Investors tend to obsess over the choice of options: “Should I buy Citigroup? Or 3M, Microsoft?” However, one’s choice of option does not matter as much one’s overall asset allocation. Almost any underlying asset can make you money, if you choose the right strike price. The better question you need to ask is how options fit into your overall portfolio. Ideally, your portfolio should include equity for growth, debt and bonds for (more…)