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  • dgaron2 dgaron2 Jan 16, 2012 12:03 PM Flag

    Not only must you know how to invest

    But you must also invest well. It is not enough to have theory without being able to implement it.

    Here are a few analogies I came up with in the past few years.

    1) Imagine that you are sentenced to prison for 10 years. You are locked into solitary confinement for 23 hours per day. You are given a computer with internet access and an investment/trading account with 100K in it.

    If you can turn your 100K into one million you will immediately be released from prison. However, if go broke your sentenced is increased to life in prison.

    You must physically cash out the proceeds from your brokerage account through a stock sale (so as to guard against price manipulation on a low volume security.

    On the last day of your 10 year sentence you must also cash out. Anything above 100K is yours to keep and start your life with. If it is under 100K you get nothing and are shown the door.

    If you think of investing/speculation like this, then you will realize how serious each decision is, and how good and bad decisions will effect your life.

    I would argue that the best way to deal with this prison sentence and investing opportunity would be to search for the most mispriced securities you could possibly find. These would probably be small-caps like 4Kids. If you found 4-5 of them your best move would be to put 20-25 percent into each.

    If you were only going to invest in one, you would invest in something like 4Kids after you read the verdict.

    If you look at 95 percent of the investments you have ever made you will realize that most are absolute garbage investments. There was no real mispricing, and you were better off not doing it.

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    • And now I will explain to you why Wall Street gets all of your money.

      Assume you have two exactly the same businesses in one single time. Every thing is exactly the same, including the earnings and financial condition.

      The first business is privately owned by the founding family. They hold the shares for decades and never sell.

      The second business trades on the local stock exchange, which happens to be at restaurant/bar in town. The shares at this second business can be bought every day, and there is an active market in the buying and selling of the shares at the bar, as the bartender rings up the transactions on the register. Every time there is a transaction the bartender gets at least $10, and often times more than that.

      Each person who trades at the bar also pays taxes at the end of each year if he/she comes out ahead. There are also financial advisers who visit the bar, and they will take a fee even if all they do is help you place a trade with the bartender. There are even magazine and newsletter salesman, and they do good business selling you information about the local company, and keeping you up to date on all of the goings on with the business.

      So, one business is privately owned and the shares don't trade for decades. The other business has daily trading of its shares.

      Assuming the companies to not pay dividends, there is only one way for the group as a whole to make money, and that is if a 3rd party buyer purchases the company for more than the amount paid.

      With no dividends and with no 3rd party purchase, it is impossible for those trading at the bar to come out ahead as a group. The bartender makes money, the financial advisors make money, and the magazine and newsletter salesman make money, but those who trade at the bar will take a net loss as a group.

      This is why you are broke and Wall Street types have summer homes in the Hamptons. You let them do it to you.

      This is also why Warren Buffett says that the Day Trader/Market Time Hall of fame is an Empty Room.

      Buffett also says that most people would be better off if they only were allowed to make 20 investments in their lifetime, and each time they made one, someone would punch a hole in a card until they used up the 20 punches.

      Any and all daytrading/market timing theories are 100 percent garbage. The group as a whole cannot win, and that is 100 percent fact.

      • 1 Reply to dgaron2
      • And most people don't even understand risk and reward. The novice will that you cannot win big without risking big, but Buffett has proven that the exact opposite is true. Little to no risk gets you huge rewards.

        Buffett has had his money less at risk that 99 percent of all other investors, and he has the most money. Low/No risk equals high rewards. You need to remember that Risk equals Loss.

        Say it again. Risk Equals Loss.

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