Investing

[Matt-Cook1]

I know that a lot of people here are great at maths, and mathsy people make the best investors. So, I was wondering if any of you have had experience in investing.

I'm right at the beginning of my investing career, due to being dissatisfied by the working environment of engineering. In my own time I've been putting a hell of a lot of time into research and programming finance/investment topics.

I've started with a good source; Markowitz's "Portfolio Selection". I know this is a limited approach and I will only use this as an introduction. I'll research potential improvements to his methods.

SO. Does anyone here have any stories of their own experiences, or wisdom to offer us ?

- Matt

[Lovins]

Zero experience, but the current actuarial exam I'm studying for mainly covers pricing options.

[Red Bull]

A lot of theoretical knowledge, basically everything actually. But never bothered to do it that much in practice.

[Matt-Cook1]

Oh, cool Eddie. What method? I did a monte carlo method (Longstaff and Schwartz, 2001) on Matlab that was pretty fun. Kind of elaborate method, but not too useful. Well, at least it would tell you if you should hold your option or exercise, but I wouldn't use it to decide whether or not to buy in the first place.

[rshepherd1000]

Make sure youve read Fooled by Randomness

[Worlds-One]

I let Eric in on a little info on Apple hitting 170 back in September last year (2008). I made a friendly bet with him when it was about 85-90$. The stock was at a split from where it was 6 months prior. The bet was that Aapl would hit 170 by April 2009. I believe it hit 170 by July. Lost the bet but if you were to look at aapl's chart right now you would see I had all the right intentions with my statement/bet. It's currently at 203 and hit 205. I had a price target of 220 back when it stood at $85. Cramer - that runs that show on cnbc, thinks the stock can hit 300+
 
I also wanted to be in the 120 move to 190 with call options with my friends. (back in Mar of 08)  They were a bit "timid" because at the time the market was in free fall. The stock moved 55% or so in just a few months. ITM call options was at 130 mind you and with options thats alot of $$. On a side note I actually went into the AT&T store at the gardens mall and wrote in one of their floor model iphones in the "notes" section that "apple was a buy at 120" from there it went to about 190. Very funny....


As far as investing goes, every investor or investing firm will differ from someone/place else. Do research on what stocks you like or what stocks move. Find out averages, play channels, back test. Read up on everything you can and try to learn what it is you're doing.

This all depends too on what it is your trading. (Stocks, forex, bonds, futures, options, mutual funds etc.) If you go options like Eddie - I would suggest 3 month or 1 year "calls." The "puts" are over sold at this point and its tough to really short things especially after what has already happen in the last 2 years. Any option (put or call) will be more expensive with a longer expiration (1 month to a 1 year anyway.) The longer the expiration the more the call(s) or put(s) will be per contract(s).

[Lovins]

Yeah just learned Monte-Carlo, also Black-Scholes, binomial trees, Brownian motion, etc, and methods for determining the probability an option will pay off.

[octoinky]

Brownian Motion Took an entire course on that but in my background we're more-so looking at the theory of it and proving different formulas based on alternatives like brownian bridge, absorbed brownian motion, etc.

I started a course called "Mathematics of Finance" which was totally on this stuff from a great prof but meh, wasn't so interesting.

Good stuff to look at would be stochastic processes in general, martingales more specifically, and things like markov chains, brownian motion, time-series analysis and the black-scholes formula as Eddie mentioned! Understanding the background to stochastic processes (basically "random movement") is very good just to have the intuition. Check out stuff like time-series analysis where you can break down random motion into seasonal trends, etc.. Basically there exist methods that "find the noise" in random motion, and once you take that out you can see the REAL trends, be them from regression or seasonal. Like tracking temperature right now theoretically has 3 components: linear upward trend (global warming), seasonal trend (year-round..) and random noise on top of that. Theoretically

I believe that having the intuition for things is often more important than knowing how to do it. You'll be able to pick up faster, etc., understand what software is showing you with all their pictures and breakdowns, and know what information to DISREGARD.

---

That is very little help, but maybe some articles worth wikipedia-ing will come from it

[Cyberwrath87]

1. Diversify your portfolio
2. Choose different industries that aren't necessarily correlated in performance.
3. ????
4. PROFIT!

[octoinky]

Lol, Goose, I just have zero interest in investing right now whatsoever. Having a math/econ/stats background will make me more successful than most, though, just having the intuition and not having to overpay some quack to tell me the value of diversifying.

Education at a research university isn't necessarily about being taught EXACTLY what to do in the real world. I can't go start my own business or make my own money right now, but with a strong math/econ/stats background, you are trainable, adaptable, and in general set up for success. Is it the best way to be a billionaire? Nope. But set up for a strong career wherever that may be, yes.

Dunno why you're so against education, what has your lack of it gotten you? :P

[RWG]

Freedom.

And that's something you will never have.

Is it the best way to be a billionaire? Nope. But set up for a strong career wherever that may be, yes. Is it the best way to be a billionaire? Nope. But set   up for a strong career wherever that may be, yes.

It is only the best thing to have to set yourself up for a strong career because it has been arbitrarily assigned so.  The value of an institutionalized education is not intrinsic.  It's not something like a natural aptitude or social network.  If someone decided that it should have no value, it wouldn't, unlike the two assets I mentioned.

[Matt-Cook1]

Yeah that's all good stuff, Eddie and Octo. Generating stochastic data is pretty fun. I think the only thing I haven't looked into from what you said was identifying noise. And I totally agree with your view of University, Octo; a simple quote from a tutor that I always spam to people is "uni teaches you how to learn".

Got a fair bit of statistics together last night. I'm going to code up a CAPM that takes into account skewness and kurtosis. I'll prob start with the original CAPM for a bench mark first.

Shep, that book looks pretty interesting. Looks like it'd help one take a step back and not take themselves too seriously.

Goose, mutual funds and hedge funds generally have little place in an efficient portfolio (due to performance fees), and advice like "buy this particular stock" is not effective either. You need to look at the statistics of the stock.. and even then you won't be able to tell if adding the stock to your portfolio is worthwhile without doing some maths.

[octoinky]

Like I said, look into the free stats software "R" for stats, and time-series analysis. Any text that relates

1) time series
2) financial analysis
3) "R" software

from the library / Google books will help tremendously IF you plan on toying with data. You can input stock data (a time-series is just a "list" of sorts, but with TIME attached to every point). Standard data analysis might have order, pairs, etc., but no specific time. Time series.. well, you get the idea Anyway, load a time series data set into R (can download a stocks history into a text file and upload into R) and you can remove noise to view trends, look for any seasonal components, do standard regression analysis, modify stock value for the value of the dollar then do these analysis, etc. etc. It might not help you make key decisions like investing software specifically designed to do so, but like I said before, just toying with this and knowing how stuff works is ALWAYS a good thing.

Cheers

[RWG]

Invest in real estate if you don't like mutual funds.

[Matt-Cook1]

R... yeah... I did a bit of that in 2nd year maths. Hated it of course, but didn't have an appreciation then. I'll grab it for sure.

[dragondragon18]

Freedom.  
 
  And that's something you will never have.  
 
 

Is it the best way to be a billionaire? Nope. But set up for a strong career wherever that may be, yes. Is it the best way to be a billionaire? Nope. But     set up for a strong career wherever that may be, yes.

It is only the best thing to have to set yourself up for a strong career because it has been arbitrarily assigned so. The value of an   institutionalized education is not intrinsic. It's not something like a natural aptitude or social network. If   someone decided that it should have no value, it wouldn't, unlike the two assets I mentioned.

Freedom, eh? Don't you still live with your parents? ;-)

[RWG]

Yes, and yet I can still do anything I want

And I actually mean anything.

[wheatrich]

this is how to make $ in the stock market

when everyone thinks the market will go up forever SELL

when everyone thinks the market sucks BUY

I don't believe math or stats can accurately project things that are decided by the 95%+ people involved in the market who failed that. You can't predict what insane people will do.

[octoinky]

Meh, plus the point that the mathematical foundation of investing, from a theoretical perspective, is based on the fact that all decisions are "break-even" otherwise there would be an option for 100% profit (arbitrage?) and the whole system would implode.

As in how options are priced, etc.. But understanding that stuff can't hurt.. which is why I recommended looking into the theory.

As wheat said, and as theory says as well, you can't predict it.

[Red Bull]

Unless you have inside information, which is exactly the thing I would recommend. GET IT!

[rshepherd1000]

of course arbitrage exists and can be exploited in many ways tailored to personal risk tolerance

anyway this whole discussion is fairly lol without first knowing what your bankroll is and what your goals are

[Matt-Cook1]

Bankroll is pretty small

Current goal is to set up optimization program that figures out the lowest "downside risk" (using lower partial moments or something similar) portfolios for a range of expected returns.

It's proving to challenge me (in a real cu.nty) way because, unlike variance, you can't willy-nilly form a co-lower-partial-moment matrix, like a covariance matrix. More journal articles to be read !

[rshepherd1000]

You might find this forum useful http://forumserver.twoplustwo.com/30/business-finance-investing/

[897Apple00]

oh, i am poor in maths and dislike it!