Recently, I’ve been trying to learn more about stock-market investing so that I can have better control over my money. To guide my learning process, I’ve been using the Simple Programmer course “10 Steps To Learn Anything Quickly.” Here are some of the notes I’ve written with minimal edits apart from organization and formatting.
Risk and Reward
- Risk is basically the possibility of losing money. We can observe it as early in 1300-1500 in Venetian prestiti (historical European annuity that only paid interest) prices.
- “the most important concept in finance, that risk and return are inextricably
connected” - Four Pillars.
If you want a chance at high returns, you have to shoulder high risks. If you
want safety, you have to deal with “meager” rewards.
- The lower price you pay now, the higher future returns will be, and vice versa.
- Don’t confuse the future with the past: high previous returns often mean low future returns and vice versa.
- So buy when prices are low. Unfortunately, this is usually scary because low prices are not possible without risk.
- Two flavors of risk: short/long-term
- Promises of safety + very high returns → probably fraud
- Historical returns are of limited use in predicting future returns; the historical record is better as a gauge of risk
Stocks, Bills, Bonds, and ETFs
- A short/long-term obligation is a bill/bond
- Don’t use bond returns in the 20th century to predict future bond returns, because there was the monetary shock of moving away from gold
- End-period wealth a better indicator of long-term risk than annualized returns
- Stocks are mean reverting: bad/good years are likely to be followed by good/bad years
- Bond returns don’t mean revert
- market cap(tialization)
- total value of a company's outstanding stock
- most market indices are market cap weighted
- stocks of small companies have higher returns than large companies
- ETFs are ok, but you can do better if you’re willing to take on more risk
Fear and Greed
- Fear and greed will ruin returns
“Be fearful when others are greedy. Be greedy when others are fearful.” — Warren Buffet
- Avoid idolizing wealth and security
- Don’t invest in anything you don’t understand
- Understand the incentives of people giving advice
- Pay off high-interest debt and have an emergency fund before starting