Investing $$$$$$$$$$

maru · January 2007

This Apple thread has got me thinking about investing and long term financial planning. I'm young, 26, and my friend already has a retirement fund and a bunch of stocks. At first I thought it was weird, but it seems pretty smart to start planning early. Which leads me to the problem that I don't know shit about investing, and I don't feel comfortable investing hundreds or thousands of dollars before I know what I'm doing. Where/how do you guys do it? Are the eTrades and online trading sites a good place to start? Does it make sense to buy 50 shares in Apple and hope it grows? Right now I'm just

highscheme · January 2007

Hey Maru...

First, I would reccommend that you do a little bit of research about investing in general. I don't know how much you know, but you definitely need to know how the system works in general before you can really make knowledgable investments. Here is a list of books that I found off the internet awhile ago.

Starting Out?[/b]

People new to investing need a grounding in the basics before learning from the great investors. Even though it's somewhat skeptical about the value of fundamental analysis, A Random Walk Down Wall Street by Burton Malkiel is a solid and wide-ranging survey of finance that's as good a place to start as any. Jeremy Siegel's Stocks for the Long Run, though often criticized as a product of the bull market, is also a good general overview of stocks as an asset class.

Analysis for Financial Management, by Robert Higgins, is one of the best (read: least painful) introductions to accounting that I've found, and you simply have to be able to understand how cash flows through a company if you plan on picking stocks. Accounting isn't exciting, but it is the language of business, and investors need to talk the talk before walking the walk. Though I'm a bit biased, I'd also recommend The Five Rules for Successful Stock Investing by yours truly--it's an accessible overview of fundamental analysis, and covers some topics that aren't always emphasized elsewhere, such as economic moats.
Finally, the unfortunately named Why Smart People Make Dumb Money Mistakes by Gary Belsky and Thomas Gilovich is the best entry-level book I've found on the fascinating topic of behavioral finance. People are wired in odd ways that cause us to make decisions that are out of whack with what we rationally "should" do. If you don't know what those flaws are, you can't try to consciously avoid them while investing.

Great Managers?[/b]

There's no better place to learn about investing than at the feet of those who've practiced it with resounding success, and readers could do much worse than starting with Warren Buffett. My favorite of the many Buffett biographies is Roger Lowenstein's Making of an American Capitalist, after which you should read the pithy and insightful annual letters written by Buffett to shareholders of Berkshire Hathaway (brk.b.B). Since the letters are available for free on Berkshire's Web site, I'm comfortable stating categorically that they're the best deal available in investment education.

Benjamin Graham's The Intelligent Investor is a must-read, and the recent edition edited by Jason Zweig has copious--and excellent--footnotes that bring Graham's classic ideas into the modern age. Just as Graham is often thought of as the father of value investing, Phil Fisher is in many ways the original growth investor, and his Common Stocks and Uncommon Profits should also be high on any investor's reading list. It's the perfect complement to Graham.

Moving to the more recent stars of the investment firmament, Peter Lynch's Beating the Street is essentially the journal of a very successful money manager, which is what makes it so readable and informative. The thing I love about this book is the passion for investing that jumps off every page--if this book doesn't get you excited about picking stocks, nothing will. And proving the point that you can't judge a book by its cover (or title), You Can Be a Stock Market Genius by Joel Greenblatt is a largely unsung book that ranks in my all-time top 10. Greenblatt is the founder of Gotham Capital, and has achieved simply astounding returns by simply poking around the market's oft-forgotten corners, such as spin-offs, rights offerings, recapitalizations, and the like. You won't regret reading this one--it's relatively short, full of case studies, and engagingly written.

I'd also highly recommend John Train's Money Masters of Our Time, which profiles about a dozen successful investors of wildly varying styles, as well as Seth Klarman's Margin of Safety, which is a great read by a modern value master. A warning: The latter is out of print--if you can find a copy for a reasonable price, snap it up. True value investors are advised to obtain a copy through their local library, given that used copies sell for more than $800.

Last but not least, I would highly recommend Poor Charlie's Almanack, which collects Buffett partner Charlie Munger's major speeches and writings over the past couple of decades. Munger may not have the public profile of Buffett, but he's just as insightful. If you have a limited budget or reading time, I'd get this before Munger's biography (Damn Right! by Janet Lowe.) The latter was good, but the Almanack was better.

Finally, colleagues of mine have good things to say about Marty Whitman's The Aggressive Conservative Investor, and David Dreman's Contrarian Investment Strategies. I've not read either, but the folks who've endorsed them have good taste in books, so I don't think you'll go too far wrong.

Histories and Narratives?[/b]

Knowing where the market has been--and becoming familiar with its more interesting characters and episodes--is second only in value to reading about great investors. History often does repeat itself, and being familiar with the market's past can help you spot bubbles and bottoms when they reappear.

John Kenneth Galbraith's A Short History of Financial Euphoria is a slim volume that's a fine place to start, while Devil Take the Hindmost by Edward Chancellor is a fantastic and in-depth history of manias through the ages. Warning: This one is best suited for history buffs and stock geeks. I loved it, but it can be dense.
Though intimidating at over 800 pages, Ron Chernow's The House of Morgan is worth the effort, since the history of the Morgan banking dynasty touches almost every corner of Wall Street over the past century and a half. And one final history book--Peter Bernstein's Capital Ideas--has been often recommended to me as an interesting and accessible history of academic finance.

On the lighter side, two classics by Michael Lewis stand out: Liar's Poker and Moneyball. The former tells the story of the larger-than-life characters who made Salomon Brothers the king of bond trading in the 1980s--with some laugh-out-loud episodes--while the latter chronicles how the Oakland A's parlayed one of baseball's smallest payrolls into a winning track record. I think Moneyball has more applicable lessons about investing, but Liar's Poker is simply a great read and gives an insider's view of life inside an investment bank during a bull market.

However, I think the best book in this genre has to be Roger Lowenstein's When Genius Failed, which chronicles the rise and fall of the Long-Term Capital Management hedge fund in the late 1990s. I can't recommend this one highly enough. The story is good--LTCM really did come close to causing major financial havoc--and the lessons you can learn are even better. If there was ever a more cautionary tale about the danger of hubris in finance, I haven't read it.

In fairness, that may be because I still haven't found time to read yet to read any of the many Enron books that have come out since that firm's demise. The two that have been recommended to me most often are Bethany McLean's The Smartest Guys in the Room and Kurt Eichenwald's Conspiracy of Fools--both have received many plaudits.

Make You Think?[/b]

The final category of books on the ultimate investment reading list are volumes that force you to think more deeply, or in a different way, about investing. Robert Cialdini's Influence is along the same lines (though more sophisticated) as Why Smart People Make Big Money Mistakes, and shows how and why we're susceptible to persuasion by others. If you think this doesn't sound like it has anything to do with investing, think again--following the herd is one of the easiest investment traps to fa ll into, and Influence will help you realize when you're being led astray by the crowd for irrational reasons.
Fooled by Randomness, by Nassim Taleb, is more directly about finance, but is no less thought-provoking than Influence. Taleb explores how easily we confuse luck with skill, and the importance of knowing which is which. Taleb is more of a quantitative analyst and a trader than the other authors on the reading list, which adds to the book's appeal.

Back in the fundamental-investing camp, Bruce Greenwald's simply titled Value Investing should also be on the list. Greenwald presents a back-to-basics twist on valuation by hammering on the importance of the replacement value of assets, using some in-depth case studies to make his point. Greenwald's approach is somewhat different from the discounted cash-flow approach we use at Morningstar, which makes the book an interesting read.

Finally, I would be remiss if I didn't recommend Michael Porter's Competitive Strategy, which is still the best primer for thinking about competitive advantage. It can be repetitive and dry in parts, but it's still worthwhile. You can't understand economic moats without being familiar with Porter.
Recent Additions?I've fallen behind on my own reading recently, but I did make time for Fortune's Formula. This is a fascinating book by William Poundstone that connects physics, hedge funds, and gambling in telling the story of John Kelly a Bell Labs physicist who worked out a formula for optimizing bet sizes given a bettor's opinion of the edge he or she has over the house. Substitute "portfolio position sizes" for bet size, and "investor" for bettor, and you'll see how applicable this is to investing. A thought-provoking book.

Colleagues of mine have also recommended Stumbling on Happiness, by Daniel Gilbert, which looks like a great read for anyone interested in behavioral finance, as well as More than You Know, a collection of wide-ranging pieces by Legg Mason chief investment strategist Michael Mauboussin. Although I haven't read this book yet, I have been reading Mauboussin's commentaries for years, and they're always thought-provoking. Finally, my colleague Haywood Kelly highlighted six recent books in an article a few months ago, all of which look quite good.

Conclusion?[/b]

Needless to say, this list could have been much longer--in particular, I only mentioned shareholder letters in passing, and they are a great (and free) resource--but it's a great starting point for your investment education. If I had to pick just five books from this list to form a good set for the avid investor on your gift list, they'd be Analysis for Financial Management, Making of an American Capitalist, Buffett's shareholder letters, When Genius Failed, Fooled by Randomness, and You Can Be A Stock Market Genius.

As for your question about which service to use, I would definitely recommend an online brokerage. I use Scottrade.com, but there are many comparable sites...some cheaper. With scottrade every trade (Buy or Sell) is $7 flat fee. Meaning if you buy $500 or $50,000 worth of a stock, it will cost you $7.

Also with scottrade you only need $500 to open an account, but there are some places that have no minimum requirement. However, I would suggest you have at least 100 times the transaction fee, unless you are just playing around to get a feel for how things work. The main reason for this is to keep the fee at 1%.

goodluck

highscheme · January 2007

Forgot to mention that from the books in the article the one I would personally recommend is Benjamin Graham's The Intelligent Investor. It is a certified classic.

Also, depending on how much you know about the stock market/investing, you might want to either use wikipedia or buy a book explaining the fundamentals of the system itself and the key vocabulary etc.

Beek · January 2007

Don't own stocks directly unless you know what you're doing. It's a sucker's game. Most people have no business owning stocks directly, especially when the portfolio size is small.

Spend time learning and making a plan before you make any investments. There's a lot to learn but it isn't as tough of a topic as you might think. I recommend you read The Wealthy Barber by David Chilton. It's outdated and has some Canada-specific stuff, but it's an easy read and will get you in the right frame of mind.

That book will recommend you invest in mutual funds, but many people believe index funds are a better option these days. And I agree. A diverse portfolio of index funds is a very easy efficient choice for an investor with less than $50K to work with. There's tons of info on the net, search for Couch Potato Portfolio, Lazy Portfolio, Coffeehouse Portfolio... Once you surpass $50K that you might move on to ETFs or direct stock ownership or whatever, but you should be more informed by the time you get there.

RAJ · January 2007

Real Estate is about as aggressive as I get.

For a safe call... I have a high interest savings account, 401K, and a couple mutual funds as well as owenership in the start-up I work for.

sabadabada · January 2007

I would recomend a ROTH IRA if you are serious about investing "long term." With a ROTH you put in money after tax, but it grows tax free and you take it out tax free. I would also recommend direct investing directly from the company, many large stabile bluechips offer this program. I direct invest in Philip Morris which is an excellent investment and spins off a nice dividend. As for individual stocks, I would wait until the next market correction, and if you arent buying 5 - 10,000 shares of most stocks, you arent going to make any real short term money anyway.

DJFerrari · January 2007

Here's a good site for investing tips, articles and strategies. You can also trade fake stocks to see how you do.

Investopedia

sabadabada · January 2007

Here's a good site for investing tips, articles and strategies. You can also trade fake stocks to see how you do.

Investopedia

lets have a competition. we can all start with 10,000 and see who makes the most money in 6 months. entertaining and instructional. Stockstrut.

Rockadelic · January 2007

Here's a good site for investing tips, articles and strategies. You can also trade fake stocks to see how you do.

Investopedia

lets have a competition. we can all start with 10,000 and see who makes the most money in 6 months. entertaining and instructional. Stockstrut.

I'll by 2,500 Library LP's at 4 bucks a pop and win this contest hands down.

highscheme · January 2007

lets have a competition. we can all start with 10,000 and see who makes the most money in 6 months. entertaining and instructional. Stockstrut.

I remember doing the stock market game when I was in 6th grade...one of the best school related projects I ever did

DjArcadian · January 2007

lets have a competition. we can all start with 10,000 and see who makes the most money in 6 months. entertaining and instructional. Stockstrut.

I remember doing the stock market game when I was in 6th grade...one of the best school related projects I ever did

I did the same. Picked some stock called SquareD which went up something like $25! Apparently the company went overseas and is no longer listed on the NYSE.

DJFerrari · January 2007

lets have a competition. we can all start with 10,000 and see who makes the most money in 6 months. entertaining and instructional. Stockstrut.

I remember doing the stock market game when I was in 6th grade...one of the best school related projects I ever did

Wow... 6th grade. The only trading game I knew then was baseball cards

I did a stock market project as a senior in high school. I chose 6 stocks at their 52 week high, 6 at their 52 week low, and 6 at random. This was 1998 and I picked Yahoo as a random one because of the name. Let's just say it completely threw off the logic of the project and damn well pissed me off that I didn't use real money!

gloom · January 2007

I would recomend a ROTH IRA if you are serious about investing "long term." With a ROTH you put in money after tax, but it grows tax free and you take it out tax free. I would also recommend direct investing directly from the company, many large stabile bluechips offer this program. I direct invest in Philip Morris which is an excellent investment and spins off a nice dividend. As for individual stocks, I would wait until the next market correction, and if you arent buying 5 - 10,000 shares of most stocks, you arent going to make any real short term money anyway.

the tax free benefits of this option is what did it for me. highly recommended.

4YearGraduate · January 2007

For any money that you want to keep in a savings I highly recommend an ING orange account. Their interest rate is higher than many local short term cds. I am a very satisfied customer of theirs.

kitchenknight · January 2007

For any money that you want to keep in a savings I highly recommend an ING orange account. Their interest rate is higher than many local short term cds. I am a very satisfied customer of theirs.

i will cosign this, as well as the RothIRA stuff.

The ING account is great, as well, if you do freelance work, as you can set up an account for your tax payments. It really helped me organize that aspect of my life.

DJ_Enki · January 2007

I would recomend a ROTH IRA if you are serious about investing "long term." With a ROTH you put in money after tax, but it grows tax free and you take it out tax free. I would also recommend direct investing directly from the company, many large stabile bluechips offer this program. I direct invest in Philip Morris which is an excellent investment and spins off a nice dividend. As for individual stocks, I would wait until the next market correction, and if you arent buying 5 - 10,000 shares of most stocks, you arent going to make any real short term money anyway.

I'm hardly a financial whiz, but I have a Roth IRA in addition to a 401(k), and I'm quite happy with that setup. With a lot of IRAs and 401(k)s, you don't really have to decide the particulars of your investments (though you can if you want to) and can instead just state in general terms how aggressive you want to me, how willing you are to take risks, etc. You know, decide whether you want to go balls-out or slow and steady or whatever point in between.

I've never had any desire to get into the stock market. It just seems like cee-lo for dudes with snazzy suits and power ties.

DjArcadian · January 2007

I would recomend a ROTH IRA if you are serious about investing "long term." With a ROTH you put in money after tax, but it grows tax free and you take it out tax free. I would also recommend direct investing directly from the company, many large stabile bluechips offer this program. I direct invest in Philip Morris which is an excellent investment and spins off a nice dividend. As for individual stocks, I would wait until the next market correction, and if you arent buying 5 - 10,000 shares of most stocks, you arent going to make any real short term money anyway.

the tax free benefits of this option is what did it for me. highly recommended.

Can you withdraw money from a ROTH without penalty before retirement age?

kitchenknight · January 2007

I would recomend a ROTH IRA if you are serious about investing "long term." With a ROTH you put in money after tax, but it grows tax free and you take it out tax free. I would also recommend direct investing directly from the company, many large stabile bluechips offer this program. I direct invest in Philip Morris which is an excellent investment and spins off a nice dividend. As for individual stocks, I would wait until the next market correction, and if you arent buying 5 - 10,000 shares of most stocks, you arent going to make any real short term money anyway.

the tax free benefits of this option is what did it for me. highly recommended.

Can you withdraw money from a ROTH without penalty before retirement age?

You can withdraw up to $10,000 for a first time home purchase sans penalty. I believe other withdraws will get you a penalty.

Not to tell you what to do with your money, but if you can avoid the $10,000 first time home withdraw, you should. As all the cliches say, "you can take a loan out for a home; you can't take a loan out on your retirement."

CousinLarry · January 2007

You can withdraw up to $10,000 for a first time home purchase sans penalty. I believe other withdraws will get you a penalty.

Not to tell you what to do with your money, but if you can avoid the $10,000 first time home withdraw, you should. As all the cliches say, "you can take a loan out for a home; you can't take a loan out on your retirement."

Also you can buy a home these days without putting money down. There are a lot of great benefits for first time buyers.

DjArcadian · January 2007

You can withdraw up to $10,000 for a first time home purchase sans penalty. I believe other withdraws will get you a penalty.

Not to tell you what to do with your money, but if you can avoid the $10,000 first time home withdraw, you should. As all the cliches say, "you can take a loan out for a home; you can't take a loan out on your retirement."

Also you can buy a home these days without putting money down. There are a lot of great benefits for first time buyers.

In my housing thread a week ago lots of people were saying you gotta carry all this extra insurance if you get a home loan with no money down.

kitchenknight · January 2007

You can withdraw up to $10,000 for a first time home purchase sans penalty. I believe other withdraws will get you a penalty.

Not to tell you what to do with your money, but if you can avoid the $10,000 first time home withdraw, you should. As all the cliches say, "you can take a loan out for a home; you can't take a loan out on your retirement."

Also you can buy a home these days without putting money down. There are a lot of great benefits for first time buyers.

In my housing thread a week ago lots of people were saying you gotta carry all this extra insurance if you get a home loan with no money down.

yes, but if the cost of insurance is less than the money you would be making on that $10,000, than it isn't worth it. Keeping in mind the compounded interest on that money in an IRA, it is most likely more prudent to keep it invested there, and pay the cost of insurance.

CousinLarry · January 2007

You can withdraw up to $10,000 for a first time home purchase sans penalty. I believe other withdraws will get you a penalty.

Not to tell you what to do with your money, but if you can avoid the $10,000 first time home withdraw, you should. As all the cliches say, "you can take a loan out for a home; you can't take a loan out on your retirement."

Also you can buy a home these days without putting money down. There are a lot of great benefits for first time buyers.

In my housing thread a week ago lots of people were saying you gotta carry all this extra insurance if you get a home loan with no money down.

I think there was a little bit of extra insurance, but really not much at all. I think it is only for the first year too. Bottom line, I didn't put a dime down and I don't pay much more then I did in rent and I own a house.

sabadabada · January 2007

Also, I think you have to pay back the money you take out of a 401K. And another thing about the ROTH is that you can only participate if you make under $110K, last I checked. Once you break like 90K or something they start to limit the contribution until you are completely barred at $110.

when i say pay back I mean pay back to yourself, back into your fund account.

maru · January 2007

so far

GenePontecorvo · January 2007

Here's a good site for investing tips, articles and strategies. You can also trade fake stocks to see how you do.

Investopedia

lets have a competition. we can all start with 10,000 and see who makes the most money in 6 months. entertaining and instructional. Stockstrut.

I'll by 2,500 Library LP's at 4 bucks a pop and win this contest hands down.

Haha. You're banned from the comp man, you've already achieved Ultimate Baller Status!

kitchenknight · January 2007

Also, I think you have to pay back the money you take out of a 401K. And another thing about the ROTH is that you can only participate if you make under $110K, last I checked. Once you break like 90K or something they start to limit the contribution until you are completely barred at $110.

I think at the higher end you can invest in a SEP IRA. Not that this is a problem that I have or anything....

DJ_Enki · January 2007

Also, I think you have to pay back the money you take out of a 401K. And another thing about the ROTH is that you can only participate if you make under $110K, last I checked. Once you break like 90K or something they start to limit the contribution until you are completely barred at $110.

Isn't there a contribution limit for the Roth regardless? I vaguely recall being told that I couldn't contribute more than X dollars per fiscal year but not worrying about it much because the contribution limit was more than I could forsee contributing (and no, I've never made even half of $90K in a year). Maybe they do the limits on a sliding scale?

sabadabada · January 2007

Also, I think you have to pay back the money you take out of a 401K. And another thing about the ROTH is that you can only participate if you make under $110K, last I checked. Once you break like 90K or something they start to limit the contribution until you are completely barred at $110.

I think at the higher end you can invest in a SEP IRA. Not that this is a problem that I have or anything....

I once had that problem, before I went back to school

kitchenknight · January 2007

Also, I think you have to pay back the money you take out of a 401K. And another thing about the ROTH is that you can only participate if you make under $110K, last I checked. Once you break like 90K or something they start to limit the contribution until you are completely barred at $110.

Isn't there a contribution limit for the Roth regardless? I vaguely recall being told that I couldn't contribute more than X dollars per fiscal year but not worrying about it much because the contribution limit was more than I could forsee contributing (and no, I've never made even half of $90K in a year). Maybe they do the limits on a sliding scale?

You can contribute no more than $4000/year to your ROTH IRA. I know there is a new option this year that you can contribute your tax returen directly to your IRA, but I don't know if that is in addition to the $4000, or just a portion of it. I'm gonna worry about that when I'm doing my taxes.

motown67 · January 2007

What Sabada said about a Roth IRA for long term. For short term you should look into money markets, they're basically high interest checking accounts. I think there are some CDs that are just as competitive with their interest rates now as well. For investing in stocks, if you're not sure about individual companies than you can look into mutual funds that invest in a group of stocks.

indiana45s · January 2007

How you invest, which types of accounts you open and what instruments you choose to invest in will depend on what or how you intend to use that money in the future. Here are a few thoughts:

1) If you work for a corporation that has a 401K which includes a matching contribution, MAX this out. The match is just free money you???re passing over if you're not taking it. Since this income is withheld pre-tax, you are already saving extra money because your not paying taxes on that amount.

2) If you don't have that option, the Roth IRA is probably your best bet. Again, you pretty much have to max this out every year if you want to retire with any level of comfort.

3)If you want to keep certain levels of cash on-hand, Money Market rates are extremely competitive right now. Vanguard's Money Market fund has been returning 5.10 percent which is better than most banks can do.

4) Probably the last place a novice investor should invest is directly into stocks. Day trading is cool when the market is on fire but it is unpredictable and always carries the risk that a stock can completely tank.

5) Diversify. All the books will say this and it is true. If you have enough money to spread around a lot of different types of mutual funds do it. Small, mid and large cap stocks move in unpredictable cycles. If you chase the profits, you will make less money than if you buy and sit on all the cycles. Don't be afraid to invest in volatile regions like Russia, Brazil or East Asia. Emerging Markets are on FIRE right now, but could just as easily collapse an day if a major disruption in investor confidence emerges.

Finally, start reading the business section or get a subscription to the Wall Street Journal (the op-eds will make you throw up, but you'll otherwise get some of the best writing in journalism today)

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