How to explain to a 2-year-old how to start investing in stocks?
I'm actually a hedge fund manager and started looking at stocks during college.
Unfortunately, my investing experience has shifted tremendously from dealing with a few thousand dollars to getting a job where I'm paid to invest other people's money.
Here are some key differences:
The Manager-Agent problem: Now that you're investing on behalf of someone else, how do your incentives align? There are many models in the investment sector.
Market effect: When you only have pocket money, you probably don't think about it.
Scalability: There are several strategies that can consistently make small amounts of money. If you're a big gamer, you might not bother.
Unfortunately, my investing experience has shifted tremendously from dealing with a few thousand dollars to getting a job where I'm paid to invest other people's money.
Here are some key differences:
The Manager-Agent problem: Now that you're investing on behalf of someone else, how do your incentives align? There are many models in the investment sector.
Market effect: When you only have pocket money, you probably don't think about it.
Scalability: There are several strategies that can consistently make small amounts of money. If you're a big gamer, you might not bother.
Costs are different for institutional investors. Not necessarily cheaper, but configured differently. This has an impact on what you achieve.
Investment horizons: Most funds have some type of monthly report where you want to look good. People can decide for themselves.
Info: You will not be chatting with brokers in your home trading account. This can be good or bad.
Stock market fetish: For some reason, when people think of "investment", they think of shares in publicly traded companies. There is a huge investment universe out there: Single stocks, Corporate bonds, Government Bonds, Interest rates, Currencies, Commodities, Property, etc. Only a very small part of my career was spent trading stocks. No matter what field you're in, you have to make sure you pay attention to the big picture. Check out Soros, The Alchemy of Finance. It talks about a lot of markets.
Instrument fetish: For similar reasons, you've read many DIY traders talking about stocks and options. They go back and forth about expiration charts and the like, without really understanding how options work. (Hint: it's about volatility, not price.) Other tools you need to understand are bonds and swaps. Any introductory book on financial math will do. I normally prescribe Hull.
Recommendation:
Don't get bogged down in details, read extensively on a wide variety of topics. FT or WSJ. Economist. Have a thesis about what's going on.
Do not follow a particular ideology. You need to see them all before you decide. I'm thinking of the whole basic/technical thing.
Risk: You need to know what it is, but nothing really replaces experience. Nassim Taleb's books are great (pop ones). He also has a technical book on derivative instruments. I personally have a signed copy.
