I know next to nothing about trading. But it's become apparent to me that some of the core concepts/terms in trading (long, short, hedge, liquidity, futures, cover, etc) are very useful for modeling things in other walks of life. So, trading-savvy HNers: Are there any books, websites, or habits that you'd highly recommend to help a newbie become familiar with basic trading concepts?
Pick up a few books like Liar's Poker, When Genius Failed, and Barbarians at the Gate. That'll give you an engaging intro. Then you can start reading sites like FT, seekingalpha, Bloomberg, etc.
A few pieces of advice: under no circumstances do you want to get caught in the weeds of technical analysis, similarly stay away from the gold bugs, and finally learning is good, but don't jump in unless you are prepared to lose your shirt.
You won't learn finance specifics from those books, but they're all great recommendations.
In particular, everyone in this community should read When Genius Failed as a cautionary tale. It had a big impact on my world view. Here's a case where the best and brightest formed an accurate, contrarian hypothesis and executed on it perfectly, but were then blinded by their own cleverness and succumbed to hubris (the partners were leveraging their personal wealth to increase their stakes in their fund) and lost it all.
under no circumstances do you want to get caught in the weeds of technical analysis
Why is that? (I ask as someone who is genuinely curious and has no prejudice, not as someone who disagrees with you.)
similarly stay away from the gold bugs
What do you mean? Do you mean, "Don't buy gold," or do you mean something more than that? And, why? (Similar caveat to before, modulo that it looks obvious to me that gold is a much safer store of value than almost anything else and probably even a good investment.)
I'm fond of Warren Buffett's view on gold: you could buy a hunk of yellow metal that just sits there, or you could buy an equivalent amount of Coca-Cola. Coca-Cola will give you about a 3% dividend every year, plus there are thousands of people working hard every day to make sure that they sell even more Coca-Cola next year. At the end of, say, ten years, your hunk of gold is still the same amount of gold. But your chunk of Coca-Cola has grown and even given back to you 30%. So the question is, which would you rather buy?
Technical analysis can give you a false sense of 'knowledge' - when you may only be picking up patterns in randomness. But it's very seductive in its certitude.
Gold : If the 'store of value' argument is obvious to you, it's also obvious to a lot of other people. The price of gold tends to balance out the two camps : Anyone who sells you gold believes (naturally) that the price is higher than can be justified (vs. other assets). Gold can certainly go up and down from here. People also used to believe that houses were a fantastic store of value ('everyone has to live somewhere') - that was only 6 years ago.
The typical trader's wisdom is that if a taxi driver (or some other version of 'the man in the street') offers an opinion about a 'sure thing' - run in the opposite direction. Currently, taxi drivers love gold. A few years ago, they had friends flipping condos. Before that it was internet stocks, etc...
If the 'store of value' argument is obvious to you, it's also obvious to a lot of other people.
I don't know, I mean, there's lots of smart people who think gold bugs are just nutty libertarian types, and then there are other smart people who aren't particularly bullish on gold (such as yourself).
But it seems kind of backwards to just "do the opposite of what everyone thinks is a sure thing" (as you said) or "do the same and jump on the bandwagon". Ultimately, in many cases, there will be economic fundamentals (and not just other people's sentiments) that will drive the value of things over time.
Which leads me to a more specific question: What kind of event would cause a major "correction" that would drive the gold price down (either over time, but a significant downward trend, or suddenly, like a bubble popping)? I can't really think of one. Can you?
I mean, one would be if everybody "sentimentally" just decided gold was in a huge bubble, but that seems quite unlikely without an underlying factual reason. Another would be if there were lots of much better investment opportunities, that would drive wealth stored in gold into factors of production... e.g. a very major, capital-intensive global economic boom. Right? Which is something I would be willing to bet against, at least over the course of the next decade.
> Which leads me to a more specific question: What kind of event would cause a major "correction" that would drive the gold price down (either over time, but a significant downward trend, or suddenly, like a bubble popping)? I can't really think of one. Can you?
Hmm... Let's think:
Strengthening of the global economy.
Political crisis in China that prompted players with lots of money to flee.
Government action in the US, India or China banning or restricting gold ownership or import.
Accounting scandal affecting a major gold ETF.
Discovery of a new, large deposit of ore.
Changes in tax treatment.
Changes in margin requirements for investors.
There are people who are investing in gold today because the US debt situation is horrific and the economy is in a bad place -- they are rational investors. There are other people who have been predicting the fall of the monetary system since 1980, and are recommending that you orient your life toward the stockpiling of gold, and cash out your 401k for a 100% "gold IRA". Those folks are gold bugs.
Gold isn't a terribly useful metal. There are some minor electrical applications, a handful of catalyst applications, and of course jewelry. The size of the international investment stocks is a great multiple of the annual usage in all these categories.
So the high value of gold is predicated on the high value of gold -- think tulips, Miami condos, and dot com equity.
However, gold has been in this bubble for a very very long time. Consider the famous investing maxim "the market can stay irrational longer than you can stay solvent" and just stay away is my opinion.
In response to the sibling post on transmuting gold, the minimum possible energy cost is really, really high (due to the necessary gamma rays and the cross section of 198Hg). Unless we figure out a way to produce to nearly free energy it is never going to be worth it.
> What kind of event would cause a major "correction" that would drive the gold price down.
The value of gold has fallen a few times before. Mostly because people moved onto something else as an investment. When investing in industry is uncertain, like it has been when the solvency of countries are even in question, gold and other commodities is a good hedge. However, just like no one could perceive that house prices could collapse (since everyone needs somewhere to live and the population is growing), people struggle to understand that money put into gold now could be tempted to new investments tomorrow. Planetary Resources could also discover a golden asteroid.
> I don't know, I mean, there's lots of smart people who think gold bugs are just nutty libertarian types, and then there are other smart people who aren't particularly bullish on gold (such as yourself).
1) It doesn't depend on how smart the person is. It only depends on whether or not they believe it.
2) It doesn't have to be everyone. It just has to be enough people.
> Which leads me to a more specific question: What kind of event would cause a major "correction" that would drive the gold price down (either over time, but a significant downward trend, or suddenly, like a bubble popping)? I can't really think of one. Can you?
This actually makes me wonder what it would take to synthetically manufacture gold. A glance at Wikipedia says that it's not feasible (possible only in "unmoderated reactors", and I don't know what that means), but we seem close enough that if we wanted to, we could probably do it.
I will be thoroughly entertained if Iran actually decides not only create a honest-to-God nuclear reactor, but uses it to synthesize gold and flood the market. It'll never happen, but it would be hilarious.
>(possible only in "unmoderated reactors", and I don't know what that means)
I'm fairly sure that refers to a nuclear reactor gone into meltdown. By the time you've knocked together enough particles to make gold nuclei it's quite hard to calm the thing down again...
It's possible to distinguish natural diamonds from synthetic diamonds because diamonds can't be melted down and recast, so the impurities and flaws of natural diamonds set them apart.
Gold, on the other hand, is routinely melted down and recast.
Correction; women seem to want 'the real thing', but diamonds aren't themselves valuable, they are a status symbol. Girls don't want to show their friends a "fake" diamond and unfortunately due to marketing, they consider man-made fake even though it's real.
Somehow I can't imagine lab-produced gold being worth less than naturally occurring gold for jewelry, etc. I imagine the only potential difference would be the distribution of isotopes. But I suppose it could still happen if large players would benefit.
Technical analysis is curve fitting run amok. There is so much data that the dangers of post hoc hypothesis formation is even more acute than usual. On top of that the 'field' is filled with people hawking a mix of appeal to intuition and techno-babble that is really smarmy.
As for gold bugs, you aren't going to learn anything about trading from them. They may be right or they maybe be wrong but if your answer to everything is buy gold, how interesting is that? On top of that, and something I'd rather not get into a huge debate about, their understanding of macro tends to be pretty medieval.
There is a case to be made for having precious metals as part of a diversified investment portfolio. (IIRC Burton Malkiel, mentioned elsewhere in this thread, suggests that it be about 1% of your holdings.) But the “gold bugs” are the people who treat gold as the measure of value.
This does a really good job of explaining how having people fulfilling different roles viz trader, dealer, investor results in being able to buy and sell whatever you want whenever you want. I wish I could send a copy to everyone who thinks flipping second-hand goods on Craigslist is arbitrage.
Open an account on thinkOrSwim (etrade, whoever), fund it, trade with small amounts of money and research everything as you go.
Arbitrarily, SLV, which is an ETF that tracks silver futures. If you want to play with fire (and learn a lot of cool stuff), trade options (that's what I used to do)
Websites: SeekingAlpha (side note: financial articles, SA included, are sophisticated-sounding babble put out by someone that has to meet their quota, not well-thought-out logical explanations by people in-the-know)
Make a list of terminology and learn directly what it means to your trading. Pretty much any trading term that has general meaning and isn't arcane and quant-y is googleable. I recall Khan Academy also having very useful videos explaining a lot of terminology (Salman Khan used to be a trader)
For example, in SLV:
Liquidity: How easy (read: cheap) it is to open and close a position. If the spread on an option is $33.00 (sell) and $33.33 (buy), you lose 1% (most people say $0.33 - I prefer to look at the percentages) just by getting in and out of a position regardless of your trade (I'm ignoring commissions), and assuming the trade reliably goes through instantly. The higher the cost (time, risk of nonfulfillment, money) of opening and closing a position, the more illiquid the position is.
In the context of houses, the time and effort and money put into maintenance and time and uncertainty involved in buying/selling, etc make them extremely illiquid investments. If you own AAPL stock and it crashes, you can hit a button and sell it. If you own a house and the housing market collapses, good luck!
If I were to invest the cost of a house in some high-volume stock with a tight bid-ask ratio and sell it two years later for the same price by hitting a button on my phone, my losses are just the bid-ask difference and I was never really at much risk of being unable to sell it instantly (during market hours at least). It's a very liquid position.
That's just one example, but there are plenty out there. Jump in feet first, google all the things, and don't wager stupid amounts of money.
"A random walk down Wall Street" by Burton Malkiel is the classic layman's introduction to investing.
I would also recommend "Fooled by Randomness" for the introduction of the essential idea that most returns are not "normally distributed" - most profit and loss happens via wild swings, and most successful people are lucky rather than good.
Finally, for a more technical but very entertaining read: "Trading and Exhanges" by Larry Harris. eg in this book I learnt about "the Brazilian straddle" options position: a naked short option position hedged with a one way ticket to Brazil. (in case the bet goes against you) ;)
Like with any other language, I've found that frequent interaction with financial terms improves your literacy and helps you make better connections between ideas. For instance, a few years ago when Southwest Airlines seemed to have much lower prices than everyone else, I read that they had bought futures contracts back when oil prices were low. Right there you have a company that's 'naturally short' oil, who 'hedged' against rising prices by buying 'futures', etc. A couple of good sources for financial news are the APM Marketplace podcast and Felix Salmon's blog on Reuters, and you can look up terms on Wikipedia when needed.
Keep in mind that a bunch of the commonly recommended finance books are either a bit pop-finance (Liar's Poker) or somewhat outdated (Intelligent Investor), which is OK if your goal is to be entertained or well-versed, respectively. Most authors have a thesis, and if you were to only devote time to one book and it happened to be something like Fooled by Randomness, you'd find yourself with a very skewed view of things. That's why I'd suggest current news if you're only interested in financial terms as they relate to your job.
And finally, like with any other jargon, realize that while it's useful to know and can help formulate ideas, a lot of people overuse it. Not saying this article does it, but I've seen finance people go "short" undesirable menu items at a restaurant. Don't let the gratuitousness make you think these terms are more important than they are :)
The best books are the 'Interview' series by Jack Schwager. These date right back to the 1980s until a very recent release last year. They are just interview format books with successful traders from a very wide variety of markets and styles.
The key takeaways from the books are 'your investment style must fit your personality' and 'anything is tradeable if you have an edge'.
The books will give you a very good grounding in trading concepts as well as open your eyes as to the diversity of people that succeed in the field.
It will also help you dismiss 'advice' like 'technical trading is useless' or 'fundamental trading is hopeless', because you will be able to detect the advice-givers bias, and realise that, like anything, it's different strokes for different folks. What matters (in trading, in life) is that you identify an edge you hold, and apply that edge with discipline. And if you don't know what your edge is, you don't have one.
I have also been following this course and am extremely disappointed in its quality -- not just in poor production, but also in the coverage of course material. I would not recommend this as a primer on investing.
Last year I was in a kindof similar situation, this stock, investment, trading always intrigued me.Started with random reads i.e. articles at marketplace, FT and looking for terminologies at investopedia. The first formal read was: Trading for dummies (sounds bit noobish) but it proved a top move, with zero distractions and aqcuired the basic fundamental and technical analysis concepts plus lot more. After it, definitley go for some detail read Intelligent Investor, Liar's Poker .
Something like "Options as a Strategic Investment" is probably the shallow end of the big pool of modern trading. Highly recommended. Others might disagree, and say its over-ambitious (without some technical chops).
