What Tools and Training are Required?

Anyone can buy and sell stocks. The question is “Can it be done successfully?” Anyone can lose money. Too often young people simply jump in with all their money, knowing nothing, convinced they will only ‘learn by doing’. The only thing you ‘learn by doing’ is your risk tolerance. Different skill sets are required for different strategies, but there is overlap.

1. Have The Time. The necessary time varies with the strategy you choose. Technical traders need to be glued to their screen. They cannot work a regular job at the same time. But they can go on vacation worry-free because they exit the markets completely. In contrast, the passive indexer needs no more attention than to monitor news on the economy. But because he stays invested he needs to continue that attention even while on vacation. The strategy of fundamental analysis requires finding and monitoring 20 different companies. That takes a lot of time and effort. It cannot be done in a spare moment, or whenever you get a chance.
2. Enjoy the Process. If you do not really enjoy the process of learning theory, running the portfolio and withstanding the emotional roller coaster then the process is a cost. The cost has a monetary value regardless if it takes attention away from your family life or time away from your paying job. The benefits of passive investing are clear for all the people who don’t satisfy this requirement.
3. An Independent Mind. Free thinking is not so important when your strategy is rules based. The technical trader needs only follow his pre-determined rules for entry and exit. The passive indexer’s only decisions concern the choice of index and frequency of re-balancing. But any stock-picker using fundamental analysis needs to take positions based on the belief “the market” is wrong – that he knows better than the market. While it is true that being ‘right’, alone, won’t make you money, you DO make money when the market realizes for itself how right you are.The web has communities (silos) of opinion into which you can get sucked. Discussion forums are predominated by one particular point of view. These views are treated very like a religion. Differing opinions are met with disdain, sneers, and comments like “We have respected resident experts who all disagree with you”. Before deciding to pick stocks ask yourself whether you actively look for information on the web that disagrees with your current ideas, or whether you feel comfortable surrounded by like-minded people. An excellent quote from James Montier is:”Critical thinking is really all about being a contrarian in thought. Learning to be skeptical, to question what you hear, and evaluate it based on merit, rather than emotional appeal. In essence taking a contrarian view point requires us to learn three skills. The first is highlighted by the legendary hedge fund manager Michael Steinhardt, who urged investors to have the courage to be different. He said, “The hardest thing over the years has been having the courage to go against the dominant wisdom of the time, to have a view that is at variance with the present consensus and bet that view.” The second element is to be a critical thinker. As Joel Greenblatt has opined, “You can’t be a good value investor without being an independent thinker—you’re seeing valuations that the market is not appreciating. But it’s critical that you understand why the market is not seeing the value.” Finally, you must have the perseverance and grit to stick to your principles. As Ben Graham noted, “If you believe that the value approach is inherently sound then devote yourself to that principle. Stick to it, and don’t be led astray by Wall Street’s fashions, illusions and its constant chase after the fast dollar. Let me emphasize that it does not take genius to be a successful value analyst, what it needs is, first, reasonably good intelligence; second, sound principles of operation; and third, and most important, firmness of character.”Only by mastering all three of these elements can you hope to be at ease as a contrarian.Critical thinking also involves pushing yourself to think in ways that don’t come naturally. For instance, you have to learn to look for the information that shows you are wrong. You have to learn to try and kill the idea, rather than nurture it. This goes against the grain. With practice all of these elements of critical thinking become a little bit easier – but never let your guard down, because that’s when the bad old habits start to creep in again.”
4. Understand Economics. Everyone needs to understand how the economy works, how interest rates are affected and their impact, what the difference is between ‘a business cycle’ and ‘an asset bubble’, what a ‘run on the bank’ is, how inflation impacts interest yield curves, etc. Even FX traders need to understand how one word from a central banker will change the value of their asset. The media presents opposing economic analysis and points of view. To position your portfolio you need to decide between them yourself. An excellent source of this understanding is Greg Ip’s book “The Little Book of Economics” published in 2010. It is a very readable cover of macroeconomics for investors (or informed voters). Get it from your library section BUS 330.An example of this played out in the aftermath of the 2008 Credit Crunch. During that period the opinions of media and pundits swung in lock-step from fearing inflation to fearing deflation, and back again, three times. The decision investors made at the start determined their preference for high-income over growth stocks, and their preference for perpetual over rate-reset preferred shares, and their preference for long-term over short-maturity debt. The resulting difference in returns was very wide.
5. Understand Financial Statements Understanding financial statement reporting is necessary for fundamental analysis. It is common to hear Statements dismissed as irrelevant, biased and misleading. Most times this comes from someone who never learned to read them. This site tries to show you where adjustments are necessary, but that IN NO WAY detracts from their importance. You cannot predict the future without a firm grasp of the past and present. Regardless of their shortcomings, the financials are your source of the ‘facts’ that can contradict the media’s ‘story’. They fix the starting point for your projection of the future.If you do not understand financials and how to use them to develop your own story about a company, and/or if you do not want to spend the time doing this work, please do not kid yourself. You should not be stock picking using fundamental analysis. If you do not understand financials you will not be able to evaluate or understand many of the ‘proofs’ of arguments presented on this site. Frequently they track the company’s Balance Sheet and Income items through time, along with the stock’s price. If you don’t know how these items interact with each other you won’t understand the ‘proofs’ or feel comfortable with their conclusions.There are a few websites to help you learn to understand financial statements. A professor at the Schulich School of Business has written articles on each of the Statements that are easy to digest. Damodar has a good webpage trying to distill a huge amount of financial statement interpretation into something a casual reader can digest. There are now free university-type courses on the web. One on accounting is offered by Coursera. I have not taken the course but it might be a good first step for those serious about learning. The Chartered Accountants have written their own publication “Reading Financial Statements” that is really quite good. Maybe the best way to learn is sitting in a comfy chair with a book from the library and a selection of Annual Reports to see the real thing. Don’t use the reports of Banks or OilExploreCo’s. Their financials have a slightly different format. Choose a normal business that produces and sells a product. You will find educational books in the “Business” section (657.3) of the library, not the “Personal Finance” section (332.0) or the “Investing” section (332.6).
6. Math Skills.Everyone needs to learn the Time-Value-Of-Money equations and how to calculate rates of return. On this website you will find the equations used repeatedly. They are incorporated into spreadsheets for tracking your returns. They are in models used to show you how to analyze a problem. They are necessary for comparing investments. They are used in proofs that an accepted doctrine is false. Etc.Spreadsheets are a tool that should be used by everyone – even if your only asset is your home with a mortgage. Many financial decisions have so many variables that their integration in a model can only be done with a spreadsheet. Keeping track of your portfolio’s results can only be done with spreadsheets. Most importantly, other people’s advice is often backstopped by some spreadsheet that ‘proves’ their conclusion. You need to know how to test spreadsheets for their validity. Simply parking your brain at the door of the ‘expert’ is not acceptable. Many of their spreadsheets are wrong. Can you tell if the spreadsheets on this website are correct?
7. Have the Support of your Family. This section has been added after listening to discussions on web forums. It is clear there is a sexist divide regarding investment decisions. Hopefully the following doesn’t apply to you.
   • Managing family investments is not the same as managing your own money. Your wife’s priorities and wishes carry equal weight to your own. The family will pay the price for your inattention to them, or any failure to grow the savings, not just you.You don’t get to determine the level of risk assumed. Chances are the gambler in the marriage is more motivated to assume responsibility for investments. Gambling is not a good quality and it does not make you more suited to investing.
     E.g. If disagreements on risk have caused you to split the assets in half – each spouse managing their half, then you do not have the right to offset her safe investments by over-weighting your own risky ones. It is lying and cheating to violate this compromise by forcing the total portfolio into the risk-profile you alone want.
     E.g. If you are picking stocks because you get personal enjoyment from it, but your wife wants the risk-free index return, then you must passive-index. The family should not pay for your fun.Don’t be too quick to presume your wife has no interest in or knowledge of investing just because she lets you do what you want and says she’s not interested. The key word is ‘LET’. Many wives see their role as the family peacemaker. They know testosterone is tied up in investing, while budgeting is considered woman’s work (home economics). They know you will disregard any opinions they may have, so they tune out what they cannot change.But how are differences reconciled? This is one situation where an outsider, an investment advisor, can play ‘marriage counselor’. His job would include siding with one spouse, and convincing the other why their POV needs adjusting. He may also assume full responsibility for the investing decisions. This effectively gives both spouses some one to blame, not each other, when markets do poorly – which is guaranteed to happen periodically. Of course the financial advisor will not want to assume that blame, but no matter how he covers himself legally, you both can still fire him when you like. Which is better than divorce.
   A 2016 paper models the relative bargaining power of the two people in a relationship – their alternate choice to go it alone. They found confirmation in the actual data showing that the risky allocation of assets in a relationship tilts toward greater risk when the male has more power. They found that decisions to marry and divorce result in risky assets being reduced for men when they marry, and for women when they divorce.