[DonQuigleone]

Originally Posted by SaintessHeart

All securities ARE risky. It is risk appetite and management that keeps your psychology intact, and thus, your portfolio.

Yes, but some securities are riskier then others. It is entirely possible to express that risk quantifiably. So, a US treasury bond is, generally, almost risk free. It will not fail unless the US almost collapses or chooses to default on it's debt. Now that's currently a real, if remote, possibility.

An investment in a new start up that's highly leveraged is very risky, there's no definite way of knowing whether it will fail or succeed.

A long existing company that has few outstanding liabilities (IE almost all it's liabilities is equity), is not a risky company. In fact, a company that has a assets minus debt value greater then it's market valuation is virtually risk free, as even if the company was dissolved tomorrow, the sale of assets would cover all equity. This is, of course, fairly well.

Not all risk is equal. Saying that "all securities are risky" is like saying crossing the road is always risky, due to the chance of being hit by a car. But some streets are busy, and some streets are empty. But even on the emptiest street you have a chance of being killed at random. The same goes for securities. Some of them are like a busy street, and you better be watching. And some are empty side streets, where nothing is really happening.

Don't bring in cliches like "mature" and "well-informed" when you are talking about a cohesive fund management, impromptu or not. People like that don't manage funds, they only write books and teach in lectures because they think it is foolish as complete grown-ups to throw hard-earned money away.

I more mean mature in a behavioural sense. Mature people will walk away from a failed investment and learn from the experience. Immature people will panic and look for someone to blame. The ill-informed person will be think they're bound to succeed and make loads of money. The well-informed person will know that stocks are a risky business, and that they might fail, and they might succeed. If they fail, they will not be surprised. As long as everyone is aware of the risks going in, I can't see fights and recrimination breaking out.

People go into business together all the time. I don't see much difference between opening a business with someone else and investing in stocks with someone else. In both cases you want to be sure you can trust the other guy, and that the other guy has a decent idea of what he's doing. And both cases hold the prospect for complete failure. Luckily, stock trading doesn't hold the potential to bankrupt you (unless you're taking out debt to do so).

Go work in a bank or government institution for a couple of years and come back and tell me how it works. Or run a paper account for a single market cycle of any kind and tell me how is it like to be slaughtered like the sheep you behave as.

Well I plan to learn how it works. And it's easier and more fun to learn if you do so with other people (this is the main thing I learned from college...).

Kid, go read a bloody REAL chart, candlesticks or graph, on different time periods. That argument is so nonsensical to the point that I find it irritating.

Market capitalisation varies. An actual business does not, certainly not day to day. A company does not radically change in a single day. It's simple logic. If you have a company holding 10 factories today, it will hold those same factories tomorrow, and those 10 factories will be worth the same amount. Now, a hurricane could strike, destroying half the factories, or some amazing technological development could suddenly render all those factories utterly obsolete. But those are "acts of god", and occur infrequently. Otherwise, a company can not change very quickly.

Now what the market thinks the company's value is can change quickly. But that zigzaggy graph of the total market capitilization of the company is not an accurate reflection of the real performance of the company. In fact, you can't really assess and change a company's real value more often then the company releases it's budget figures, which is only once every month, or once every quarter.

How do you, yourself know the company is screwing up royally then?

A company doing well or not from a singular perspective is an OPINION. When it becomes generally agreed upon then it becomes a FACT. You are indulging in alot of risk if you require a consensus to sell or buy a fund held collectively.

You are right, when it's just you, it's only your OPINION. If a larger number of people can agree, it's more likely to be FACT. So I can say "I think this company will do well because it's got a new CEO, whose previous company saw growth of 10% a year for 5 years, and he's got a great knowledge of the industry", but my friend will say "Yes, but the company income has no way of covering it's current debt obligations, and the other members of the board have no experience whatsoever in this field, and are all accountants".

This is where the skill comes in. Starting out, all investors will be poor judges. With experience they'll get better at it. If people share their insights, like above, with one another, they'll learn faster. For instance, there I would have learned to look more closely at a company's debt, and it's other board members, 2 obvious, but easy mistakes to make (some people do buy stock purely because of the CEO...).

And short-term or long-term position, you are still investing in a position. It is your exit plan that is of true importance in either trading or investing.

Perhaps so. But surely it's possible to plan ahead an "exit plan". Most sudden price drops can be somewhat anticipated, and planned for. For instance "if at the next quarterly report, profits are X, we sell at Y price". ENRON like sudden scandals followed by collapse are rare, and frankly, nigh impossible to avoid anyway. You just have to try and spot the bad businesses beforehand. A group can do this as they have "many eyes". But, I may be wrong, but I don't see how sudden snap decisions would be frequent if you're engaging in a long term strategy.

Investing and trading is about learning things the hard way. If you guys are not at the learning at the exact same pace as each other, then one of you'll be left in the dust while the others move on. Learning money management is a stage-by-stage process, if you move onto the next stage without mastering the previous, you'd wipe yourself out.

Very possible, but it may not be an indefinite arrangement. Besides that, I've known this guy for a very long time, we have basically the same level of intelligence in almost everything (we both play a lot of strategy games). I've spoken for hours at a time about how to determine the best troop composition starcraft, or why particular companies failed, or the mistakes Germany made in WW2, how to win at Diplomacy (this is a great game to learn game psychology with!)... If this was a guy who I only discussed the latest episode of family guy with, I'd agree with you, but we've always been keen on analysing stuff, and we've always had a good friendly sense of competition and collaboration. I can't really think of a better person to coloborate with.

I don't want it to seem like I'm not appreciating your points. You have convinced me that I should be careful in how I set this up. For instance, I'm going to have a simple contract to limit the possibility for blame and recrimination. And I'm going to put a time limit of a year, so that no one gets stuck in something they don't like out of a sense of "loyalty".

And if you don't catch up, your friends will be running the fund for you. Then shouldn't you start paying them for their work?

At that stage, I'd probably find an excuse to pull out. Or it would spur me on to improve more...

That is why it has to be personal. You learn at your own pace - and that is the fundamental of investing/trading psychology; that is called -risk control-. And by managing the money on your own, it is called -risk acceptance-.

I think it's a question of personality. I don't know how it is for you. But I don't enjoy learning things on my own, if I have no one to talk to, I get bored and stop trying. I have a lot more motivation and enjoyment when I can discuss things with other people. Some people prefer to do things on their own. It's a question of temperament.

And you aren't even accepting your own risk by putting money together with a group whom none of them is a fire baptised money manager, personal or commercial.

I don't see how this necessarily follows. None of us are thinking "because we're working together, we're bound to succeed!" We (my friend and I) are pretty pessimistic about our prospect of success. In fact, because none of the others are "fire baptised money managers" we have a better conception of risk, because we can't say "this guy knows what he's doing, let's just do what he says". We'll both face the same baptism by fire without anything shielding us, we'll just be doing it with someone else (making the whole ordeal more bearable, if not enjoyable).

It is called an illegal fund. Unless your country has no financial laws, or those stuff are kept personal and under wraps, any sharing of accounts have to be made known to the broker, unless it is with a blood relation for inheritance purposes.

It is being kept personal, so no one will really know. Also, the quantities involved are peanuts. If large quantities get involved, we'll just set up a partnership/limited liability company and then we can do as we like legally. So long as one person is not managing the other person's money (IE all partners are co-managing) it is not illegal. If one person was doing all the managing, they'd need a license, and it would be illegal.

I am getting more and more convinced that you are not knowing what you are getting into. You are arguing from a standpoint that traders != investors; which is completely wrong. We are BOTH personal money managers with different tactics and strategies.

Investors, in their way of money management, are a subset of traders who hold stuff for a significantly long term. Traders indirectly invest when we deal in options and futures because of certain financial laws which we can use to our own advantage. The similar thing about us is that we hold things with an intention to have an overall gain in our portfolio through analysis, opportunity leveraging and most importantly, dealing in pure risk.

While you're right, I don't think you're correct to say that it's all about risk. For instance, greater risk is not necessarily bound to greater returns. In an efficient market, it is, but markets are not efficient. Look at the paper linked in the 3rd reply in this thread.

The thing is, if it's all about risk then investing and trading is on the same level as gambling. Now, certain trading patterns are, basically, gambling. But with investing, you can control risk. You can estimate it. In fact, everything in life entails risk. It's just as risky to work at a company as to invest in it!

And if you have an engineering background, like I do, you'll be aware that when dealing in design and construction, you're dealing with material failure and risk. But, by taking measurements, you can measure and control that risk. So, you might assume it's impossible to tell when an aircraft will fail. This is not true. You can't know absolutely, but you can go over the entire aircraft looking for cracks. If you find long cracks, you can estimate the remaining life of the aircraft based on measurements, and work around it. A similiar process can be done with all risky endeavours. It's more difficult in something like investing (because you have to deal with qualitative factors), but a group of people working together can estimate the risk of any investment, and so be able to take a measured choice in investing in it. If an investment exists for which risk can't be measured, don't invest!

Your plan is a speculative risk. Before you drop another argument, go draw up a personal financial plan of your own (not investment plan). If you don't even know where to start, you shouldn't even be investing at all.

This is why I started a thread, looking for "investment advice" . Any good links as to how to draw one up?