How do people research and learn out stocks and other investments?

December 6, 2013 6:15 AM

I have a bit of discretionary money (1k). Rather than just letting it sit in a bank account earning basically no interest, I am opting to dip my toes in to the world of stocks, options, investing, etc. Other than buying shares in a company I am already aware of and think is going to do well in the future (which isn't always that simple, I know), how do people independently (ie. not via a broker) research and learn about other stocks and worthy investments?

I do NOT wish to use a broker or any sort of third party advisor, I don't want to hand my money off to someone else and let them do with it as they please. I'm looking to do this personally, on my own for the most part. I want to be in 100% control of where my money goes and how it is managed, I want to be the one pulling the trigger on these things. I see this as a bit of a hobby that could potentially benefit me financially. I would, however, appreciate being pointed in the direction of some worthy blogs, articles, books, etc. to help me in this.

and yes, before people get their knickers in a twist, I know that investing right now is unpredictable and that we are likely at the cusp of another huge crash. I am not investing a ton of money, this isn't my life savings or my retirement savings, I am only investing money that I could afford to lose (but hopefully won't). And yes I know that investment forecasting is all a big pile of crazy statistics and gambling and I can't expect to walk in out of no where and be able to make the level of informed decisions as people who have been doing this for years.

posted by PuppetMcSockerson to Work & Money (24 answers total)

Response by poster: I forgot to add that I have a questrade account all set up and funded, I am going to do this online.
posted by PuppetMcSockerson at 6:18 AM on December 6, 2013

For the basics, I recommend A Random Walk Down Wall Street.
posted by escabeche at 6:21 AM on December 6, 2013 [3 favorites]

I think viewing it as a hobby is the best way to approach this, but would encourage you to have the bulk of your savings in passively managed investments.

Having said that. The next question is why do you want to do this. Do you want to make money, or do you want to feel good about what you own and be able to sleep at night? Because those two things are probably mutually exclusive. There is a lot of data on what does work in investing. Basically there are two things that work. Buying very cheap stocks and buying stocks that have gone up a lot and selling them very quickly when they stop going up. And those things don't always work - although they do work over a multiple year time span. Which of those interests you more? Anything else is pretty much a fools errand. Like buying some awesome tech stock? yeah you're gonna buy google but you are also gonna buy adaptec or something that looks awesome and then something changes and its worthless. You don't need many of those to lose money even if you have google.

Next Question - How numerate are you? what is your day job? That'll determine what you should read.

But basically you have to develop a process for finding investments that might be potentially interesting and then you have to figure out how you are going to research those investments. Real investing isn't gambling. But a lot of "investors" are gamblers.

And if you already understand that passive is the way to go but are choosing to invest a small portion actively - you don't need to read "A random walk down wall street". That answer is the equivalent of not answering the question.
posted by JPD at 6:34 AM on December 6, 2013 [3 favorites]

If you want to read one book that will increase your stock IQ I would recommend Joel Greenblatts "The Little Book that Beats The Market". Greenblatt is a legendary investor on a par in many respects with Warren Buffett.

Nevertheless, my best advice is to put it in the ETF CSD and come back in 20 years.

kind regards
jcw
posted by jcworth at 6:40 AM on December 6, 2013 [4 favorites]

You might like The Motley Fool.
posted by mochapickle at 6:41 AM on December 6, 2013

Investing in individual stocks sounds like a fun hobby, and it sounds like you're comfortable with the idea that hobbies do not necessarily maximize future wealth. So great.

"A random walk down Wall Street" does an excellent job explaining basics of the stock market. Yes, it (sensibly) advocates passively-managed index funds as a retirement vehicle, but I think it's still a good book to read before starting a hobby of purchasing individual stocks. For example, if you read the book, you are unlikely to continue to agree with the statement "we are likely at the cusp of another huge crash".
posted by deadweightloss at 6:45 AM on December 6, 2013 [3 favorites]

Joel Greenblatts "The Little Book that Beats The Market".

Magic Formula turns out to have been pretty much an artifact of the time period Joel was looking at.
posted by JPD at 6:48 AM on December 6, 2013

How do people independently (ie. not via a broker) research and learn about other stocks and worthy investments?

There are a lot of sources that can point you towards possible stock choices: Internet, media, off hand comments made by other people, etc. If you don't have a particular stock in mind, researching anticipated trends (for example, tech stocks are on the rise, or pharmaceuticals are doing poorly) is a good way to start. There's a couple sources to help you with that; I like Bloomberg, as others have mentioned there's Motley Fool and Bogleheads, and of course, there's always the Wall Street Journal.

Once you've decided on an area, you can look at the stocks and do some analytics. Is there anything that is doing something different from the others? Why? Make a list of stocks that look interesting, whether because they're moving a lot, not at all, have had big changes from previous years etc. Then, you get to research your stocks.

Once you have a list of things that are interesting, you can get into deeper research. Do a google search for the companies, see what the news is reporting on. Did the stock rise because they've submitted something for FDA approval? Or is a new phone release coming out? You can also look at some stats: EPS is earnings per share, Beta is how much the stock moves with the market. Investors argue a lot about how important these things are, and how relevant they should be to your decision making. You'll find a lot of books talking about this.

Once you find something that you think is a solid proposition, I recommend watching it for a few days (or weeks) to see if your predictions turned out correctly. Once you think you have a good grasp, then jump on in. You sounds like you know the risks.

For books I recommend The Intelligent Investor, by Benjamin Graham which has been called the best book on investing by Warren Buffet.
posted by valoius at 7:02 AM on December 6, 2013

Magic Formula turns out to have been pretty much an artifact of the time period Joel was looking at.

That is a curious assertion.
Over the period 1988 -2009 which covered multiple market cycles, Magic Formula CLOBBERED the indexes - gaining 150% more annually vs the indexes.

This year magic formula is crushing the indexes again, roughly 100% outperforming the S&P 500 index.

That is some artifact! Basically, it has crushed the indexes by a wide wide margin in all the time that it has been in existence (1988-2013)

I recognize that no investing style is optimal in all market conditions, but I think to dismiss it as an artifact is a huge mistake. This is no laboratory result either, look what Greenblatt has done for his investors over last several decades.


kind regards, jcw
posted by jcworth at 7:07 AM on December 6, 2013 [1 favorite]

Just a definitional clearup. A broker doesn't necessarily control your funds - they facilitate transactions. You'll need to use a broker to purchase stocks/ETFs/securities. YOU still manage your funds in these cases.
Many of these online brokers can help provide you tools for making investment decisions, and sometimes can provide some personal counseling on investing. Looks like questrade has an education section, to both help you learn about investing and how to use their tools more effectively.
posted by troytroy at 7:10 AM on December 6, 2013

Its underperformed a simple value stategy. Basically it loads on value and quality and quality has underperformed. 74-11 magic formula has CAGR 13.94 while buying the cheapest decile of EV/EBIT over that same time period has returned 15.95%
posted by JPD at 7:11 AM on December 6, 2013 [2 favorites]

I strongly recommend "The Intelligent Investor" and weakly un-recommend "A Random Walk Down Wall Street".

If I were you the first thing I'd do is go to the SEC website and look up a company whose business you think you can understand. Just off the top of my head, I think Campbell Soup (CPB) would be a good example of an easy first try. Read their 10-K. You can find a nice PDF version on the company's investor relations website, but be sure to learn how to get filings from the SEC too. If that bores you to tears, this is not the hobby for you. If it fascinates but confuses you, then you probably need to learn some basic accounting and then repeat with other companies.
posted by mullacc at 7:11 AM on December 6, 2013 [3 favorites]

and the reason for that is that magic formula loads on value and quality and quality has underperformed.
posted by JPD at 7:12 AM on December 6, 2013

This is one of these questions where I wish it were easier for Americans to bet on horses, when instead they open investment accounts.

You could do a lot worse than read Warren Buffett's letters to Berkshire Hathaway shareholders. You're allowed to skip the stuff about reinsurance, but the rest will give you a sense of Buffett's investment philosophy.
posted by holgate at 7:17 AM on December 6, 2013 [2 favorites]

If you are a programmer the book "Quantitative Value" might resonate with you - although I personally have some issues with their final output. But it explains process really well, and once you get that there are all other sorts of factors you can incorporate. (or not incorporate as it were)

Since you seem to want to actually research stocks rather than just buying the names suggested by their process I would suggest you use their output as a sort of hunting ground. That way assuming you are appropriately diversified - say 30 names you are already starting from a position where you are biased towards outperforming the market.
posted by JPD at 7:18 AM on December 6, 2013

Well, I guess you and I have different ideas of what performance is. FNSAX, basically a mechanically derived subset of the Russell 5000 has outperformed spy by 50% over the course of its existence. That is real money and a real investable mutual fund (moving now to the Gotham moniker if I understand correctly) And Magic Formula returned 24% annually over 21 years across numerous market conditions. I am not saying there is NOTHING that outperforms magic formula by any means, but on the other hand I think Joel Greenblatt has plenty to say in that book to the novice investor. And clearly no strategy outperforms in all market conditions.

Also, seconding unrecommend of a random walk down wall street.
Warren Buffetts shareholder letters are interesting.
posted by jcworth at 7:28 AM on December 6, 2013

Mod note: JPD, jcworth, if you want to keep discussing this you need to do it over mefimail, this is not a place for an ongoing sidebar.
posted by cortex (staff) at 7:32 AM on December 6, 2013

Response by poster: Couple clarifications:
1. I'm Canadian, in case that matters.
2. I'm a computer programmer, so I'm fairly numerically minded. Definitely a logical, procedural thinker.
3. I see this first as a bit of a hobby, and second as a vague chance to maybe make a couple extra dollars.
4. I'm pretty interested in the science (if that is the right word) if it, the patterns that seem to repeat over time, the things that always seem random, the sorts of markers that in hindsight were obvious signs of rises/falls. I do see it largely as gambling, but there is some interesting aspect of human nature that comes in to play as well.
posted by PuppetMcSockerson at 7:50 AM on December 6, 2013

There are tenured professors and financial industry professionals whose job it is to determine the optimal investment strategy - and that basically boils down to passive buying and holding low cost index funds. Anything else is lots more work with debatable abilities to beat the market over time. I don't think you need to worry about brokers or advisers - most won't even return your call for 10,000 dollars given what that means in terms of their percentage.

Only a few people have taken me up on it, but you should do the experiment to convince yourself - if you were to take two accounts and put half your money in each, where one just sits in market tracking index funds and the other you're actively managing - there are pretty low odds you're going to outperform the index.
posted by NoRelationToLea at 9:03 AM on December 6, 2013 [1 favorite]

"how do people independently (ie. not via a broker) research and learn about other stocks and worthy investments?"

* Yahoo Finance
* A Bloomberg (ask a friend who works in finance)
* Read Jim Cramer's Confessions of a Street Addict for the nitty gritty about stock picking and hedge fund culture that is in many ways WRONG for the average investor but will be informative for purposes of your query
* Read The Big Short by Michael Lewis
posted by hush at 10:25 AM on December 6, 2013

With $1K I'd recommend against investing in individual stocks. Trading fees will be too high relative to your portfolio size. Want to make 10 trades? Assuming $5 a trade from a discount broker, that will be 5% of your investment. Can your stock picking ability beat an index fund by 5% when on average professional stock pickers do worse than an index fund?

Academics have searched in vain for evidence of individual stock pickers that can outperform indexes over time. If you want to pick individual stocks think of it as entertainment akin to gambling, indeed, the odds are not as stacked against you as in a casino.

Assuming you are young you can make an investment with much higher potential return on investment by sticking the money in an index fund and forgetting about it and using the time you would have spend researching stocks to advance your education, career or business.
posted by thinkcontext at 11:06 AM on December 6, 2013

PuppetMcSockerson: "1. I'm Canadian, in case that matters.

It does, mainly in that your tax advantaged accounts system is different. In the US, I'd recommend opening up a Roth IRA. I know fuckall about Canada.

2. I'm a computer programmer, so I'm fairly numerically minded. Definitely a logical, procedural thinker.

Great, I'm a programmer/sysadmin. But it doesn't really help in the way you want it to. Trading costs are going to be a huge problem. If you trade 10 times a year, using Questrade's advertised 5 dollars a trade you're incurring expenses of 50 dollars. On a principle of a thousand dollars, that's 5 percent a year! Long holding periods are going to be required to overcome the fixed trading cost, and you want a lot of different positions to minimize variance.


3. I see this first as a bit of a hobby, and second as a vague chance to maybe make a couple extra dollars.

I understand the hobby motive. The stock market became a lot more visible and exciting during the dotcom bubble. Passive index funds optimize these, and have expenses around .07 percent to .1 percent. So much better! I recommend you start by learning and researching mutual funds and etf's. Less sexy, but more useful for the small investor. As you build up a portfolio (of knowledge and wealth), you can eventually trade out of it.

4. I'm pretty interested in the science (if that is the right word) if it, the patterns that seem to repeat over time, the things that always seem random, the sorts of markers that in hindsight were obvious signs of rises/falls. I do see it largely as gambling, but there is some interesting aspect of human nature that comes in to play as well."

If you have access to an academic library, there are numerous journals. This Google Tech Talk covers a few papers that were interesting at the time. Random Walk Down Wall Street would be definitely up your alley, as it covers a number of patterns of historical note.
posted by pwnguin at 3:07 PM on December 6, 2013 [1 favorite]

I think you have had some good advice here but I just wanted to chime in with a few observations. Excuse my rambling.

1. You shouldn't invest money that you can't afford to lose, but there's little point in investing money that you don't mind losing*. If you're doing Buffett-style buy and hold long-term value investing, you need more money than $1,000 for it to be worthwhile. If you achieved an annual return of 20% over 5 years, that would be a great result. You would have more than doubled your money - but in absolute terms, you're only up ~$1,000 in 5 years.

Psychologically, it's hard for us to care about "small" amounts of money (relative to our total wealth). Investing $100,000 as a retail investor is different than investing $1,000, not because of liquidity (because you're such small size you're just noise either way), but because a daily P&L of +-$1,000 has a greater psychological effect than a daily P&L of +-$10. Most people would be much more conservative and serious about investing 50% of their total wealth than 1% of it. I guess what I'm saying is... do you even learn anything from investing money that you don't mind losing?

2. A lot of retail investors for some reason tend to gravitate towards stock picking, particularly illiquid small-cap names because they think they've found some "diamond in the rough." Or, they buy some company's stock because they like their products. Or, they short some company because they disagree with their business practices. All of these are generally bad investment strategies (and you see people asking about them on AskMe all the time).

But you know, investing isn't all about picking stocks. You could, for example, invest all your money in SPY (the S&P 500 ETF) and move money into cash when you think the market is going to sell off. That's active management too (and obviously, you would have had a hard time beating the market this year if you sold at all, but it's just an example). Or you could sell calls against your SPYs when you think the market is topping out. Or you could run a strategy where you allocate money across sector ETF's based on relative valuation. Or even trade the gold, currency, and bond ETFs in a kind of "global macro" strategy.

Trading index (as opposed to single stocks) is much more about the broader flow of money, economic conditions, macro events, and the business cycle. It might not be for you, but it's just something to consider besides stock picking.

*unless you were doing some highly levered trades and truly OK with losing all of your investment premium, but it doesn't seem like that's what you're interested in
posted by pravit at 5:47 PM on December 6, 2013 [1 favorite]

Honestly your time will be better spent if you just put the money in a broadly diversified low fee index fund and forget about it and then do your computer programming job. Think about it. Giant trading firms with super computers and PhD quants try to eke out a fraction of a percentage more than the market average using these resources. Do you think you can do better than that? Do you think it will be worth your time? Especially if you are only investing thousands instead of millions or billions? The best way to benefit from the stock market is regular, disciplined investing (preferably automatic contributions from your bank account) in low fee highly diversified investment instruments over a long period of time. If you try to pick stocks, you will lose in the short run or the long run because either you will pick a bad stock and lose money in the short term or you will pick a great stock and conclude you are a genius and get overconfident and then lose even more money in the long run. You don't want to go down that road.
posted by Dansaman at 9:11 PM on December 6, 2013