Investing as a hobby

[Scotty]

Up until this year I basically left my money in a number of TD mutual funds in my RSP account and didn't do a lot else. But this year I started making a LOT more money, and from about mid-March have been investing fairly heavily. It's been a trying experience given what kind of year it was, but I've learned a lot - though I still think I'm nothing but an amateur.

As my investments have grown, though (through monthly purchases, not so much profits), the amount I can make and lose in a day has grown, and I've found myself becoming more risk adverse. I've been reading The Intelligent Investor, by Benjamin Graham, and that's settled quite a few things in my mind, particularly with regard to value investing. But I'm not taking it as a bible, and don't have the time or inclination to put the level of attention into researching stocks he advocates. I do, however, look into them far more carefully than I used to.

I find myself watching investment shows on TV, particularly on BNN, and reading the investment pages in the Globe and Financial Post. I'm checking my watch list, and the statistics and performance of all sorts of stocks, funds and ETFs, incorporating new ones to keep an eye on, discarding others. Every month I make more purchases, and that's always a fun time. It's quite interesting and I can spend hours looking over things, researching them, reading what the so-called experts at stockchase have to say, then looking at the contrarian views.

One thing I've learned is that the 'experts' can be wrong as often as they're right, if not more. That's something Graham mentions in his book, which was originally written decades ago. So things haven't changed much. In fact, the worst investments I made were made very early, as I was just starting out, and because I read 'experts' telling me how Manulife had its act together and was going to be doing so much better (-35%), and how Research in Motion was also going to be doing much better in 2011 (LOL). Thankfully, I didn't take large positions in either, as I was just starting out and being tentative.

Graham was so right about not letting day to day, month to month changes over-excite you, for I've seen myself drop out of stocks because of short-term falls, only to see them rise up again and make back what I'd lost. At the same time, I don't have the tolerance for loss to watch a stock plunge month after month and ignore it. I did with Manulife and RIM but they were small positions, and even then, well, I should have gotten out a long time ago.

Anyway, it's interesting (to me anyway) how much of a hobby it's become, and also that while many of these 'experts' and their funds lost quite a bit of money last year I was up reasonably well, despite my initial set-backs. It's also interesting how completely inept these experts are, as a group, in predicting what the market is going to do, and how they give in to their own emotions to do the very things Graham warns of. You'd think a group of professionals would have more, well, professionalism, and less emotional, longer term view of things.

[August1991]

In recent years financial economists have increasingly questioned the efficient market hypothesis. But surely if market prices were often irrational and if market returns were as predictable as some critics have claimed, then professionally managed investment funds should easily be able to outdistance a passive index fund. This paper shows that professional investment managers, both in The U.S. and abroad, do not outperform their index benchmarks and provides evidence that by and large market prices do seem to reflect all available information.

Burton Malkiel, 2005

Martha Stewart was able to beat the market but in general, even full-time, savvy professional investors cannot consistently beat the market.

There are a few tricks though, and if you enjoy doing this Scotty, then that is your income.

In fact, the worst investments I made were made very early, as I was just starting out, and because I read 'experts' telling me how Manulife had its act together and was going to be doing so much better (-35%), and how Research in Motion was also going to be doing much better in 2011 (LOL). Thankfully, I didn't take large positions in either, as I was just starting out and being tentative.

I had nothing to do with RIM but I lost with Manulife (and Nortel - ugh!) in part because I reckoned that they couldn't go any lower. Edited January 8, 2012 by August1991

[RB]

Up until this year I basically left my money in a number of TD mutual funds in my RSP account and didn't do a lot else.

My motto for this trading: If you don't have money to lose don't trade.

Edited January 9, 2012 by RB

[CPCFTW]

Burton Malkiel, 2005

Martha Stewart was able to beat the market but in general, even full-time, savvy professional investors cannot consistently beat the market.

There are a few tricks though, and if you enjoy doing this Scotty, then that is your income.

I had nothing to do with RIM but I lost with Manulife (and Nortel - ugh!) in part because I reckoned that they couldn't go any lower.

The market can be beat if you are actively day trading. I have worked for a brokerage and have seen people that have hundreds of thousands in their TFSA from day trading (tax-free income! )

Price discovery is usually pretty quick, but it certainly is not instantaneous.

Edited January 9, 2012 by CPCFTW

[Scotty]

The market can be beat if you are actively day trading. I have worked for a brokerage and have seen people that have hundreds of thousands in their TFSA from day trading (tax-free income! )

Uh, how would they do that when the TFSA is limited to $5k per year and is only in its fourth year?

[August1991]

The market can be beat if you are actively day trading. I have worked for a brokerage and have seen people that have hundreds of thousands in their TFSA from day trading (tax-free income! )

....until they blow up, and they always do.

[Bonam]

Uh, how would they do that when the TFSA is limited to $5k per year and is only in its fourth year?

By making very high returns. If you've put in 15k and made 1000% returns you're up to 165k, for example. You can get that kind of return in just a few hours if you make the right bet at the right time (which of course is impossible to know with certainty in advance).

Anyway, cool thread. I, too, have been doing trading (not so much investing) as a hobby. I found I've definitely learned a lot, and made some good profits so far too along the way.

You are completely right: "experts" offer no deep insight into the markets. If they really knew a consistent way to beat the market, they'd be trading their money, rather than being paid an hourly salary for talking about it. And such people do exist, they're just not the ones talking. If someone discovers a truly consistently profitable trading system, they keep it to themselves and reap the profits, rather than broadcasting it to the world and thereby eliminating any edge the system has.

Oh and mutual funds are the devil. The very last thing I'd ever invest in. Pay some idiot to manage my money and watch him get paid millions / year even if he incurs massive losses? No thanks.

[fellowtraveller]

There has to be a return on the time invested required to learn investing tactics thoroughly, and the time required to monitor and manage the accounts. The risk is just not worth the possibility of reward, especially since there is an obvious option to gain as much or more income safely.

I think my time is better spent earning income and investing it in either boring investemtns I trust like GICS and low risk funds, or in high risk activities in areas that I can undertand thoroughly, control directly and get a large return on a lveraged investment- like local real estate.

So I understand investing small time as a hobby, since you likely won't make or lose much if you invest the time and money at a hobby level.

But no way am I going to spend all day trading unless I am pretty near certain I am taking home $70 to $100k per year, every year.

[dre]

Oh and mutual funds are the devil. The very last thing I'd ever invest in. Pay some idiot to manage my money and watch him get paid millions / year even if he incurs massive losses? No thanks.

Well that depends on your own psychology and how much time you want to put into it. Mutual funds take very little effort to invest in from day to day, and most investors make money. Only 1 in 10 day traders makes any money. The rest give up and let their accounts expire.

[Bonam]

Well that depends on your own psychology and how much time you want to put into it. Mutual funds take very little effort to invest in from day to day, and most investors make money. Only 1 in 10 day traders makes any money. The rest give up and let their accounts expire.

Most mutual funds return substantially less than just investing in a market index, especially when one looks at long time periods. If one wants to "fire and forget" invest, a broadly traded index ETF is a far superior choice.

[Scotty]

Most mutual funds return substantially less than just investing in a market index, especially when one looks at long time periods. If one wants to "fire and forget" invest, a broadly traded index ETF is a far superior choice.

I have been getting out of mutual funds because of their high fees - not to mention poor results. The ones I'm still in - for now - are all bond funds. And to be honest, I'm only in them because I have to fill out a form and take it in to the bank to arrange to get my funds moved from my bank's rrsp account to my discount broker's rrsp account, where I can exchange them for something else.

As an example.

TD Canadian Bond Fund +8.4% yr MER 1.11%

BMO Long Fed Bond ETF +19.7% yr MER 0.20%

TD RR Bond Fund +15.3% yr MER 1.50%

Ishares RR Bond ETF +16.7% yr MER 0.35%

Of course, it's even worse for equities

example

TD Canadian Equity -11.16% yr MER 2.18%

TD Dividend Growth Fund -1.50% yr MER 2.03%

BMO Global Infrastructure ETF +19.65% yr MER 0.61%

BTW, half my money is in bond ETFs and funds. Given how they did last year and the rocky road ahead I don't see that changing soon.

Edited January 13, 2012 by Scotty

[CPCFTW]

Uh, how would they do that when the TFSA is limited to $5k per year and is only in its fourth year?

I said day trading. People do it as a full-time job and you can trade options in a TFSA.

Lets say I put 10k in my TFSA. I can buy 100 call options trading at $1.00 (exposure = 100 shares per contract or 10,000 shares). Now lets say the underlying stock is trading at $20/share, and the options I am trading have a delta of 0.7. This means that for every $1 increase in the share price, the option increases by $0.70. The stock jumps up $0.20 (1%) on some random news, and I go long the call options for 1 min during this swing. I make $0.14 x 100 x 100 = $1400.

Now repeat this for 4 years with a 70-80% win rate on your trades = 300k TFSA.

It's basically tax free income for these people who do it as a job.

BTW I also heard a story of someone who dumped 500k into their TFSA when it was first introduced then immediately withdrew it. He got nicked for 1% overcontribution penalty for one month, then the next year his contribution room was 500k (withdrawals from previous years are added to next year's contribution room). Now he has 500k+ in tax free investment room. The government closed that loophole pretty quickly though.

Edited January 15, 2012 by CPCFTW

[CPCFTW]

....until they blow up, and they always do.

You're thinking of people who dump all their money into penny stocks.

I'm talking about day trading which involves a level of risk management to be successful.

Edited January 15, 2012 by CPCFTW

[sharkman]

I had a co-worker who made a ton of money in a few months but then the bottom dropped out and he ended up over 50k in the hole. If you don't know what you're doing you can really get hurt.

[Scotty]

I had a co-worker who made a ton of money in a few months but then the bottom dropped out and he ended up over 50k in the hole. If you don't know what you're doing you can really get hurt.

If he ended up in the hole he was playing complicated games that nobody but an expert ought to be involved in. For ordinary investors, you buy stock in a company, and that stock goes up or goes down. You don't wind up owing money on it, though.

[CPCFTW]

If he ended up in the hole he was playing complicated games that nobody but an expert ought to be involved in. For ordinary investors, you buy stock in a company, and that stock goes up or goes down. You don't wind up owing money on it, though.

You do if you open a margin account. There's not much complicated about buying on margin... it's pretty much the same concept as a down payment on your home.

You could open a margin account in a few days, dump 30k in it, then buy 90k worth of a stock (3:1 leverage) that you got a hot tip on. Stock goes to 0, broker sells you out, and you owe 60k. Something like that likely just happened to a lot of Canadian investors in fact. See TRE.TO.

Edited January 22, 2012 by CPCFTW

[Scotty]

You do if you open a margin account. There's not much complicated about buying on margin... it's pretty much the same concept as a down payment on your home.

Buying on margin is one of those things only experts should get involved in, and even then only if they have money to lose. It's extremely risky.

Buy solid blue chips and diversify your portfolio and there's no way you're going to be owing money.