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The Toybox

people for the conservation of limited amounts of indignation


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adventures in gambling: two months and a week of introspection and blank staring
children of dune - leto 1
seperis
Today I learned about options.

If you are celli and just started hyperventilating, no, I'm not using them. I just read up on them. To say I understand them is a lie. To say I understand the theory, okay, maybe.



After much consideration, and a lot of reading, I finally get the conceptualization of the Dow Jones Industrial (it is not industrial), the Russell Index (has rules!), the S&P (top five hundred large cap, snobby?), and the NASDAQ (I got sleepy before I got this far). Basically, I've been reading up on the concept of "the market". Which I do put in quotes, because really. So not.

First off, historically speaking, I discovered the stock market in Western Europe was in coffee shops, and suddenly, a lot about it made so much more sense. It also explains a particular section of the book Through a Glass Darkly or it's sequel, set Britain during one of the Georges that's a really strange romance which, okay, not relevant, but the main character's brother killed himself after his shares in East India Company dropped (that's familiar) and then her husband she was estranged from had a heart attack, but a lot of stuff seemed to be happening in this like, wharf where you wouldn't think all these wealthy people would go. Now I know. That was their stock market.

So I feel more educated just knowing that.

Personally, to me, the most fun was to discover the Dow had never gotten above a 1000 by the year I was born, but started getting energetic in the last twenty years so as to hit fourteen thousand last year before a great and tragic drop (I'm still kind of boggling that in 1972 we went over 1000 for the first time, in 1987 we went about 2000, 1991 went to 3000, and then acceleration FTW, though I suppose if you look at it as percentages instead of as raw numbers, it doesn't look quite so dramatic.) Looking at the rate of return in each one was kind of surreal, because again, it's basically like watching mob behavior in very organized form.

Now that I feel I am almost caught up with the twenty-first century.

Current Statistics

I moved to a positive for the first time on Wednesday, exceeding my principle investment including all fees by .58%. Friday moved me to 1.5% profit, and Monday stayed around .92%, with some wobbliness near the end. Yeah, that's over, but not by much. Current loss is at -2.95%.

My Learnings

1.) Option in theory make sense, and I can see their usefulness. I can't see how anyone can use them without an accompanying heroin addiction to help calm you down. It's like playing poker where you can't see the cards for weeks and people can walk away from the game at any time. And now the movie Wall Street makes so much more sense. OTOH, if you are just that sure of something (how?), or you know how to use it to reap premium profits (okay, that did make sense to me), then huh.

2.) Apparently, an investor has a strategy. Yeah, who knew? I didn't.

So, strategy. Yeah. Okay.

I picked out a group of stocks that were below $50 a share that looked like they weren't in danger of dying in the next year (this is surprisingly hard; did you know all companies in the world are on the verge of collapse? Brand new world) and looked at their fifty-two week low and high prices to see what I was dealing with.

(Excluded food and commodities, since Wal-Mart, Kraft, and some of the others who are benefiting from the crash are on a nice high and therefore, I can get them later if I really want them probably for less. We'll see how that kind of thinking works out in the long run.)

The ones that were too close to their low or too close to their high I excluded and then moved to a six month and a three month view for the remaining. Removing the superlow and superhighs from the 2007 highs and the recent crash, I checked to see which ones were most steadily gaining but not arrowing up and down too dramatically and picked out ones that had regained about one third of the distance between their lowest and highest prices. Jumpers make me nervous; I can't tell why they're doing that and therefore, I do not want to deal with them.

(I also like the ones moving up slowly. I don't know why. Too many turtle and hare stories? No clue.)

Out of those, I checked dividends to see what the percentage was and excluded non-dividend paying. Out of those, I closed my eyes, made a wish, and picked the one that closed the lowest and still stayed within that one-third of lowest 52 week price. Actually, I chose the second lowest, because GE's debt is making me nervous, I don't care what Warren Buffet says. And Pfizer pays out dividends in March. It's also safe until Lipitor goes generic (see, I research), which gives it plenty of time to do what it likes, which could include takeovers. I find this very exciting.

3.) My spreadsheet is getting more complex. At first, I was tracking initial total investment and current value for masochistic purposes and running gain/loss (mostly loss) percentage by the total value and by share, then added a column for average price per share, then one for minimum sell price for return of all investment without a profit. However, I found a use for average cost per share in giving me my limits on when to buy--as in, below that or don't bother. What I'm not very good at is getting a decent idea of what it is supposed to be while not inflated; even excluding highs and lows, I'm still getting a range, which is why I picked out the one third mark for buying.

There's also factor three, which is what makes me wary of the most established companies like Microsoft--when you get to a certain size, there just isn't much growth you can do outside artificial inflation of the price by market booms. We are nowhere near that, which is why it feels pointless to invest in anything that won't move more than two percent either way for the foreseeable future.

4.) The most useful visually for tracking purposes has been SPY, the SPDR S&P 500 ETF (I always have to look that up to remember the full name, since there are so many of these things). As a general rule, it's the first to fall and the last to rise (obviously, since it's based on the S&P index). Due to how it's weighted, I can usually also tell by the speed of the drop or the rise if there is an investor panic in place or just a bad unemployment report. For some reason, it doesn't seem to follow, say, the actual values of the companies so much as what sorts of drugs the stockbrokers are taking. I mean, theoretically, bad news and good news have to do with the stocks that are actually on it, but not so much. So far, the biggest losses and gains came from--I don't get this--the theoretical premonition of something going wrong in the second quarter of 2009 or something. I don't remember exactly, but I remember looking at my spreadsheet sadly circa November when things got buggy.

Suffice to say, the stock market has a mood disorder.

5.) Continued research in investing at the best of times is like reading various skill levels of fanfic based on a single source that happens to have a lot of canonical AUs; interpretation varies so much that I'm actually understanding why investors panic if they hit any three different investment advice columns at any given time. It isn't just they all say different things; it's that week to week, they say completely contradictory things without sufficient explanation of why they did a one eighty on the subject. There's also a very strong dramatic streak through it all; it's all death or immortality, dancing or plague without an in-between in sight. It's stressing. There's one that's like freaking Hamlet, talking to skulls about the oil company and totally unsure about his being from hour to hour.

6.) I wish I could say I have any better idea what is going on, but it's still a mystery. Though I know now I am supposed to diversify which means the next month will be spent in working out the differences in sectors, industries, retail, equity and fixed income, medical and pharmaceutical, technological, and commodities. Strangely, sometimes, these things are far less obvious than one might think. Not to mention I am apparently in danger of--something--without an international market presence in there. Though not China! Except yes China. Or something.



And now it is Wii time.
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Well, you've made my head explode, but in an educational kind of way. And you're absolutely right - if you assume that everyone involved in the stock market is operating out of the nearest Starbucks, it *does* make more sense.

I think your strategy sounds awesome - I'll keep my fingers crossed in a highly scientific way for you!

I think horseracing makes more sense than the stock market and that's saying something.

You are so smart! I am educated by reading your self-education!

I am reading Standard and Poor's Guide to Money and Investing? It's like a foreign language. I am taking notes.

Man, this post reminds me of my husband's dinner conversation some days where I nod at appropriate places and silently brain freeze.

Some further things for you to consider - companies have a PE, which is a price vs earnings ratio (the stock market has this also). A high PE means that the company's stock is doing better than it's earnings might suggest, which can be bad or indicative of the market having a positive attitude about the company's future. And of course the inverse is true. Traditionally, there's a certain range of PE's that are normal and any outside those bounds are probably more dangerous (don't ask me what the norm is though - although I do know that the DOW had a pretty high PE overall before Nov and a lot of people were predicting a self-correction to get it back to the norm levels - and now the question will it stop in the middle of teh range or drop to the low end).

Also, if you're looking for dividends and a relatively safe investment strategy, traditionally municipal bonds are the way to go. They are safe unless whole towns/counties start filing bankruptcy and they tend to pay a pretty nice percentage dividend. That said, they are getting killed right now because people are losing money everywhere and just withdrawing their money from everything they can. This could indicate a buying opportunity - but it's not clear how far they will fall if the economy continues to crater.

Stock options are risky. Often they are included as part of a package deal if you're investing quite a bit of money in a company starting up (or getting bought out) or as part of employee benefit deals. Rarely does someone just buy options on their own I think (could be wrong, but it's pretty risky). So usually you have x amount of stock and an option to buy Y amount more of the stock for a certain price that may or may not be under the market value at some point (which is when options are valuable). So if the stock does well, then you do even better than just having regular stock because you can buy at the lower price and sell immediately (sometimes) at the higher. If the stock does poorly, well you lose whatever the original stock was and so long as there is no force buy aspect then you just ignore the options. They're the imaginary gift that comes from a deal to buy a large amount of the stock itself.

And I have to run so can offer no more very amateurish comments on something my husband knows way more about.

This is still more about options than I worked out. Did I mention I took notes and screenshots?

Decloaking from lurker mode for a moment... Did you read the article in last Saturday's New York Times Magazine section on Risk Management on Wall Street. I think you'll find it both highly informative and occasionally hysterical (this guy Taleb is so Rodney McKay's long lost twin...).

Link: http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?pagewanted=1&_r=1&sq=Risk&st=cse&scp=3

No, and going now to read! Thank you!

which kind of options? stock options, or futures options?

....

I haven't gotten to the difference. There are puts involved. And premiums. And guessing the future price?

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