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During my MBA studies at Wharton, I took classes in macroeconomics from the legendary economist Jeremy Siegel. I also studied portfolio theory, the theory of efficient markets, securities analysis, and risk pricing. By the time I graduated, I became convinced that trading stocks was a suckers game: most stocks most of the time are accurately priced based on current information, and when new information emerges, there are a lot of people sitting closer to the trading switch than you are. Since 85% of portfolio managers don’t even beat their indices (or a buy-and-hold strategy) I have never in my professional life engaged in trading.
That said, I understand the lure, so now I will give you the answer I gave to my son when he was 19 and asked the same question. If you must try it, here is my advice:
obviously pick the lowest cost trading platform you can find. This part has improved vastly in 30 years with eTrade, Robin Hood and literally dozens of very low cost brokers
Choose a portfolio of stocks. 30 would be statistically ideal fro m the standpoint of eliminating almost all individual security risk but that’s too many to keep track of. But at least 12–15.
Pick stocks that are riskier than the index you are trying to beat. Usually that means younger companies though not always. Determining risk is outside scope of this answer but a clue will be PE and other multiples.
Pick your portfolio in a sector that is experiencing wholesale transformation. I told my son 5–6 years ago: software is dead, every enterprise will be run on cloud based platforms. He bought Netsuite, Salesforce, and 5 peers and rode the SAAS wave. This sounds like it’s always growth tech companies and it usually will be, but at the moment there is another revolution underway in AI and big data, it turns out the chips inVidia has been making forever for displays are great for AI processors. Check out their stock chart over past 12 mos. Everyone wants ‘stock tips.’ What really matters is observing the movement of tectonic plates. Two immutable transformations underway to get you thinking: The Sharing Economy is going to be huge. It may be the biggest revaluation of private assets in history, who wins? Energy in America is going to be permanently cheap, far cheaper for longer than ever before thanks to fracking. Who wins, who loses in a world where the US is energy independent?
Once upon a time I might’ve advised trying your portfolio strategy without actually investing but I now know that’s like playing poker without real stakes: without money in play we aren’t fully engaged!
Finally it is worth observing that trading can get you into some really complicated accounting when tax time arrives so if it transpires that you have a gift, you’ll want to get on a formal trading platform that will streamline your bookkeeping.
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