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Comments on: Stocks vs Mutual Funds



These are simple guidelines for people who are new to investing. It is meant as a guide only.



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By: Anu

Tue, 30 Jul 2013 17:04:12 +0000

You need to know that it is the best opportunity for grownig your wealth as it allows you to invest in a wide selection of businesses in amounts that represent a reasonable risk to you and benefit from the company with relatively little effort on your part. It would behoove you to read as many investment books as possible to develop your own theories. There are essentially two aspects to investing, finding candidates for investment and proportioning the investments as per the probabilities and risks involved. Most people focus on the former and likewise many books focus on that with the most reliable being the value investing concepts put forth by Ben Graham and espoused by Warren Buffett and others. Essentially finding stocks that are priced below their proven value due to unfortunate but hopefully temporary circumstances.The second is often overlooked but is far more important as getting it wrong could turn good investments into bad investments, in general there are two camps, those who believe that it can be quantified and those that believe that only a relative ratio of reward to risk can be quantified and the rest is dependent on individual judgement. The argument between the two centers on defining the utility of wealth. Those that believe that a reasonable guideline can be derived quantitatively often use the log utility of wealth and the methods are often referred to as Geometric, Logarithmic or Kelly Criterion; it's usually mathematicians, engineers and physicists that are in this camp from as far back as the 1700 s, these include Bernouli, Latane, and more recently Thorpe, Kelly, and Shannon. Those that say that only human judgement will suffice are usually economists such as Samuelson, Markowitz and Scholes. I would say that though it is only human judgement that suffices due to the utility of wealth being subjective, the log utility of wealth is a reasonable approximation and hence the geometric methods provide reasonable guidance from which to develop the human judgement needed.Most people approach this second problem by wide diversification which trades potential for growth for a reduction in non-systemic risk. As to how much diversification is sufficient, that's the trick.Read a few books, ones I would recommend are The Intelligent Investor by Ben Graham, The Dhandro Investor by Mohnish Pabrai, and Fortune's Formula by William Poundstone. In truth you need to read as many as you can bear and formulate your own opinion.There is one far more important aspect, that is to realize that it takes discipline, it will do you no good to spend a month learning about financing and then not using what you learn for ten years. You need to have the discipline to make it part of your daily life, you must divide your income into categories as soon as you receive your income. Traditional categories are Spend , Save , Donate and Invest . The Spend category is so that you never make a financial decision because you want the money to buy something. The Save category is that you never make a financial decision because you needed money due to some unforeseen emergency. The Donate category is so that you never make an investment decision because you felt you had to help someone or contribute to society.