Tuesday, July 8, 2008

Investing Philosophies

I have been studying different philosophies about investing in the stock market.

What I've learned is that there are pretty much two opposing viewpoints: active and passive.

The one most people seem to practice is called active investing. It is the idea that one can maximize return through various hands-on, management techniques. These are generally ways of answering the questions of what to buy or sell; when to do it; and, how much to pay for it.

One active strategy is trading or attempting to buy low and sell higher. There are various means of doing this and nothing that anyone guarantees to work every time.

Another active strategy is called dollar averaging. This method is usually connected to mutual funds and requires investing regularly and periodically. Some people think it is passive but I classify it as active.

Yet another is called value investing. This is the Warren Buffet approach kind of. You hunt "good" companies and buy them and hold them. Some people think this is passive but apparently they've had an easier time finding "good" companies than I have.

The opposing idea is passive investing.

This is pretty much the idea that it is not possible to predict the market either for a bunch of stocks or for an individual stock. There's a concept called "Efficient Market Hypothesis" that holds that it is simply impossible to predict the price of stocks. Period. It also holds that the market itself contains all the possible information about pricing for both individual stocks and entire markets.

I've been thinking about this quite a bit. I especially have thought about it when I've been watching the business commentators on the cable channels. I find it very interesting that they all say things like "the market reacted today to the shortage of goldfish in Peru" or some such thing. But the day before they didn't predict that the market was going to react to the goldfish in Peru problem. It is only afterwards.

Then I think of the Efficient Market Hypothesis and say to myself "hmmm."

So in this system you just buy all the stocks there are and you do not worry about timing and what not. Now it would take a lot of money to buy all the stocks individually so people have created these so called index funds and ETF's (exchange traded funds) and probably some other names. They are kind of like mutual funds except there isn't any stock picking involved.

Well, that's pretty much all I've learned.

One more thing actually that I will mention:

Someone asked an Oklahoma oil man how to make a million dollars in the oil business.
He answered "Start with ten million."


Lori1955 said...

I love the quote from the oil guy. These days that sure is the truth. The stock market has not been kind to me this year but as they say, you haven't lost anything until you sell. SIGH.

~Betsy said...

Once I get done with all the financial responsibilities I have to meet (college, weddings, etc,), I'd love to get back in the stock market. Win or lose, I find it fascinating.