A Systematic Organization of a Goal
25 January 2008
So I’ve been stressed recently about investing and so I decided to sit down and approach my goal of being a bad ass investor in a systematic manner. Here’s what I came up with. I think what I did here could be done with just about any goal.
“I feel that my quest to become a highly profitable trader has been very disorganized, causing me to waste time, feel stressed, and lose money. Thus, I’ve decided to take a serious look at what exactly I’m trying to accomplish, problems with that goal, ways to overcome that goal, and, finally, I will create a specific curriculum that allows me to efficiently make progress in accomplishing that goal.
My goal (broad): To be an effective options trader, because options offer the greatest potential rewards, more control, and an experience that is close to that of a venture capitalist (a career I might want to have when I’m older).
Note: effectiveness, in this piece, means being able to generate maximum profit while spending the least amount of time and incurring the least amount of stress. Each of these is equally important, although I predict that profitability will be the most difficult aspect of effectiveness to achieve.
Problems with the goal of trading options: Investments in options have relatively high minimum equity requirements, high risk, and require permission which might only be available far in the future. An option with a lower risk (percentage wise) has a higher minimum equity requirement.
Potential Solutions to Problems with Options: Because options offer high leverage, small gains can be made large. Thus, I can achieve good gains while lowering risk if I seek very low risk opportunities. Another way to reduce risk and min. equity requirements is to use level three options; unfortunately, however, these require difficult to obtain permission.
Potential problems with the goal of being effective:
-
To be an effective options trader, I will need to understand options trading very well, specifically which options to buy in a specific situation.
-
I also need to be able to recognize opportunities (such as situations in which a certain stock is very likely to change in a certain way).
-
I then need to assess the risk, the potential for profit and loss, and if possible, divine as precise as possible an idea of how much and when important factors (such as price and volatility) of the stock is going to change. Based on this assessment, I need to know which option will being the most profit at the least risk and purchase it. Once the option has been purchased (and becomes an investment), I need to be able to continually assess changes that are occurring in real time and make profitable decisions (such as whether to buy (and what, exactly, to buy), hold, or sell (and what, exactly to sell)).
-
The more time I spend (in the organized and efficient manner described in this piece) on developing these skills, the less time it will take for me to do them, and the less stressed I will be as I do them.
Ways to increase effectiveness:
-
To improve the ability to understand exactly how all of the different option types (such as different strike prices and different expiration dates) as well as the different options strategies (such as spreads and straddles) respond to different changes in the underlying stock, I need to read options trading books, practice with virtual trades, and gain experience from real trades.
-
To improve my ability to spot opportunities, it is most important to be paying close attention to a number of companies that are either very good or very bad, to wait for times where they are drastically under/overvalued and are likely to be corrected. The better I understand these companies, the better the opportunities will be (in that they will be more effective (profitable, take less time and cause less stress)).
-
To improve my ability to assess these opportunities, I need to read books on technical and fundamental analysis, value, growth, momentum, and other types of investing, and on investing psychology; I need to practice with virtual trades and gain experience from real trades. I need to discuss stocks often with others so I can see things I wouldn’t on my own, as well as learn to quickly and concretely describe aspects of the stock that are likely to cause it to act in a certain way. I need to quickly record these in a journal and state precisely how I think they will cause the stock to change and why, based on that change, a certain option strategy will be the most effective. During the investment, I need to keep these aspects in mind, watch for changes in them in real time and react accordingly (I will base my reaction on a quick reassessment process in which I do a trimmed-down version of what I did before I made the investment). Also based on these assessments, I need to determine the most effective time to end the investment and end it. After the investment is over, I need to assess how closely the investment followed my original assessment, how well I was able to reassess and react as the situation changed, and make note of all of this in my journal, paying specific attention to aspects of the stock that I didn’t consider that caused it to change in ways I didn’t expect.
Plan to increase effectiveness:
-
Find two hour blocks of time each day of the week, preferably the same time block, and set it aside as time to be spent improving options trading effectiveness.
-
Only look at, read about, or think about stocks during those time blocks, unless you are currently involved with an investment.
-
Avoid things (such as websites) that will cause you to think about stocks outside of the time blocks and, even when in a time block, try to avoid random data (such as random stock quotes or short articles), as it destroys your focus and increases your stress (it seems the human brain does not do well when confronted with an excess of random data).
-
It is fine to spend those time blocks doing other things; however, if you miss this time blocks, do not try to reschedule them for later, just wait for the block the next day. If something is on your mind that keeps you from focusing effectively on investing, then do try to force it; take care of the other thing instead. Always remember that you’re young, you already know more than a lot of options traders, and, like with options trading in general, THERE WILL ALWAYS BE ANOTHER OPPORTUNITY.
-
Try to spend a 40-60 minutes working on items from the schedule (one at a time), and the rest of the time practicing effective options trading with a virtual account (ie, go through all of the steps); focus on whatever aspect of effective trading you’re currently reading about.
Schedule of readings and activities to do:
-
Read chapters in options books on simple calls and puts. Avoid references to more complex options until you are able to obtain level three options privileges (which might be far in the future). After reading these chapters, read chapters on different tools (such as mathematical models) for trading simple calls and puts.
-
Get a book on technical analysis, assess what aspects will be useful and then update this part of the schedule and study them.
-
Get a book on momentum investing, assess what aspects will be useful and then update this part of the schedule and study them.
-
Go in search of more companies, read their earnings reports and try to gain a sense of them.
-
Get a book on investing psychology, assess what aspects will be useful and then update this part of the schedule and study them.
-
Think of more tasks to add to the schedule and add them (then do the top one).
Rationale behind this plan: I’m sure I spend more than 14 hours a week thinking about and reading about investing, yet I accomplish very little for the amount of time I spend. I believe that 14 hours a week devoted to anything is quite a bit, and more than enough to experience rapid increases in skill if done the time is spent in an efficient manner. I think the plan is efficient, because I don’t need to waste time deciding what to do during the time I’m devoting to improving my investing, because I have clear guidelines saying what I should do. I also spend a significant amount of time devote only to this one thing, which I think will help reduce inefficiency caused by having to think about multiple things as once. Most importantly, this will reduce the stress I feel when I’m working on other things, but I feel like my time would be better spent doing stocks, or I spend a few moments checking stocks. I think this scattershot approach is hard on my brain and causes stress; the times I’ve learned the most about stocks have been when I’ve focused on one thing and one thing only (like reading Peter Lynch’s books on the plane).”
“Photosynthesis should make any short-list of Nature’s spectacular accomplishments. Through the photosynthetic process, green plants and cyanobacteria are able to transfer energy from sunlight and initiate its conversion into chemical energy with an efficiency of nearly 100-percent. If we can learn to emulate Nature’s technique and create artificial versions of photosynthesis, then we, too, could effectively tap into the sun as a clean, efficient, sustainable and carbon-neutral source of energy for our technology.”
http://www.lbl.gov/Science-Articles/Archive/PBD-follow-the-energy.html
I’d like to find other sources confirm this, but it seems legit. If this is the case, biofuel and biomass energy is much more viable than I had thought before. The problem, of course, is that photosynthesis creates chemical energy, which is much more difficult to transfer and use than the electricity made by solar panels. Furthermore, it has to be burned (at least with current technology) in order to be burned, a very inefficient transfer of energy, and, in doing so, it causes many of the same environmental problems that we currently experience from petroleum use.
If there were a way to have have a photosynthesis reaction that created electrical energy instead of chemical energy, or a solar panel that behaved like chlorophyll, then we’d experience the best of both worlds.
Kiva is an organization that let’s you find individuals throughout the world and loan money to them so they can improve their lives.
I just loaned $25 to a farmer in Azerbaijan who needed $700 total (other people around the U.S. and the world have loaned the rest) to buy12 sheep and enough food to feed them. Over the next 18 months, he’s going to sheer them and sell their wool then kill them and sell their meat and, with the money he earns, pay me and everyone else who loaned him money back and keep some of the surplus so he can buy more sheep. Every week or so, he writes up a report about how the operation is going and I can read about the good my money is doing. It’s economic development and it helps this man and his community. In 18 months, I get all of the money back and I can loan it out again, and again when I get it back, and continually do this, each time helping another person.
Kiva is a non-profit and they survive purely on donations, so all of the money you give goes to the person receiving the loan. They work with local banks to make sure that the loan is repaid. At the specific local bank that gives the money to the farmer I was talking about, they have a 0% delinquency and default rate: no one has ever been late or defaulted on their loan at this bank.
What’s funny is that I feel great now– better than if I’d spent the $25 on a shirt or a meal or something like that. I feel like this could revolutionize the world, seriously, and I encourage you to give it a try and help out your own farmer or store owner or whoever.
Here’s a video of Bill Clinton explaining Kiva. It’s quick and does a great job.
How Wave Power Works
4 January 2008
http://www.ecogeek.org/content/view/1258/
This website has a video (full of shameless, cheesy self-promotion — it’s a delight to watch) that explains how their aquabuoys (a form of wave power) work, as well as a short article about how California is planning to implement this technology.
The Impact of Solar Energy on Real Estate Values
4 January 2008
The only thing a grid-connected solar farm needs besides the solar panels, wires, machinery etc. to build the farm and connect it is land. Not all land is equal of course; the sunnier (defined by photons/second to strike the land) the land is and the closer to consumers of its electricity, the better. Thus, land that perviously had been more or less useless like deserts, mountain tops, the tops of plateaus, the ocean near the equator suddenly have great value. If I had any money, I´d be buying up huge tracts of wasteland near the equator but also near centers of electrical consumption because I have to imagine that their property value would go up if solar panels ever become a primary source of power for the world.
Information/time
21 December 2007
Nearly anything anyone could possibly want to know is now available on the internet. Information is power (it certainly is money; conceivably, with enough information, one could buy an option in a stock that´s about to increase by around 50% and achieve around a 1000% gain in one day). The problem, then, is that it takes us time to find information, and, at this point, we don´t have unlimited time. That´s the main purpose of this website: to utilize our collective filtering ability to find valuable information and then concentrate it here for you.
Or to put it in an overly simplified way: assuming information has monetary value, this website allows you to earn more money, or just gather more valuable information per hour, than you can anywhere else. We are constantly trying to increase I/t.
Our website increases your I/t by decreasing time spent searching and by providing articiles that have a higher I value than can be found elsewhere.
There is another way to increase I/t, however, and that is by decreasing the value of t. Here is a link to an article that describes a company that does exactly this:
http://venturebeat.com/2007/05/10/live-ink-offers-better-way-to-read-text-online/
Livelink allows you to take any reading material and decrease its t value (and increase its I value) by converting it to a format that allows you to read it faster (lower t) and retain more of what you read (higher I).
Pardon my editorial explicitive, but that is fucking amazing.
Right now this service is quite expensive, but how long will it be before all text is written in a more efficient format, before people start to investigate the means by which information reaches the brain (not just written text, but spoken word, pictures etc.) and, in every conceivable way, the connection is improved by a more efficient format.
I/t is the essence of this page. As much as we can, we have to track, promote and provide developments such as these that allow for a higher I/t.
Opportunity in Africa
16 December 2007
http://knowledge.wharton.upenn.edu/article.cfm?articleid=1863
Ever since attending a USC luncheon bringing together all faculty and students doing work in Africa last week, I’ve been floored by the potential in Africa. This article points out the golden opportunity of Africa: its lack of development. New technologies (mobile communications, off-the-grid power sources, etc) face little regulatory resistance or entrenched corporate resistance. As entrepreneurs and investors, we cannot afford to ignore Africa. We may not know much about Africa; but neither does the majority of businessmen around the world.
Making Solar Economical for the Consumer
16 December 2007
http://renu.citizenre.com/
What a great business model! This company is capitalizing on the high front-end investment requirements of going solar. Here’s the basic idea:
- Solar power saves consumers money in the long run by lowering their electric bills.
- Solar installation is expensive.
- It can take roughly 20-25 years for consumers to recap their initial investment (a period far too long for most people to consider).
- Long-term investors, however, are willing to wait 20-25 years to recap their investments, especially in today’s uncertain economy.
- Citizenre offers to pay for solar installation; in exchange, consumers pay a rental fee to Citizenre.
- Cititzenre performs all maintenance and repairs.
- Consumers save money by generating their own power and Citizenre makes bank by guaranteeing a steady income for decades (consumers can ‘lock in’ their power rates for up to 25 years!).
Here’s to you, economics.
China’s Stock Bubble
16 December 2007
http://www.knowledgeatwharton.com.cn/index.cfm?fa=viewfeature&articleid=1749&languageid=1
Leave it to Wharton to have the eloquence to elucidate the complexities of the Chinese stock market bubble to a young American white boy.
From what I understand now, the problem is the following:
- Bank savings rates are so low that returns are negative when you factor in inflation.
- China’s emerging middle class, therefore, is putting all of its money into the stock market instead.
- There are relatively few companies to invest in in China and those that do offer shares typically only offer a very small percentage to the public.
- As a result, an increasingly large amount of investors dollars are chasing a small pool of investment opportunities, artificially driving up prices.
Potential solutions:
- Raise interest rates.
- Encourage companies to distribute more shares.
What does everyone think? What are China’s best options? Are there any industries/companies than would survive a correction? If interest rates were raised and investors shifted their funds into banks, would banks be a good play (would the increased number of deposits make up for the higher rates they have to pay borrowers)?
