how to learn finance

[kalos]

I bought some cheap courses from udemy

[IainB]

I recommended above that looking for good teach-yourself finance textbooks in places where they sell secondhand books would be useful.

As an example, look at this superb textbook I found last week - at NZ$7.00 it was a steal. It provides a self-contained course in the fundamentals of corporate finance, which forms "the other side" of personal investment: Re: What books are you reading? - Fundamentals of corporate finance.

The CD-ROM of mostly Excel spreadsheets is very handy and a smart way to teach/learn.
I bought the book to help coach my 15 y/o daughter.

There will be more - the same or similar - such books in any place that sells secondhand books.
As my old accountancy lecturer used to say: "Never pay retail and always ask for a discount - especially for paying in cash - or buy good second-hand stuff."

Picking up old textbooks for a song is a no-brainer to keep study costs down. Textbooks are regularly updated to make money and each new edition is sold at a huge mark-up, whilst previous editions go for a song, even though the basic content of accounting/finance textbooks usually varies little and doesn't age between editions.

[mouser]

Of all the websites I have ended up on while searching for finance/investment info, the most useful one I've found so far is: http://www.investopedia.com

Their articles explaining concepts are reliably great.

[wraith808]

Of all the websites I have ended up on while searching for finance/investment info, the most useful one I've found so far is: http://www.investopedia.com

Their articles explaining concepts are reliably great.

-mouser (February 13, 2017, 09:06 PM)

Seconded.  Motley Fool is worth mentioning also, specifically http://www.fool.com/answers/faq/

[IainB]

Came across this interesting article today. There's also an audio at the link - an interview. It's all very interesting because it discusses some of the maths behind the apparently empiric reality that the majority of active fund management decisions are likely to turn out to be futile in terms of making any advantage (good fund performance) from stock-picking, and are more likely to result in a disadvantage (poor fund performance). It's seems that the odds are against success.
(Copied below sans embedded hyperlinks/images, with my emphasis.)

The Math Behind Futility
An overlooked statistical concept shows why it’s so hard to beat a benchmark.
by Oliver Renick
April 10, 2017, 11:00 AM GMT+12
Interview audio Duration Time 3:22

J.B. Heaton is an unlikely stock market revolutionary. He doesn’t work in investing, his academic research focuses on legal aspects of insolvency, and most of his holdings are index funds. Yet thanks to his intellectual wanderings, Heaton today finds himself championing a slightly different take on active management’s decline—and, as it turns out, one that three professors advanced almost 20 years ago to scant recognition. Not only can’t humans outdo benchmarks, they all say, we can’t even fight them to a draw.

Let’s begin with the simple coin flip. You’ll call it correctly about half the time, right? Well, the collective efforts of active fund managers around the world come nowhere near even that, with the proportion besting benchmarks lately hovering around 19 percent, according to Bank of America. “How are so many smart people bad at their job?” asks Heaton, a lawyer with dual doctorates from the University of Chicago. “We’ve always known in our gut that active managers aren’t losing to the S&P because they’re monkeys. What we haven’t ­understood is just how hard it is to beat passive investing because of this effect.”

The effect Heaton is referring to is the subject of a five-page paper he published in 2015 with colleagues Nicholas Polson and Jan Hendrik Witte; Hendrik Bessembinder of Arizona State University recently expanded their findings. In short: The distribution of returns in the stock market is bizarrely lopsided. Often, equity benchmarks are so reliant on gigantic gains in just a handful of stocks that missing them—as most managers do—consigns the majority to futility. “Your intuition is that you can randomly pick stocks and start at zero,” Heaton says. “But the empirical fact is if you randomly pick, you are starting behind zero.”

What Heaton and his colleagues didn’t realize when trying to solve the riddle of chronic underperformance is that someone already had done it, for the most part, in a 1998 study, “Why Active Managers Underperform the S&P 500: The Impact of Size and Skewness,” published in the inaugural issue of the Journal of Private Portfolio Management. One of the original authors of the study is Richard Shockley, an associate professor of finance at Indiana University. At the time of publication, Shockley and his colleagues were investigating their observation that the drag from manager fees and the cost of managing a portfolio didn’t explain the degree of consistent underperformance by mutual funds to their benchmarks. The culprit as they saw it: the concept known as positive skew.

The implication, like it or not, is that a concentration of outsize gains in a minority of index members is tantamount to a death sentence for anyone who gets paid for beating a benchmark. It’s a pattern of returns that virtually ensures everyone outside of an indexer owns mostly deadbeat stocks. “It gets very little attention,” says Rob Arnott, the Research Affiliates co-founder and smart-beta pioneer who’s no stranger to pontificating in the academic realm. “The focus is often on the random walk and the coin toss analogy, and the impact of skewness is overlooked.”

The findings have implications for everything from how active funds are judged to whether the explosion in passive investing will ever subside. It also offers insight into the number of stocks a manager can own before becoming a “closet indexer”—a term used to refer to stockpickers who choose enough stocks to essentially replicate an index. Seldom is the concept trotted out in the debate over investing styles, and you hardly hear “skewness” as a reason for a money manager’s bad year.

Dozens of interviews with fund managers showed that few were familiar with the equity market’s degree of skewness and its impact on performance relative to a benchmark. “The paper didn’t get read,” Shockley concedes. “We undersold it. We thought it was going to be a bang-up journal, and they didn’t market it very well.” Part of the problem, he says, is that the math isn’t terribly easy to understand. And that’s where Heaton comes in.

Heaton, Polson, and Witte distill the statistical argument into a straightforward five-page paper that uses a simple illustration, adapted here to a bag of poker chips: Say you have five poker chips, four worth $10 and one worth $100. The five chips have an average value of $28, but what if you reach into the bag and pull out two chips over and over? That’s roughly how mutual funds approach stocks, with managers picking portfolios that are subsets of the broader group. The problem is, the majority of selections will fail to snag the $100 chip. Mathematically, there is an average value of $56 across the 10 two-chip combinations—the problem is, 6 of 10 times you’ll grab a pair with a sum of $20. The same thing happens with stocks chosen from a benchmark. Only a few managers will own the biggies, relegating the rest of the industry to mediocrity—or worse.

The ratios in the above example are a generous illustration of what happens in the market. In reality, there are thousands more combinations, and the number of outcomes that will trail the average far outnumber those that will beat it. As a result, waiting to catch the winners over time becomes an impractical strategy. Sure, a couple of funds will own the flavor of the week (or month, or quarter) and rise above the benchmark, but for most the result will be far less than the average. And the poker chip illustration leaves out a key fact—that some stocks will fall in a given quarter, offsetting the influence of the gainers. While that’s true, Bessembinder’s study, expanding on Polson and Witte’s work, found that over time, instances of outsize declines in most indexes are much lower than instances of eye-popping gains.

Of course, part of the reason is there’s a limit to how far stocks can drop: 100 percent. But beyond that, what stood out to Bessembinder is how lopsided returns really are. Indeed, according to his work, so precious is the performance of the tiny cohort of gainers that it masks that your average stock historically has been a worse investment choice than a one-month Treasury bill.

“At a practical level, skewness matters,” Bessembinder says by phone. “The underlying statistical issue is underappreciated. Even if there weren’t fees and expenses, the odds are you’ll underperform.” According to his findings, roughly 70 percent of stocks will do worse than the Treasury bill, with the rate of performance improving directly with company size. Yet even in the top decile of market capitalization, 30 percent still offer smaller gains than the T-bill.

By itself, the observation that you need to pick winners to beat the benchmark isn’t news. What else are fund managers paid for? The point of this vein of research is that the contours of the market itself make the odds against picking winners prohibitively long. Active managers may be doomed, but that doesn’t make them idiots. With investor cash pouring out of actively managed strategies and into passive ones, the stakes for stockpickers have rarely been higher. Even as individual stock returns show more variation since last year’s U.S. presidential election—a characteristic active managers often hail as crucial to selecting stocks—investors have taken money out of mutual funds and piled into exchange-traded funds this year. On a personal level, fund managers might find some solace in the ­research. The degree of skewness changes in any given year, and 2016 was an unfavorable one for stockpickers, according to Heaton. Put one way, the average stock in the S&P 500 returned 1.5 percentage points more than the median one, creating a scenario akin to the poker chip narrative.

Despite all the academic evidence, some on Wall Street expect the tide to turn back to active management. A December note from David Kostin, Goldman Sachs Group Inc.’s chief U.S. equity strategist, hailed the return of a stockpicker’s market as imminent. “I think they’re flat-out wrong in saying it’s a stockpicker’s market,” says Research Affiliates’ Arnott, referring to Goldman. “Wider dispersion increases the opportunity set, yes. But it also increases the opportunity to get it wrong, and the active manager will get it wrong as often as they get it right.”

While the notion of a stockpicker’s market can surely be debated, Heaton, Shockley, and Bessembinder would probably take a bigger issue with the wording of the latter part of Arnott’s statement: “as often as they get it right.”

After all, skewness says otherwise.
_____________________________
 Renick is a stock markets reporter for Bloomberg News in New York. With Chris Nagi.
This story appears in the April/May 2017 issue of Bloomberg Markets magazine.

Before it's here, it's on the Bloomberg Terminal.  LEARN MORE

[mouser]

Fantastic post, Iain -- thanks for sharing that.

I have been reading investing books for a while now and they all unanimously agree that indexes are the way to go -- hold most of the market and don't try to guess the winners.  This advice seems to have been given by the best investors for almost a century.
Most of the argument has rested on the difficulty of picking winners, and as mentioned above, the difficulty of active fund managers performing sufficiently better to offset their higher fees.

It's nice to see an additional explanation for why it's so hard for active fund managers to beat indices -- the fact that most of the gains are due to a very small number of (hard to predict) stocks that do well in any given year.  This argument is similar to the arguments about why timing the market is so hard -- that most of the big gains happen in VERY VERY short windows of stock price jumps, so that if you try to get out when prices are falling and get in as they are rising, it's already too late and you've missed the significant rises...

[IainB]

...most of the big gains happen in VERY VERY short windows of stock price jumps, so that if you try to get out when prices are falling and get in as they are rising, it's already too late and you've missed the significant rises...
________________________

-mouser (April 10, 2017, 05:18 PM)

Yes, timing is all. Sadlement, in my experience it seems to me that, when I make a buy of a stock at what I reckon is a cheap price, then the whole market takes that as an indication to drop the price of that particular stock, and when I make a sell of a stock at what I reckon is a high price, then the whole market takes that as an indication to raise the price of that particular stock.   

But yes, joking aside, it is a potentially very useful article and for the investor it provides a much-needed and pretty definitive explanation as to why active fund management performance is typically so bad and such a gamble.
It also cuts through all the BS that fund managers are fond of spouting.

Talking of BS in the financial market, if you listened to the audio, and kept listening after it finished, there's another audio - I think, immediately following - where some idiot with a South African accent talks about the market having a "headwind". The only "wind" about it is the blowhard who is uttering that phrase. If you listen to how he speaks, he has the annoying habit of raising the tone upwards at the end of a sentence, as though he's asking a question rather than making a statement. This can often be a dead giveaway that the person speaking variously lacks certainty/self-confidence, or lacks competence, and/or lacks knowledge of what they are talking about and is thus unconsciously appealing to the listener to accept what they say. It can be like a professional stigma - the sort of thing that will get one rejected when being interviewed for a job (but nobody will tell the applicant that is why they were rejected).

The TV cartoon series of Family Guy made a somewhat unkind joke about this particular characteristic/habit:

Family Guy - Season: 5 Episode: 5 - Whistle While Your Wife Works (first aired November 2006)
(The "Jillian syndrome".)
In this episode, Peter badly injures his hand while Brian gets a new girlfriend.
When Peter gets hurt and cannot work, his boss tells him that he needs to speed things up.
Brian brings his "idiot" (per Stewie) blonde girlfriend, Jillian (a photographer) home to meet the family. Stewie is not impressed.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Stewie: All right, Brian, you can do this. You can dump her, because once it's done, never again will you have to listen to her talk like [this?] You know, where everything has a [question mark at the end of it?] With an upward [inflection?] At the end of [every sentence?]

Brian: Yeah, I don't know what I was [thinking?] Oh, dammit, now I'm doing it too!
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

[IainB]

I had meant to post about this brilliant service here, earlier. I think it is potentially the most useful service for bank account holders that I have come across in years. I once drew up a design for a similar service in NZ, as I saw that it was sadly lacking and was something that the NZ banks could have offered, but weren't about to offer anything like it to their customers, as it would reduce the free marginal profits they made of customers' credit account balances on the overnight money markets. In fact, if someone tried to introduce such a service in NZ, it would probably be blocked at every single turn, as the trading banks effectively have an oligopoly and probably aren't about to relinquish their grip on that anytime soon and certainly not without a fight. The Royal Bank of Scotland introduced something similar when they bought out the NZ Countrywide Bank, but the Countrywide Bank was bought out by The National Bank (a wholly-owned Lloyd's Bank subsidiary), who unsurprisingly expunged the service.

These are not statements of opinion but pragmatic observations drawn from experience of working at the heart of things in the finance/insurance/banking sector in NZ/Oz for some years, where they generally have excellent banking systems that serve the banks very well indeed.

Digit: (digit.co) - an algorithmic savings manager.
A potentially seriously useful service.   

(FAQ copied below sans embedded hyperlinks/images.)

Frequently Asked Questions

[Select]

https://digit.co/about/faq

How does Digit work?
Every day, Digit checks your spending habits and moves money from your checking account to your Digit account, if you can afford it. Easily withdraw your money any time.

What makes Digit different than a recurring bank savings transfer?
Digit automatically figures out when and how much is safe to save based on your lifestyle. Digit doesn't require you to figure out an arbitrary amount to transfer every month.

Is Digit safe?
Yes. Digit uses state-of-the-art security measures. Your personal information is anonymized, encrypted and securely stored. All funds held within Digit are FDIC insured up to a balance of $250,000.

Does Digit cost anything?
Digit is completely free. You will see "Hello Digit Inc" transactions in your checking account but these transactions are just transfers to and from Digit.

What are Savings Bonuses?
Make money for saving money! Every 3 months Digit will automatically pay you a Savings Bonus (currently 0.20% annually). No fine print, no account minimums. Just sit back and collect your bonuses.

What is the Digit no-overdraft guarantee?
We believe so strongly in our math and our ability to safely identify money you can afford to save that if we overdraft your account, we'll cover the fee, up to two times per customer.

Where is Digit currently available?
At this time, Digit supports over 2,500 banks and credit unions within the United States.

Does Digit have an app?
Yes, we have an iPhone app and an Android app.

Does Digit work with banks located outside the United States?
Unfortunately, Digit is U.S.-only right now. We have hopes to expand internationally in the future.

Do I need a savings account?
No. When you signup for Digit you get your own Digit account which will hold any Digit savings until withdrawn. Any funds held in your Digit account are FDIC insured up to a balance of $250,000.

How do I access my Digit savings?
You can withdraw your savings 24/7/365 and as many times as you want per month. You can access your Digit savings by messaging Digit 'Withdraw' whenever you'd like to move money to your checking account.

What should I do with my Digit savings?
Some of our users have started a fund for emergencies, splurged on a trip, or paid down debt. You can also move your savings to other accounts (for investments or retirement) as often as you wish.

Have other questions?
We are always here to answer them. Please visit the Help
_____________________________

See also: The startup had helped users save $75 million around this time last year.

-IainB (April 01, 2017, 01:06 AM)

[Deozaan]

This may not be the appropriate place for this, but I've recently discovered Betterment, which seems like a good resource for investing for the future.

At least in the U.S.A. I'm not sure if their services are different or restricted in other areas of the world.


For more details on why you may want to use Betterment, read more info here:

https://www.betterme....com/why-betterment/