What to do with some extra money?

[CardMinger]

Hello,

I have built up a decent size bankroll of around 20k by playing poker and doing a little bit of stock trading etc. I am wanting to get into the market a little more heavily and was just hoping to get the opinions of some of the experts around here. I have read the thread on books and ordered a few of those to start. I also guess I should mention that I am 21 years old so its not like this money is critical to my retirement / family or anything right now.

I guess my question just comes down to:

How can I put my 20k of (pretty much) disposable money to work for me the best...and if that method is in the stock market what are some other starting points to consider besides this forum and the books I just ordered?

I know this is quite an open ended question and being new to all of this I may have left out some very important information that you all need so please feel free to ask, comment or criticize.

Thanks a lot for your time and for reading this post!
CardMinger

[RollaJ]

you sure you want to take ur hard earned money and gamble it away? /images/graemlins/smile.gif

[squiffy]

I think there are three main ways of making money --realistically, aside from your day job.

First, real estate.
Second, stocks.
Third, a business idea.

I wouldn't recommend starting your own business unless you have some experience or talent in that area. Most business ventures are a long-shot for the uninitiated amateur. And if you have a full-time job, it may be hard to find the time and energy to start up a business on the side.

Buying real estate in the right location is generally a good idea, but transaction costs are high and appreciation is sometimes slow, so it is typically a long-term investment. You have to make sure you buy from a reputable builder to avoid construction problems and defects. You need to be sure you have a steady job which will enable you to pay the mortgage. And hopefully you will be staying put long enough to profit from the investment. You also need to scout out a good location where the home or condo will hopefully increase in value.

Even Peter Lynch seems to recommend that most people consider buying real estate before buying stocks.

See Learn to Earn at p. 102, 109 "Stocks are likely to be the best investment you'll ever make outside of a house."

Though real estate does offer the tremendous advantage of leverage. Put down $20,000 and buy a $200,000 home with a loan at 6% interest for 180,000, practically free money after you consider inflation and tax deductions.

You are probably less likely to lose a ton of money overnight buying real estate, though it can certainly happen. So it's probably a more secure investment. And your investment grows tax free. And if you live the home two years out of the past 5, you can actually sell it tax free.

Still, I would recommend starting with stocks for several reasons. Then you can shift to real estate once you have saved up anough for the down payment and have a job you like in a city you like. Most young people will be moving around a lot until they find a job they like and owning a home may tie them down unnecessarily. Stock investing you can do from any city as long as you have internet access or a phone.

Done correctly, you can do quite well in stocks, despite the taxes. To avoid (reduce or defer) taxes you should try contributing as much as possible to an IRA or 401k so that you can trade tax deferred or tax free and let your profits compound.

I like the Warren Buffet Way and Warren Buffet Portfolio by Hagstrom as a conservative starting point. This is only a very basic intro, but not a bad way to start.

Lynch is good to read too. One Up on Wall Street and Beating the Street. Though I don't agree that his approach is all that easy for the average investor to duplicate. I think the Fischer/Graham/Buffett approach is a bit easier for the average investor to follow. (Though there is some overlap. Some of Lynch's plays are similar or identical to a Buffet type play.

There are many other excellent books out there, with more math and more advanced info, but just start with an overview first.

And of course visit as many websites and read as many magazines as you can related to finance and investing. Also watch CNBC to learn about what's going on in various sectors and in the market.

www.fool.com (http://www.fool.com) www.money.com (http://www.money.com) www.morningstar.com (http://www.morningstar.com)

Wall St. Journal, Investor's Business Daily, Business Week, Fortune, Forbes.

If you haven't taken a basic economics class in college you should consider auditing an adult ed class or undergrad class if you have time. Otherwise buy or borrow a basic college or high school econ text and review it on your own.

Other helpful books are

Dorsey The Rive Rules for Successful Stock Investing
Graham The Intelligent Investor
Fischer Common Stocks Uncommon Profits
Bogle Common Sense on Mutual Funds
Unofficial Guide to Stock Picking
Vick How to Pick Stocks like Warren Buffett
Winning with the Dow's Losers
Stocks for the Long Run
John Neff on Investing
Irrational Exuberance
Dreman, Contrarian Investment Strategies
Superstock Investor

The Millionaire Next Door

Investing in Real Estate McLean and Eldred

I started investing after getting out of law school. Initially I only contributed the max to my 401k and put the money into S&P500 Index funds. Then when I moved to a new employer would roll over the money into a Vanguard IRA and put it in the healthcare fund and the S&P 500 fund and for a time into the energy fund.

I am about 40 now and have two homes. One in Dallas that I rent out and one in Fresno.

I paid about 183K for the Dallas home in 1993 and it may be worth 230K to 260K now give or take. I only put down about 18K or 10%. I only owe about 140K or so on the mortgage. And basically the renter pays the mortgage and taxes for me, so it's kind of like a tiny business. The home was bringing in about 1700 to 2000 a month in rent, depending on the economy, which covered my expenses.

The Fresno home I bought in 2002 for 199K. It may be worth about 250K to 280 K now, since Fresno has been a super hot market for the past 3-5 years. But I don't expect that to continue forever.

I have about 237K in my retirement accounts which I use to trade stocks. And trading is risky. Sometimes I make a lot sometimes I lose a lot. But so far, the gains seem to have outweighed the losses.

My dream is to retire at age 50. But more likely I will have to wait till 55 or 60.

Work sucks. It's boring and I think I should have gone into some type of Wall St. job instead. But there is no guarantee that I would have enjoyed any more success.

The big problem with investing seems to be that it's get rich slow. Since I don't care for my job I want to get rich fast. But that can be bad, if it forces you to take unnecessary or foolhardy risks.

My dream is to double up a couple times so that I have about $1 million cash. But that's not easy.

I can find good stocks, but need the leverage of options (calls -- 1 or 2 year leaps) to make a huge return.

But since most of my money is in my retirement account(except for about 60K in my cash account), I cannot use options (except selling covered calls).

For example, I recently bet the farm on NOK. I started buying at 17 and it kept dropping to 11 and I kept buying. I ended up getting about 12,500 shares at avg. price of 13.34. It went to 17 and has now dropped back to 15.80 or so.

My friend at the same time bought about $40,000 worth of Jan. 2006 calls at strike 10 and 15. So his return was much higher than mine. Something like 50% or so. Whereas my return was about 15 to 20% or so. I was fully invested and he still had about 310,000 in cash left over, only risking a smaller portion of his portfolio.

But don't try options until you have read and studied and traded stocks for 3-5 years. Seriously. It's very dangerous.

[squiffy]

I didn't have to put any money down on the Fresno home. Which was nice. But that left me with a higher monthly payment of course and a larger loan amount. A big mortgage is not necessarily a problem, but it increases your risk of losing the home altogether if you should become ill or disabled or just screw up and lose your job.

One good thing about getting into real estate now is the easy credit. No money down or low down payment and low interest rates.

The downside is that because interest rates are low, tons of people have bought homes and have bid up real estate prices to levels that seem reminiscent of the tech bubble.

But real estate is very regional. So prices may be reasonable in Kansas, but unreasonably high in Las Vegas, New York City, and California.

[The4Aces]

if i were you i would put 3k into a IRA, and keep doing that for the rest of your life. at 21 if you keep putting the max in every year you will have a large amount of money when you are ready to retire.

[CardMinger]

Squiffy,

Thanks for taking the time to write such a great reply!

It is somewhat strange actually that you and I actually have some things in common. My permanent residence is actually in Hanford CA (right next to Fresno) and I am currently attending college at UC Irvine. I also am invested in the Vanguard S&P500 Fund (I am including a P.S. regarding that fund at the end of this post).

I currently do not have a real job per se...I have worked doing web development for a real estate company for awhile and so I do have an inclination toward real estate but like yourself I want to "get rich quick" within reason and also agree that the RE market around the valley resembles the technology bubble of the early 2000's. Either way I dont really pay taxes (shhh!) on this side job so I dont believe I can put money into an IRA...is this correct?

Sorry theres not much content to this post I guess I just wanted to tell people a little more about myself.

Also as far as the side note for the Vanguard fund goes...I noticed a trend that the S&P (and other major indices) as a whole usually jump during the holiday months between October and January 1st. So around October first I bought 25k worth of the Vanguard S&P500 Index fund at 104.25 and just sold it at 112.23 for a pretty nice gain.

Do you find value in these kind of moves or do you think things will even out long run?

Again thanks a lot for all the valuable information!

I will also look into the books you suggested after reading the ones I just ordered that were suggested in the books thread and will take your suggestions to watch for trends in the market and read more online....do you know of any other forums such as this one where people discuess general stock strategy and not really a certain stock in general?

Thanks again...and sorry if I rambled!

[GeorgeF]

I think you should go to China an learn Chinese. If you are really clever and can beat a poker game you should go to Macau.

If you cannot be disuaded from investing I suggest you get a foreign currency account at everbank.com and buy some gold too. Wait for a market crash and then buy in. Consider commodities instead of stocks.

[squiffy]

Talk about coincidence! This is a pretty popular website with people contributing from all over the U.S.!!! One of the judges I used to work with lives in Hanford and commutes to Fresno every day. I have never been to Hanford, but one of my lifelong goals is to visit Hanford before I die to visit the cows. Just kidding!!!! But yeah, I do know of Hanford.

Well, if you read the fresno bee hard copy or online, you know how much Fresno and California real estate have been going up!!!


BACK TO STOCKS


Unlike poker, real estate and stocks are stacked in your favor. If you are patient, take reasonable risks, and keep contributing money, the chances of you winning big are huge. Put another way, I think an investor with average intelligence, patience, and effort stands to do very well over the long run in stocks and investing. Whereas I think the average poker player just breaks even or makes only a tiny profit, so that poker is fun, but not a legitimate source of wealth generation, unless you are in the top top top percent of skilled and hard working players.

If you look at a chart of the DOW over, whatever, 80-90 years or at the S&P 500 over its entire existence (not sure how long, say 50-60 years???) the chart basically just goes up. Even the 1929 crash is just a temporary blip, over the long long long run.

So, if you are investing in the top U.S. companies, it's hard to lose. Because over time, they will PROBABLY make money, and a lot of it. They attract the best minds, ideas, and resources. And America, to date, has been a strong capitalist nation, with ample resources, political influence, and economic know-how.

So a long-term stock investor, investing in reputable companies, (not BS penny stocks), is basically investing in one huge 80 year bull market for top U.S. stocks. So it doesn't take a lot of talent, in that sense.

Let's look at your play. It's a good example of a smart play, though some might quibble with your holding period. But it's basically sound and conservative.

There seems to be strong anecdotal and research evidence that a January effect exits.

Is this theory logical? Yes. Absolutely. Human beings invest in the stock market and humans sometimes follow patterns.

For example, I notice at my local card club that early in the month tends to be busier than later in the month and Fridays tend to be busier than Mondays Tues. Wed. And several employees confirmed this when I asked about it. They theorized that it coincides with the issuance of paychecks at end of the week or beginning of the month. Or perhaps the paycheck is issued at the end of themonth and the person comes in the following weekend. And it makes sense that Psychologically, people stay up late Friday to celebrate the end of the week and because they can sleep in Sat. and Sun. So human beings and animals SOMETIMES follow patterns.

If you are hunting deer, maybe you wait at a salt lick or near drinking water??? Why because at a certain time of day, deer come by to drink or lick, etc.

Because people pay taxes, they often sell losers at the end of the year to lock in tax losses, then reinvest in late Dec. or early Jan. Similarly mutual funds want to close out their books toward the end of the year.

There also may be psychological and economic effects. People may give or accept financial gifts at year end. If people want to invest in an IRA, they want to deposit it as soon as possible during the New Year so that their money has maximum time to earn dividends and appreciate in the market, etc.

So perfectly plausible that this Jan. Effect really does exist. We could be wrong. It could be an illusion. But you have to make a call based on the available evidence sooner or later and decide whether to invest or not to invest.

So, you choose to invest. A sound decision.

The upside is simple. The S&P goes up, you make a paper profit, and decide when to sell. Easy.

The downside is the market may go down. Huge terrorist strike, assassination of Bush, Vioxx scandal, dead body found not buried at a cemetary owned by your company (this really happened to one of my stocks formerly called SCI and I took huge losses, unbelievable!!!!)

But based on historical data, the S&P 500 tends to go in which direction. UP UP UP. Now, if you need the money in one month to pay tuition, then you should not invest. Your personal situation means that you will be forced to sell at a loss. So investing under those conditions is foolhardy.

But if you can afford to wait 1-2 years for the market to recover from a recession or war scare or some other economic problem, you will be fine. So if you CAN AFFORD TO BE PATIENT, you aren't really facing much downside, except sitting around praying for the market to recover and feeling pretty bad in the meantime.

In addition to data, you should read what top fund managers and famous investors say. Bogle obviously is a fan of Vanguard. And even Warren Buffett has been quoted as saying that putting your money into a low cost index fund is a perfectly reasonable move for an investor who lacks the time and inclination to pick individual stocks, or who has too small a bankroll to properly diversify.

The only downside is that by Buffett's standards, when you buy the S&P 500 you are over-diversify and almost guaranteeing yourself a lower return, but the upside is you also are facing less risk. So it really depends on your interests, abilities, and risk profile.

So all factors point to it being a good move.

The only thing is, selling so soon may be a slight inaccuracy. You may leave some money on the table if Q1 2005 for whatever reason turns out to be a strong quarter. But you need to analyze the economy, the pattern of the S&P 500 (typically a super year, a so-so year and a down or negative year in 3 year cycles, with the occasional mega bull or mega bear cycle).

You also need to consider the Jan effect question, which seems to imply that small caps go up, then back down again in Feb./Mar.

Though this year, the effect seems to be hitting large caps, which calls into question the entire validity of the Jan effect theory.

In any event. I would say, probably some truth to the Jan. effect theory. But even if there isn't, there is historical data showing Dec. and Jan. are typically strong months for the market (perhaps after strong Christmas sales and the psychological effect of being positive about the New Year).
So not much downside to your decision. And in hindsight it did work.

2003 was a strong year for the market recovering from the long pseudo-recession triggered by Sept. 11, 2001 terrorist attack.

2004 was a slow year, but picked up in Nov./Dec. after the election. So you benefitted from that. (post election pro-Bush pro-market euphoria is another factor, so you can never just point to one factor and be sure that it was THE CONTROLLING FACTOR. (That is one of the problems with economics. It's hard to perform any kind of controlled study or experiment to show why a particular stock or the market in general went up or down on a particular day.)

Anyway. Investments are like poker and chess. You keep reading, keep playing. Keep analyzing each of your moves that worked or failed. And analyze why it didn't work or fail. And compare your moves with moves you read about in the Wall St. Journal, Business Week, etc. I especially like reading books by or about famous investors to see how they made certain kinds of investments, their logic analysis etc.

You won't always be able to duplicate their plays, but it may give you some ideas that you can safely and reasonably apply to your own situation.

Keep posting here. If we can make this forum as strong as the poker forum, then we can all benefit.

I have tried the Yahoo message boards, but you generally see a lot of idiots there. Though occasionally I see a few helpful posts. Though little analysis, just unsubstantiated tips about some bs stock.

Here, at least, you have some analytical types, who have been influenced by the more rigorous analysis of the poker site in thinking carefully about how to play a particular hand.

I think the more specifics we can all give about our personal situations and decisions, the more we can offer helpful advice and benefit.

Of course, don't give out your social security number, bank account and home address.

But age, amount of investment, name of stock, date of investment, investment goals, investment knowlege, etc. are all important.

If you are 21 and have plenty of extra cash, you can take greater risks than a 65 year old who is about to retire and absolutely needs to make sure the money is there. A 65 year old needs to think twice about betting on Amazon at a PE of 500, because his entire life savings may disappear. And he cannot afford to wait 5 years for it to recover, if it recovers at all.

If one is an A student and a whiz at math and have the time and interest to read a lot about economics and finance, then it is more likely you can succeed at stock picking.

If one is a D student who hates to read and can barely do math, then index funds may be best, etc.

[squiffy]

So every time you have an investing idea, give a little post and people can offer their insights, if any. And sometimes just writing out your thoughts helps clarify your thinking.

Also see if you can find an investing club on campus to seek out info from talented classmates, whether undergrads or Bschool students.

When I went to law school, there was a kid in undergrad who eventually came to the law school on the same campus. He used to play a lot of chess and was from S. Africa. He was quite conservative politically, so I didn't really get to know him, being a liberal myself.

But in hindsight I really should have joined the conservative club or the young entrepreneur's club, etc., to learn more.

This guy ends up being one of the founders of PayPal and is a multi millionaire now. I have seen him on CNBC a few times.

I am not saying that knowing him would have made me a millionaire by age 40. But who knows what I could have learned talking to him about chess or investments, etc.????

Anyway I heard his dad was a big deal in South Africa, but still no doubt he was a smart cookie.

Just like Bill Gates, who dropped out of Harvard, but whose dad was a big shot lawyer in Seattle (Mom a prominent socialite from a wealthy family)

Or Steve Case from Punahou School in Hawaii (my home state). His dad also a big name partner at a local firm. Case at least spent many years at Proctor and Gamble first!!!

[1800GAMBLER]

Thank you for the reply.

[WarDekar]

Which founder are you talking about? I know one of them went to UofIllinois and was in the CS program there (what I'm doing currently). Just wondering where he ended up going to law school if it's the same guy.

[squiffy]

The founder I know of is Peter Thiel. Went to Stanford Undergrad and law school.

Though I believe there is more than one founder, as there are computer issues and business issues. But Thiel is the only one I know of.

[eggzz]

At your age, I recommend a Stock Dividend Reinvestment Plan in a solid blue chip company. I started one in ExxonMobil (well, back when it was just Exxon) and FannieMae. Fannie has had some problems of late, but I continue to invest in these two plans about 80% to Exxon and 20% to Fannie anyways. This is aside from my pension and 401k.

Now once you can build up a good nut, you get quarterly dividends which you reinvest and buy more shares. You don't have to do anything, the plan does it for you, you get quarterly statements, etc...

What I like about the Exxon plan is that you can send them a check for as little as fifty bucks, and they will buy all stock with it, that would be like .901 of a share. You don't have to buy an even number or anything. Additionally, there are no fees. I don't know why or how they do this, but there aren't. I guess its in place to invest in the company, and they don't need to charge five bucks every time you purchase new shares, like Fannie Mae does.

I started with five hundred bucks, now I have about ten grand in exxon stock, and its cool getting the statement and seeing how many shares I repurchase each quarter by doing nothing. Actually its not that much right now, but once I can get up to 30k or something, then it will be tangible.

Then when you are old and grey, you start cashing those dividend checks.