What should I do in order to become good at managing money?

Water Cooler Careers
#1

I am 28 years old, and I have accumulated net assets just shy of $1 million.

I made most of this money before going to college, and in college I majored in Economics and did relatively well. I have never held a job even remotely related to finance/economics/accounting, although I did own and operate several small businesses and I also worked as a programmer in the past.

I’m guessing that my situation is unique because I’m not constrained by the desire to get a job. My primary goal is to gain the education necessary to manage my own assets and maybe that of a few close friends. I hope that someday I will be able to generate 10% annual returns with low volatility. I hope that someday I will be better prepared than the average person when it comes to foreseeing and getting ahead of major economic downturns and collapses. I am passionate about getting good at this, as I’m sure many of you are. I am not against getting a job if it is the best way to learn skills related to asset management, but I am seeking your advice as to what combination of work experience and educational resources would be optimal in pursuing my goals.

I started trading when I was 18, with a very small account, and like most people, I lost money. I’ve since gotten a little better, and I did fairly well in 2011 and I’m up so far this year as well. I know this doesn’t mean much, but I’m just trying to convey that I have some experience and that I read financial statements and I know what implied volatility is and I trade some basic options spreads. But beyond that, I’m an amateur.

I want to learn more and I’m thinking about taking the CFA’s just for the sake of developing my intellectual understanding of how best to manage my money. Would it be worth it for me to pass 3 levels even if I never get a job? I know that there’s all kinds of garbage coming from academia, such as efficient market theory. But I want to understand everything, including the concepts I disagree with. I want a deep understanding of international economics, monetary economics, derivatives, risk management, accounting, etc. I want to understand in order to have an edge, but also because I fear what I do not understand. When I read news on finance.yahoo about some far off country’s policy actions and I don’t have the vaguest idea how to quantify its effects on my life and my finances, it scares me. I want to devote my life to understanding finance and economics + some accounting too. What is the best, most efficient way to do this?

I’m also really sick of just learning on my own without any community to support me. My friends are all pretty ignorant/uninterested in this kind of stuff, so I have no one with whom to check my understanding against, to see if I’m missing something. And if I join some kind of investment club, whether it’s in real life or an online discussion board, how can I even trust that the people there know what they’re talking about? I once met a professional value investor who managed a few million dollars for his clients and he didn’t know his ass from his elbow. Well, he did teach me about the importance of accounting with respect to value investing, but that’s it. He had no formal education in finance, economics, or accounting and he said that the CFA (or any license for that matter) is a complete waste of time and that I should just read books on my own.

Sorry for the long post. Any help would be very appreciated, thank you.

#2

At 28 with a net worth of 1M, I’d say keep doing what you were doing. Don’t bother wasting your time managing money.

#3

^ +1

#4

the thing about professionally managing money is that it doesnt matter if you are “good”.

as long as you have a shiny office and are fully registered, you can offer to track the SP500 or any other benchmark and people will pay you an administration fee.

#5

Read Ben Graham then get back to us.

#6

I can’t re-do what I did to make my money. It’s not a steady thing, it’s risky and involves a lot of variables (think startups and reckless investment of capital). I don’t want to make more money, I just want to protect what I have so far. Even if I had the choice, I would choose intellectual understanding over another million dollars.

#7

I don’t care about being paid, and I’m fine with it if I never manage money professionally. I just want to be good for the sake of being good, and also for the sake of protecting my future against risk.

#8

I read Intelligent Investor, but isn’t Ben Graham just a value investor? I want to understand everything, not just value investing. Will reading Ben Graham’s texts teach me everything I need to know about everything?

I don’t want to just beat the market on a relative basis. I want to understand forex and the economies of other countries and I want to understand complex derivatives strategies. I was drawn to the CFA because it seems like it covers a wide breadth of topics. I’m open to other paths to learning what I need to know, but I was under the impression that Ben Graham didn’t write about everything that I want to learn about…

How did everyone else on this forum learn what they know?

#9

[quote=“cpunch”]

I don’t care about being paid, and I’m fine with it if I never manage money professionally. I just want to be good for the sake of being good, and also for the sake of protecting my future against risk.

[quote=“dvictr”]

why not just put it in a savings account then and save yourself all the admin, all you need to do is do some due dilligence to decide which banks offers you the least credit risk for a given level of interest rate

#10

In addition to the credit risk, wouldn’t I be exposing myself to inflation risk and forex risk? Parking my money in a savings account is the same thing as going long on USD. Plus the returns are terrible. Why aren’t the best money managers in the world just parking all their money in a savings account?

Maybe I wasn’t being clear… When I said that I don’t want to manage money professionally, I meant that I don’t want to be paid by others to manage their money. I want to learn how to my manage own money in a way that maximizes returns and minimizes risk, and this is inclusive of being able to predict (better than the average person) global economic events such as debt defaults and government policy actions.

My question for this board is, do I do this by going to school, studying for the CFA’s, working, or following some other path? I’m just looking for some guidance.

[quote=“Penny-wenny”]

[quote=“cpunch”]

I don’t care about being paid, and I’m fine with it if I never manage money professionally. I just want to be good for the sake of being good, and also for the sake of protecting my future against risk.

#11

right i see, i missunderstood before.

#12

cpunch. IMVHO, if you’re serious about being good, practice and study this stuff for at *minimum* 2 yrs before you start playing with real money. Especially given your goal of being good at “everything”. I do see you’ve read Intelligent Investor. However, Graham is important in fundamental analysis of equities. So if you’re looking to do that, it’s worth reading.

Start out with a strategy, master it, then consider using real money, then study another strategy, master that, rinse/repeat.

#13

CFA could be good for you to organize your learning so you are not studying everything all the time. You need to take a structured approach and I think that would be an good, inexpensive place to build your base of knowledge.

With regard to understanding countries and economic events, reading The Economist cover-cover for a year you will have a relatively informed world view compared to the average investor.

You are going to have some work to do before you start making fancy tactical bets in your real portfolio. For now, I would take the majority of your portfolio and diversify it globally across asset classes, maybe with a capital preservation tilt. Do work to learn more about investing and, frankly, about the world because that is how investment decisions are made. If you see an investment that looks intriguing to you learn everything you can about it formulate a thesis and post it on a message board for people to poke holes in. When you feel comfortable with being right, maybe put a little real money in it and see how you do.

I am not sure what you are looking to learn with respect to “complex derivative strategies” as this can entail many different things. I really depends on what strategy you are looking at, but in my experience it is smart to start with understanding the underlying, i.e. stocks, bonds and commodities, before implementing options strategies on them.

#14

I would stay away from “complex derivative strategies” until you feel pretty comfortable with non-complex ordinary strategies.

First, decide that it is going to take several years to learn to manage money well. Say five years. Set aside seven years (5 + some cushion in case it doesn’t work) of your living expenses and just put that in interest bearing savings accounts that try to keep up with inflation. This will support you as you are learning. The remainder is potential investment capital, but don’t invest more than a very small amount it until you have at least a year or two of successful results.

Here is where it’s important to consider the difference between trading and investing. Investing is putting money away for a long time on the expectation that by giving up the idea of using that money today, it will grow faster than if you had it always available to you. You’re basically taking a long-view, and you change your portfolio composition mostly in reaction to changes in your opinoin about the long view and possibly the substitution of better opportunities for weaker ones.

Trading is about buying and selling based on expected short term changes in opportunities, often based on news events. It’s a different skill set, but it’s useful to know about. Investors can make money, traders can make money; both can lose money too. But when you see someone saying “such and such just happened, so I’m loading up on S&P call options and will sell in two weeks,” that’s a trading decision, not an investment decision.

Your portfolio will likely use both kinds of strategies, but make sure you know whether you have an investment thesis or a trading thesis. Also, try to get a sense about whether you have better insight into the long term or the short term. Different people have different insights.

CFA can be helpful for you in terms of knowing the different ingredients that go into this stuff, but it is a ton of work. For you, it may make more sense just to buy the books off of someone and read them, as opposed to signing up for the exam and going through the pain that goes along with it.

#15

If knowledge is what you are looking for you don’t need to pass the exam, all you need is to read the curriculum. CFA curriculum will give you more info than you need about some stuff and in some cases you’ll need to go to other sources to get more depth. CFA curriculum is pretty good at teaching you the basic stuff that is mostly academia and that nobody believes actually happens, but I agree, learning that stuff will give you a point of reference.

I’d say buy for cheap last year’s curriculum and start looking over… the decision of actually enrolling for the exam might come after.