I am a PhD student with CS background. Recently, I have been interested in how some stocks perform, and how some traders perform their decision making. I have seen some papers regarding this question, but I found that a surprising amount of the authors never bet themselves anything.
So, as to really understand their thinking process, I decided to start investing a pocketful amount of money (let's say 100$).
How should I do it? Where should I start? Of course it would be nice to earn a little bit of cash in the process, but it is not a realist goal.
Thank you all.
This should be a giveaway. Trading individual stocks or derivatives is gambling. If you have some spare cash and want to gamble, that's fine but it's helpful to be explicit about what you're doing.
Evidence: there are professionals who try to actively manage portfolios. By definition, half of them get worse than market returns. Half! And these are professionals! With teams and research and 40+ hour work weeks put into this.
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As someone else pointed out, the stock market is gambling. This doesn't mean you should avoid it, it just calls for utmost responsibility. There are at least three fundamental rules of responsible gambling that you must follow.
- Rule zero is to never bet unless you have an edge. If the tables are tilted against you, you will lose. This is probably going to be more obvious after the next rule.
- Rule one is to gamble a lot. Once you have decided you want to earn money through taking risk, you must take risks over and over again. That is the only way to make sure you approach the expected value. You can't control individual outcomes, but you can expose yourself many times and let the law of large numbers control the end result. (If you do this when you don't have an edge, you guarantee loss.)
- Rule two is to make different bets, not the same bet over and over. This is because you might not have the edge you think you do, so by making the same bet over and over you might, accidentally, work hard toward a negative expected value.
- Rule three is to not over-bet, and to try to avoid under-betting too. There is such a thing as a perfectly-sized bet to maximise the end result. Find out about the Kelly criterion. It tells you how much of your capital you should put into a bet based on what your edge is. (But again, it only works with repeated exposure, and when you re-invest your winnings.)
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Translated to speculating in stocks, this means, roughly, stash most of your capital away somewhere very safe. Bonds, treasury bills, savings accounts, you know.
I'm not going to tell you to hunt for under-valued stocks. We can just pretend they don't exist. If there's anything humanity is really fucking good at, it's determining the value of stocks. There are many things you can be one of the best in the world at, but evaluating publically-traded equity is not one of them.
So what to do then? With small amounts of capital, buy stocks you think are in the beginning of an exponential growth phase. These are hard to find, because the beginning of exponential growth looks anything but exponential. Early exponential growth looks constant. Stagnated. Underwhelming.
Most of the stocks you find will at best break even, or more probably decrease in value. This is why it's important that they're on an exponential trajectory, because decreasing value on an exponential curve is actually not that dangerous, because the decrease is slower and slower as it loses value.
If you're lucky, a few stocks will grow instead. Growth on an exponential curve will also go slow at first. Maybe for months, or years. But if it takes off, then it goes wheeeeee—SPLAT, once it hits some natural limit. The stock will keep going up, because now the momentum traders and index funds are buying it, but this is hollow value that will disappear once people realise the underlying growth is no longer there.
You step out before the SPLAT but not before the wheeeee. If you can do that, just a few of these will pay off all your other loser stocks.
It is important that you follow rule two here: don't buy several similar stocks, because they will rise and fall together. The market is more correlated than most people think.