Capitalist

June 19th, 2006 by Editor B

We got an insurance payment for the flooded contents of our house months ago, but we can’t refurnish until the renovation is complete. So I’ve got some extra cash on hand, and I wasn’t sure what to do with it. I put it in a savings account for safekeeping, but I figured it might be smarter to invest it in the stock market. I have no clue about stocks or anything financial, but fortunately my father is another story. In fact he’s what most people would call a Financial Wiz.

So after talking it over on his recent visit, I opened an E*Trade account. Today, Dad called me up and guided me through my first purchases: a little CHK, a little BHP, a little EP. Dad specializes in selling covered call options, but we were unable to sell options on these stocks today because my account is too new. That’s fine, because I want to take baby steps and understand what I’m doing.

I’ve already made $20 in the last hour, which is kind of fun, but I have a lot of questions about this whole process. Who are these companies I’m investing in? What am I really promoting? I’ll sort that out eventually, but for now I’m just trying to understand the basic mechanics. It’s fun to be able to do something like this with my father, and I’m grateful that he’s sharing his wisdom with me.

17 Responses to “Capitalist”

  1. Frolic Says:

    Yikes, direct investments from individual investors is kinda of scary. I would recommend some kind of low cost index fund.

  2. Lee Says:

    It’s always fun to learn something new from a wise soul. Especially when it’s your father. Just don’t get in too deep man.

  3. Michael Says:

    Not that I really know anything about stocks & bonds, but I’m guessing a “covered call option” is related to short selling in some way. Hope you didn’t mind me clicking on your links–looks like all three companies are (just a little) down at the close…on the other hand, if you ARE looking to short the stocks, that’s good news…but you’d be borrowing, not actually buying the shares.

    That, I understand, sort of…beyond that, when I think about financial markets, my head starts to hurt.

  4. David Says:

    I would NOT put your insurance money in the stockmarket. Put it in a savings account, take pocket-change worth of interest, and rest easy knowing it’s completely safe. Or maybe your dad would compensate you if you lose half your money.

  5. Rachel Says:

    It seems like gambling to me! But then what isn’t.

  6. Frolic Says:

    I agree with David. The stock market is not the place for short term investing.

    You made a quick $20, but that just shows the volatility of those stocks. You could also lose $20 in the same period, and in fact you probably will. It would only be in the long term that you would have gains.

    I hate to disagree with your dad.

  7. Editor B Says:

    Actually I was a little disingenuous in my original post. The truth is that we have more cash from our insurance settlement than we will need for refurnishing our basement. Therefore I’m thinking of this as a long-term investment.

  8. Frolic Says:

    Long term is good, but I would still suggest an index fund. The only way to beat the market (other than dumb luck) is to know more than everyone else. That’s not very likely.

    Unless you have inside information, it’s unlikely that you would ever be able to beat the market. (This is why congressmen are the best investors in the world.)

    You also have to consider your transaction cost (i.e. the cost of trading).

    I personally don’t have enough money to invest, but if I did I would start with an index fund. As a volunteer, I’ve been on the investment management committee of a non-profit and running their $40 million endowment. My experience has been that even the best managers in the business (and we never hired anyone but the best) can rarely beat the markets for large and mid cap stocks.

  9. Editor B Says:

    I’ve been socking away some funds in TIAA-CREF through my employer’s matching program for a couple years now. I guess that’s an index fund or mutual fund of some sort.

    I thought it was a good time to try something higher risk. I don’t have insider information, but I do have some confidence in my father’s savvy. He’s been doing this for most of my life, and he’s got a pretty good track record so far. Further, by selling options on these stocks I’ll limit my risk somewhat. Covered call options are bascially hedging your bet. It also means that I won’t be able to profit wildly if the stock takes off.

    My father is convinced his strategy is relatively safe, even conservative. I wouldn’t go that far, but I think I’m in a good position to handle the risk right now. Worst case scenario: I lose all this money. Eh, so what. We’ll still be ahead of where we were pre-Katrina.

  10. M.A.D. Says:

    Shouldn’t you be spending yer Katrina Money on nudie bars and sex change operations?

  11. Frolic Says:

    “Further, by selling options on these stocks I’ll limit my risk somewhat. Covered call options are basically hedge your bet. It also means that I won’t be able to profit wildly if the stock takes off.”

    Very true, but then you’re not doing something that’s higher risk. Risk=reward.

  12. Sophmom Says:

    Goodness gracious sakes alive, B! You should give that money to me. :)

  13. Maitri Says:

    Go for it, but keep watching the trend like a hawk and ask your dad to tell you when to pull out. BHP Billiton (good fund), Chesapeake Energy and El Paso Energy are all THE MAN. That’s what you’re promoting. (Tee hee.)

    I need to get back on my own Scottrade individual investment account which I’ve dreadfully neglected since Katrina.

    Oh, and don’t invest in housing materials (when is the bubble going to burst on that one?) and tech stocks for too long.

  14. oyster Says:

    I have a recurring fantasy about an online day-trading school set up in New Orleans which is wildly successful and sucks millions from the markets and reinvests it in our city.

    I don’t know the first thing about trading stocks (though perhaps I should learn because this seems to be a period that favors trades over buy and hope strategies).

    Funny thing is, a successful local millionaire real estate investor had exactly this plan a couple years ago for the multi-story office-building at the end of St. Charles and River road. He wanted to convert it to a day trading school– whatever that would be. Later, I learned about his stock trading style from a friend of his. (It sounded like a very naive strategy at best, but I keep hoping some New Orleanian will unlock an exploitable market inefficiency and benevolently teach (a few) others the secret of the universe.)

  15. avocado tom Says:

    First, you should SERIOUSLY consider reading “The Four Pillars of Investing” by William Bernstein. Get it from the library, skim as necessary, but it’s worthwhile and eye-opening.

    Second, remember the basics:

    The greater the potential return, the greater the risk.

    Therefore, if you want to make sure your money is still around in 2 years (i.e. you’re not concerned about it doubling, you just want it to not sit around and languish), go LOW RISK.

    Things like bonds and CDs are just that: LOW RISK and you can get ones that are guarranteed to beat inflation. They are also DIY, so you can buy them yourselves without brokerage fees.

    In general, stocks are higher risk but with a higher potential return. There are low risks stocks/funds, but your investment and return are still not GUARRANTEED – there’s still a chance you can lose it all.

    Therefore, the question is: “How much risk can you take?”

    If you can take some risk, then maybe it’s worthwhile to put 50% in stocks/funds and 50% in bonds. That’s higher than I would go, but it’s up to you. I certainly wouldn’t go higher than 50/50 and would probably not recommend going over 30/70 (stocks/bonds) given that you want this money back and you want a guarrantee of that.

    But it all comes down to risk and how much you’re willing to accept.

  16. avocado tom Says:

    oh, and i second the “index fund” advice above.

    Cheers,
    avo

  17. b.rox » Blog Archive » Maybe It’s Right to Be Nervous Now Says:

    [...] I wrote about this a couple years ago I got a number of comments from readers, most advising caution. But I decided to keep this money in [...]

Leave a Reply