Investing 101

By

Syed Masud Mahmud, Ph.D.

April 30, 2020

Copyright © 2020

Outline of the Talk

• Disclosure

• Introduction

• Part I:Basic Concepts of Investing

• Part II:Investing in Sectors

• Part III:Hedging using Financial Derivatives

• Part IV:Efficient Market Hypothesis versus Beating the Market

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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DISCLOSURE

• I am not a financial adviser.• This talk is for information purposes only.• I am going to share the lessons that I have learned

over the years, by reading financial news, analyzing financial data, and actively participating in the financial market.• If you want to invest in the financial market, first,

you need to do your own research, and then invest.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Introduction

• This talk is prepared mostly for the people, who are in their 20s or 30s.

• The purpose of this talk is to make you a better long-term investor.

• Investment is necessary for everybody, but someone needs to understand the basics of investing for becoming a successful investor.

• Someone also needs to understand how the professional money managers have been doing, so that the person can understand how easy or difficult the game is.

• If you are disciplined and follow the rules of investing, there is a very high chance that you will be a very successful investor.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Why do you need to invest?

• To have enough money for retirement.

• To beat inflation.

• To afford rising Healthcare costs. Now, an average nursing home costs about $90,000/year/person.

• When you will be 65, there may not be any Social Security.

• Due to the power of modern science, many of you will celebrate your 100th

birthday. Therefore, if you don’t start investing early on, you may outlive your money.

• Money isn’t everything, but it gives good mental strength during bad times.

• Financial troubles can create stress, and stress can create health problems.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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How much do you need?

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

https://www.investors.com/etfs-and-funds/retirement/you-need-this-much-retirement-savings-at-your-age-and-income/

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How much do you need? (continued)

• After your BS degree, if you start a job at $70,000/year, your salary after 40 years of work should be at least $200,000 to $250,000. You will need at least $3 millions to $4 millions to retire.

• Without Social Security you will need more.

https://www.msn.com/en-us/money/savingandinvesting/5-pieces-of-traditional-retirement-advice-that-no-longer-work-like-they-used-to/ar-BBVu6rr?ocid=spartandhp

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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How much can your money grow?• Assume that you invested $7,000 (10% of your starting salary) during your first

year. After that, every year, you increased your investment amount by 2%.

Portfolio Balance at age 65

• The above table shows that the sooner you start investing, the more money you will have when you will be ready for retirement.

• The long-term average return from the stock market is between 9 and 10%.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

Starting Age

Return on Investment per Year

7% 8% 9% 10%

25 $1,787,299 $2,276,923 $2,920,138 $3,766,981

35 $812,125 $962,651 $1,145,632 $1,368,329

45 $333,723 $370,418 $411,846 $458,636

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Part I

Basic Concepts of Investing

Different Types of Investments

• Real estate:Investment return depends on three things, which areLocation, Location and LocationProperty management could be a headache and a time-consuming task.

• Commodity:Examples: Gold, Silver, Soybean, Corn, Oil, etc.Commodities are very volatile.

• Bond:Examples: Corporate Bonds, Municipal Bonds, US Treasury Bonds, etc.

Short-Term US Treasury Bonds are the safest, then Municipal Bonds, and after that, Corporate Bonds.Returns from bonds aren’t high.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Different Types of Investments

• Individual Stocks:These are issued by various corporations.

Examples: MSFT (Microsoft), FB (Facebook), AMZN (Amazon), etc.

These are more risky than bonds, but generally they give higher returns.

• Actively Managed Funds (known as Mutual Funds):Yearly management fees:

➢It’s about 0.5% to 1% of your portfolio balance, meaning about $50 to $100/year for a portfolio balance of $10,000.

➢Sometimes, the fee could be as high as 2%/year, meaning $200/year for a portfolio balance of $10,000.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Different Types of Investments

• Exchange Traded Funds (ETF):These are baskets of stocks. These are not actively managed. Investing via ETF is called passive investing. Components of the ETFs are also changed from time to time, but not too frequently.

Examples:

XLF : It tracks a basket of financial stocks (BRK.B, JPM, BAC, WFC, C, etc.)

XLE : It tracks a basket of energy stocks (XOM, CVX, COP, SLB, etc.)

XLK : It tracks a basket of technology stocks (MSFT, AAPL, INTC, CSCO, etc.)

IBB : It tracks a basket of biotech stocks (GILD, VRTX, AMGN, BIIB, etc.)

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Different Types of Investments• Difference Between Mutual Funds and ETFs:

➢Transactions (buying and selling) for Mutual Funds are executed at the end of the day.

➢ETFs can be bought and sold at anytime during the day, while the market is open.

• Index Funds:➢These funds track the performance of a large group of stocks, say 500 stocks or 3000

stocks. The components of an index are also changed, but not too frequently.➢The fee for an index fund is very low.➢The yearly fee for an Index Fund could be as small as 0.015% of the invested amount,

meaning $1.5/year for a portfolio of $10,000.

Examples:➢S&P500 tracks the performance of the top 500 US stocks➢DOW tracks the performance of the 30 major stocks of US.

Dow stocks are called Blue Chips.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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List of S&P500 and DOW Companies

S&P500 Companies:

https://en.wikipedia.org/wiki/List_of_S%26P_500_companies

DOW Companies:

https://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Some Statistics from 1950 to 2015.

Increase in Cost of Goods:Cost of goods increased by about 10 times from 1950 to 2015.

Increase in Salary:➢Average salary increased by about 13 times from 1950 to 2015.

➢Workers’ productivity kept the cost of goods down compared to salary increase.

➢Productivity increased due to modern technologies.

Investment Return from S&P500:From 1950 to 2015, investment in S&P500 grew by over 400 times.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

Increase in Cost of Goods10 Times

Increase in Salary13 Times

Investment Return from S&P500400 Times !!!!

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Investing Isn’t Gambling – The Stock Market Isn’t a Casino

• Many people believe that the stock market is a casino.

• If it were a casino, S&P500 couldn’t have converted $1000 to over $400,000 from 1950 to 2015.

• S&P500 also converted $1,000 to over $60,000 from 1976 to 2018.

• However, the short-term volatility of the market makes it look like a casino.

• Experienced and successful investors ignored the short-term volatility of the market. They focused on the long-term growth of the market.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Speculators or Short-Term Traders• Speculators try to predict some short-term movement of the market

or some stocks, and then buy or sell based on their speculations.

• Most speculators don’t pay attention to the fundamentals of the stocks. They use their gut feeling or some tools to buy or sell.

• Speculators can also be called as the short-term traders.

• Speculation is kind of like gambling because there is too much uncertainty.

• Vast majority of the speculators lose money in the market. Only very few of them make money over the long-term.

• Many of them try to Get Rich Quick, and this is a recipe for a disaster.

• Most average individual investors are speculators or short-term traders. That’s why their performance is very poor.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Over the Long Term, Average Investors Underperform the Stock Market by about 6.5% perYear

There are many reasons why average investors underperform the market. Some of the reasons are:

• They mostly chase HOT stocks.

• If their HOT stocks go down, they sell and chase other HOT stocks.

• They do panic selling during a market downturn.

• Many of them try to time the market.

• They trade too much➢ Economics Nobel winner, Eugene Fama, said, “Your money is like a bar of soap. The more you

handle it, the less you’ll have.”➢Another Economics Noble winner, Richard Thaler, said, “Be a lazy investor — Buy and Forget.”

https://www.fool.com/investing/general/2015/11/01/the-average-americans-investment-returns-and-how-y.aspx

https://www.marketwatch.com/story/americans-are-still-terrible-at-investing-annual-study-once-again-shows-2017-10-19

https://www.thebalance.com/why-average-investors-earn-below-average-market-returns-2388519

https://faculty.haas.berkeley.edu/odean/papers/returns/Individual_Investor_Performance_Final.pdfInvesting 101 By Syed Masud Mahmud, Ph.D

Copyright (c) 201918

Over the Long Term, Average Investors Underperform the Stock Market by about 6.5% per Year

• The average return from the market over a period of 40 years is about 9.8%/year. At this rate, $1,000 is converted to $42,000 during that 40-year period.

• Average individuals’ return is about 3.3%/year. At this rate, $1,000 is converted to $3,600 during that 40-year period.

• There is a huge difference between the return from the market and that from average individual investors. It’s $42,000 versus $3,600.

• Therefore, the best way to grow your money, with less effort, is by investing in the total market.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Successful Investors• Successful investors focus on the long-term growth of the market.

• They ignore the day-to-day volatility of the market.

• They build their wealth by focusing on the fundamentals of the stocks and holding those stocks for a reasonably long period of time.

• Most long-term investors hold stocks for 3 to 5 years. Some of them hold for even longer periods.

Examples of Successful Investors:

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

• Benjamin Graham• Warren Buffett• Peter Lynch• John Templeton

• Seth Klarman• Ray Dalio• John Paulson

and many more

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None of them were speculators or short-term traders.

Warren Buffett is the most Successful Investor

• If someone invested only $1,000 in Warren Buffett’s fund in 1964, now that $1,000 became about $23 million.

• If someone invested only $1,000 in his fund in 1976, now that $1,000 became about $11 million.

• Benjamin Graham, father of value investing, was Buffett’s mentor.

https://en.wikipedia.org/wiki/Warren_Buffett

https://www.forbes.com/profile/warren-buffett/#764bea5d4639

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

Buffett named his first son “Howard GrahamBuffett” to honor his mentor Benjamin Graham.

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Buffett’s Mentor

BenjaminGraham

Buffett’s son Howard Graham

Buffett

Security Analysis by Benjamin Graham and David L. Dodd

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Quants• People who use quantitative analysis for trading stocks, they are called Quants.

• Quants use sophisticated algorithms and statistics to trade.

• Track records show that not many quants were able to beat the market.

• The most successful quant is James Simons. He was a code breaker for NSA and also a math professor.

• Average investors can’t become a quant because he/she may not have the necessary background and skill

• Simons’ Net worth as of Dec 2019 is $21.6B

https://en.wikipedia.org/wiki/James_Harris_Simons

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Lessons from the Successful Investors

"Be greedy when others are fearful and be fearful when others are greedy." - Warren Buffett

"The time to buy is when there's blood in the streets." - Baron Rothschild (An 18th century British nobleman who made a fortune from investing.)

The four most dangerous words in investing are “This time it’s different.” - John Templeton

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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How are the Professional Money Managers doing in Investing?

• Every year, about 70 to 80% of the professional money managers CAN'T beat S&P500.

• Over a 15-yr period, about 95% of the professional money managers CAN'T beat S&P500.

https://www.cnbc.com/2017/02/27/active-fund-managers-rarely-beat-their-benchmarks-year-after-year.html

https://www.aei.org/publication/more-evidence-that-its-really-hard-to-beat-the-market-over-time-95-of-finance-professionals-cant-do-it/

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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What’s the best choice for an average individual investor?

• An average individual investor has a full-time job and a family to spend time for.

• An average individual investor may not have time to do enough research for selecting stocks.

• Even after doing enough research there is no guarantee that an average individual investor would be able to beat S&P500.

• An average individual investor should focus on his/her main job, and periodically invest, from his/her pay-check, in an index fund, e.g. S&P500.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Some Basic Terminologies

• Outstanding Shares

• Float Shares

• Market Capitalization or Market Cap

• Revenue

• Earning

• Dividend

• Bull and Bear Markets

• Bubble

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Some Basic TerminologiesOutstanding Shares:

Total number of shares that a company has.

Float Shares:The number of shares that are available for trading (buying and selling).

Float Shares = Outstanding Shares – Restricted Shares

Market Capitalization or Market Cap:It’s the value of all the outstanding shares of a company. It’s determined by multiplying the number of outstanding shares of the company by its share price. For example, if there are 100 million outstanding shares of a company, and the price of each share is $15, then the market cap of that company is $1.5 billion.The market cap of a company changes everyday because its share price changes everyday.

https://www.investopedia.com/terms/m/marketcapitalization.asp

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Some Basic Terminologies

Revenue:It’s the amount of money collected by selling the goods and services of a company.

Earning:Earning = Revenue – All Expenses

Dividend:➢It’s a part of the earning that is returned to the shareholders as cash.

➢A company which is growing at a rapid pace, normally doesn’t pay any dividend to its shareholders. Instead, the company uses that cash to expand its business.

➢Examples: Facebook doesn’t pay any dividend, but AT&T pays over 6% dividend.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Some Basic TerminologiesBull and Bear Markets:

• Bull Market: When the market is going higher and higher due to economic expansion, that’s called a bull market.

• Bear Market: The market is down by at least 20% from its peak.

Bubble:

• The market is extremely overpriced. During this time, the little guys are sucked into the market.

• Also, during this time, people talk about the stock market at every gathering and say how rich they have been becoming lately, which then sucks more little guys into the market.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Performance Chasing or Cult Following

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• Normally, most individual investors are late in the game, and they start to chase those stocks, which have already gained a lot. Even many professionals chase performance. This is one of the reasons why they can’t beat S&P500.

• The investors who keep on chasing the performance, they are called Cult Followers.

• We are going to look at the quantitative analysis of Performance Chasing based on the performance of various sectors from 2007 to 2018.

• Even Sir Isaac Newton lost money by chasing performance. In the early 18th century, he lost about $10 million of today’s money by chasing South Sea Bubble.

https://www.sovereignman.com/finance/how-isaac-newton-went-flat-broke-chasing-a-stock-bubble-13268/

How Sir Isaac Newton went Flat Broke Chasing a Stock Bubble

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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A Janitor was able to grow a portfolio of size $8 millions

How did he do that?

1. He was NOT an active trader.

2. Time was on his side (he lived until he was 92 years old)

3. He invested in dividend paying stocks.

4. He didn’t speculate. He bought Blue Chip types of stocks.

5. He had a diversified portfolio with at least 95 stocks.

Investing 101 By Syed Masud Mahmud, Ph.DCopyright (c) 2019

https://www.cnbc.com/2016/08/29/janitor-secretly-amassed-an-8-million-fortune.htmlhttps://www.fool.com/knowledge-center/what-is-a-blue-chip-stock.aspx

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Making Money from the Stock Market is NOT About How Intelligent You Are

• A janitor was able to grow his money to $8 million, where as, Newton lost about $10 million worth of today’s money. Therefore, it’s not about how much intelligence or education you have.

• Newton being one of the greatest physicists lost money in the stock market because he was a Cult-Follower.

• After losing money in the stock market, Newton said that he 'could calculate the motions of the heavenly bodies, but not the madness of the people.’

• Making money from the stock market depends on how well you can control your FEAR and GREED.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Large Cap, Mid Cap, Small Cap and Micro Cap stocks

Large Cap StocksMarket Cap of the company is at least $10 billion. Large cap companies are well established and mature companies. These are relatively safer companies.

Mid Cap StocksMarket Cap of the company is between $2 billion and $10 billion. Some of the mid cap companies are still growing and they are on their way to become large cap companies.

Small Cap StocksMarket Cap of the company is between $300 million and $2 billion. These are relatively new companies. One day, some of these will become large cap companies, and some may go out of business. Some others may be acquired by large companies.

Micro Cap StocksMarket Cap of the company is between $50 million and $300 million. These are very new companies. Some of these may not have any revenues yet. These are very risky companies.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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S&P500 is a Large-Cap Index

• S&P500 contains 500 large-cap stocks.

• It represents over 75% of the total US market.

• It is used as a Benchmark by the large-cap money managers.

• The goal of every large-cap money manager is to beat this index, but 95% of them can’t do it over a 15-year period, and 99% can’t do it over a period of 20 to 30 years.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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S&P500 is the best choice for average Individual Investors

• By investing in S&P500, average individual investors can not only do well in investing, in fact, they can beat 95 to 99% of the professional money managers over the long-term.

• The stock market is the only place where an average investor can beat the professionals. It’s not possible in any other fields.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Some Statistics Based on Real S&P500 DataThese statistical results are generated based on the following assumptions:

- Initial Salary = $1,000/year - Amount Invested = 20% of salary

- Dividend = 2% - Investment Frequency = twice/month

Statistical results are generated for two investment periods: 35 years and 40 years.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

Investment Period

Total Investment Amount for Various Salary Raises per Year

4% 3% 2%

35 Years $14,730 $12,092 $9,999

40 Years $19,005 $15,080 $12,080

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Some Statistics Based on Real S&P500 Data (continued)

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

Starting Year Portfolio Balance After

35 Years 40 Years

1950 $49,621 $122,034

1955 $72,220 $108,684

1960 $70,958 $258,683

1965 $171,489 $161,007

1970 $107,954 $113,833

1975 $71,659 $152,511

1979 $84,917 $132,175

Average $89,831 $149,847

Average after removing the Lowest and the Highest Portfolio Balance $81,542 $136,312

$1000/year initial salary, 4%/year salary raise, 20% of salary is invested and dividend is 2%

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Some Statistics Based on Real S&P500 Data (continued)

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

Starting Year Portfolio Balance After

35 Years 40 Years

1950 $43,869 $106,741

1955 $63,116 $94,105

1960 $62,243 $225,503

1965 $152,129 $141,918

1970 $97,311 $101,764

1975 $65,240 $137,503

1979 $77,199 $119,114

Average $80,158 $132,378

Average after removing the Lowest and the Highest Portfolio Balance $73,022 $121,408

$1000/year initial salary, 3%/year salary raise, 20% of salary is invested and dividend is 2%

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Some Statistics Based on Real S&P500 Data (continued)

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

Starting Year Portfolio Balance After

35 Years 40 Years

1950 $39,126 $94,351

1955 $55,577 $82,218

1960 $54,948 $198,042

1965 $135,659 $125,894

1970 $88,156 $91,579

1975 $59,734 $124,920

1979 $70,656 $108,255

Average $71,979 $117,894

Average after removing the Lowest and the Highest Portfolio Balance $65,814 $109,000

$1000/year initial salary, 2%/year salary raise, 20% of salary is invested and dividend is 2%

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Summary of Statistics Based on Real S&P500 Data

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

Investment Period

Average Balance of the Final Portfolio (after removing the Lowest and Highest Portfolio Balance) for Various Salary Raises per Year

4% 3% 2%

35 Years $81,542 $73,022 $65,814

40 Years $136,312 $121,408 $109,000

ParametersInitial Salary= $1000/year

Investment Amount= 20% of Salary

Investment Frequency= Twice/Month

Dividend= 2%

Investment Period

Final Salary for Various Salary Raises/Year

Total Investment Amount for Various Salary Raises per Year

4% 3% 2% 4% 3% 2%

35 Years $3,946 $2,814 $2,000 $14,730 $12,092 $9,999

40 Years $4,801 $3,262 $2,208 $19,005 $15,080 $12,080

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An example, using Real S&P500 Data for an Initial Salary of $70,000

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

Investment Period

Average Balance of the Final Portfolio (after removing the Lowest and Highest Portfolio Balance) for Various Salary Raises per Year

4% 3% 2%

35 Years $2.85 millions $2.56 millions $2.30 millions

40 Years $4.77 millions $4.25 millions $3.82 millions

Investment Period

Average Balance of the Final Portfolio (after removing the Lowest and Highest Portfolio Balance) for Various Salary Raises per Year

4% 3% 2%

35 Years $5.71 millions $5.11 millions $4.61 millions

40 Years $9.54 millions $8.50 millions $7.63 millions

Table I

Investment Amount= 20% of Salary

Table II

Investment Amount= 10% of Salary

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Take advantage of your company’s 401K plan

1. Start investing in your company’s 401K plan from day one.

2. The contribution in 401K is tax deferred, meaning you don’t have to pay taxes on that money until you withdraw during your retirement.

3. If you are in 24% tax bracket and contribute 20% of your salary, your take home pay will go down by about 15%.

4. If you can’t afford to contribute 20% of your salary, at least contribute up to that amount which is needed to get the full matching from your company.

5. If you don’t take advantage of the matching part from your company, you are giving away free money.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Which funds should you select from your company’s 401K plan?

1. Your company’s retirement plan may have many funds to chose from, and many of those funds will charge high fees.

2. Every company’s retirement plan should have an index fund. Select that index fund. The fee for that index fund should be very low.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Steps to Build a Large Enough Retirement Nest Egg1. Pay off student loan and any other loans where you pay more

than 6 to 7% interest.2. Save and Invest through your company’s 401K plan.3. Contribute to your company’s 401K at least up to the amount

that is needed to get the full matching from your company.4. If you don’t have any student loan or high interest loan to pay,

contribute to your 401K plan as much as you can afford.5. If your company doesn’t have a 401K plan, invest in IRA or Roth

IRA.6. Build an emergency savings fund to protect you from a loss of job

or any other short-term financial problem.7. Don’t try to beat the market (even the professionals can’t do it)

Invest in an Index Fund like S&P500.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Steps to Build a Large Enough Retirement Nest Egg (continued)

8. Automate your retirement contribution from your pay check

9. If S&P500 is down by over 30% and you have extra money to invest, slowly add that money into S&P500 over a period of 6 to 12 months.

10. Make a budget and stay within that budget

11. Make sure that you have bought various types of insurance to protect you from various financial disasters. If you don’t have enough insurance, your net worth can go down significantly, or you may need to file for bankruptcy when some disasters strike you.

The types of insurance that you need to buy are:➢Life insurance to protect your loved ones.➢Insurance for your cars and house.➢Medical insurance.➢Additional disability insurance, when your company doesn’t give enough

disability coverage to its employees.➢Long-term care insurance to afford nursing home.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Why can’t the professionals beat the market?

1. They have bosses, and they need to satisfy their bosses. Therefore, they try to beat the market. In the process, they make lots of trades. Lots of trades mean there are lots of possibilities of making mistakes. Sometimes human emotions can be involved at every trade.

2. They also have clients to satisfy. If they don’t do enough trading or don’t have HOT stocks in their portfolio, the clients may think that they aren’t doing anything, but collecting only fees.

3. For every trade, there is a person on the opposite side. Therefore, if one manager gains from a trade, the other manager who is at the opposite side of trade loses.

4. Trading isn’t a Zero-Sum game. It’s a Negative-Sum game because there is a transaction fee for every trade.

5. There are many other reasons, why professional fund managers can’t beat the market.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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How to invest in S&P500?

• Many financial institutions, such as Vanguard, Charles Schwab and Fidelity, have created index funds for S&P500. Examples: VFINX, SWPPX, FXAIX, etc.

• The buy and sell orders for these funds are executed at the end of the day.

Company Fund Yearly Fee/Expense Ratio

Vanguard VFINX 0.14% ($14 fee for a $10,000 portfolio)

Fidelity FXAIX 0.015% ($1.5 fee for a $10,000 portfolio) Very Low Fee

https://www.investopedia.com/articles/markets/101415/4-best-sp-500-index-funds.asp

https://fundresearch.fidelity.com/mutual-funds/fees-and-prices/315911750

https://personal.vanguard.com/us/funds/snapshot?FundId=0040&from=TPV&FundIntExt=INT

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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How to invest in S&P500 (continued)

• You can also invest in S&P500 through ETFs. Examples: SPY, IVV, VOO,etc.

• The ETFs for S&P500 can be traded at anytime during the day, while the market is open. These ETFs will also charge you a fee/expense-ratio. In the past, when you traded these ETFs, you were also charged a transaction fee. Now, most brokers don’t charge a transaction fee.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Understanding the Fundamentals of Stocks

• Investing in individual stocks is very time consuming because you need to understand the fundamentals of the stocks, and sometimes it’s not that easy.

• You can understand the fundamentals by studying the balance sheets and income statements of the corresponding companies. That’s what most professionals, who want to hold stocks for few years, do. But, still 95% of them can’t beat S&P500 over a 15-yr period.

• Warren Buffett buys stocks based on the fundamentals of stocks.

Let’s Look at the Fundamentals of Some Stocks by Looking at Their Financial Data

AAPL (Apple)

F (Ford)

BA (Boeing)Investing 101 By Syed Masud Mahmud, Ph.D

Copyright (c) 201951

Technical Analysis of Stocks

• In this analysis, people look at some moving average lines (technical lines) of stocks to make their buy and sell decisions.

• Most often, they look at 50-day and 200-day moving average lines.

• There are some people who want to make their living from their trading income. Some people may be able to do that, but these are NOT the ways how people built their wealth over the long term.

• There are hundreds of books on technical analysis. If these analysis could build lots of wealth, the authors of those books would have made tons of money using these techniques. But, that’s not the case. They make their livings by selling those books, but not by using those techniques.

• There are all kinds of people out there who will try to sell you lots of things about how to make money. Don’t believe those.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Charts of Boeing (BA)

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Part II

Investing in Sectors

Investing in Sector Funds/ETF

• Individual investors, who don’t have time to do the research, should invest in S&P500 only and stay away from the individual stocks.

• They should also stay away from the day-to-day volatility of the market.

• They should invest in S&P500 and focus on their main job, so that they can prosper in their career. That way, they will have more money to invest and will be able to grow their portfolio much higher.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Investing in Sector Funds/ETF (continued)

• If you decided to become little bit adventurous, you can start to invest in sectors. But, still stay away from the individual stocks.

• Even if you want to invest in various sectors, keep most of your money in S&P500. Invest only little bit in various sectors.

• There are ETFs for various sectors, such as technology, biotechnology, financial, energy, semiconductor, software, artificial intelligence, etc.

• Investing in S&P500 doesn’t require any knowledge about the financial market, and you will not be required to do any research either. Just keep on adding money in a S&P500 fund.

• Investing in various random sectors will require some knowledge about those sectors. If any sector is down, you may need to understand why that sector is down.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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US Equity Sector Performance 1976 through 2015

https://engineeredportfolio.com/2016/12/17/historical-performance-of-us-equity-sectors/Investing 101 By Syed Masud Mahmud, Ph.D

Copyright (c) 201957

Consumer Staples Sectordid the best from 1976 to 2015.

This is a recession proof sector because you need to eat food and brush your teeth even during a recession.

This is one of the favorite sectors of Warren Buffett.

S&P500 Sector Performance

https://novelinvestor.com/sector-performance/

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Performance of S&P500 Sectors from 2007 to 2018

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Short Name Actual Name

Initial Investment in

Jan 2007

Final Balance in Dec 2018

Return in %

INFT Information Technology 11,000 39,249 257%

HLTH Health Care 11,000 35,729 225%

COND Consumer Discretionary 11,000 34,210 211%

CONS Consumer Stapes 11,000 30,071 173%

UTIL Utilities 11,000 25,228 129%

S&P500 S&P500 11,000 25,098 128%

INDU Industrials 11,000 24,444 122%

MATR Materials 11,000 20,936 90%

REAL Real Estate 11,000 18,148 65%

TELS Communication Services 11,000 17,657 61%

ENRS Energy 11,000 13,587 24%

FINL Financials 11,000 11,279 3%

• Without a Crystal Ball nobody could know that from 2007 to 2018, Information Technology would be the best sector, and

• Financials would be the worst sector.

Chasing Top Sectors versus Investing in Bottom Sectors• For each one of the following cases, it’s assumed that $11,000 was invested in the

beginning of Jan 2007.

• Table I shows the results for investing in the top “N” sectors, meaning at the beginning of every year, the investor liquidated his/her entire portfolio and then equally distributed the money among the top “N” sectors of last year.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Table I: Investing in the Top "N" Sectors

NFinal Balance at the end of Dec

2018

Return compared to S&P500

1 18,010 -28%2 16,961 -32%3 18,921 -25%

4 18,661 -26%

5 23,567 -6%

Table II: Investing in the Bottom "N" Sectors

NFinal Balance at the end of Dec

2018

Return compared to S&P500

1 17,019 -32%2 19,622 -22%3 24,253 -3%4 25,263 1%5 25,841 3%

• Table II shows the results for investing in the bottom “N” sectors, meaning at the beginning of every year, money was equally distributed among the bottom “N” sectors of last year.

Investing in all but the Top “N” and Bottom “N” Sectors• For each one of the following cases, it’s assumed that $11,000 was invested in the

beginning of Jan 2007.

• In this case, at the beginning of every year, the investor liquidated his/her entire portfolio and then equally distributed his/her money among all the sectors, except the top “N” and bottom “N” sectors.

This is a Market Beating Performance.

Value Investors use this Strategy.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Table III: Investing in all but the Top "N" and Bottom "N“ Sectors

NFinal Balance at the

end of Dec 2018

Return compared to

S&P500

1 26,016 4%2 28,311 13%3 28,018 12%4 32,862 31%

Investing in sectors may not be possible via your 401K plan

• The 401K plan of most companies may not have Sector Funds.

• Therefore, investing in Sector Funds may not be an option for you. I presented this information for your knowledge, indicating that there are ways to beat the market.

• If you have money left after you have contributed the maximum amount, allowed by IRS, to your 401K plan, then you may try to invest in sectors outside your 401K plan. However, don’t think about this option without contributing the maximum amount to your 401K plan.

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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You can Invest in Various Sectors via ETFs.

• You can use ETFs (Exchange Traded Funds) to invest in various sectors.

• Before you invest in an ETF, check whether the ETF is concentrated into too few stocks.

Examples:Holdings of XLE: https://finance.yahoo.com/quote/XLE/holdings?p=XLE

Over 46% of XLE is concentrated in CVX and XOM

Holdings of XLK: https://finance.yahoo.com/quote/XLK/holdings?p=XLK

Over 41% of XLK is concentrated in MSFT and AAPL

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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Part III

Hedging using Financial Derivatives

Hedging

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

• Hedging isn’t a new concept.• People have been using this technique for hundreds of years.

An Example:Bob is a farmer, and he grows corn to earn his living. John is a baker, who makes bread to earn his living. At this moment, corn price is $3.60/bushel. Weather forecast for the next year is uncertain, but there is a high chance that there could be drought next year. John can’t make any profit if corn price goes above $5.0/bushel. Bob has lots of surplus corn. He thinks that even if there is going to be drought next year, it isn’t going to be too severe, meaning he will be able to grow good amount of corn.

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Hedging Contract

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

Bob and John are signing the following contract:• John is willing to pay Bob a premium of $0.25/bushel to get a delivery of 10,000

bushels of corn next year at $4.75/bushel. John paid a total premium of $2500.• Next year, if corn price stays below $4.50/bushel, John doesn’t have to buy corn

from Bob. Instead, he can buy from the open market. However, John is going to lose his $2500 premium that he paid Bob.

• Next year, if corn price breaks through the roof, say price becomes $6.25/bushel, Bob is obligated to sell corn to John at $4.75/bushel. Yes, in this case, Bob loses lots of profit. However, if Bob has enough corn in his storage, he doesn’t need to worry too much. In fact, he is still making good money compared to what he made the previous year by selling corn at $3.60/bushel.

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What if Bob didn’t have enough corn?

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

• Next year, the corn price is at $6.25/bushel. Bob had only 6000 bushels of corn in his storage, and he was able to grow only 1000 bushels of corn during the next year. Therefore, Bob had only 7000 bushels of corn.

• Bob didn’t have enough corn to meet his obligation. He needed to buy 3000 bushels of corn from the open market at $6.25/bushel, so that he could deliver 10,000 bushels of corn to John at $4.75/bushel.

• Bob is losing $1.25/bushel, and the total loss for Bob is $12,500.

Calculation of the Loss for Bob• Note that Bob already collected $0.25/bushel when he sold (wrote) the

contract. Now, he is collecting another $4.75/bushel. Therefore, in total, he is collecting $5.00/bushel. Since the current price of corn is $6.25/bushel, Bob is losing $1.25/bushel.

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What if Bob didn’t have enough corn? (continued)

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

• In our example, Bob didn’t have enough corn to meet his obligation. Therefore, he had to buy 3000 bushels of corn from the open market at $6.25/bushel.

• Bob had to have $18,750 to buy 3000 bushels of corn from the open market. If Bob didn’t have that money, he could go bankrupt.

• However, if Bob wrote the contract to deliver only 6000 bushels of corn, the amount of corn that he had in his storage, then he didn’t take any risk of going bankrupt though he was making less profit.

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The Danger of Selling/Writing Hedging Contracts

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

• Bob had only 6000 bushels of corn in his storage. Therefore, if he sold a contract to deliver only 6000 bushels of corn, he had no risk of going bankrupt.

• But, if he sold a contract to deliver too many bushels of corn, which he didn’t have in his storage, then he would have taken too much risk.

• Sometimes, this type of risk can make a company go bankrupt.

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The Danger of Selling/Writing Hedging Contracts

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

In 2008, American International Group (AIG) was about to go bankrupt• During the housing bubble from 2005 to 2008, AIG sold some contracts known as

Credit Default SWAPS, but they didn’t have enough money to meet their obligations.

• When homeowners started to default on sub-prime mortgage loans, AIG was on the hook because they sold too many contracts of Credit Default SWAPS and didn’t have money to meet their obligations. That was a stupid act on the part of AIG.

• Then US government had to step in to save AIG by giving them $182.3B to meet their obligations and run their other businesses.

• Later on, AIG paid back $205B with interest. US Government made a profit of $22.7B.

https://en.wikipedia.org/wiki/American_International_Group

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The technical name of the contract that Bob and John signed

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

• In financial terms, the name of the contract that Bob and John signed is “CALL Option”.

• Bob sold a CALL Option to deliver 10,000 bushels of corn at $4.75/bushel.

• John bought a CALL Option to receive delivery of 10,000 bushels of corn at $4.75/bushel.

• This contract is basically an insurance contract. John bought the insurance contract to protect his business. Bob sold the contract to collect some premium with the hope that next year, he would be able to grow enough corn. Bob hoped that next year, corn price wouldn’t go above $4.75/bushel.

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The Beauty of Selling/Writing Hedging Contracts

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

• Most often, selling hedging or insurance contracts is a profitable business. This is how all the insurance companies make money.

• Once in a while, a 7.9 Magnitude Earthquake or Category-5 Hurricane can cause lots of damages. Only at that time, insurance companies lose some money. Otherwise, they make money most of the time.

• In the stock market, the investors can also buy or sell similar contracts called Option Contracts.

• Just like insurance companies, investors can also make money by selling Option Contracts. Investors will make money most of the time by selling Option Contracts. But, once in a while, like the insurance companies, the investors can also lose money.

• However, as long as the investors have enough underlying shares to meet their obligations for selling contracts for CALL Option, there is no risk. This is similar to Bob having enough corn in his storage, when he sold his contract to John.

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Speculators buy Option Contracts

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

• In the stock market, speculators buy Option Contracts with the hope of making lots of money very quickly.

• Ninety five percent of the short-term Option Contracts expire worthless, meaning the buyers of the short-term Option Contracts lose money 95% of the time.

• Whatever money the buyers lose, that’s the money the sellers gain. Therefore, sellers of the short-term Option Contracts make money 95% of the time. This is the reason selling option contracts (or insurance contracts) is a profitable business, provided the sellers can meet their obligations when catastrophic situations occur.

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Selling Covered or Naked CALL Options

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

• When investors sell CALL Options with enough underlying shares to cover their obligations, that strategy is known as selling Covered CALL Options.

• There is no additional risk in selling Covered CALL Options beyond whatever risk the investors have already taken by owning the underlying shares. However, if the share price goes through the roof, the profit for the investor is limited.

• Since there is no additional risk in selling Covered CALL Options, this strategy is allowed in a retirement account, such as IRA, Roth IRA, Rollover IRA, etc.

• When investors sell CALL Options without having any underlying shares to cover their obligations, that strategy is known as selling Naked CALL Options. This is similar to Bob selling/writing contracts without having any corn in his storage.

• Selling Naked CALL Options is very dangerous. The loss could be unlimited. Therefore, this strategy is not allowed in a retirement account.

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Option Strategies

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

1. Albatross Spread: An advanced neutral trading strategy.2. Bear Butterfly Spread: A complex bearish trading strategy.3. Bear Call Spread: A bearish trading strategy that requires a high trading level.4. Bear Put Ladder Spread: A complex bearish trading strategy.5. Bear Put Spread: A bearish trading strategy that is suitable for beginners.6. Bear Ratio Spread: A complex bearish trading strategy.7. Box Spread, Conversion & Reversal Arbitrage and Strike Arbitrage: See Options

Arbitrage Strategies.8. Bull Butterfly Spread: A complex bullish trading strategy.9. Bull Call Ladder Spread: A complex bullish trading strategy.10. Bull Call Spread: A bullish trading strategy that is suitable for beginners.11. Bull Condor Spread: A complex bullish trading strategy.12. Bull Put Spread: A bullish trading strategy that requires a high trading level.

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Option Strategies (continued)

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

13. Bull Ratio Spread: A complex bullish trading strategy.14. Butterfly Spread: An advanced neutral trading strategy.15. Buy Call Options: See Long Call.16. Buy Put Options: See Long Put.17. Calendar Call Spread: A simple neutral trading strategy.18. Calendar Put Spread: A simple neutral trading strategy.19. Calendar Straddle: An advanced neutral trading strategy.20. Calendar Strangle: An advanced neutral trading strategy.21. Call Ratio Backspread: A fairly complicated volatile trading strategy that leans

towards bullish.22. Call Ratio Spread: An advanced neutral trading strategy.23. Condor Spread: An advanced neutral trading strategy.24. Covered Call Collar: A fairly simple neutral trading strategy that is suitable for

beginners.76

Option Strategies (continued)

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

25. Covered Call: A relatively simple neutral trading strategy that is suitable for beginners.

26. Covered Put: A fairly complex neutral trading strategy.27. Iron Albatross Spread: An advanced neutral trading strategy.28. Iron Butterfly Spread: An advanced neutral trading strategy.29. Iron Condor Spread: An advanced neutral trading strategy.30. Long Call: A single transaction bullish trading strategy. Suitable for beginners.31. Long Gut: A simple volatile trading strategy suitable beginners.32. Long Put: A single transaction bearish trading strategy that is suitable for

beginners.33. Long Straddle: A simple volatile trading strategy suitable for beginners.34. Long Strangle: A simple volatile trading strategy suitable for beginners.35. Naked Call Write: See Short Call.36. Naked Put Write: See Short Put.

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Option Strategies (continued)

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

37. Put Ratio Backspread: A reasonably complex volatile trading strategy that leans towards bearish.

38. Put Ratio Spread: An advanced neutral trading strategy.39. Reverse Iron Albatross Spread: A complex volatile trading strategy.40. Reverse Iron Butterfly Spread: A complicated volatile trading strategy.41. Reverse Iron Condor Spread: An advanced volatile trading strategy.42. Short Albatross Spread: A complex volatile trading strategy.43. Short Bear Ratio Spread: A fairly complicated bearish trading strategy.44. Short Bull Ratio Spread: A fairly complicated bullish trading strategy.45. Short Butterfly Spread: A complicated volatile trading strategy.46. Short Calendar Call Spread: An advanced volatile trading strategy.47. Short Calendar Put Spread: A complex volatile trading strategy.48. Short Call: A single transaction bearish trading strategy.

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Option Strategies (continued)

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

49. Short Condor Spread: An advanced volatile trading strategy.50. Short Gut: A simple neutral trading strategy.51. Short Put: A single transaction bullish trading strategy.52. Short Straddle: A relatively simple neutral trading strategy.53. Short Strangle: A quite straightforward neutral trading strategy.54. Strap Straddle: A simple volatile trading strategy suitable for beginners.55. Strap Strangle: A simple volatile trading strategy suitable for beginners.56. Strip Straddle: A simple volatile trading strategy suitable for beginners.57. Strip Strangle: A simple volatile trading strategy suitable for beginners.58. Synthetic Covered Call, Short Straddle, and Straddle: See Synthetic Options

Strategies.

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Part IV

Efficient Market Hypothesisversus

Beating the Market

Efficient Market Hypothesis versus Beating the Market

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

• The Efficient Market Hypothesis (EMH) is a theory that states that asset prices fully reflect all available information. In other words, EMH says that it is impossible to "beat the market".

• There are many proponents and critics of EMH. • The critics are mostly the successful investors like, Warren Buffett, Charlie

Munger, Peter Lynch, Seth Klarman, George Soros, James Simons and many more.

• There are also many critics of EMH in academia. Economics Nobel winners Robert Shiller and Richard Thaler are critics of EMH.

• EMH would have been perfect, had all the investors been identical. However, that’s not the case in reality. In reality, the market is not efficient at all, especially during a Bubble and severe Bear Market cases. That’s the number one reason why many people were able to beat the market.

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Investors versus Traders

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

• Investors look for long-term growth of their portfolio. They invest based on the fundamentals of stocks. They don’t trade much.

• Traders try to make money by trying to determine the trend of the market. Their main goal is to have a continuous cash flow regardless of the condition or direction of the market.

• Day-traders may buy and sell the same stock on the same day.• High-Frequency traders may buy and sell the same stock in every minute or

millisecond.• Since the investors and traders don’t follow the same rules, that makes the

market inefficient.

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Investing is an Intersection between Economics and Psychology

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

• Seth Klarman said that investing is an intersection between economics and psychology. https://www.youtube.com/watch?v=ohtAnE8C4Ao

• He also said that the economics part, meaning how to determine the asset price, is not that hard. It’s the psychology part, which is hard, and that makes the market inefficient.

• Behavioral finance is a relatively new area. People who work in this area, they also don’t agree with EMH.

• Human psychology, not the valuation, plays a major role in the movement of the market. Due to this human psychology, sometimes the market could be overpriced and another time it could be underpriced. Experienced value investors take advantage of these overpriced and underpriced situations of the market. This is the primary reason, why value investors can beat the market over the long time.

• Value investors couldn’t have beaten the market had the market not been affected by human psychology.

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The Stock Market, known as Mr. Market, is a Drunken Psycho

Investing 101 By Syed Masud Mahmud, Ph.DCopyright (c) 2019

Warren Buffett said, “This imaginary person out there -- Mr. Market -- he's kind of a drunken psycho. Some days he gets very enthused, some days he gets very depressed. And when he gets really enthused, you sell to him, and if he gets depressed you buy from him. There's no moral taint attached to that.”

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Shiller Says, “Easy to Beat the Market” Over the Long Run

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

• Eugene Fama and Robert Shiller received the Economics Nobel Prize at the same time in 2013. However, they hold opposing views with respect to each other.

• Fama came up of with the EMH theory. Shiller doesn’t completely agree with EMH. You may watch this video. https://www.youtube.com/watch?v=Tn-A7eCUrYk

• Fama didn’t take the psychology part of investing into account when he developed his EMH. This is the primary reason, why his hypothesis is not completely valid.

• Shiller says, “Over the long run, value stocks outperform the market.”

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The Example of Sector Investing is an Evidence against EMH

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

• Previously, I showed the following example for investing in sectors. This is a market beating example over a period of 12 years, from the beginning of 2007 to the end of 2018.

• We couldn’t have seen this evidence, had EMH been valid.

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Table III: Investing in all but the Top "N" and Bottom "N“ Sectors

NFinal Balance at the

end of Dec 2018

Return compared to

S&P500

1 26,016 4%2 28,311 13%3 28,018 12%4 32,862 31%

Comments from the Critics of EMH

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

• Charlie Munger: https://www.youtube.com/watch?v=QETbx4l_KLA

• James Simons: https://www.youtube.com/watch?v=pEA5rYFOMeI

• Richard Thaler: https://www.youtube.com/watch?v=_rYkLonO1TA

• Peter Lynch:When he was asked about his opinion on EMH, he replied saying, "Efficient market? That's a bunch of junk, crazy stuff.“

• Buffett said: "If EMH were right, I would still be selling newspapers.“

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Are The Trading Tools or Products Effective?

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

• Many people will try to sell you various trading products. Don’t buy any of those. If those products were very good, they would have kept those secret.

• If they could build enormous wealth using those products, they wouldn’t be selling those products, rather they would be secretly using those products to build wealth for them.

• Before you buy any products or pay for any advice/service, check their track records. Find out how much they made from the stock market. Most likely you will find out that they haven’t made much. That’s the only reason, why they are trying to make some money by selling some products, rather than by trading or investing.

• Using their products you may be able to make some money, but most likely you won’t be able to beat the market. Every professional manager’s dream is to beat the market. It’s a very competitive game. If those products could beat the market, 95% of the professional fund managers wouldn’t be underperforming the market over a period of 15 years.

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At the End, Monkeys Win Again and Again by Beating the Experts

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

Even though professional managers have had hard time in beating the market, monkeys, even blindfolded monkeys, have been doing very well in the market

“A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.” – Burt Malkiel, “A Random Walk Down Wall Street” https://en.wikipedia.org/wiki/Burton_Malkiel

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• https://www.forbes.com/sites/rickferri/2012/12/20/any-monkey-can-beat-the-market/#20e51b95630a

• https://www.wsj.com/articles/SB991681622136214659• https://www.marketwatch.com/story/how-hedge-fund-

geniuses-got-beaten-by-monkeys-again-2015-06-25• https://www.stockinvestor.com/35446/beating-market-

surprise-surprise-monkeys-win/

Any Questions?

Investing 101 By Syed Masud Mahmud, Ph.D Copyright (c) 2019

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