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Your post is premised on the stock market being a zero-sum game; for every winner there must be a loser. That is a false premise. Public ownership is a way for companies to raise needed capital in exchange for a share of their future. That's win-win. If you try to beat the market, then your success requires someone else's failure.

So just buy an index fund, and hold on. You will make more money long-term than you would in just about any other asset class.

David,

I do agree with you that there are win-win opportunities in the stock market. Investing in index funds (though plain vanilla they might be) is indeed better than having one's money rotting in a checkings account.

A few friends of mine decided to invest in small caps when they were still in college. In the first couple of months they doubled their money. Then they lost it all. If one does have a genuine passion for trading and investing then, by all means, keep trading and investing!!! If one is looking for fast cash, there are easier ways of making money... and there are more fun ways of going thru college than looking at stock quotes on a bunch of LCD screens.

It sounds like your friends tried to beat the market, so their experience is not applicable to my advice. Nor is the need to spend your time looking at stock quotes on LCD screens.

David,

I don't know what your definition of "beating the market" is. What my friends did was to try to find undervalued small caps by looking at the fundamentals. In that sense, what they were doing was more "investing" than "trading". It worked really well for a while, then one of the companies failed to bring a product to the market on time and the stock took a nose dive. Well, the lesson to learn is that due diligence is a wonderful thing. In the arrogance of youth, these guys thought that looking at P/E ratios and other such figures would make them rich. They lost some money, but they're wiser now ;-)

By beating the market, I mean trying to outperform, say, the S&P 500 by identifying underpriced stocks and buying them (and also, by implication, staying away from overpriced stocks).

> don't invest in stocks, invest in yourself

QFT. Unless you are trying to do market-timing (day trading) with penny stocks, your investments aren't going to be liquid enough and they aren't going to return enough to significantly increase that $2000 in a reasonable amount of time.

Day trading in penny stocks is significantly risky. I did it in college once with $3k. I was up to $9k after a month or so, then managed to lose it all in the next couple months. Your luck is probably just as good playing slot machines, and it's probably actually better playing blackjack. Most penny stocks are penny stocks for a reason (they're crappy companies).

You'd do better to spend the $2000 and, more importantly all that wasted time, working on your idea and seeking out investors (if you really need more money).

I'm willing to bet that for a reasonable amount of time, nine times out of ten, it will be easier to get someone to invest $10k in you than it will be to turn $2k into $10k on the market.

I have this theory that small transaction size actually confers a small advantage. You never have to worry about having enough orders on the other side of the transaction, thus you can do any transaction at the lowest price offered. Whereas big bid orders are basically the average price of the N lowest offer prices. I have no facts or experience on this, just a theory.

In other words there may be profitable techniques that are impossible for the big boys to use, simply because they can't be bothered with tiny investments.

Also, I thought you could eliminate transaction costs using a broker like zecco. Such a broker might invalidate my above theory though, if it were true.

The problem is "small" in your definition is at least in the thousands of shares, probably more in the hundreds of thousands of shares in anything liquid. It's true that mutual funds have a hard time moving in and out of the market quickly, but you're competing against traders who will happily do 1000 share trades all day long.

Hmmmm. You are probably right. I still wonder if there might be some advantage in only making small investments, such that the strategy is worthless for investors with money, but not worthless to you.

Suppose you do think you have an advantage - like, you have a PhD in math, you have some clever trading algorithm, and it trades well on paper under what you think are realistic assumptions. Your advantage is, I don't know, that you don't trade on emotion so you do less stupid stuff (I've never traded and have no plans to). Then what?

There are way too many hedge funds building trading systems. Some know what they are doing, but many don't. Trading algorithms are important, but choosing a financial instrument which one understands well and other people understand not-so-well is also critical.

Personally, I think that stocks are too simple. Many people understand them reasonably well. Microsoft's stock is not that different from GM's stock, though Microsoft builds software and GM builds cars. Bonds are more complex. Commodities are even more complex: trading crude oil is not the same as trading sugar or corn. Structured products are probably the most complex of all (not even the banks know how to price them), which leaves room for the small guys to dream of making a profit.

Quoting Paul Graham ( http://www.paulgraham.com/wealth.html ):

"Suppose you are a little, nimble guy being chased by a big, fat, bully. You open a door and find yourself in a staircase. Do you go up or down? I say up. The bully can probably run downstairs as fast as you can. Going upstairs his bulk will be more of a disadvantage. Running upstairs is hard for you but even harder for him."

In my most humble opinion, this applies not only in the start-up arena, but also for small investors up against the big banks and hedge funds. Banks are famous for excruciatingly painful bureaucracy, which makes them slow to react to the market sometimes. Banks typically trade large volumes, which works against them. If there's an edge one can exploit is to trade instruments which one understands very well with people who do not understand them all that well.

The "few" who manage to make money in the stock market are the ones who buy when the market is down and sell when it's up. It's as simple as that.

The difficulty is knowing when the market is down enough for you to make money before you're forced out of the market because you need the money.

I don't know if that moment is now, but the pros who work 12 hours on it apparently don't know either. Otherwise they wouldn't be in trouble now.

So, let me ask you a different question. What makes you think that kyro would do worse than the pros who lost entire banks by getting in at the top?

I'm not saying he should put money in the stock market, but humbleness before those awesome pros that he would be up against is not a good reason to stay out.

And by the way, even if you view the market as a zero sum game (which it is not, but that's another debate), you forget one thing: Many pros are forced to sell right now. They are forced to lose because of margin calls, redemptions, minimum capital requirements, etc.

So it's not necessarily the admirable wisdom of the pros you are up against right now. They are on the floor. Their hands are tied. They have no choice but to sell to you knowing it's not to their advantage in the long run.

If you are 100% in cash and don't need the money within the next 2 years and you don't have to meet margin calls, redemptions or capital requirements, you win, no matter how smart you are compared to the pros.

"The "few" who manage to make money in the stock market are the ones who buy when the market is down and sell when it's up."

Not necessarily in that order ;-)

"the pros who work 12 hours on it apparently don't know either. Otherwise they wouldn't be in trouble now."

Not quite true. I was referring to the stock market. The current crisis was not caused by stocks, but my collaterized debt obligations and other arcane financial products which no one knows how to price.

"I'm not saying he should put money in the stock market, but humbleness before those awesome pros that he would be up against is not a good reason to stay out."

I don't like stocks as an investment, so maybe I am biased. I have known so many people who have tried to make a fast buck in the stock market and lost it all, that maybe I am too pessimistic.

It's not my money, so Kyro should do whatever he feels like. However, I think some realism is always desirable. But then, it's just $2000. That's peanuts. It's not like one's entire life will be doomed if one loses $2000, right?

There's a lot of people out there that invest without any prior knowledge at all, I wouldn't doubt that many of them don't even realise how much there is to stock trading. I have known someone that put down £30k without understanding even the basics, and obviously they lost it all. I don't think you have to beat the pro's, you just have to beat the idiots, and be blessed with some luck.

I agree with other comments, you have to be ready to lose the money, hopefully in exchange for knowledge. If you can't afford to throw the money away, don't risk it. But you never know until you try..

I agree with what you say, but at some point it's a good idea to buy stocks.

1) If you buy a range of dividend stocks you have vary good odds of making money over the long term. Just not a lot of money.

2) Always trade at least 1k or the transaction costs are going to kill you.

3) Time is on your side. 2,000 * 1.05 ^ (65 - 21) = 17,000, but paying taxes on this every year is going to bite you.

4) Mutual funds have a worse return than just buying stocks, but the transaction costs are less harsh so if your just in the market for a few years go with an index fund.

If you buy a range of dividend stocks you have vary good odds of making money over the long term. Just not a lot of money.

That's nice until they cut their dividend. Which should be happening in the next 6 months in weak sectors.

- I agree you don't have any advantage. On the other hand the meltdown has already happened, so the prices have been corrected already.

- On the other hand, using the stock-market by investing for the long-term is the biggest crap someone can sell you. There are better ways to invest for the long term, assuming you have more money.

- $2000 may be a lot to you, but it's not a lot of money. So assuming you are a fast learner, want high returns and you have the risk gene, I would recommend learn forex instead. You will learn a lot more in 6 months than what you will learn investing for the stock-market. You will probably lost at least 50% of your capital but you can't learn if you don't burn real money.

(I mean all of this in terms of making an extra few percent - not making 2k into 200 million)

I think you have the advantage of timing. Being a casual investor you can leave $ as cash until an opportunity arises. You don't need to invest in this current landslide until the smoke clears, big firms and anyone who has already lost money is already committed (few will cut their losses).

You also have the luxury of just needing to choose one or two good companies. Drop the $2000 in Microsoft in the early days and you would be a rich man. Take that lesson to today, and maybe you think RIMM is oversold and will be the dominant mobile player for the next 10 years. You put your chips there, and not spread out over 5 mobile stocks.

I realize those two things are very difficult to do (timing and selection), but I do think certain individuals can do it better than the rest of the market.

My biggest point though: Don't waste ANY time in the market until you have enough money so that the difference between 3% returns and 5% is meaningful. 2K + the market == a waste of your time, as others have suggested invest that into yourself.

>- I agree you don't have any advantage. On the other hand the meltdown has already happened, so the prices have been corrected already.

A couple of summers ago someone could just have easily said: "on the other hand, house prices have ballooned, so the massive undervaluations in the housing market have been corrected already"

You are arbitrarily calling a bottom without any justification other than an efficient market hypothesis, which, given recent volatility, is hard to put forward.

I am not in position to compare the two. But, the housing market was growing globally and so fast that the it was obvious it is artificial.

However, if you said that, yeah that's the answer you actually got.

"arbitrarily calling a bottom without any justification other than an efficient market hypothesis"

the deal is that you should not make predictions on what the outcome you need to be. Rather, correct you predictions and adjust your investments.

As I remember, there was only one major player who realised it. I think this is the definition of non-obvious.

If it was so obvious that is was artificial, then you would have taken the bet.

The meltdown has already happened? How do you know?

Like an earthquake you can't predict them, but you can get safety measures.