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Investment basics
South Park Blue Suit

Had a good discussion w. jcreed tonight in response to a post he made a few days ago about investing.

In short, it was about a 90 minute discussion attempting to cover the what/hows of investing and retirement planning from the bottom-up without getting too deep on any area, but without skipping over the important details. I figure given I've used this knowledge pretty extensively to get to early retirement, I'd at least try to codify it, as I think most folks have had rudimentary exposure to all of it at some point, but might be missing some pieces to be able to cognitively reason about key decisions.

The general outline of the conversation (with a few cleanups and topics I didn't get to but should have) is below. I'm sure some of you are pretty well versed in much of this, but figure I'd post here, so folks at least have a checklist of what they should learn about when venturing into the world of personal investment management.

Fundamentals - where stocks/bonds/investment vehicles come from:

  • Double entry accounting and corporate balance sheet structure (liabilities vs. OE)

  • What corporate bonds are

  • What corporate stocks are

  • Where other bonds/fixed income securities come from (treasuries, municipal bonds, mortgage-backed securities, credit card debt, REITs, other loans)

Investment Vehicles:

  • Bonds - types (corporate, public, securitized, seniority), how they pay you money (coupons, terminal payments)

  • Stocks - types, how they pay you money (dividends, buybacks, capital gains)

  • Volatility of payouts, and valuation

  • Leverage (why two companies that have the same net profit will have bonds & stocks that are differently valued)

  • Corporate information sharing (annual reports, quarterly reports, investor calls, insider information rules)

  • Efficient market hypothesis

  • Mutual funds, and the free company-specific risk diversification they provide

  • Volatility you can't avoid via diversification/mutual funds (macroeconomic)

  • Actively managed vs. passively managed funds, if the higher overhead fees are worth it (magellan/berkshire vs. vanguard S&P 500), and the implicit free rider problem if nobody does analysis on valuation

  • The fallacy of buying funds with the highest historical returns / 20 experiments -> p<0.05 / and the football tout service story

  • Traditional index funds vs. Exchange Traded Index Funds (mid day trading vs. lower fees)

Retirement/Financial planning - how much to invest & where:

  • Historical returns and volatility by investment type

  • Future performance / "out of model" risks

  • Your retirement horizon & acceptable volatility, age % rule (don't forget social security = bonds), and Year 20XX funds

  • My monte-carlo simulation tool

  • Capital gains taxes, short term vs. long term gains, and rules (FIFO, LIFO, 12 months, etc..)

  • Tax exempt/delayed retirement accounts(401k/403b, IRAs w. contribution limits, roth vs. standard)

  • Other tax exempt securities and double-taxed securities (municipal bonds, foreign stock dividend withholding taxes)

  • 4% "safe withdrawl" rule

  • Full service brokers vs. discount brokers (what you get/don't get for your money)

  • Physical mechanics of various online self-managed solutions

  • Dividend reinvestment plans ("DRIP"), and implications on short term/long term capital gains

  • Life insurance, disability insurance, and why do it or not

  • Tax implications of selling/buying stocks frequently or infrequently on non-retirement accounts

  • If you really like a company (or work for them), pros/cons of investing a larger % in a single firm

Advanced topics:

  • Hedge funds - what are they, what do they do vs. traditional actively managed funds

  • VC funds and angel investments - what are they, what do they do, qualified investors

  • Private equity firms - active company management & adjusting leverage

  • Options and futures, why they were first created, and how investors/businesses use them to increase/decrease volatility