
Request for Startup: Codecademy for Stocks - yoseph
http://www.vuru.co/blog/2012/02/06/request-for-startup-codecademy-for-stocks/
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yannickt
This reads like a request for a startup to teach people how to pick stocks. I
am not sure this would be particularly useful, and I fear it could be
dangerous. There is plenty of evidence that the average investor, instead of
obsessing over the return on investment, would be better off putting their
money in index funds and focusing on things that are in their control, like
their savings rate, (tax-efficient) asset allocation, or minimizing investment
fees. There is no shortage of accessible material on the subject.

Also:

"The old model of financial advisors, mutual fund managers and brokers is
dying fast."

Is there any evidence to support this? I.e., are mutual fund managers making
less money? And if formally trained investment professionals, as an aggregate,
are not good at managing money, is it reasonable to think that individuals
will do better with a code academy for stocks?

~~~
nirvana
Do you have any evidence to supper your assertion that it is dangerous to
train people in investing? I know its popular for people to throw up their
hands and give up and claim that index funds are the way to go. I also know
that many people who have done so, would prefer to think that they are doing
the smart thing, and so they claim that this is the smart thing, despite the
fact that it is really easy for anyone who thinks about it for a few minutes
to beat those returns. Take an index- say the Dow Jones[1]. The companies in
the index don't change very often at all. It would be very easy to buy a few
shares of each company and simply hold them. You have the commission fees in
the first year, but with discount brokers, that's pretty small, and then there
would be no more fees. Meanwhile the people who gave up and just handed their
money over to be "managed" in an index mutual fund are paying %1-%2 a year in
fees. Spending an hour making a spreadsheet and you can keep your replica of
the Dow Jones balanced by adjusting where you put new money in.

Why pay %2 of your investment, every year, to managers for something that
would take you an hour to do once?

Over 10 years that's %20 of your investment, not even counting the effects of
compounding.

Over 40 years that's %80 of your investment, not counting the effects of
compounding which will be much more significant.

[1] IF you don't have the funds to buy the whole index, you can buy just the
heaviest weighted ones. Further, when companies do leave or get added to the
index, you can trade this when its announced, rather than have to wait like
the index fund does, which means you get a better return because the index has
to buy them after they've appreciated due to being announced as being added to
the index.

~~~
yannickt
I never said that it is dangerous to teach people about investing. I am saying
that investing is about a lot more than stock picking. Since passive investors
beat active investors after costs [1], I think it is better for the average
investor to focus on things that they can control to a large extent, like
savings rate, fees, tax efficient asset allocation, diversification,
investment horizon, etc.

Also, I do not advocate buying just any index fund, just those that are a good
proxy for the market as a whole. The S&P 500 is much more representative of
the US stock market than the Dow 30, and the Wilshire 5000 even more so. It is
may be easy to replicate the Dow 30, it is much harder to replicate the S&P
500. And this assumes that one is only invested in US stocks, and is not
diversified across other asset classes, such as international equities or
emerging markets.

There are plenty of index funds that charge much less 1% in fees. Many charge
0.25% or lower. The following page has a spreadsheet that calculates the
impact of fees on mutual fund investors:

[http://wheredoesallmymoneygo.com/detailed-breakdown-of-
the-r...](http://wheredoesallmymoneygo.com/detailed-breakdown-of-the-real-
impact-of-mers-on-an-investment-portfolio-over-time/)

(Canadian, but the idea is the same for any stock market)

Using the spreadsheet, let's assume an initial contribution of 100K, an annual
contribution of 5K, a 5% growth rate, no trailer commission and no advisor
payout.

After 25 years, an investor who put the money in a fund charging an MER of 2%
would have lost 33.72% to compounding costs versus a 0% fee portfolio.

An investor who put the money in a fund charging an MER of 0.25% would have
lost _5.07%_ to compounding costs versus a 0% portfolio. I don't think that's
a bad deal for the average investor at all.

[1] Cf.: The Quest for Alpha, by Larry Swedroe; The Power of Passive
Investing, by Richard Ferri

~~~
nirvana
Actually, you did. The RFS was to teach people about investing, not stock
picking. You've got an axe to grind and you're lying about what other people
have said in order to grind your axe. The idea that passive investors beat
active investors is nonsense. You cannot prove it, nor does your reference
even address the issue. It is a claim wholly unsupported, and if you will
think about it objectively, you'll find you cannot prove it without getting
all investor to give up their entire trading history, and then evaluating them
over the course of that history. Nobody has access to that information so they
publish spurious nonsense in order to talk people into investing in their
funds.

Your statements about the fees charged by mutual funds is inaccurate. %2 is
appropriate, and in some cases it is %2.50 or %2.75. Which, according to your
own link, means that over some period of time %90 of the money goes into fees.

You have heard a little bit about investing and think you know what you're
talking about, but you're repeating the propaganda of people who were trying
to sell you something.

I suggest that if you will go out and educate yourself, you will find that
these people were trying to rip you off. In fact, your statements in this
thread are proof positive that the RFS was right-- so many people are
completely ignorant of investing-- even what investing "is". (you keep calling
it "stock picking" as if that phrase was relevant.)

But I know you won't, I know you're emotionally invested in this ideology,
because it likely dovetails with your political ideology (liberal, right?
think people should be forced to invest in social security, which will never
return even %1 of the money they give up, because its "dangerous" to let them
invest that money themselves, right? If you're not a liberal, at least this
shows the motivation for people spreading the idea that stocks are complicated
and that teaching people about investment is dangerous.)

But, at the end of the day, having so many people completely giving up on
investing simply means there's less competition for the outstanding deals out
there, and the market is even more inefficient, which leaves me with more
opportunities to profit.

So, for that, I thank you.

I've learned that, you cannot talk to people about investing-- for many of
them it is like a religion. So you are free to have the last word. If people
are foolish enough to believe you, then its their responsibility, not mine.
I've proven you wrong, that you won't accept it is on you, not me. So, go to
town.

~~~
yannickt
I did not lie, you seem to be the one with an axe to grind and you haven't
proven anything.

What I wrote about fees charged by _index_ funds is perfectly accurate. For
instance:

\- the Vanguard Total stock Market Index Fund charges 0.07%;

\- the Vanguard Total World Stock Index Fund charges 0.45%;

\- the Schwab S&P 500 Index Fund charges 0.09%;

\- the Fidelity Spartan 500 Index Fund charges 0.10%.

Of course most mutual funds charge much more, _precisely because they are
actively managed_. Index funds _are_ passively managed, involve very little
trading, and as a result charge much less.

I never, ever advocated that people give up on investing, and I think you're
the one in need of an education.

------
veyron
The real problem is that the biggest lessons you have to learn (e.g. self
control, ability to tolerate a small draw-down, discipline to act on winners
and losers if your theory doesnt pan out) require a real-money test. You can
learn modeling etc from a book, but the experiential knowledge requires you to
play with cash.

~~~
yannickt
This is a great point. Most people I know largely overestimate their risk
tolerance, and go from aggressive to conservative at the first hint of a
market crash.

~~~
nirvana
Just because you are unable to be disciplined, does not mean you should
project it onto everyone else. You may have jumped in and done stupid things-
that's not uncommon- but deciding to give up afterwards, and then claiming
that nobody else is capable of being rational-- is an error. You went so far
as to say the idea of teaching people about investing was "dangerous".

That's quite a bit of overcompensation on your part!

~~~
veyron
The 'danger' of teaching people to invest is that the people who generally
teach have some sort of ulterior motive that isn't about people's economic
welfare, and that generally skews the discussion.

For example, sell-side analysts push trading ideas that the banks don't want
to hold, research analysts push ideas that favor their respective funds and
clients, and then you have blubbering idiots like Dick Bove (he is
particularly memorable for calling citi undervalued when it was $300 [30
before the reverse split] and for calling BAC overvalued when it dipped below
5 recently) showing their faces on CNBC. Stewart had a brilliant segment (~ 9
minutes) walking through the disservice that CNBC performs, wish I had a link.

Most people's exposure to investing involves contributing to a 401K, and lots
of people lost boatloads of money when the markets crashed. In fact, lots of
people are still suffering losses.

ETA: so I'm 24, and my financial advisor has been pushing for me to put all of
my money in the stock market. If I did that, I would have missed out on the
great bond rally last year.

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DevX101
Its usually a bad idea for individuals to hold specific stocks.

Its never a bad idea for individuals to learn some basic code.

~~~
virincognito
While I don't agree with your first point, it's certainly up do personal
opinion. However, it's never a bad idea for people to understand how to invest
and manage their money. From my understanding, that was what the author was
talking about.

~~~
veyron
managing money != trading stocks

------
IceCreamYou
I sort of tried doing this for the PennApps Hackathon in January:
<http://unstock.me/>

It turned into a silly little linear game. We realized that intelligent
investment in the stock market requires setting up advanced models that
require math beyond what most people can manage. If you're not working with
such a model, you're probably losing money to the people who have one. There
are some general concepts to learn about the stock market that don't have to
do with math, but they're mostly pretty obvious and hard to make into a fun,
game-like format.

~~~
IceCreamYou
Also, it's not just the math -- it's the data. Successful investors spend
large amounts of time every day poring over financial reports to find
companies whose stated value is different than their actual value. That's not
something really teachable; you just have to want to sit there for hours doing
it.

~~~
nirvana
Its really easy. You find companies with trustworthy management and sound
businesses, look at their growth, find a reasonable discounted expected future
growth, then calculate the net present value of discounted future growth. If
the stock is trading for that amount, then you pass. If the stock is trading
at a discount to that, then you buy.

Those who think the market is efficient are saying that there are no stocks
like that... but if you look around, its not hard to find them.

When I was a buy and hold investor, I made %50-%100 returns each year spending
about 5 hours a year in investigation (and most of that was just because I
liked checking out possibilities. Most of it was fun. Once I'd found the
keepers, it took me an hour each year - about 15 minutes each quarter- to
update the numbers in the spreadsheet.)

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rayhano
Like <http://volcube.com> ?

~~~
nirvana
That's interesting. It seems very focused on specifically training traders,
and in options, for market makers, and the like. Something like that targeted
at a broad audience might be really useful.

~~~
rayhano
I can make an intro to one of the founders for a chat...

------
corkill
Except Codeacademy you are learning a skill which can be used to create.

Stock picking is essentially staking your money on something which you have no
control over. I'm not against people learning about it. But yeah tons of
better things to learn about, don't think it would take off. Seems like
something to cover this would need to be more like an ongoing game and a lot
less like code academy lessons.

Why do stock analysts, market experts etc even exist when they can hardly
predicate things better than the average investor? Because there is a demand
for them.

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andr
There is a generally-accepted way to write software that works, even if there
are alternative approaches.

With finance, there is not one generally proven way to make money. Once you
get your feet wet in a financial market, there are no rules on how to make
money or value stocks and other investment instruments. Experienced finance
types lose money all the time. Someone that only completed an interactive
learning game is bound to lose their savings.

------
nirvana
The difficulty in this is that there's a much more cohesive perception of how
you program javascript than there is on how you invest in stocks. In fact, for
much of javascript there's little debate, yet for stocks there are large
numbers of people who have been sold falsehoods and have become emotionally
invested in believing them. Even the people who haven't fallen for snake oil
are rather diverse in their investing strategies. For instance, my preferred
vehicle, stock option spreads, are considered "too risky" by many people, and
for others they just have trouble wrapping their heads around them.

So, I think the first thing that you'd need to do for such a startup, is to
limit your audience to people who are independant thinkers, people who want to
invest themselves and want to take control over their financial lives and
haven't given up on the idea that they can be successful doing so.

This may have been obvious when you were writing the RFS, but I'm not sure
what percentage of the market that is.. and if you want to address the whole
market, you've got a lot of myths to deal with. (like the idea that the market
is efficient, or that individuals can't pick stocks, or that mutual fund
managers are better at managing money.)

Or, put another way, maybe the first module in such a system would be
disproving these myths.

------
nirvana
Think Or Swim, is an options trading platform, that has some very good
software for analysis. You can get a free paper trading account from them.
Probably some of the best training you can get would be to take that paper
trading account, reduce the amount of cash (it starts with $1M) to the amount
you really have to invest, and then start investing.

It lets you go back in time and buy or sell on specific dates in the past.
This allows you to back test mechanical strategies. But for working with real
time events, paper trading lets you make your trades with no knowledge of the
future, see how you do as time goes on and have no money at risk.

Always a good idea if you're going to do anything with increased leverage
(like shorting or options).

