Many, many stories have been written on the Internet about making
money by investing. There are websites dedicated to
it, news channels, books, magazines, you name it. Much
less has been written about not making money. In this node, I will
attempt to fix this curious oversight by giving some effective techniques
that help you to make no money from your investments. In fact, many of the
handy tips here will make it possible to even lose your life
savings.
Let us first define what we mean by investing. With investing, I mean using
your money to buy and sell things like stocks, bonds, putting it in a
deposit, buying commodities, real estate, land, you name it. Not making
money by not investing is actually rather easy. Foolproof techniques, such
as taking a trophy wife/husband, buying sports cars, giving it
away, etc. are well-known. These need not be discussed here.
The first very good way of not making money is by trading very often,
especially with a very expensive broker. Depending on your account,
buying or selling something like some shares might cost you say 10 dollars.
So, changing your position by selling a position in one share and buying a
position in another costs you 20 dollars. If you do this roughly every month
or so with 5000 dollars, you already need to make 6% on your investment, and
that is roughly the difference between a low-risk and a high-risk
investment. In other words, a lot. It's in particularly bad if you trade
very similar shares, like exchanging Exxon for Conoco Philips, and
back-twelve times a year.
But wait! There are more costs to be made! You see, when trading, there is
the bid-ask spread. Essentially, it might costs you 10.05 dollars to buy a
share, and when selling it, you get only 10.00 dollars back. So, in buying
500 shares, that's 25 dollars gone! Especially if you fancy the illiquid stuff, you can really rack up costs doing this. If you add
this to the 10 dollars costs, you can manage to spend 365 dollars a year,
which is about 7.5 percent, or almost the whole expected long-term return of
stocks! As you can see, trading a lot can really help to get rid of your
excessive cash.
Given that trading costs money, over-diversifying helps, too. If you are
synthetically recreating the S&P 500 by just buying most of the companies,
you are probably doing this. Of course, your asset mix is slightly
different, and should give you an edge, right? Well, in practice, this
edge is typically too small to overcome the costs you had to make to get
into your complicated position.
Interestingly, this is the root of one of the most common and perhaps
worst investment strategies followed by professional fund managers, namely
almost following a benchmark index. By doing so, a fund manager can
charge you costs as if he were being really creative with your money,
while the amount of creativity is so small it's not likely he will
overcome the extra costs even if he is right. In such a case, a bold gamble
with an investment manager that doesn't follow an index but just thinks he
is right, or just meekly following an index is probably better.
Something that deserves a special mention are those cute little funds
managing for instance a teak forest in a Middle-American country you
couldn't find on a map. If you are really lucky, it's one of the funds
that acts like a Ponzi scheme, with the owner spending the money in South
America on other plant products, or invests it in sports cars. Even the funds that are at least trying to make money
might have a hard time doing so, given the extremely risky nature of doing
business in pretty much lawless countries. Of course, if all does work out,
you might make quite a bit. Problem is that it's very hard to see on the
outside if the fund you are investing in is a scam or not. If you are
serious about losing money, invest everything in the same risky fund, and
especially do so with money you can't miss. Of course, if you do get lucky
and make a lot of money, just reinvest it in another fund. After a few
iterations, you are pretty much guaranteed not to have to pay capital gains
tax anymore.
The First World also offers plenty of ways to lose money. A favorite
is options. An option is the right (if you buy it) or obligation (if you
sell it) to buy or sell a share. Now, used properly, subtle, almost
risk-free plays on almost any scenario can be made, investments can be
protected, and you don't risk anything you don't want to.
Options also offer an almost unlimited destructive potential. For instance,
you might want to sell put options, believing a stock will never drop,
pocketing the premium. If you do this long enough, you will eventually be
short puts on, say, Fannie Mae and lose an astronomical sum of money. For
this to work, you of course do need to keep scaling it up, otherwise the
loss wouldn't wipe you out. Buying options, especially options that only get
value when the stock has moved quite a bit (far out of the money options) is
also a good way of losing money, especially if you put a lot of money in a
single position. If you spread your positions, the rare big win would cancel
the losses and you might break even, but by having only one or a few big
positions, you make this scenario a lot less likely. So, got a hunch, bet a
bunch!
Another, much less spectacular way of not making money is just putting your
money in a savings account in a big bank. You see, various banks offer
various interest rates, and the ones spending it on billboards, commercials,
and sponsoring sports clubs tend not to be the ones that give you most.
Capitalize on this by not shopping around and just dumping your money in the
first bank you find. If you find a particularly bad bank, in the long run,
inflation will grind your money to dust.
Something worth mentioning here is that smaller banks may be more risky.
However, in many countries, the government guarantees a certain amount of
money in each bank account. Hence, investing less than this sum in a
riskier bank that pays more interest is in fact an (almost)
risk-free way of increasing your yield. So, if you want to lose money,
don't do that.
One final money-wasting trick I'd like to share is high-yield
bonds. High-yield bonds are bonds by companies that may go
bankrupt In this case, you would lose some or all of your
investment. They do pay more interest, so if you spread your portfolio,
the extra interest should cover the occasional loss. Hence, do not do
this. So, in order to lose money, do the following. Buy one bond in a
particularly nasty company you do have a good "gut feeling" about.
Especially don't bother to check their balance sheet or anything. If the
company survives, just repeat the process as you apparently have a good
feeling about these things.
There are of course many more ways of not making money, but many of the
essentially amount to the same thing: Making costs without prospect of
return and taking massive risks. Doing this should rid you of excess cash
easily.
Having read this far, you might want to know if there are also good ways of
making money. Well, just don't do the things mentioned above and you
should be pretty much fine. Oh, and one more thing: don't take investment
advice from random people on the Internet. The investment spam in your
email falls in this category-and so does this writeup.