Investing as a hobby
- October 23rd, 2013
Investing is a serious business. We are talking about your future here, people. So should investing ever be a hobby? Admittedly the lure of investing in individual stocks, ETFs, currencies is strong. As I wrote in my book:
There are few arenas in which an amateur can compete against professionals on an equal footing. In the financial markets, that is the reality with nearly every trade. Some would surely argue that the playing field isn’t level; but in the end, for every buy there is a sell, and on the other side of a trade is likely a professional investor—although today the other side of the trade is just as likely to be a computerized trading algorithm.
The Dumb Money has a post up talking about four steps investors should take including the fact that vast majority of the time long-term investing means sitting on your hands. In fact much of what passes for investing these days is a hobby. He writes:
Reading financial blogs all of the time, following finance people on Twitter, writing this blog: a lot of the things I do I do mainly for fun. Whether you are an long term investor or a trader, this is all perfectly fine, as long as you recognize it is totally separate from your actual investing/trading process, and as long as it doesn’t lead you to violate your rules.
Over the weekend there was a longish post up at WSJ by Liam Plevin talking about the “fun money” phenomenon. Leaving aside the idea that these kind of stories show up closer to market tops than bottoms, it explores why investors who have the bulk of their assets in broadly diversified, indexed portfolios have an account dedicated to individual stocks. For some this outlet provides them the psychological wherewithal to put the rest of their savings on autpilot. Plevin writes:
Some investors say they find it easier to stomach putting most of their money into plain-vanilla index funds if they can actively trade with a small, safe amount, which allows them to balance the goal of managing risk with a desire to have the dice in their hand.
Just because we allow ourselves to indulge some hunches from time to time does not mean we should leave our good senses behind. The article correctly points out that individuals who indulge in investing as a hobby should keep good records and track their performance. They may soon find that their perceived winners are offset by quickly forgotten losers. Maybe the most dangerous thing a hobbyist investor can face is in fact an early (and sustained) winning streak.
John Hempton at Bronte Capital ran into just such an individual. He tells the (short) story of a wealthy investor on a hot streak picking high beta stocks via the charts. The title of Hempton’s post: “I am so glad these people exist..”
There is nothing necessarily wrong with spending your time learning about investing and putting those ideas to work. Just don’t expect to become the next great hedge fund manager. Like many hobbies spending time poring over charts and balance sheets will look to many outsiders like a waste of time. Just make sure you treat this “hobby” more like a business and with a big dose of humility. Because you don’t want to be the guy on the train talking to John Hempton.
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