As I mentioned in my last post, my 19 y.o. son’s online business is doing quite well …

… well enough for him to start thinking about investing in stocks. Or, real-estate.

But, right now, he’s thinking mainly about stocks.

Unfortunately, his thoughts are more towards Tesla and Twitter than GE and Unilever.

At least, he knows they (TSLA and TWTR) are speculative 😉

So, this is how the conversation went:

AJC Jr: I want to invest in Twitter. How much should I invest? I have quite a bit set aside …

Me: How much you have to invest is the least important part of your decision-making process.

AJC Jr: Oh! What’s the most important part, then?

Me: Well, son, you’re considering speculating in a technology stock that could go in any direction. How much to invest actually depends mostly on how much you’re prepared to lose?

AJC Jr: Hmmm. In that case, I think I’m prepared to lose $10k.

Me: OK. Now, how far do you think the stock is likely to fall.

AJC Jr: I think it’s going to go up!

Me: Of course you do 😉 BUT, if it does fall, how far do you think it will go … worst case?

AJC Jr: If I wait for a while – for all the IPO hype to die down – and buy Twitter at more reasonable $30 a share, then I think the most it will go down is $10.

Me: In that case, if you are prepared to lose $10k and you only think the stock will drop by 1/3 worst case, then you could invest up to $30,000.

AJC Jr: But, I could afford to invest a lot more in stocks!

Me: Sure! Just not in risky stocks … and, not more than $30k in Twitter. Now, take look at this stock chart for a nice, safe, boring trash dumping company I’m considering investing in …

When investing, decide if you’re in it for the long-term, or if you are simply blindly following some boom/bust tech trend; if the latter, look at how much you’re prepared to lose and make your decision on how much to invest based on that.

I’m always amazed by people who think that they can make ‘quick bucks’ (or, its sister currency: ‘easy bucks’) just by fiddling with paper …

… if trading stocks, options, FOREX, or commodities is something that you really want to do, I should at least teach you all that you really need to know before you begin.

And, it all has to do with catching monkeys …

But, rather than hearing it from me, far better to learn from the masters at Goldman Sachs, whom – or, so I am told by a very unreliable source – share this story with every new hire on their very first day of training:

Once upon a time in a village, a man announced to the villagers that he would buy monkeys for $10 each. The villagers, seeing that there were many monkeys around, went out to the forest and started catching them.

The man bought thousands at $10 and as supply started to diminish, the villagers stopped their effort.

He further announced that he would now buy at $20 each. This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms. The offer rate increased to $25 for each monkey captured and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!

The man now announced that he would buy monkeys at $50!

However, since he had to go to the city on some business, his assistant would now buy on behalf of him.

In the absence of the man, the assistant told the villagers, “Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 apiece and when the man returns from the city, you can sell each monkey back to to him for $50 each. He’ll be none the wiser and we’ll all have made some easy money!”

The villagers squeezed together all their savings and bought all the monkeys.

Then they never saw the man nor his assistant again … of course, now there were monkeys everywhere!?!

That’s how trading really works; welcome to ‘Goldman Sachs’!

[Source: http://www.quora.com/Jokes/Which-are-some-of-the-most-profound-jokes-ever/answers/1170178]

So, before you begin trading, consider this:

EVERY trade is two-sided.

This means that if you WIN some other shmuck has to LOSE. Sounds a bit like a poker game, doesn’t it?

If you agree, it would be wise to remember a very important saying in the world of professional poker:

If you can’t see who the shmuck is at the table … it’s you!

So it goes with trading: for every trade there is a counter-trade, and it’s probably being made by somebody with more experience than you …

… since so much institutional money passes through the various markets each day your ‘adversary’ is most likely a professional investor.

Now, let me ask you:

Would you play heads up poker with a professional poker player for anything other than the learning experience or fun?

Or, do you  really think you can turn a long-term profit catching monkeys? 😉