Talk Goals:
1. Communicate Clearly
2. Well-Organized
3. Promote Understanding
4. Encourage Critical Thinking
5. Encourage Engagement

Q's:
- How many of you have savings?
- How many of you invest in stocks?
- What do you invest it in?

Goal: to convince you not to try to pick individual stocks but to invest in the market index (eg STI) instead.

Q:
What are some ways that people pick stocks?

- A good company does NOT mean its stock will go up (need to consider it's price)
- A cheap company does NOT mean its stock will go up (meed to consider its future prospects)

When you're buying anythings, it's not enough to just look at how the good the produce is, but also how much it costs.

Stocks trade on open markets where anyone can buy or sell. The current market price is such that at that price, it's just expensive enough such that no one is willing to buy but cheap enough such that no one is willing to sell.

Current price is the "fair" price. What that means is that it's not obvious if the stock will go up or down. If it were obvious that it would go up, ppl would have bought it already. Therefore changes in stock prices are driven by events that others do not expect. 50-50.

This notion that stocks are basically unpredictable is known as the Effecient Market Hypothesis (Gene Fama, Nobel Prize Winner). Since the 60s, has been the central organizing principle in finance. Of course, no one is saying that every stock is perfectly priced in every situation, there are exceptionss.

Since the 80s, there's been an important branch of economics and finance that studies how human behavioral biases may play a role in people's economic or financial decisions. Still, base assumption even today is that markets are effecient and then go from there to identify specific ineffeciencies caused by transaction frictions, information bottlenecks, behavioral biases, princiapl-agent problesms, etc.

Reminds me of Churchill's saying, "Democracy is the worst form of government, except for all the others." Same things goes for the effecient market hypothesis. It's the worst financial theory, except for all the others.

Q:
- How many of you play poker?

In poker, there's only so many chips on the table. To the extent that someone wins, another must lose. So when you sit down at a poker table, and after you play a few hands, you better know who you think you can win money from. Otherwise, as the famous saying in poker, "If you can't spot the sucker, it's you." If you're not confident of beating other players, that means you're just going to be financing other player's winnings.

The market index returns the market average. By definition, the average means that for everybody that makes above the averge, someone must make below the average.

Who are you up against?

- Professional investors who do this for a living. Reason they can do this for a living is because they are extremely good at what they do
- Better access to information beyod just the company's fundamentals and price movements, includes:
1) hire people who call up stores and pretend they're customers
2) Twitter, Google, etc. sentiment
3) using satellite information (number of cars parked outside)
4) Use computer programs to sift there company reports and news releases (word choices, tones)
5) email receipts; small business invoices; credit card data; shipping container records

More and more automatic trading algorithms
1) The time-difference of where you place the servers actually matters
2) The performance of the fiber-optic cables that connect the servers
3) Machines are getting smarter (Machine learning). They've beaten people in Chess, in Jeaopardy, and in Go. People who are designing these machines are the smartest computer scientists from Harvard and MIT.

For you to trade a stock, someone must be on the other side. Why are they willing to trade against you? What do you know that they don't know? Probably not a lot. What do they know that you don't know? Probably a lot.

- In addition to possibly losing to other people, you will for sure lose to the house everytime you trade
- 1) stock exchange, you have to pay transaction fees/bid-ask spreads
- 2) brockerage firm: pay commission
- 3) government: pay taxes

Whenever you buy an individual stock, you become less diversified so you take on increasing risk. It also becomes a source of worry that will suck time and energy.

Academic studies that show people who trade more tend to do worse.

1) Have a budget and save. People get rich not because they are good at picking stocks. It's because they work hard and save money.
2) Why not invest in mutual funds that can pick stocks for you. After fees, almost all funds lose to the market index (especially over long run). If they are really good, they don't want your money (prefer very rich institutions like Harvard or Yale).
3) Instead of focusing on how to invest your money, just put it in a globally diversified equity ETF. Minimize trading and commissions.

Investing is one of the rare disciplines where experts cannot beat the average bc/ the average consists of experts.

1) It's fun. Like gambling or buying the lottery. Not based on optimizing the outcome.
2) Fear-of-missing-out. ie Herding
3) Most people think they are above-average drivers. Most people think they have above average IQ. Professors are the worse. 94% think they are above averge!
4) Ignorance. Selective memory. Don't realize how the markets work.