Originally Posted By Inspector 57 I've read this thread pretty quickly, and the numbers and tax laws and exceptions and things are just sort of washing past me. But one thing that X said sticks with me: "The only risk is the principle you start with." Is that true? I've thought about it in a situation that (I think) is analogous... I'm in Vegas. I've budgeted myself $200 to gamble for the day. On the way out of my casino to take a walk down the strip, I sit at a bar, order some coffee, and put a twenty into a quarter poker machine. I hit for $1,000. Feeling very good about that, I decide that when I get down to "Casino X" I'm going to sit at the $25 dollar tables instead of the $10 tables. Which I do, and I lose $400. Decide that another game would be luckier, sit at a dollar poker machine, make my $400 back, plus $80. Have lunch. Go back to the same machine. Lose the $480 I'd won there, plus another hundred. Go back to my hotel, lay by the pool, have dinner. After dinner, lose $500 in the casino. Two questions: (1) How much did I lose? $20 or $1000? (2) Is this just a philsophical question, kind of just a mental or semantics game? [If so, boot me off the thread for being too off-topic.] Or does this question represent "real" concepts in the world of finance? If it's a real question, and if the answer is $1,000, then wouldn't X's risk grow each time he makes money? (Not taking into account the nightmare tax scenario.)
Originally Posted By SuperDry Great questions, Inspector! I think it depends on who you ask. <<< Two questions: (1) How much did I lose? $20 or $1000? >>> I think the casino would tell you that you lost $20. I think that you really lost $1000. <<< (2) Is this just a philsophical question, kind of just a mental or semantics game? [If so, boot me off the thread for being too off-topic.] Or does this question represent "real" concepts in the world of finance? >>> It's philosophical, semantic, and real all at the same time. The whole notion of "I'm just playing with the house's money" can be very dangerous, as it allows almost the entire temporary advantage to the player to be marginalized and minimized at the very moment when it should be cherished. As Kenny famously said: "There'll be time enough for countin' when the dealin's done."
Originally Posted By Mr X I understand your point Marc, but consider this... What would be worse, to invest $3,000 and have it increase a lot, only to lose it all in a market crash, OR invest 10% of your paycheck religiously over a period of years and lose everything in that same market crash? That was the point I was making in the "you're only risking 3 grand". Of course, you COULD still be investing your income in other ways so that if you DID lose on that 3 thousand dollar investment you'd not have lost everything. Anyway, though I can see the similarities between Vegas and the stock market, the fact is that the odds, over time, are much more in your favor on wall street rather than the Bellagio. Casinos are designed to take your money. The market, assuming the economy prospers, awards an amazingly steady 10 percent per year return over time. And if you are careful with chosing the companies you invest in, you can make much more than that (of course, you can also lose your shirt, no doubt).
Originally Posted By Mr X Re-reading your analogy, I'd say you lost nothing. As long as the coffee and dinner were worth at least $20.
Originally Posted By friendofdd I'm not a gambler, so all I've ever done is designate a small amount of money for slot machines. If I lost it all that was ok as I considered it entertainment money. However, I do not consider my investments to be for entertainment. It is my intent to achieve growth. I believe we need to be certain what the money is for and then be somewhat cautious for the investments. Ten percent per year, in the stock market, can usually be earned in conservative ways. But that has not been true for the last several years, until recently.
Originally Posted By RoadTrip As far as I'm concerned, your only loss is your principal. Even the IRS figures it that way... your gambling wins are offset by your gambling losses... you only pay tax on the amount that your wins exceed your losses.
Originally Posted By peeaanuut Im with the only lose the $20 crowd. If you had walked out of the casino with the grand than I would say you lost the grand. The thought being while in the casino, winnings are only a temporary hold until you either lose it (most likely) or leave the casino. So skip to the market. If you invest 3grand and it ups in an account and than the market crashes and you lose everything, well than you only lose the 3 grand. But it upped and you withdrew 10g and than reinvested the 10g and than the market crashed than you would be out 10 grand. The thought being dont reinvest your winnings unless you can stand to lose them.
Originally Posted By fkurucz >>Anyone see a downside to this? Other than the obvious risk of your stock choice tanking, that is (which is a risk, but with careful research it's a calculated risk I believe).<< The problem is that it doesn't take much to lose everything, because you are leveraged to the max.
Originally Posted By fkurucz >>Playing poker has the same amount of risk as stock investing?<< Writing call options is as about as close you can get to gambling on Wall St.
Originally Posted By friendofdd It seems to me that you lose more than your investment capital and gains if you crash. You also lose what you could have gained in a fixed interest account.
Originally Posted By Mr X >>>Writing call options is as about as close you can get to gambling on Wall St.<<< COVERED calls, fkurucz? Speculating, sure. But I don't see it as "gambling" so much (naked shorting and all that though, yes...short selling in general seems pretty iffy to me). I understand your point, DD, but the problem with fixed interest investments is they don't keep pace with inflation...thus your investments are LOSING real world "buying power" year by year. If there was a fixed interest investment that paid 10.5%, you can bet that there wouldn't be nearly as much interest in investing in the "riskier" stock market.
Originally Posted By SuperDry <<< COVERED calls, fkurucz? Speculating, sure. But I don't see it as "gambling" so much >>> Covered calls are a totally different game than naked calls. But I would still equate stock market speculation with gambling. <<< I understand your point, DD, but the problem with fixed interest investments is they don't keep pace with inflation...thus your investments are LOSING real world "buying power" year by year. >>> As an aside, DD (as is almost always the case on LP with his posts) offers wise advice. Back to the point: Until a few years ago, the notion that "you must invest in the stock market in order to get an inflation hedge" was absolutely true. But it's not so much true anymore. Now that the US Treasury issues inflation-protected bonds/notes, you can very conservatively invest money with no stock market risk and still be totally protected against inflation, no matter how high inflation might rise. I think there are still very good reasons to invest in the stock market (such as prospects for long-term growth) but the need to do so as an inflation hedge is no longer the case.
Originally Posted By SuperDry There are Series I Savings Bonds ("I Bonds") which like regular savings bonds are purchased in small denominations. There are also Treasury Inflation Protected Securities ("TIPS") which are for larger investments. Both pay an interest rate that adjusts automatically with the CPI inflation rate. So if you buy one of these instruments, then you're protected against inflation no matter how high it goes. Check out <a href="http://www.treasurydirect.gov/indiv/products/prod_tipsvsibonds.htm" target="_blank">http://www.treasurydirect.gov/ indiv/products/prod_tipsvsibonds.htm</a>
Originally Posted By fkurucz >><<< COVERED calls, fkurucz? Speculating, sure. But I don't see it as "gambling" so much >>> Covered calls are a totally different game than naked calls. But I would still equate stock market speculation with gambling.<< At the end of the day its the same. The only diff is that with a covered option you had to pony up some collateral to cover a potential loss. Either way you lose the money if the stock doesn't short.
Originally Posted By SuperDry <<< >>Covered calls are a totally different game than naked calls. << At the end of the day its the same. The only diff is that with a covered option you had to pony up some collateral to cover a potential loss. Either way you lose the money if the stock doesn't short. >>> I have to disagree with you here. With a covered call the only thing at risk is opportunity cost. That is, if the stock goes to the moon, then you don't get to participate in the appreciation because you sold the rights to that possibility to someone else for the price of the call. But when selling a naked call, you have a theoretical unlimited liability. Selling a covered call is not just a matter of putting up *some* amount of collateral - it's a matter of putting up 100% collateral in the same denomination of the liability. The two are totally different situations.
Originally Posted By Mr X >>>Either way you lose the money if the stock doesn't short<<< Can you explain this further? I think what SuperDry said makes sense, you are basically "risking" further gains. But, if you are happy with a 10 percent gain or whatever, how is it that you "lose the money"? The only potential I can see for a really big loss is if the stock drops like a rock and you have to buy to close before selling off...possible but not probable(that having the call would hurt you more, I mean). In any case, I think the fact that the only options play available in sheltered accounts IS a covered call demonstrates that it is, at least in practice, less of a risk.
