Comment by papeda
6 years ago
Somewhat meta comment, when I read all the conflicting recommendations here (seriously, for almost all recommendations there’s an anti-recommendation somewhere in this thread), it makes me question the value to me in really trying to understand the financial system.
I mean, I’m not completely financially illiterate. I understand compound interest. I stick with sinking most of my money into passive investing, saving x months of expenses in checking for surprises, and not accumulating any debt.
Every now and then I think about getting back into value investing (it was fun in high school) which is a little more active, but the effort required to understand this system seems enormous/impossible. There are simplified expositions of how to read a balance sheet, but then I run into weird edge cases of financial trickery that I’d never be aware of. So I figure I can’t compete with pros and passive investing seems like a reasonable enough approximation in the long run.
When I compare it to all of the other stuff I could learn or skills I could acquire in the same time, so far “learning about the financial system” is so messy and uncertain to me that I never really pursue it.
Has anybody run into this issue? What did you decide?
Yeah, I would make a distinction between learning about the financial system for investment purposes- which as a non-professional in that space I think is pointless- vs learning about to understand what's happening in the world.
Whatever domain you're in, whatever interests you have- having something of a model of the financial machinery that basically underlies all human activity, both in the small and in the large, I would argue is super valuable.
The space is ENORMOUS and incredibly complex and so one has to have a plan and some kind of motivation for carving a path through it, to be sure.
Hard to engage with more specifics without more context, happy to continue the conversation.
> Whatever domain you're in, whatever interests you have- having something of a model of the financial machinery that basically underlies all human activity, both in the small and in the large, I would argue is super valuable.
What’s strange is I’m generally in favor of “staying informed”. But I typically skip most financial news. For example, looking at last week’s issue of The Economist, there are several articles in the finance section. I summarized these below, but my reaction to most is “yup, sounds like the logic I saw in my first-year econ class”.
Maybe my issue is that I rarely feel like I learn anything from these articles; they mostly read as applications of basic theory that might work. In this case, my read on finance is there’s a set of basic principles that explain most of the decisions made and then just beyond that lies an enormous set of more complex but also controversial material.
In contrast, I think of other areas as having a lot of “basic information” that I don’t know, with the controversial bits much further out. So if I’m trying to accumulate useful and relatively uncontroversial info, finance is not the best place.
(Those summaries:
1. interest rate cuts may not suffice to avert recession, governments may add in spending, tax cuts, and credit to banks to increase liquidity
2. fear has led to price increases for safe haven assets like gold, bonds, and stable currencies and drops for economic activity trackers like oil and copper; share price changes have varied depending on debt levels and how different companies are expected to react to societal slowdowns
3. might be a good idea to pivot between stocks and bonds as market rises or falls; downturns can be opportunities if your horizon is long enough
4. if the economy slows, how should banks deal with reduced payment abilities, especially when they may be legally required to not have too many bad-looking liabilities?
5. something about corporate bond trading [this one was most confusing]
6. some special bonds offer yields to investors with the catch that if some defined disaster strikes the investors will not get money back; these bonds have not yet been useful to covid because of stringent conditions on duration and impact of the disaster before payout, and complications of prevention (countries who respond well may get paid less)
7. covid has particularly hurt commodities markets, and by extension economies that rely on commodities (like Saudi Arabia))
Hear you- it sounds like you have a sufficiently rich mental model that the reports "make sense"- some semantics/meaning are conveyed. They might even "sound obvious"- why is X even news? Etc.
That's a tough place to be- on the usual models of learning curves for a practitioner that's right at the edge of transitioning out of beginner. A lot of people who are "book smart" are here.
In order to learn more, to actually get out of beginner stage, brains need to practice. They need to DO. You would need to find a problem to work on that causes you to produce not just consume.
Does that make sense? Hope that's helpful and not offensive, all comments intended to be positive/growth mindset/supportive.
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> So I figure I can’t compete with pros and passive investing seems like a reasonable enough approximation in the long run.
It sounds like you’re conflating making good investment decisions with understanding the financial system. For me, understanding the financial system means understanding how banks, insurance companies, and pension funds work, how they interact with government (e.g. the central bank), and also knowing a bit about financial plumbing.
That’s not necessary or sufficient for making good investments!
You'll find that even in the hard sciences, which are more objective many times over than the social sciences. Any complex field is going to generate controversy. That doesn't mean it isn't worth learning about.
That said, you should know why you're studying finance if you're going to spend the time on it. For me intellectual curiosity is a good enough motivator. It also helps me evaluate claims made by, for example, public officials. But I think it is reasonable to question whether it will significantly improve your personal financial situation.