December 27, 2009

How I Came to the Study of Economics

I began to become interested in economics, finance, and investing in January of 2008. I read here and there on the stock market, index funds, fundamental analysis of securities, technical analysis of price charts, the foreign exchange markets, and later options trading. I read on websites and web forums and when I encountered a term that was new to me, I searched for it elsewhere, defined it, found it in common usage and attempted to understand the concept that it represented. I used a stock screener to identify a few companies to begin to research, then I read everything I could find on the internet about those half dozen or so companies and their stock. I poured over their charts, analyst opinions, earnings reports, their industries as a whole and their competitors. Then I made predictions of their price movements in the market and began to track my predictions and adjust. That was my way of teaching myself learning how to play the market.

I found the FOREX market more difficult to apply this method to, even after coming to understand how the market itself operates (no small feat when considering the complexities of 100:1 leverage, fiat currencies, and such things as carry trades) so I stayed with the stock market, only branching out to options earlier this year. I have only ventured into the selling of covered call options, a very conservative and safe strategy that has netted me significant profits this year, and I have yet to buy and sell options for pure speculation. I will soon though, but I don't have the time now to master time-decay, delta, beta and the numerous other arcane technical aspects of options price fluctuations.

I have made several very costly (over $500 each) blunders in my learning process, but I was able to recover from each of them within several weeks. Looking back at this year, I could have done a lot better if I had taken more risk, if I had been able to see the future, or if I had done a myriad other simple things that were impossible to see at the time. Even so, my account has grown considerably this year, this year of financial hardship. I didn't see the 40% drawdown in my account that others did, that destroyed so many retirement accounts. Looking back over my performance, I achieved approximately 35% or so gain, but it isn't fair to calculate it all from the beginning, because I began with only $600 and most of the money that I put in, went in this year. In short, the actual percentage gain is over 35% (and is pulled down by over $1,200 in losses from two bad trades that ate into my profits).

Why the interest in economics? At first, it was the realization that I had very little money and a lot of debt in a world where money matters. But then I quickly came to the realization that economics is far more than just the naked lust for money. Economics describes the behavior of humans as they interact in a productive manner. Economics describes, models, and directs human energy in all its forms. We can have theories of economics without recourse to money of any sort. But money is the currency (words begin to fail me a this point) or the medium of exchange, the fluid by which the energy of human endeavor is transmitted, stored, and distributed. Economics, I realized, underlies in a very basic way what life is all about, just as physics and chemistry lie beneath the natural world. We still look to biology and sociology to model plant, animal and human behaviors and societies, but on a some level, economics explains their fundamental interactions in a very important way. Sure, we could speak of the economics or a termite mound, but here I deviate from my point. Economics is the study of human production and the currents of human energy in its many forms.

My interest in economics naturally corresponds to my desire to understand the world (and to exert some amount of control over that world as well). Additionally, I have always been attracted to the notion that by dint of mental processes alone I could solve some problem or vanquish some foe (the game or chess and the tying of unbreakable knots are my two favorite analogies in this arena) and when faced with the modern iteration of the stock market, I suspected that I found just such a challenge. With the caveat that, due to insufficient data, there is an unavoidable random factor involved, I have found the stock market to be just the intellectual challenge I had hoped it would be. Through my trading--reading charts, following news, interpreting economic indicators, following sectors--I can grow a small amount of money into a considerable sum. This has often seemed more like a game than an investment, but as long as I take the "game" seriously enough and continue to see regular and significant gains, I can accept that.

I don't pretend to any great erudition in either investing or economics. I am fascinated by it and I continue to teach myself and learn all that I can. I use it and I profit from it, both intellectually (I understand the world so much more now) and financially. It is hard for me to imagine how little of the operation of world affairs I understood before and even more difficult to fathom how little I still grasp with my limited education and experience. There are thousands of blogs in cyberspace now that have great wisdom and insight about economics and finance (Deep Capture is one I just discovered last week) and this cannot be one of them. But in the future, I will share a few small scraps of knowledge that I have come to possess in the hope that I may both educate and inspire any readers that I have.

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