November 10th, 2020

Applicable Knowledge

The search for useful knowledge in finance and money as the intersection of finance and technology continue to evolve.  

The search for applicable knowledge in finance is very convoluted and challenging for investors of all experience levels.  There's no shortage of information outlets, but there's a substantive shortage of applicable information (so much financial information should be classified as 'noise' with limited real life applicability). There may be no industry in the world that's as concentrated in the centralization of useful and applicable information (held by a very few groups/individuals) as finance and money management. In this blog post we'll address decentralizing financial information and what that could lead to for everyday investors. 

Why is information hoarded (concentrated) in a tight subset of the financial industry?  There are many reasons why you could explain the concentration, but they'd all be subjective and not useful to us here. For the sake of this post, let's assume that why information has been hoarded is irrelevant. How do we decentralize useful financial information and money management techniques and knowledge? We must start by creating a basic ladder of general financial knowledge. If we were to start with a blueprint to learn – what would it be?  If we had a baseline to expand our financial knowledge through decentralized mediums and techniques who where would it start?  We've ventured to create a generic baseline blueprint below:


Our basic blueprint for a decentralized understanding of finance and money management would be based on answering these questions for yourself and reviewing these steps and associated principles: 

1. What is money?  How does money work?  If you can't answer what money is, then you are not ready to get started in your financial journey.  You also won't be able to value your own works and productions each day the way that you should. Beginning with a common understanding of what money is should be a prominent baseline for all investors, especially beginners. 

2. What is debt?  How does debt work?  Debt is one of the most misunderstood concepts in finance by everyday investors. Since we live in a debt-based economy (which means that our banking system is built on fractional reserve lending), we're constantly surrounded by a narrative of debt and debt consumption, and the majority of these narratives are pro-debt narratives. Did you know that when you deposit $1 into your bank account, the bank where you deposited can loan $10 dollars out to others for that $1 that they hold in reserves? This might seem scary to think about for a second, but it has both pros (growth is very unlimited in this system) and cons (there's not enough collateral without lenders of last resort if things get very bad and everyone wants their dollars back at the same time). Debt at useful levels (strategic borrowing) is a good thing but overloaded amounts of debt for purchases that depreciate (consumer debt) is generally a bad thing. Regardless, you have to understand debt and how it works and functions if you want to be a good investor. 

3. How do I save money?  Savings is the first step before investing. If you're just starting to invest or thinking about investing, we'd suggest you actively save first. You must evaluate your personal finances to calculate how much is going out the door (expenses) versus how much is coming in (wages/earnings).  If you're able to get your expenses less than your wages/earnings, then you're 'earning a profit' as they say in business. Once you get to a point where you're earning regular profits, then you'd progressively look to invest your profits into markets in order to earn a return that helps compound your savings.  

4. How do the markets (stocks, bonds, forex, etc.) work?  Is there a short answer? The stock market (like all markets) is where buyers and sellers meet to do business and buy and sell things to one another. The stock markets of the world provide the exchange of stocks of publicly listed companies. This transfers liquidity from buyers and sellers (cash from the sale and exchange of stocks) to theoretically place money into the best capital allocators (increased prices and liquidity). Conversely, it also facilitates the money flow out of those capital allocatators that are not deserving of liquidity (stocks that go down are seeing liquidity drain). Over time, there's been a theory of efficient markets, which states that market participants have all the information that they need at all times to make good decisions.  This has largely been debunked. If anything, markets have proven to be massively inefficient because of the sentiment factor. Sentiment is like putting Nitrous Oxide (NoS) in a car and can irrationally impact investment decisions. In the short run, markets resemble a popularity contest. And in the long run, they're much more of a truth serum of value for where you place your money.  

5. What are the typical market investments that I can make?  What are the securities that I can invest my money into?  You can invest in stocks (shares of publicly traded companies), bonds (a loan to a corporation, municipality, or government while guaranteeing pay back of your principal and interest at a future date), options (contracts that give you the right to buy or sell an underlying security), ETFs (exchange traded funds), mutual funds (aggregations of money from many investors into a specific asset class), futures (contracts with the right to buy or sell a commodity at a set date in the future), and others instruments (like swaps, derivatives, etc.)

6. What type of account should I use to start investing?  You'll want to work with a digital brokerage account where you'd ideally like to stay with for a long time. We'd encourage you to take a look at all the brokerages available, not just the ones where you can 'click to trade for free' – because as they say, if you are not paying for the product, you are the product. Once you have a brokerage account and have begun to funnel your savings there, then you're ready to begin investing.

7. I am ready to invest, where should I look first? Start with identifying your risk tolerance. Most of the things that you'll read, hear, or see, jump straight to investments themselves or how to evaluate them. Although these are logical steps in the process, you first must determine your risk tolerance (i.e., What do you think about risk?). It's very important to define this first because risk matters. Try to think about how you feel when you loose money and how you'd classify yourself. If you're very afraid to lose money, you have risk aversion. If you have risk aversion, then it's very logical for you to invest in things that are low in volatility. This reduces your chances of being upset by large changes in the value of the securities you hold because they're less likely to happen when investing in low volatility securities. Defining your risk tolerance is the first step once you're ready to invest in the markets. 

8. I now have my risk tolerance assessed, so how do I start building a portfolio?  Regardless of what anyone will tell you, this is a totally independent journey. No matter what you do, you'll have to educate yourself on at the least the very basics of the different securities and what they do and don't offer. This applies to all securities, from stocks, bonds and options, to ETFs, mutual munds, futures, etc. What's best for you? It's a 'choose your own adventure' kind of thing. That's why knowing your risk tolerance and starting from there is your first step, but don't be afraid. You can and will be successful if you start on sound footing (assessing and identifying your risk tolerance). Assuming you're ready to build a portfolio, then you need to ask yourself and answer some questions about what your personal situation is, what your time frames are (how long you want to hold securities), and what you end goals are. Then you can begin looking for investments. 

9. How do I start searching for investments to acquire?  One thing is for certain, there is no shortage of investments available these days.  But all investments are not created equally. You should use the's Explore search to help you start. The Explore search is built with a quantitative mathematics engine behind it to analyze a stock, mutual fund, or ETF against its peers.  It features a scoring system that let's you know exactly how each security has been performing against similar securities. How do we know what its peers are?  When listing a securiity, the markets provide it with a classification. This allows us to look at every classification, and the securities within them, and compare the securities against one another. We then use a volatility scoring system which measures how much a security's price moves and how violently (or not) it moves up and down, resulting in a 'volatility rating'.  Ideally, you'll want to look for securities that are outperforming their peers and have a volatility rating that matches your risk management style. When you find an investment match for yourself, then you're ready to acquire the security.

10. When do I buy?  Once you're ready to acquire your security, you might be wondering when to buy it. If you bought in the bottom of 2009, you'd have really done well. Adversely, if you'd bought in 2008 before the market crashed, you may still be up now 11 years later, but your returns wouldn't have been as good and you'd have been in for a gut-wrenching ride. There's no exact formula to finding the best times to buy and sell, however, with's Live Charts module along with our vSPACE algorithms like VPOC, FVGs, and MOMENTUM, you can look for trends in your desired security (whether it is trending in a bullish or bearish market), levels at which an entry or an exit can take place (supply and demand), the volume levels where the majority of investors find good value in the stock (volume points of control), and what the momentum is with the security that you're evaluating. If you can use our easy-to-understand,functional tools via the Live Charts module, then you can look to make entries and exits in the market that could have higher probabilities of returns over time, even if you are a long-term buy and hold investor.

11. So I bought, now what? Can I insure my securities and if so, should I?  Great, you executed a trade and acquired some securities for investment.  Assuming you know your time frame for holding them, then you can take a look at the insurance side of managing your portfolio. Insurance? Didn't know that existed for securities? Well, it does for most (especially securities traded in high volumes) by way of options. This is where's Options Matrix comes in handy for you. Just head to the Options Matrix and click 'Portfolio' strategies, then enter your security and your time frame for that option. The Options Lab will then run scans through the entire options universe for that security and bring you back some insurance strategies you can use if you're looking to protect your investment. It's that easy.

12. How do you successfully monitor your investments? The last piece of the investing process is monitoring your investments properly and understanding that nothing goes up perpetually over a long enough time horizon. There's one caveat to that statement, however: indexes (like the S&P 500 and the Nasdaq) do something called rebalancing. Rebalancing means nothing more than throwing out the losers and pulling in another winner to replace them. This does help to increase the returns of the index over time (which is logical because the index would never be weighed down by a few poor performers). The reality is that there are many periods where the macroeconomic environment does have challenges that are greater than indexing rebalancing process can fix (and sometimes more rapidly than an indexing rebalancing process can address). This actually happens fairly regularly. For example, in 2001, 2008, 2012, 2015, an 2018 to name a few instanes. Economists refer to these challenges as corrections...but we refer to them as 'repricing events'.  The term 'correction' implies that the price is correcting and will soon return to it's current state. But that's misleading. It's misleading because the factual statement is that it is being 'repriced' by the market participants (remember our buyers and sellers from earlier). When things get repriced, then can continue to be repriced as market participants don't all necessarily think the same thing at the same time. There's no guarantee at any time that things are only ever 'correcting'. This is why it's important to monitor the levels of the market, the bull and bear pivots, and volume points of control of the security that you are holding. These help you determine if a repricing is just repricing or if it's more than repricing.  Depending on your time frame of investing (how long you're actively looking to hold investments), monitor your stocks based on that time frame. For example, if you're holding for years, looking at daily price fluctuations might not make the most sense. Conversely, if you're trying to profit from a stock in a more short-term time frame, then monitor daily price moves or even intra-day price fluctuations. 

13. Rinse and repeat. Knowing that investing will be a never ending journey, how do you make sure to stay the course?  Investing is truly a journey, it's not a destination. Thinking in absolutes is the worst thing you can do with investing because there are no definitive outcomes. You have to think in probabilities.  hese probabilities keep you honest and realistic with yourself and your objectives. You're responsible for your approach and the tools and resources you choose to use to help you invest. Focus on winning the larger game and pay attention to the benchmark tool in our Portfolio module to help you. If you're not beating the benchmark indexes regularly, then reevaluate your strategies and keep learning and evolving as an investor.  

This baseline blueprint is really just basic 'starter pack' for investing and money management. We wrote it to be simple, short, and applicable. There is much, much more you can learn and much, more for us to share. If you're interested in digging much deeper down the investing knowledge rabbit hole right now, visit our knowledgebase. It's free for everyone to access and has details on the inner workings of every facet of market investing, ranging from options calculations, greeks, and technical analysis, to futures, derivatives, portfolio building, and more. Check it out! Applied Science
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