Some categories of sin stocks include tobacco, cannabis, alcohol, firearms, and gambling, to name a few. The term “sin stock” is also subjective to one’s political stance and what they categorize as controversial or not. Personally, I believe a sin stock can be part of a diversified portfolio to act as a systematic risk mitigator. Here are some pros and cons of sin stocks:

Sin stocks are highly resilient and profitable, making them attractive to investors looking for steady returns without unpredictable behavior. Sin stocks are known for performing successfully even during economic recessions. This can be attributed to psychological tendencies in people during economic crises. For example, high unemployment rates during a recession may lead to a higher demand for alcohol or cannabis as a coping mechanism. This results in sin stocks outperforming other sectors during a depression. Additionally, the habitual tendency of the gambling industry for example allows for steady growth of the stock. They are also dividend paying stocks. 

On the other hand, sin stocks also have disadvantages of political risk and sin taxes. Political risk goes hand in hand with regulatory risk since government policies can affect how strict regulations are for these products and also affect how heavily they are taxed. The demand for these products decreases when the sin tax is extremely high, which causes the stock to be affected as well. 

Now to answer the burning question, are sin stocks part of an ethical issue? I personally believe that putting your money into a controversial security is also the same as booking a vacation to Las Vegas; your money is being used to “support” a certain lifestyle even if your stay just consists of walking around the Strip. However, I can understand those who believe in putting your money where your conscience is. I just hope they’ve never vacationed in Vegas before or else that would be hypocritical.

Alpha

Alpha is a performance metric that represents the excess return of an investment relative to the expected return as predicted by the Capital Asset Pricing Model (CAPM). This metric determines whether an investment can ‘beat the market’ or not. A positive alpha indicates that an investment has outperformed its market-adjusted expected returns. Alpha is calculated as the difference between the actual return of the portfolio (R_p) and its expected return based on market risk, which is calculated using CAPM:

Alpha (⍺) = R_p – CAPM
CAPM = R_f + β(R_m – R_f)

R_p = Actual Portfolio Return
R_f = Risk-Free Rate
β = Beta
R_m = Market Return

Here is an example of how excess returns are calculated: An investment portfolio has returned 15% in the past year. If the risk-free rate is 2% and the market benchmark return (S&P500) is 10%, and the portfolio beta is 1.3. Has this portfolio’s return exceeded the market return?

Expected Return / CAPM = 2% + 1.3(10% – 2%) = 12.40%
Alpha = 15% – 12.40% = 2.6%

Therefore, we can determine that the positive alpha of 2.6% means the portfolio has outperformed the market.

CAPM provides an expected rate of return based on systematic risk, which serves as the benchmark to determine if an excess return, or alpha, is generated by the actual investment performance relative to this expected return.

Beta

Beta is a statistical measure that determines the volatility and correlation of an asset compared to the rest of the market. Like we discussed above, beta is a component of the Capital Asset Pricing Model since the beta is the systematic risk that is accounted for when calculating expected return. A beta of 1 represents the market (S&P500) and a beta above 1 means the stock is more volatile than the market and has a strong positive correlation to market movements. A beta of less than 1 means the stock is less volatile and represents a weaker correlation. 

Active investors can utilize beta to manage risk, and leverage market movements for higher returns. For example, mixing low-beta stocks into a portfolio with high-beta stocks can act as a buffer against extreme losses. Additionally, active investors can make the best out of bullish and bearish systematic market trends to fill the portfolio with high-beta stocks during the bull market and low-beta stocks during the bear market.

Sharpe Ratio

Sharpe ratio is a metric that allows investors to assess the performance of an investment relative to its risk. For example, investors can measure how much excess return they are receiving for the extra volatility they are enduring from investing in a riskier asset. The Sharpe ratio accounts for the portfolio return, the risk free rate, and the standard deviation in a formula as follows:

(R_p – R_f) / σ_p

R_p = Actual Portfolio Return
R_f = Risk-Free Rate
σ_p = Standard Deviation of Excess Returns

I will not delve too deep into the relationship standard deviation has in active investing, but it basically measures how much an asset’s return will vary from the average return. The higher the Sharpe ratio is, the higher the portfolio return is for each unit of risk taken. Active investors can utilize Sharpe ratio for portfolio optimization. This is the strategy of adjusting the weightage of each asset in a portfolio to achieve the highest return with the lowest risk. For example, an investor can pick a handful of stocks in different sectors and can choose to invest $100k overall for all these assets. Optimizing this portfolio would involve investing more money in certain assets and less in others so it is weighted according to highest return and lowest risk. 

Pros & Cons of IPO Investing

IPOs allow investors to get an early head start on a stock when they have enough knowledge about the company to invest and could potentially make high returns. Additionally, increased media coverage about the IPO can provide up-to-date information about the company and the status of the brand new stock. On the other hand, IPOs can also be dangerous to invest in due to lack of financial information. Many traders depend on long term financial data accumulated over time to evaluate a stock, such as financial ratios and other statements, and the lack of this information does not reveal a stock’s true potential; this is why IPOs are mainly for the short term only. 

How to Invest in IPO

When dealing with great uncertainty, investors should take advantage of research, risk tolerance, and investing goals. Having as much information as possible about a company’s industry trends, competition, and overall potential can give investors a big picture even without specific financials. For example, Better.com’s layoffs or lack of proper leadership are crucial for the future of the stock. When investing in the unknown, only investing money that you can tolerate losing can soften the blow of a bad IPO with significant losses. Finally, evaluating whether your investing goals are long-term or short-term can determine whether IPO investing aligns with your goals, since it is mainly for the short-term.

The Banking Industry

The banking industry’s first revolutionization through fintech allowed financial services such as payments, transfers, balance checks, and more to be done completely digitally. Combined with AI, we now have capabilities in personalized customer service, fraud detection, and financial data modeling. For example, advanced customer service technologies allow quicker problem resolution instead of having to speak to a representative on the phone. AI’s ability to “learn” through patterns has been a game changer for fraud detection to warn users of unusually large transactions or other suspicious activity based on deviation from usual habits. Finally, since AI is extremely useful for handling large amounts of data to automate tasks, features such as instantaneous credit score calculations and predictions are provided to users.

Investing

In addition to managing your money, AI and fintech advancements can be utilized to grow your money in the stock market, without the glass ceiling that is human psychology and bias. Recently, I was researching algorithm trading APIs which have given the speed and strategizing of placing trades an infinite upper bound. AI’s ability to identify and analyze patterns by referring to hundreds of market data sources gives it an upper hand over the human brain due to its accuracy and efficiency. AI can replicate the most human tendency of decision making to make trading decisions. Additionally, AI takes advantage of minute changes in stock prices that happen in the span of milliseconds to place trades. 

Emotional Trading

Could fluctuations in your emotions be more detrimental than fluctuations in the market? The answer is yes. Impulsive decision making due to fear of loss or overconfidence about gains could often have the opposite effect through panic selling or buying too many shares during the bear market. Short-term variations in the market could act as background noise that is hampering your long-term investment success, leading to emotional trading. Additionally, many investors who experience losses might indulge in revenge trading, which is the act of overcompensating a loss through buying excessive shares without a set plan. 

FOMO

Articles titled “Top 10 Stocks That Will Skyrocket in July 2023” may be the reason why your investments are not going anywhere. There are hundreds of speculative articles that utilize clickbait titles to fuel investors’ fear of missing out, influencing them into jumping on a certain stock’s bandwagon to secure a gain. However, no one can predict the future of a stock, and this is just a marketing strategy. 

Herd Mentality

2021’s GameStop phenomenon was the epitome of how human psychology drove stocks and how following the herd could be a very dangerous strategy for investment.  Conversations about buying or selling GameStop on websites such as Reddit led to many amateur investors believing strangers’ advice on the internet solely because thousands of people were following the same strategy. 

Bias

Bias is our brain’s unconscious tendency to understand material quicker with less information. Traders who fail to find and follow accurate research will often subconsciously submit to some biases such as confirmation bias, recency bias, and loss aversion bias. Investors who view the stock market’s behavior as a self-fulfilling prophecy will fall prey to confirmation bias by only consuming research supporting their beliefs. This tunnel vision trading strategy does not embrace the unpredictability of the market. On the other hand, traders with a recency bias would generalize short-term trends as a pattern that would continue in the long-term as well. These investments could have a bullish trend at the moment due to a current event, for example, but could take a sharp bearish turn in the future. Finally, loss-aversion trading follows a tip-toe approach around larger investments, usually after a significant loss. Trading solely to avoid losses causes investors to stop viewing investing as a big picture. 

CD or Savings Account?

CDs and savings accounts are two ways to grow your money risk-free, and each method has its regulations. Most CDs require a minimum amount of money to open, and do not allow withdrawals for a specific amount of time, without payment of a fee. Even though CDs have the highest interest rates, this option was not the most ideal for me without a traditional savings account on the side to make withdrawals freely. Savings accounts tend to have lower interest rates than CDs, and allow withdrawals whenever, so I decided to choose this option. 

Brokerage Accounts

Brokerage accounts allow individuals to multiply their money faster and at higher rates depending on experience and strategy, but are met with general stock market risk that is highly variable. I invested some of my money into the stock market as a learning opportunity and maintained a diversified portfolio of index funds and individual stocks as well to reduce risk.  

Debit or Credit Cards?

After setting up my savings accounts, I was deciding between a sole debit card or the combination of a debit and credit card. I was particular about building credit, and realized that a credit card would also allow me to budget based on my credit limit and earn cashback. In order to make every payment on time, I set up automated payments at the earliest date, and also made sure to have sufficient funds in my savings account that was always more than my credit limit so I could pay it off fully every single time. 

Last month, I was able to have several very successful trades from the Apple stock after following this strategy. I noticed that AAPL would often reach its day’s lowest price towards closing, so I would place a limit buy order in that range. I would then place a limit sell order that was at a realistic price in accordance with the day’s range. For example, if today’s highest price was at 191.50, I would order at a limit that is a little above or below that number depending on whether the trend for the last few weeks has been bullish or bearish. Observing after hours is also a helpful strategy to determine this value. I have noticed that underestimating highs and overestimating lows has always been a safe mindset while trading. 

This “wave” pattern that certain stocks go through on a daily basis can be a great opportunity to pursue a long-term scalping strategy that leads to significant gains over a span of a few days to weeks. 

Financial Ratios

Financial ratios of a company’s historical data can act like bubble wrap for your potential investments. Let’s start with Verizon’s P/E ratio at 7.69, which seems to be low compared to other stocks in the sector such as Meta with an earnings ratio at 24.69. For investors, this means that they could make around 3x the profit by investing in Meta compared to Verizon. Next, let’s discuss the general volatility of the stock with the beta. Verizon’s beta is at 0.34, which is significantly lower than the rest of the market, which might initially seem like a green flag. However, an extremely low beta is a Trojan horse circumstance for extremely low returns. Meta’s beta at 1.18 might be intimidating for investors, but it can lead to high returns. 

Communications Sector

The communications sector is an integral part of the U.S. economy, and it consists of all publicly traded companies that provide wireless, cellular, fixed-line, and other communication services. This sector is weighted at 7.3% of the S&P 500. In 2022, the communications sector severely underperformed the S&P 500 with a loss at around 35%, but the first quarter of 2023 has been a significant rebound for this sector with Meta and Netflix stocks skyrocketing. Since the communications sector is heavily weighted with Alphabet and Meta, its performance is considerably determined by these cyclical stocks. 

Takeaway

The lack of sufficient volatility in a stock could never really lead to high enough profits, unless utilizing a strategy such as scalping that involves the accumulation of small trading profits that snowball into sufficient gains; however, this could also be very time consuming. Nevertheless, Verizon’s dividend payout at around $0.65 per share still makes it an attractive investment solely depending on where an investor’s priorities lie. 

Tuition

General education at a four year university is a marked up version of the exact same education you can find at a community college. As a Cal State student who still wanted to utilize the prospects of my four year university while saving tuition money, being dually enrolled in a community college for general education and taking major requirements at my four year university allowed me to finish these requirements in one year instead of two, while saving a year of GE tuition which is around 8k. 

Food

There ain’t no such thing as a free lunch, and this phrase is literal as a college student. Housing and food tend to occupy a large portion of a student’s expenses, and tend to be overpriced. Dining options are embellished with fancy phrasing such as “swipes per week,” to convince students that they are getting the best bang for their buck, but let’s do the math:

California State University dining options range from $1500 for 90 entries into the dining commons, which is around $16.67 per meal, and 90 entries are not even enough for the whole semester. 90 entries would last for only about a month if a student was having 3 meals per day. Assuming there are around 20 weeks per semester at a university, spending around $50-$70 per week on groceries would still only add up to around $1000-$1400 for the entire semester, and increases control over your food options and for dietary restrictions. 

Even “best value” options that allow unlimited entry for around $2500 per semester have a weekly expense of around $125 in food. 

Housing

Residing in on-campus housing is highly romanticized for being one of the best social experiences in college, but the real hack lies in adjacent off-campus housing. Getting a larger room for half the price and not having an RA sound too good to be true, but hear me out. Double room occupancies have a semester rent of around $6400 and triple room occupancies have a semester rent of around $5500. These rooms are usually around 17”x10”, but sharing a room means that only half or even a third of it is your personal space, depending on whether it is a double or triple. The monthly rent for a double or triple adds up to around $1375-$1600. Off campus housing in very close proximity to the university ranges anywhere from $700-$1200 a month for single occupancy rooms that often tend to be larger than what university housing offers, resulting in around $2800-$4800 in rent for the entire semester.

These are some of the personal finance decisions I made my first few years of college. Your mileage may vary.