Day Trading vs. Long Term Investing
I have a number of personal "Laws" that I have created over the years that I use to remind myself to be happy, to be diligent, to have fun, and etc. One of my personal favorites reads as follows:
Only when the minority becomes the majority will true change take place.
I have found this law to be applicable in almost every social setting that you can apply it to, and trading is no different.
If you have been following financial programs, newspapers or magazines recently, you have no doubt found that day/position trading is becoming the new "hot" topic of late. And the reviews have been no less than misleading, one-sided, and without objectivity. One of the great mysteries of the modern era has to be, why is it that the press is fearful of giving a complete picture of the topic at hand?
Lets take a moment to discuss trading and investing.
It seems as though it is believed that trading and investing are diametrically opposed. If diversification is needed in order to adequately "invest", then shouldn't a diversification of investment style also be used. Why not take advantage of what the market is offering on any particular day in order to minimize loss, cut cost, and perhaps end up with more shares of your favorite long position.
Many of the markets' moves hold no mystery. The Feds unexpectedly raise rates, armed conflict over seas, foreign economic crisis, unemployment numbers, or most notably, analyst comments, all of these can send the markets into a tail spin. If you are an aggressive trader or investor, most likely you are no more than minutes, or seconds, away from a quick sale and the opportunity to acquire cheaper shares minutes or days later. As a trader, you are more in tune with the markets and the news that moves those markets. Realize that his alone is a tremendous advantage if you wish to take advantage of it.
For the aggressive investor, let me offer that perhaps the best strategy is a mix buy/hold strategy and day/position trading. I have found few that would argue that day trading can be incredibly profitable if done well. Most trading detractors would argue that it is impossible to keep up a record of performance that would exceed that of a good long term portfolio. But does it have to? Trading and investing are NOT diametrically opposed. I simply look at trading as a $20 bill in the middle of the street, sure there are dangers, but if you look both ways as you have always been taught, you will be successful. I still believe in buy and hold, and trading for quick capital appreciation to further my buy and hold strategy.
Not many would argue the fact that a certain amount of skill and research is necessary to make good long term investment decisions. It is no different with trading. Take the time to learn what works, and what does not. Learn from past mistakes and allow yourself to succeed. Use a trading base of capital that you are comfortable with and allow profits from your trading activity to be rolled into long positions, thus satisfying both strategies.
Don't allow others to dictate what works for you and what doesn't. You are responsible for your own successes, and failures. Vow to be successful. Do the work necessary to become a better trader, surround yourself with similarly aligned people, and take what the market offers.
Trading is not for everyone, but then again, few things are, just make sure you look both ways.
Which flag do you fly?
The eternal struggle between the trader and the investor is as heated as any debate in any sector. The traders’ argument of "why let a stock decline 10, 20, 50% or more when you could sell it and buy it back later?" certainly has merit, as does the investors’ argument of "why take a quick 5, 10, 20% or more gain when the long term gain could be much, much better?"
There are pros and cons to each style of investing, and each should have a place in your investing strategy. What is your ultimate goal by participating it today’s markets? You must have a goal, you must have checkpoints for measurement, and you must be objective.
I have found that most individuals are either traders, or investors, by nature. Similar to that of Las Vegas style gambling, either you play the tables, or you play the slots, rarely does one do both. But despite which strategy appeals to you most, you must be objective enough to see the benefits on the other side of the fence.
Let me be particularly blunt here; very, very few traders will succeed, and of those that do, very few will amass enough money to retire with. But, those that are still young enough, and those that are willing to take long term positions when an opportunity presents itself, can become wealthy over time. Objectively, it is that simple.
I am a trader by nature, but realize the benefits of long-term buy and hold. As pointed out here, and in my earlier article, I have adopted both into my current strategy. But I did not learn this by watching, or listening to, others as I should have, I learned this the hard way………..through experience. I bought 500 AOL on the first day of its IPO, at 11 ½. I sold not long after at 13 ¾. I owned 300 CSCO at 22, the first time around, I sold at 33. MSFT at 26, INTC at 25, DELL at 11, the list goes on. Take the 500 AOL, adjust for splits, and tell me what you come up with?
Realize that each decade presents new opportunities. You have NOT missed the boat, there is always another one. The stellar gains of AOL, MSFT, INTC, DELL, are in the past and while opportunities still exist with these issues, the same performance does not.
The power of the stock split is not given enough attention. A stock split of an individual’s favorite, well performing issue, allows that investor to gain a large amount of stock over a long period of time. This fact presents a tremendous opportunity, but you must be able to see past short-term results; you cannot realize the compounding power of stock splits if you trade for a living, the odds are against you.
Acknowledge your nature, whether trader or investor. If you are a trader, and are successful, spend the time necessary to find those issues that have the greatest potential to become the next AOL, MSFT, DELL, etc; the next issues are out there now. Allocate a certain percentage to long term buy and hold. Not every long-term position will perform well over the long haul, but how many does it take for you to realize the true benefits of long term investing?