After years in the stock market, I still can't really figure out whether it is better to trade stocks for the short term or to just buy and hold them for the long term.
I have heard both sides of the arguments, have read books like A Random Walk Down Wall Street, and I must say - I agree with both TAs and FAs.
But I guess I will just choose the method that works best in making money.
While a stock might rise from $1 to $1.20 in 1 month, the person who holds the stock for 1 month only stands to earn a maximum of $200 per lot of shares.
The person who trades on the down and up trends might however be able to earn more than $200. By going in and out of the same stock, his POTENTIAL to earn is much higher. The probability that he losses money is of course also much higher compared to just holding on to the stock.
So what I do is to have two portfolios: One for holding and one for trading.
I enjoy the best of both worlds. There are benefits of buying and holding and there are benefits of trading. By doing both at the same time, I enjoy both benefits.
In addition, trading provides a form of income. More income brings me to financial freedom much faster.
The tortoise might win at the end of the day but the hare leads most of the way.
I believe that people can combine both approaches to bring out the best of both FA and TA.
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Good post. In a way you have described my confusion when I first stepped into the Stock Market back in 2004. No guidance, no advice and no learning. It's just trip, stumble, make mistakes and learn.
ReplyDeleteWhile it's certainly a wonderfully delicious concept to combine both TA and FA, I have yet to see a person do so successfully and consistently. The closest I have heard of is the CANSLIM method, and practitioners swear by it. Without proper and detailed record-keeping, one cannot know if they had consistently made money (counting brokerage of course).
Well, you know the story of how 95% of traders lose money, so I won't repeat it. While TA does look like a very enticing form of income generation, note that most of the time it simply lets you lose money just as quickly. If you factor in the brokerage then the "OUCH" factor really kicks in. Maybe I am biased, but I have yet to meet a short-term trader who has made money over the years.
In the flip side, FA can get you the right company but most people don't bother to monitor, assess and analyze; and in the end they become forced buy and hold as the price tumbles.
So if you want a fair comparison, yes both methods can work equally well. But the main wild card here is YOU. You have to put in the hard work and effort to make either method work, and there's no short cuts.
While I will always (of course) advocate buy and hold and value investing, there's no harm in trying out TA and having a "trading" portfolio. Just make sure you keep losses manageable and keep a detailed record to see how you have fared.
Good luck !
Musicwhiz
It all depends on your temperament. Some people are more suitable as traders , some are more suitable being investors.
ReplyDeleteSo you really need to get a feel of what you think suits you better.
For myself, I just cannot trade. I don't know why but I just cannot convince myself that I will buy something based on price action alone today and sell tomorrow for 3% or 10% profit.
But I have since settled my investment philosophy after reading and analysing successful investors and found buy and hold for the market cycle might be one of the ways to combine trend following and value investing.
Whether I will be successful implementing it will only be known in the next crash?
Hi MW and WJ,
ReplyDeleteThanks for sharing your experiences.
I guess our mentality to investing depends alot on our personal experience as well as the books that we read.
I guess that there is really no concrete way to figure out which is actually the best method.
Thanks for sharing your insights. It is really much appreciated as sometimes, I can have a very narrow view of things.
It is always good to hear from the experiences of people so that I can learn.
Here..this quote sort of crystallized how I wanted to get in and out of an investment.
ReplyDeleteI got this quote below from Howard Marks of OakTree Capital :-
"In my opinion, there are two key concepts that investors must master: Value and Cycles. For each asset you're considering, you must have a strongly held view of its intrinsic value. When its price is below that value, it's generally a buy. When it's price is higher, it's a sell. In a nutshell, that's value investing.
But values aren't fixed; they move in repsonse to changes in the economy. Thus, cyclical considerations influence an asset's current value. Value depends on earnings, for example, and earnings are shaped by the ecnomic cycle and the price being charged for liquidity"
Now.. did you find this applicable during this credit crisis?
My views are different. I would say following the trend is the most important, i.e. don't buy when the probability is not to your favour.
ReplyDeleteAn example of a chart at my blog
http://1.bp.blogspot.com/_MpWUhDNsH98/Stdi1Nq3_GI/AAAAAAAAAyo/M0IcFerppTM/s1600-h/STI+monthly+chart.JPG
However, by doing prudent FA like MW, you would likely discover too that at the longer term resistance lines I plotted, most stocks will typically have unfavourable P/E and P/B ratios too...
My chart is an example that between 2006 and 2008, STI was crazy to go above the red line.
The red line that I drew also showed fundamental analysis as well... that is... in the long run, index should go up... In A level Economics, we call this growing the Production Possibility Curve (PPC)...
Good post... You gave me an idea to write a post/article on combining TA and FA together with these sort of scenarios... Thanks!
Thanks for all the comments.
ReplyDeleteI guess we have the rest of our lives to debate which is actually the best method =)
Only time will tell and perhaps we will all be much wiser then =)
What about buying and holding not forever but it could be for some time. Their are stocks like petsmart that traded at 2 dollars a share 11 years ago now the stocks almost fifty. Also pricesmart traded at about 7 dollars a share about seven or eight ago now its almost around sixty dollars. Their are many other examples Apple computer traded ar only 5 dollars a share in 1998 now its over 400. These stocks are being held quite a long time generally speaking I would say four to six years would be about right as far as buy and hold go. I have a website where I have been following stocks under five dollars. I generally hold my stocks anywhere form 3 to 6 years.
ReplyDelete