INVESTING V TRADING

[whiteheron]

Almost all of what i have read concludes that over time investing in long term holds beats short term trading !!
Iam not so convinced. I have been trading for about the last 1.75 years, at first not successfully (new to game and declining markets) but over the last 1.25 years much more successfully (learned a lot and improving markets)
Even after allowing for tax i consider that trading can achieve better overall returns than investing for the long term where you have to sit and watch values go down as well as up(i believe that with trading you can take advantage of buying near the bottom of short term cycles and selling near the top) not an exact science but with regular assessment of both the overall market and individual shares i believe that it is possible to get somewhere close in most cases
Iwould be interested in hearing from others on this subject, especially those that have traded successfully over time or those that have given trading away
As i am retired i can spend about two hours per day on the sharemarket which is a real interest to me (beats playing cards, watching TV etc)
I trade online in blocks of about $5000 per trade (approx one percent total to buy and sell)

[Contrarian]

Gidday WH
I have traded since the inception of internet trading, lost money but I blame the Tech wreck, the next bear after that & most of all the two things í didn't do then but do now..
10-19% stop loss
Keep the $5ks in seperate companies, don't go greedy doubling up chasing the sure bet,there is no such thing.

[garryw]

Hi,
I have found that holding for long term investment can be a very risky business. I have sat for the last three years and watched most of my portfolio squander in the doldrums, neither up nor down. I guess the secret is either, you are bloody lucky or well informed. I am neither at this stage.

Good Luck in your retirement Whiteheron.

[Longtack]

Whiteheron (Kotuku)

Go to www.sharechat.co.nz and refer to the education section at the bottom of the menu on the left. Lots to read, learn, apply & enjoy!
I believe it's written by successful locals.
I wish you a happy, healthy, long & stimulating retirement.

[foodee]

Hi Whiteheron
Like yourself I am retired and the sharemarket provides me with an interest, some entertainment and hopefully some gains. Not qualified to give you any suggestions except you might find this quote useful...look after the downside and the upside will look after itself....Donald Trump (I think).:)

cheers

[Longtack]

Buy & Hold (if you must) strategic utilities like electricity or gas generators and sellers, airports, and near-monopolies or mkt-leaders in industries that we must have, otherwise trade using T.A.

[zyreon]

"there is no such thing as a permanent investment"

Trading
approach 1:
High frequency of turnover, low profit margin.
approach 2:
Low frequency of turnover, high profit margin.

Trading is a business.

[Halebop]

Once upon a time I'd have told you I was an investor and not a trader (and believed it when I told you!).

I follow some rules based upon some of the wisdoms written about Warren Buffett and other sources in order to identify investments. These rules are centered around fundamental analysis and the concepts of long term investment.

Looking back, however, the only investment I've ever made spanning many years rather than many months was Baycorp in the early 90's. In practice many of my "long term" investments end up being just months to a year long as I am always comparing relative value. From the outside this behaviour would most definately be considered trading. Although I find agreement with the fundamental "Buffetology" view of buying great long term business propositions and letting time do the work, in practice I find this equally irrational: If this same investment becomes relatively overvalued in the short term why not sell? Particularly if there are relatively undervalued alternatives.

Because the selection rules I follow are stringent, it can be frustrating to watch companies that don't meet enough of the criteria appreciate in value. I allow myself the luxury of screwing up by setting a portion of funds for more definate trading activities. However in truth I think this is more from boredom because these same activities are sometimes barely worth the effort (This last year being an exception) and complicate my tax return. I'm sure my broker loves me though!

[wsheridan]

quote:Originally posted by zyreon

"there is no such thing as a permanent investment"


A cemetery plot would be close to it though

[TheBossMan]

Not all short-term traders may have the personality to be patient. Also depends on your age, risk-seeking ability and current position in life.

My strategy is to look for small-cap, potentially high-growth companies. But, I trade almost twice a week for the adrenalin boost.

I don't allow the two types of shares to mix.

best of luck.

[willy_wonker]

Successful short term trading requires good information which is hard to come by. I usually go into a company with a long term view, but do take short term profits if there is one to take. Go in with a long term view and you wont get disappointed if it doesnt happen.

Good luck. :)

[thereslifeafter87]

Great companies are so hard to find, that when you find one you should stick with it until it becomes irrationally overvalued.

Otherwise you will often find yourself buying and selling at the worst possible times.

Read 'Common Stocks, Uncommon Profits' by Phillip Fisher. He was the master of this approach to investing.

I have lost a lot of money by not holding long enough - losing sight of my long term focus in chasing after what is undervalued in the short term.

But, you have to find what works for you.

[Placebo]

WH I would have thought that, being in retirement you are looking for a low-risk investment profile? Plenty of yield stocks on the NZX that offer good returns. Yes you can make a good buck trading but for me this isn't an option as I don't have the necessary time to analyse and take advantage of opportunities that arise. It's also nice to have a bit of cash sloshing about :D.

Good luck with your trading. I'd consider myself a long-termer. Sometimes it pays not to watch the boards every day...

[Phaedrus]

WW, I strongly disagree with your claim that "Successful short term trading requires good information".
I have found that successful short-term trading requires good TA skills more than anything else. Long-term, FA is more important. You need all the help you can get, so why restrict yourself to one or the other? - Use both.
I too started out with a long-term "Buy and Hold" approach (based on fundamentals) but I tired of seeing my fortunes wax and wane with the market cycles. It took some time before I was able to sit on cash and overcome the associated fear of "missing out". (For some reason I felt that I had to be 100% invested at all times).
Different timeframes require different approaches, attitudes, objectives, tools, skills, aptitudes and character traits. The answer is to find the timeframe and methods that best suit you and your current circumstances.

[Cooper]

I agree Phaedrus, the best strategy for me is to buy a share with a goal in mind and then adjust the goal as information becomes more readily available. This means that a share can turn from being a long termer to a (very) short termer in the space of a day. I've found it best not to limit myself by sticking a share into a box and leaving it there (Rip Van Winkle style) because with the internet, regulations and the ready access to most of the neccesary info the market can change it's mind very quickly and you should be in a position to do so as well.

[Cooper]

That said I'm reasonably young and have the advantage of a lot of time on my side if it all goes south...

[neopole]

im not skilled enough or confident enough to trade yet.
have been studing the market since 2000.
some of my stocks, namely FPA, GPG, PWC, WRI, which i have owned a long time, have basically just gone up, with small downward preasures now and then.
i suppose if i was trading in blocks of $20k plus on regular occasions in these four, and made no mistakes, i could have made some serious cash, - tax - broker fees etc.
but then.... i have some serious investments here!
FPA up 90%
GPG up 50 odd %
PWC up 40%
WRI up 60%
all paying good divi or bonus.
i dont think traders could beat this without some serious work or risk .
i also look for rising dogs and up and coming coys, once they get to a safe margin, say 30% up and divis start rolling in, they get put in the bottom draw. the ones that seem to go no where, or down, get looked at very carefully, to see if i should average down, hold, or sell.
so far have only sold 1 stock, AIR and am happy.
i sleep easy at night, my portfolio is growing, and i get a buzz looking for new shares to add with my divi cash.
to all you traders, i wish you good fotune, i havent the nerve or skill.
ps
i have a very spread portfolio and am carrying some losers, which i average down on once in a while... waiting for the rebound.

[TheBossMan]

"i have a very spread portfolio and am carrying some losers, which i average down on once in a while... waiting for the rebound. "

Are you holding WHS by any chance? :)

[Dimebag]

I would imagine that the effectiveness of a 'buy and hold' approach is entirely dependent on the skill of the particular actor, as I imagine an active day-to-day trading approach would be.

Buying and holding, if done incorrectly, can lead to disasterous results, as can trading stocks incorrectly without the requisite skill, system, or discipline.

I ultimately believe that the best approach for a particular individual will depend on the preferences and personality of that individual. Some people are more suited to fundamental analysis, others to trading. Its a matter of character. But if you work hard at either, and acquire some proficiency, either should enable you to achieve good results.

Beware of using recent experience as a guage of the effectiveness of an approach.

The short-term success of most approaches is critically dependent on the current state of the market. Returns are best measured in relation the market index, and over a period of at least 3-5 years.

I have used a 'buy and hold' methodology for some 3-4 years; my approach has been similar in most years, but my yearly returns have been vastly different.

In the most recent 1.25 years, as you describe, I have made some 300% as most of my small-cap holdings rebounded. This, of course, followed a 30% loss over the previous two years. Yet the approach has been virtually the same. In aggregate, I'm running at about 35% compound over 3.5 years currently.

One benefit to the buy and hold approach, however, is that it can be used when one is dealing with large amounts of money. If you are successful with your investments, and grow a portfolio of $10m or more, it is much easier to utilise your 'buy and hold' skills than any trading skills. Size quickly kills off the ability to use technical trading rules as they are only effective when you can get in and out quickly without impacting the market.

Also, buy and hold seems to offer a much better return on time. Once a goods stock is found, you can sit on it for years and years and watch the profits continue to flow. With trading, you have to watch your stocks all the time and keep working to make money. When you stop working, your profits stop. With a buy and hold, all the work is done at the outset, and then you can get, sometimes, 5-10 years of good profits for only incremental amounts of work.

Trading also, clearly, has the considerable disadvantage of attracting capital gains tax, which means you have to make 50% more profit just to put yourself in the same position as a buy and hold approach.

Ie 20% from buy and hold = 30% trading - 33% tax = 20%.

Personally I prefer buy and hold as it provides a low risk way to make considerable profits will little effort. But it's a matter of personal preference ultimately.

Dimebag

[Happy]

The simple thing on trading vs hold, is that how many billionaires exist from trading stocks - well none come to mind, and I can almost guarantee that very few of the sharetraders around the world are even in the $100m+ camp.

On the other hand many billionaires and decamillionaires exist from holding stocks - two of the best e.g. Buffet and Goldsmith jump front of mind.

However even the so called LT billionaire holders like Goldsmith and Buffet know when to sell and when to buy e.g. Goldsmith prior to 87 crash and Buffet with SSB and Coke.

Personally I generally hold for 2-3 years and have over the past 15 years done very nicely to the extent that I earn more from my investments in most years that I do in my "real" job.

[thekiwi]

quote:Originally posted by Happy

The simple thing on trading vs hold, is that how many billionaires exist from trading stocks - well none come to mind, and I can almost guarantee that very few of the sharetraders around the world are even in the $100m+ camp.

On the other hand many billionaires and decamillionaires exist from holding stocks - two of the best e.g. Buffet and Goldsmith jump front of mind.

However even the so called LT billionaire holders like Goldsmith and Buffet know when to sell and when to buy e.g. Goldsmith prior to 87 crash and Buffet with SSB and Coke.

Personally I generally hold for 2-3 years and have over the past 15 years done very nicely to the extent that I earn more from my investments in most years that I do in my "real" job.


Would you agree with the notion that there is a vert marked difference between "investing in a company" and then managing it/ running it ... and "investing in a company" by buying a few shares in it.

Have you differentiated the wealth of Buffet according to the above, ie where did he make most of his gains (ie largest)?

One notion that also has to be dispelled is that Technical based trading is by its nature short term. I trade Medium Term based solely on Technicals. I could even say that at the time of entry, I have no idea how long th ride will last ... all I do is follow the market.

[Phaedrus]

Dimebag,
I gather that you have no experience of overseas markets and little or no comprehension of their size. You claim that "[u]Size quickly kills off the ability to use technical trading rules </u>as they are only effective when you can get in and out quickly without impacting the market". Rubbish! To ensure adequate liquidity, larger investments simply require the use of more actively traded stocks. Let's say your average trade is US$1,000,000. Where the daily turnover of a heavily traded stock may be 3000 times that, what impact do you think your miserable million buck trade will have? Zero, zilch, nada, nothing. Your trade will be executed in seconds and the market will not so much as blink.
There is of course another factor here - Brokerage. With small value trades, brokerage is a significant expense. As trade size increases, there are huge economies of scale. Brokerage is the same whether the trade is for $100 or $1,000,000 ($11 with Ameritrade)
You are also making the mistake of thinking only in black/white terms, as though one must be either a "trader" an "investor". In reality there are innumerable approaches lying between these two extremes. (active investing, long-term trading, etc.)
The taxation situation is not as simple as you claim, either - some "investors" are liable for tax just as some "traders" are not.
Fortunately people have infinitely more to chose from than the simplistic trader/investor dichotomy that you describe.

[Capitalist]

Yeah Phaedrus. There is no difference between a 'trader' and an 'investor'.

"Trader" is often used as a kind of a put-down, like a trader is akin to a gambler because they don't hold for a Buffett-like eternity.The only difference between long-term and short-term investing is the length of the holding period, so let's just call short-term investing "short-term investing," because that's what it is. Costs matter, but as you say a good investor controls costs-- that is part of the skill.

[Dimebag]

Phaedrus

My opinion is that you either 'invest' in companies (i.e. you become a part owner of the business, and use the stock market simply as a medium to acquire fractional ownership in businesses), or you 'speculate' on stock prices, by using any method (be it technicals or fundamentals) to either try to predict future prices, or to predict probabilities of up or down movements.

There is no middle ground. You are either investing or you are not.

Mixing the two approaches is not possible. If you do, you are are in reality a speculator that uses technicals and fundamentals to try and predict outcomes (or probabilities, as you state). This is true because you are prepared to alter your positions based on what you anticipate will happen to the price so you must be speculating.


I agree with you re-USA markets and liquidity, but your universe of potential investments is certainly curtailed. You can't trade the small caps where a lot of profit is made.

Dimebag

[Dimebag]

PS

I would have though the comment that technicals can't be used on a larger scale would have brought credence to technical analysis.

It would justify the conspicuous lack of billionaire technical traders, yet there are numerous billionaire fundamentalists.

If technicals can be so used, why has not one person made a billion using them if they can so easily enhance an investor's return over a buy and hold approach???

Dimebag

[zyreon]

you can mix both approaches

e.g.
Personal holdings = buy and hold (investments)
set up a company withyourself as sole shareholder/director:
Company holdings = trading stock (buy/sell/buy/sell)

[Happy]

thekiwi - Buffet made most of his cash in 3 investments, Saloman SB (probably his best deal) Coke and Berkshire (well I am pretty sure that is right from when I read the books). Only in Berkshire was he actively involved in the governance and decision making. Goldsmith (now deceased) was one of the big takeover kings of the 80s and was a similar kind of guy buy cheap stuff hold it for 2-3 years and then flick it eg Perrier, Goodyear, PanAm. Neither of these guys were company builders in the classical sense eg like say Gates (Msoft) or Andy Grove (Intel).

I think you are right that there is a time and a space for when the market tells you it is the time to sell and buy, but that fundamentals pick your company for you.

[Dimebag]

Yes Buffett has always been a passive owner

Happy - he also made a lot of money out of American Express, The Washington Post Company, and GEICO (ex public company now a wholly owned subsiduary).

Buffett will readily attest that the bulk of his money was made out of a few key investments (about 10 in his lifetime I think).

[Halebop]

Keep in mind that while Buffett prefers to be a passive investor, he also engages in arbitrage and trading. It's difficult to apply Buffet methodology to his plays in Silver and more recently against the US dollar - despite the (potential) merits of these investments

Previous investments in Arcata Corporation (I think Goldsmith had a tilt at this too) and Washington Power Supply System bonds show he is not always a long term investor. He prefers to own a business that might grow 20% pa rather than make a one-off 20% gain. He'll still take the one off 20% gain in absense of the former though.

Although in the internet age there is no reason why you can't make reasonably informed fundamental analysis of companies globally I prefer to play in just Australia and New Zealand because I'm unwilling to expose myself to substantial exchange rate shifts. I do sometimes go further afield but the merits have to be compelling. This substantially restricts the gene pool on companies that might consistently offer a high return. As a consequence I tend to buy good or recovering businesses as opposed to "great" businesses because these often become too highly valued - former high flyers Brambles and Warehouse being good examples of busineses I would have liked to own at various times in the 90's but I considered were too expensive. In some ways I was wrong because their share prices appreciated from just being expensive to become stupidly expensive but when the rails came off - boy does that growth valuation get punished!

Take my only "long term" holding of Baycorp. I first started buying them in around the 40 cent mark in the early 90's. By the time I sold at $10 my returns has been spectacular. The economics of the business was still looking solid - I just considered them overvalued (Hindsight is fabulous - I guess I was wrong on the fundamentals but right on the share price). If I still held today I would be worth considerably less. And in the interim, I've had some great returns on that former Baycorp capital as well - a win / win rather than a win / lose.

[Halebop]

...And here is a fundamental thing that many people forget about Buffett's "core holdings". A substantial proportion of his current business exists from opportunistic buys of distressed assets in the past - Berkshire Hathaway itself, GEICO (A great buy!), Washington Post, Wells Fargo Etc. As the impact of these sorts of buys have lessened with the growth of the company, average returns have began to diminish. This tells me as an investor* it is purchasing great value that drives growth, not retaining businesses. Buffett's more recent strategy of emphasising the purchase of solid cashflow businesses has earned improving cash returns but not provided the same level of historic growth. So it's not buy and hold that earns the stellar results. It's buy well.

* I'll make the distinction of "investor" because as business operators the Bill Gates and Stephen Tyndalls of this world will disagree with me.

[skinny]

One thing I've always wondered about the investing vs. trading debate is the *distribution of returns* to investors using either approach. Has anyone seen any studies on this ?

Buffett is usually cited as the #1 reason why investing for the long-term is the 'best' approach. But even Buffett says its unlikely that he could repeat his past performance in todays world. In addition, I can think of a few 'traders' who while not in Buffetts league are still very wealthy (Soros and Rubin for example). What I'm angling towards here is the derivatives side of the market - in theory the leverage they provide should enable the average punter with a modest capital base, but above average skill, to make far superior returns than a simple buy and hold until intrinsic valuation in 'exceeded' (or a better buy comes along) strategy. Um I think ?

edit: traders are wealthy in London !

http://www.nzherald.co.nz/business/businessstorydisplay.cfm?storyID=3572723&thesection=business&thesubsection=general&thesecondsubsection=&thetickercode=

[Nimble]

I recently read that up to 40% of Buffett's partnerships funds in the early years were invested in arbitrage or workout situations (shorter term trades). Profits from these saved him in years when his longer term investments were falling in value along with the rest of the market. He was of the opinion the arbitrage workout category of investment would produce, year to year, the most steady and absolute profits for the partnership, giving the partnership a considerable competitive edge.

[TheBossMan]

quote:Originally posted by Dimebag

PS

If technicals can be so used, why has not one person made a billion using them if they can so easily enhance an investor's return over a buy and hold approach???

Dimebag

Isn't TA a recent science when compared to fundamentals? And increased TA is a result of internet & realtime access to markets...If this is so, why not give TA another 10 years to see if billionaires do emerge.

[whiteheron]

Thanks folks for all of the great replies , Iwill study them carefully and no doubt make good use of many
I trust that the discussion on this subject has been worthwhile for other investors as well
Good investing

Whiteheron

[goodguy]

Intresting topic...particularly without the acrimony this subject has usually aroused elsewhere. Unfortunately it is spoiled for me because from the start of page 2 I'm having to scroll backwards and forwards because the print is too wide for my screen. Does anyone know how to fix it? I think the problem has been raised before without a solution being found.

[zyreon]

go to top of browser,

click on view&gt; text size&gt; (select a smaller text size)

[Liberty]

Goodguy

Click on "printer friendly" - should make it easier to read.

[goodguy]

Thanks, suggestions helped althought didn't solve problen etirely.

On the main subject, I read in an Australin book a couple of years ago that $1000 invested in Westfield Holdings (the property co) in 1960, with all divs reinvested and all rights taken up, grew to $90 million 40 years later.
Isn't this what we should all be concentrating on trying to find. Someone of Dimebag's age would only need two or three over a lifetime. Regardless of age, a small number of GROWTH companies bought at real Value prices should be the aim as Buffett stresses.

[thereslifeafter87]

Statements like the Westfield example are of little merit.
You would have to buy at the exact low, and sell at the exact high in order to achieve the returns as stated. Also, you would have to stay in through market ups and downs, downturns in the business of the company itself, and numerous situations where you might need to sell to raise cash.

[goodguy]

On the other hand, if you aim for the stars and only hit the moon you can still come oout a big winner. If you don't even try, but look for reasons not to, your chances of picking up gold are nil.

[Halebop]

Keep in mind too that although it's easy to throw around a number like $1,000 in 1960 this was a reasonable wad of money. My Dad bought his first house around then for something like 2,000 pounds.

Statisticians will tell you since 1960 inflation in NZ has been about 1,586% or a compound 6.6% per annum. This isn't even the full picture though. Back in 1960 this same amount of money was worth more because real incomes were lower, inferring disposable or "savable" incomes were also lower, meaning $1,000 was harder to amass. At the same time many inputs in real terms were higher. Productivity gains since 1960 means the plastic bucket you buy from the Warehouse today is relatively cheaper and uses less of your disposable income than the metal one you bought from your local hardware store back then.

True, a thousand dollars invested in Westfield back then has performed amzingly well (although not really earned you a dime because you had to reinvest everything for 44 years remember?). Examples like these are designed to sell Westfield shares, not make us wealthier.

[absolut-advance]

Hey there my fellow share traders and share investors, just found this thread and finished reading though it with much interest, thought id drag it back up to the top since there hasn't been a fresh post for a while and we have many new members now.

[Contrarian]

Gidday AA
Yep it is good practice to review old posts.
Choose a share or a poster & go back a few years and reflect on the calls made.

[absolut-advance]

Yes i often do a search of a long term members names and go through the old posts very interesting to see how peoples views change on different shares as time goes by, especially under the long-term share pick threads of 2000-2002