By John Reizner |
Many experienced investors and traders have at one time or another have lost their investing mojo. An investor or trader may no longer make money (they lose money) or he or she earns a low rate of return even in good markets. Life events, health issues, relationship problems, a poor financial adviser, lack of sufficient knowledge about what may work in a given market cycle, or poor execution of the investor's game plan may cause ineffective trade decision-making in the marketplace.
You must be able to claim your identity as a market player while attempting to profit in the equities market. Are you a short term trader or are you a long term investor? Or perhaps you are a long term investor who has changed his or her long term investing game plan? If you engage in frequent trading, does it damage your investment results? If you are a trader, are you investing outside your area of competence or are you simply "paying your dues?"
As a market participant, you need to match your temperament to the right investing style for you. Are you a long term investor or perhaps new in the marketplace, lured by the prospect of making a substantial living by becoming a full time trader? Or perhaps you are otherwise occupied in full time employment and aspire to build your financial wealth over several decades: compounding your wealth over time. Which type of investor are you?
The trader must have a repeatable technique which he has mastered and executes profitably year after year. This is hard to do and involves a lot of wear and tear and a lot of time gazing into computer screens.
Yet, there is no question that there are many talented and skillful individuals who are successful at short-term or swing trading on a continuing basis. The individual needs to decide whether he wishes to trade with a short-term or long-term horizon.
However, some of the most prominent active hedge fund managers fail to beat the market averages and charge layers of fees on their eager customers to boot. Not to mention the hedge fund failure rate. See my earlier article: Hedge Funds: Four Reasons Why You Should Not Invest in Them."
How many times as a budding trader are you permitted to fail? You need to decide that moment in time when you've had enough or if your knowledge may grow to the point when you could become successful trading for a living.
The trader must keep a journal tallying his or her results, the wins and the losses - and the commissions - in order to evaluate his trading results - and whether he or she has made a profit each year. For the trader, every year is a blank slate.
What about the long term investor? The record for the long term in the stock market is that it is gone up over time - albeit punctuated by depressions, a Great Depression, wars, recessions, and the Great Recession.
Ace Greenberg of the former Bear Stearns brokerage firm once remarked, "the floor of the New York Stock Exchange is littered with the corpses of short sellers." And such a luminary as former President Bill Clinton has said it has never paid to short sell America.
The equities markets have experienced over one hundred years, periods of severe overvaluation and undervaluation. If your time horizon is the length of your working life, then the downs in the market may have less of an impact as your wealth potentially increases over time. If you are about to retire, then allocating your assets properly is potentially more important in the mix: really for any long term investor.
Is the long term investor's prospects for superior investment performance any better than the trader's? Would the result be better for the former to hand the reins to a professional money manager or mutual fund manager to manage his assets? There are some very smart and talented managers around - I would do your research in this vein and refrain from choosing performance chasing jockeys or portfolio managers who "window-dress" their portfolios at the end of every quarter - solely to fatten their paychecks and to ensure that they still have a job on the first of the month.
There are various mutual fund ratings publications that may help you in your search for superior money managers with superior track records over more than one market cycle. It may be wise to examine performance in down markets as well as in up trending markets.
The method that I used in the past for many years and revealed in my book, "A Way to Wealth: The Art of Investing in Common Stocks," now available on Kindle here - is one that I employed in order to profit for over a decade while on many occasions making several multiples of my original investment.
I would add to my tome that a long term investor using my method may better profit by choosing seasoned companies using the criteria for stock selection that I developed - though there is at least one recent IPO with limited trading history that qualified under this method. See the FAQ’s for additional information about the book.
In my investing career going back over 35 years, I have not found frequent trading to be financially or otherwise rewarding; while I have found long term investing to be rewarding indeed.
Which type of investor mold fits your style?