Long-term or Short-term
One of the reasons I started writing this was to keep track of the reasons I bought a stock and to keep some on my watchlist. By that I don't mean just the ticker symbols, but the thought process; in essence to keep track of what I thought, to make myself more accountable for what I did and to learn from my mistakes as I go. Often, I have sold my winners too soon and held my losers too long. Why is it, one wonders, that so many of us end up becoming long-term investors on losing stocks- holding on to them forever and aggressive Get-In-Get-Out traders on winning ones, when really we should be doing it the other way round?
Another thing that strikes me is something that I learnt from Peter Lynch's book "One up on Wall Street" - if a stock goes up after you bought it doesn't mean you're right and if it goes down doesn't mean you're wrong.. in fact I need to be clear on the reasons why I bought or sold a stock before I buy it. Of course this doesn't mean that I should focus only on the fundamentals or the chart patterns, but whatever it is, I need to be clear about it.
My philosophy about "ultra" long term investing is that it's good only for my 401-k plan because I know :
- For a fact, unlike some companies, a mutual fund portfolio is not going to go bankrupt or go from 400 to 4
- Dollar cost averaging every 2 weeks ensures I dont buy in at the wrong time.
So then does that make me a short term trader by default? No not that too. By definition I guess a long term investor is someone focussed solely on fundamentals and valuations. A short term trader needs to be totally good at analyzing chart patterns and trend lines. I guess I'm trying to find that sweet spot - the golden ratio between technical and fundamental analysis.
Here's a thought experiment: Imagine two people - F and T one focussed solely on fundamentals(F) and one focussed solely on technicals(T) both very good, not perfect. Why would both get suboptimal results? What's the optimum solution?
- F can usually pick out stocks when they are extremely undervalued but will either get out much before the stock peaks (P/E is too high - the stock is now overvalued) or much after(The dip is a buying opprtunity until the company announces really bad results)
- One the other hand T waits for a trend to form, the confirming price-volume signals and gets in. Sometimes these trends might break and T takes a loss and gets out. However T really has to wait for a trend to take shape or risk being caught in market whipsaws. Of course once the trend has formed, T can ride it very close to the peak and get out just when the trend starts to break. The problem though is that a trend needs at least three points.
Hence I think a correct balance between fundamental and technical reasoning is possibly the best scenario. Potentially it could also be the worst if used in the exactly opposite way. Moving along I'm going to find out.
posted by pani5ue @ 3:28 PM
2 comments
2 Comments:
Talking about Mr. T - I remember a short discussion I had during an interview with an investment bank (for summer internship 2001) - I had said "I do not understand this speculation business because I think you are likely to make as many good decisions as bad ones in the long run" - To which the response was "Well, You're right to an extent, however, if you can change that ratio to 55% time correct decision, 45% wrong decision, you are through."
The above, of course, is paraphrased owing to bad memory, but the crux (of what I understood) was the above.
I guess that is the difference between Mr F and Mr T (roughly speaking):
Mr T - 55% correct decision, average returns of 50% when correct, loss of 35% when wrong => total gain of 55%*50% - 45%*35% = 11.75%
Mr F - 80% correct decision, average returns of 15% when correct, loss of 5% when wrong => total gain of 80%*15% - 20%*5% = 11.%
THe question is, are you F or T?
Actually the scenario is more like:
Mr T: correct 40% of the time on the direction. Makes huge profit when correct But takes small loss ~10% when wrong.
Mr F: on the other hand might wait for years for the fundamentals to develop into market price and also usually with a stock the technicals become worse before the fundamentals. The basic reason is that markets are efficient in a trend but not at the extremes.
Actually I also think that speculation is somewhat like glorified gambling.. at casinos people have been shown to win big at blackjack by tilting odds slightly in their favor...but not everyone wins and for everyone that wins big there are a few thousand small losers and a few big losers. Also I can imagine why good physicists might be good speculators.. inertia.. what goes high goes higher, what's still stays put until a force is applied to it to make it move...
I am still trying to find out what I am... maybe a couple of years down the blog, my trading habits will be clear enough, in perspective, for me to classify me.
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