THE POPULAR MISCONCEPTION
is that traders are foolish short-term gamblers while investors are the prudent, steady hands in it for the long term. But whether you call it trading or investing, the golden rule remains the same:Don't lose money.>
While investment goals and styles are different, we are all gunning for the same result. Notgreat companies
orfunds with five stars
, but consistent returns that outpace inflation.
As a trader, my goal isn't to make trades all day long, but to secure a rate of return that protects my investors' principal and makes them money period. Saying it's a tough market is just an excuse, and unlike investors who are "in it for the long haul," I don't see any compelling evidence that owning stocks for long periods of time is the best way to achieve that return.
Investors who preach "buy and hold" are kidding themselves. What the long haul speaks to isn't the merits of stocks as an asset class, but the mathematical effects of compound interest over time. The point of the long haul isn't that stocks will go up over time, but that even low levels of return will eventually create wealth as a result of consistent compounding. Fair enough. The problem is that "eventually" can be an awfully long time. So-called prudent investors have been misled by believing that stocks return about 12% a year. But that oft-quoted statistic actually represents a 72-year average and I for one am uncomfortable waiting around that long to see if history repeats itself.
The truth is that we have absolutely no certainty that equities will outperform other assets over the hypothetical long term. We have even less certainty that equities will outperform during our actual holding periods, which for most investors are decidedly shorter than the 72 years on which much of the long-term credo is based. That's why I worry about the short term and let the long haul take care of itself. After all, the long haul is just a bunch of short hauls lined up.
Think trading is dangerous? Try buy and hold. In my experience, the long haul is really just an excuse for leaving problems in your portfolio untouched and ignored. It encourages us to let trades become investments simply because we were wrong in our analysis. The long haul is what prompts people to buy XYZ at 100 expecting it will go to 120. But when it slides to 50, they wait and wait and hope and wait, because we've been told that most stocks eventually go up and hey, we're in it for the long term.
Investors have let this long-term dogma become an excuse to sit on or even buy more of unprofitable investments that they hope will eventually trade higher. For example, Microsoft has now been dead money for two years, Lucent for four, Motorola for seven, Apple for 14. Xerox for...well, you get the picture. This is the big danger of the long-haul philosophy: Your portfolio might be for the long haul but you live in the now.
Long-term investors who hold onto, or dollar-cost average their way into, stocks in which they are nursing huge paper losses are making a big leap of faith. Isn't it ironic, then, that the much-maligned trader who cuts his losses and moves on is charged with being reckless and risky while the investor who buys XYZ at 70% off its high is considered prudent? Not in my book.
Trading isn't about making hundreds of transactions or jumping on a hot stock. It's about being open-minded enough to realize that we don't know the future and flexible enough to admit that at some point we might want to trade one position for another. I am a trader because my interest isn't in owning stocks per se, but in making money. And while I do trade in stocks (among other investments), I don't have blind faith that stocks will necessarily be higher by the time I'm ready to retire.
If history has demonstrated anything, it's that we can't simply put our portfolios on autopilot and expect things to turn out for the best. You can't be a trader when you're right and an investor when you're wrong. That's how you lose.
Next week: Why size does matter.
Capitalistpig.com, a Chicago-based hedge fund.>