#60 Buy & Hold vs. Frequent Trading — Stock Analysis
Buy & Hold vs. Frequent Trading – Stock Analysis (#60)
Two Basic Strategies
Small players in the stock market are faced with only two basic choices in strategy: either buy & hold, or frequent trading. The former implies long term and the latter short term.
Buy & hold is the simplest way to play. The big question is when to buy and when to sell. Suppose you have bought at a high point, it will be a long agonizing wait as the stock comes down before making its way up again if you are lucky. On the other hand, if you sell at a point that is not high enough, you will regret that you should have sold later to gain more.
The short-term option of frequent trading is usually considered a gambling mentality. This strategy takes advantage of the frequent ups and downs over days and weeks. The goal is to make small reasonable profits every week or everyday, and let them add up for the long run. Some people cannot overcome the psychological barrier that this is not the right way to invest. However, when you think about your job or your own business, are you working everyday and every week to build the future? Playing stocks can be considered investing in the short term in order to build the long term.
When to Buy & Sell
When you adopt the first strategy of buy & hold, you limit yourself to only one chance in each case, that is, you buy now and sell later, both at the right times. Hopefully, the price will go up to let you profit the way you want. Remember that you want to hold the stock for an anticipated duration to get a higher price. How confident are you that the stock will be higher? Are you prepared to hold longer if it won’t happen?
When you do frequent trading, all you need is to wait for a small price increase, for instance, 5% for you to sell. Stock prices go up and down more than that margin many times within a period of days or weeks. Thus you have more than one chance to get it right. The key is to catch as many 5% increases as possible. A simple calculation is that if you only manage to catch twenty 5% gains in a single year for one stock, your total annual gain will be 100%. This is most likely to beat your buy & hold strategy.
Deciding when to buy always remains the big question for all players no matter what strategy you employ. However, it is a much simpler decision for frequent trading. All you need is to follow the stock of your choice for a few weeks to get a good feel of its moving pattern. It is usually the case that when a stock has lost ground for two consecutive days or more, the next day is likely to be a gain, and vice versa.
The other big question is that you have to buy on the uptrend. A stock goes up and down everyday. Can you tell if it is on an uptrend or downtrend? On an uptrend, even if the stock falls, it won’t take long for it to rebound. On a downtrend, even if the stock rises temporarily, it will go down further later. Identifying trends is what the stock game is all about. Most of my articles touch on this topic, especially #46 through #58.
Time Availability
Many people complain that they don’t have the time to follow their stocks. Well, if you cannot find time to look after your own investment, you’d better stay out of the game altogether. Remember no pain no gain. On the other hand, you don’t have to baby sit your stocks every minute. All you need is to get a good feel about their price movements.
Playing the stock market should not hamper your fulltime work in any way. The night before the market opens, a frequent trader should have some idea what prices he wants to sell or buy for which stocks. To save time, he uses the system of limit orders to specify the prices and quantities for buy and sell. During the trading day, he may want to check on his orders a couple of times to make adjustments.
Cash Availability
The overriding question is how much cash you have. In life, the more cash you have, the more choices and flexibilities are available to you. More cash enables you to do many things in the stock market:
• Play high-quality stocks that cost more but are more safe.
• Take more chances by buying different stocks at different prices.
• Spread your risks over different stocks with diversification.
• Recover from your mistakes easier. Suppose you’ve bought a stock that starts falling the next day. Sufficient cash enables you to hold it longer for a turnaround. You may even have surplus cash to continue playing the same stock at lower prices to make up for the losses.
www.stockfessor.com
October 2009
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