Friday, July 10, 2015

Short Term Trading vs. Long Term Investing ... It's a 'Mental Thing' .... Don't Gamble on the Short Term Direction of the Market ... Instead Buy Shares for the Long Haul and Act Like an Owner

Most individuals have neither the knowledge nor the patience to trade stocks successfully for the long haul. Instead they act like traders and not as investors. So after several unsuccessful attempts, they often quit trying and get out of the market for good. That's another mistake and a costly one.

Knowing the difference between trading and investing is crucial to investing success. To act otherwise is to play a losing game. And losing in the stock market is no fun. It's also expensive.

Traders have themselves (and maybe their brokers) to blame. In any event, only their brokers end up happy as the short term oriented 'investors' who pay for the party have little if anything in investment returns.

A Jim Cramer trading tip that retirement savers should heed tells the story of successful individual investing succinctly:

"A longtime golfer once told me that the difference between a great amateur and a true professional is pretty easy to spot: At the end of a tournament, the duffer hits the 19th hole to relax.

The pro gets some water, changes and heads to the range to hit buckets until closing time. They compete all day and then get right back out there, slamming hundreds of drives to correct whatever went wrong earlier in the day. . . .

Traders don't own investments. They rent them, short-term. They honestly expect a stock to move one way or another very soon. They trade all day and obsess about trading all night.

When the event they expected comes to pass, they sell. When it doesn't — they sell anyway. The moment is gone. Move on.

Cutting losses

Investors, meanwhile, seldom sell. They own a stock and, when it falls, they buy more of it. Their expectation is to sell someday, down the road, to raise cash for living expenses.

In the meantime, assuming all else remains the same, stocks are for holding. . . .

It should be obvious why investing works, but I'll restate it here just in case. Stocks compound your savings well in excess of inflation. Over years of investing, it's basically impossible to beat a good, solid stock portfolio.

Stocks beat bonds. They beat gold. They beat cash, of course. Owning a piece of a profitable company means you have rights to corporate cash flows in the form of dividends, and on top of that you have appreciation.

Stocks tend go up in value. Reinvesting dividends supercharges that effect.

Retirement investors find themselves in trouble when they confuse investing with trading. They take a few stock newsletters, start watching the markets on TV and begin to feel like they should trade, too.

It's a fundamental mistake. Sure, trading is easy. Just about anyone can open an online brokerage account, plunk down a few thousand bucks and go to town.

If you have money to throw away, it's a hobby of sorts. You end up learning a lot of interesting things about economics and law and how the world works.

Knowing the difference

If you're honest about it, though, once you lose that few thousand you should back out of the whole
game for good. But that's not what people do.

Rather, they double down. Inconvenient losses are deemed illogical, chance events. The trader goes back in, intent on making back the loss. Maybe the next trade works out. Instead of chance, now it's a vindication. They feel emboldened.

On it goes. A decade slips by, perhaps two. One day they wake up and realize that, after fees and compounded losses, their retirement fund is startlingly modest. Not enough to quit work by any means.

Instead of investing, they traded — and paid the ultimate price for confusing the two.

Many people play golf. Only a few truly compete. When it comes to retirement investing, knowing the difference is important."

Summing Up

Three things make for successful individual investing. We need to (1) buy shares of solid dividend paying companies (2) at a good price and then (3) watch their prices grow over time.

In other words, both the quality of the company and the entry price paid for its shares are the salient factors in achieving long term investing success.

And long term investing success is hereby defined as outpacing inflation by at least 3% annually over a lifetime of investing.

Only stocks have done that and will continue to do that.

That's my take.

Thanks. Bob.

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