As is explained in one of GeoInvesting’s cornerstone articles, “So You Want To Be A Full-time Investor? Follow these 10 steps”, there are many different ways to invest. I started investing in the 1980s, but it took me years to accept that long-term investing strategies trump day trading strategies. At least, that has been my experience. That’s not to say short-term strategies can’t be part of an overall investing game plan, especially if you are a full-time investor and might require short income when your long-term holdings are not pulling their weight or if you are just not ready to sell them. In fact, GeoInvesting implements a few types of short-term strategies that I’ll discuss at another time, but we use them only to complement our core high conviction long-term portfolio – they are not our core strategies.
That being said, I have great respect for those who are good at implementing short-term strategies on a consistent basis and totally understand why this type of investing can be viewed as preferable. Who wouldn’t want to be fully exposed to market corrections? And reaping the immediate returns of day or swing trading appeals to investors’ sense of success, a dopamine response similarly inherent to the positive feedback loops typical of social acceptance of successful like-minded investors. Twitter and investing make for a dynamic duo these days, especially when it comes to your daily dose of quick flips. You are going to see traders tweeting about the record money they are making on days like we have been seeing over the last two weeks. It’s natural to want to feel that high. Long-term investing is simply boring!
However, as hard as it is to go through the pain of market corrections, such as is currently happening due the COVID-19 and the Saudi/Russian oil price wars, it’s just as hard to not be in the market when it’s rallying. You might think you are building wealth when you are able to “cherry pick” short-term gains, but you’ll ultimately miss out on bigger, more sustained gains down the road when the bull market materializes – and it always has. A recent CNBC article highlighting a study by Bank of America stresses this point:
“Looking at data going back to 1930, Bank of America found that if an investor missed the S&P 500′s 10 best days in each decade, total returns would be just 91%, significantly below the 14,962% return for investors who held steady through the downturns.”
It’s no doubt that some investors are able to develop a great skill set for excelling at short-term investing strategies. I know some traders that come into the office, work a couple hours, and follow strict disciplines for taking profits or minimizing losses. Some of the best traders simply know when to walk away and shut it down. If you have been investing for a while, you probably already know if you are one of these elite craftsmen. However, I have run into so many investors who were lured into the short-term day trading by individuals that claim “you can have a Lambo one day too dream,” only to have failed miserably. In fact, many GEO subscribers started out as short-term investors before joining our Premium service and have become advocates of adding long-term investment strategies to their arsenal.
In GEOs article, “So You Want To Be A Full-time Investor? Follow these 10 steps”, we stated:
“In the world of finance, you are going to have advice coming at you from multiple directions. Every full-time investor (including me) has an opinion on the best strategy to implement to make money in the stock market. Ultimately, you need to find the ones that you connect with.”
We connect with long-term investment strategies and believe it’s an option that investors should consider as a core or at least as a supplement to short-term strategies. With regards to long-term investing, it’s also no cake walk. But the earlier you get started at this process, the better, since your experiences, like your returns, can compound over time.
I firmly believe in five key reasons why we believe long-term investing should be the preferred core strategy for most people:
1. Long-term investing forces you to better understand the company you are investing in.
Long-term investing does not mean set and forget. You need to check in on your core holdings to make sure management is still on track with their strategy and that things have not changed in the competitive landscape, economy or industry that can derail growth. However, this practice will make you a better investor.
To specifically keep up with the most current goings on at a company, you need these tasks on your check list:
- Regularly visit the company’s website in case there may be some new information not yet widely known to the public. Do it monthly – two minutes of your time is a small price to pay for your peace of mind.
- Make sure you keep yourself abreast of the most recent company presentations – again, most likely posted on the company’s website. If it’s not, don’t be afraid to contact company management or investor relations to get a copy emailed to you. A lot of the information in these presentations related to industry trends and numbers can actually be costly and incomplete if you are independently looking for them from other sources.
- Stay on top of all the company’s press releases – you wouldn’t want to miss a very material factor that might impact operations
- Obviously, analyze quarterly sales, earnings and balance sheets and converse with other investors or the company about these financials if you need help in understanding certain line items or revenue, margin and liquidity trends
Because you are committing to holding a position through volatility, through your own negative behavioral bias and through possible bad times, it is important to have a good understanding of the companies that you are investing in.
While this may sound like an extra burden, you will develop a competitive advantage over those who do not desire to go the extra mile to understand what they are investing in. By having a more thorough and detailed knowledge of your investment, you are in a better position to decide which way to go with it and are more likely to make the right decision at the right time.
With short-term trading, there is often the pressure to make a trade fast without having a full understanding of the company being traded. This makes it harder to develop the skills needed to really understand companies and management strategies. You may end up even selling a long-term position to an uninformed short-term trader, due to superior information you may have acquired through your hard work! Snap judgement will at some point likely lead you to make the wrong decision many times over – a big reason why so many people are unsuccessful and leave the game altogether.
However, in all fairness, long-term investing carries its own set of emotional challenges that need to be conquered. But a lot of these challenges are triggered by short term fear, panic, excess use of margin, mismanaged personal finances and not knowing your investment good enough.
2. Long-term investing gives you more time to perform research and due diligence.
While investing for the long-term forces you to gain a thorough understanding of companies you are investing in, stepping away from trading will give you more time to gain and analyze the information needed to make the right investment decisions. With short-term strategies, you are often required to make a lot more buy and sell decisions, glued to your computer during market hours. This leaves you with much less time and energy to perform the fundamental research needed to hunt for potential multi-baggers. By the end of the day, you are probably going to be fried, not wanting to look at your computer.
3. Long-term investing requires that you make fewer decisions.
Although we all like to think of ourselves as intelligent people, the truth is, nobody is perfect. Even the smartest and most experienced among us will eventually make a mistake or some bad decisions. As the number of decisions that we need to make as investors increases, the likelihood of a wrong decision also increases. By adopting a long-term strategy, there are much fewer buy and sell decisions.
Many of us fail at short-term trading because the fast pace and minimal time available to make decisions tends to trigger emotions or impulses, leading to irrational decisions. Since more time is available before committing to a long-term position, more logic and thought are able to go into that decision, which can reduce the likelihood of emotional trading.
Mutual fund manager Peter Lynch, in an educational series call “Stock Shop” said:
“Investing is a personal thing. You have to do it by yourself. You don’t do it with a committee. You have to be able to have the emotional strength to stand the volatility of the market in general and stocks in general. The key organ here is not the brain, it’s the stomach. Do you have the stomach for this? Do you have the patience for it? You should be able to look in the mirror and say to myself, “What am I going to do if the market goes down”?
It’s this kind of emotional intelligence that will ultimately tell you what kind of investor you really are, and some of the personal decision-making challenges, and even habits, you must overcome.
4. Long-term investing allows you to enjoy your life more.
Since you have fewer decisions that need to be made, and a lot more time to make them, you are in a position where you are simply able to enjoy life. With short-term strategies, many investors often find themselves constantly stuck to a screen in order to monitor the markets and make trades. Trading can become addictive. Remember, you don’t have to find every opportunity!
With a longer-term emphasis, conservative use of margin, proper sell disciplines and good personal finance management you can learn to deal with pressure. With conservative use of margin, you will be able survive and not be wiped by market crashes. With proper sell disciplines, you will be raising cash that you can deploy when markets correct or continue to build wealth by investing in real estate.
Good personal finance management (manageable debt burden) will give you the fortress to weather market downturns. These last points are very important parts to making sure you build wealth overtime, through market corrections.
Even though investing in general does deal with its own set of conscious burdens, you will be able to calmly and meticulously perform your research, while also making ample time for participating in leisure activities or spending time with friends and loved ones. Not only will you be able to devote more time to these things, but the time spent will be higher quality because you will not be constantly distracted or worried about monitoring your short-term positions.
Early in my pursuit to become a full-time investor, I used to perform research once a week, on Sunday, for about 6 hours. I would use the rest of week to call management teams of those companies that entered my Sunday wish list.
5. Long-term investing lets you pay less taxes and fees.
With short-term investing, you are likely to pay more taxes on your profits, suffer the possibility of dealing with “wash sales”, as well as other fees associated with the data you might think you need to be exposed to as many short-term strategies as possible. Short-term investors who hold their position for less than one year will have a capital gains tax of between 10-37%, depending on their tax bracket. On the other hand, capital gains tax for long-term investors is capped at a maximum of 20% for the highest bracket, and can be as low as 0% for the low bracket.
In addition, because short-term strategies require significantly more trades to be made, there will be more commissions. Contingent on the platform or brokerage that you make your trades through, these additional fees can add up to a significant expense and can drastically reduce your actual gross return on investment. Having said that, Zero Commission trading is being offered by on-line trading platforms like Ameritrade and Robinhood, mitigating some of these costs and starting a wider industry trend.
IRS’s recent implementation of “wash sales” also affects short-term traders to a much higher degree.
“A wash sale is a sale of a security at a loss and repurchase of the same or substantially identical security shortly before or after. Losses from such sales are not deductible in most cases under the Internal Revenue Code in the United States.” (Source: Wikipedia)
Thanks for reading. I hoped you enjoyed this article. In addition to the five major points described above, we believe there are many more advantages to developing a sound long-term investment strategy. We have compiled scores of educational articles over 13 years and similar insights that will enlighten you to things that you may have overlooked in your pursuit to be a successful investor. Stay Tuned!