Buy and Hope vs Trading

[Realist]

The age old argument....

Does anyone agree that Buy and "Hope" (hold) is the most risky method?

I was reading Leon Wilson's "The business of share trading" book tonight and he believes trading is far less risky than buy and "hope". He was slagging the hell out of it as something only suitable for retired people.

How can buying an excellent bluechip that is not overpriced and pays good dividends be riskier than trading a speculative stock that has never made a profit?

His belief is people will hold on too long if the price is going down and they could lose all their money, HIH, OneTel, Enron etc.

Sure it is possible, but diversifying so that no more than 10% of your investments is in one stock you'll lose at most 10% in the worst case scenario. And few if any bluechips ever just go belly up.

The flipside is you don't pay tax, or brokerage fees, there is no slippage, and no stress, you reinvest dividends and large companies tend to get bigger, small companies are far more likely to go under. And you do not need a stop loss because you mostly don't lose.

Trading is so hard to make a profit, it takes many hours of your time, you get slippage on your buy and sell prices, you pay brokerage fees and get hammered with a large tax rate. You usally miss out on dividends as well.

Amusingly he quotes Warren Buffett in his book, does he not realise Buffett is a buy and hold man?

 

[ctp6360]

Re: Buy and Hope v Trading

Hey Realist, just letting you know I've really been enjoying your posts. You seem like a really sensible guy who has his own way of doing things, but hearing everyone on here talk about trading is making you doubt your own method.

Growing up I always saw examples of buy-and-hold forever which showed, through the magic of compounding that by buying blue chip stocks and reinvesting the dividends you always won in the end. And I believe this is true.

However, on the flip side I think about "efficiency of capital" as in, by holding blue chips over the course of many years you can be confident of a positive result (probably much better than cash-based investments) but the question is, could that same capital have produced higher returns if allocated differently throughout the time period?

For instance even if you were a buy-and-holder, simple technical analysis would have told you that the uptrend of most blue chip stocks was broken in May, and that selling out at the end of this trend, and buying at the resumption of the next uptrend (obviously you can't pick the start of a trend, but if we're talking long-term then its a given that you'll notice it eventually), then is that a more efficient use of your capital?

I think it is! Obviously by closing positions and re-opening them you're losing capital gains tax benefits, etc, but I'll tell you this much, if I had sold my blue chips at the start of May and bought them back now, I'd be happy to pay capital gains tax because it would have been a lot less than what I've lost by the drop in the share price.

Please keep this discussion going Realist, I am interested in hearing more about your own trading method and how, if at all, you plan on integrating technical analysis in your current long-term buy and hold plan.

 

[cuttlefish]

Re: Buy and Hope v Trading

I think that it depends on what you are trying to do. If you're looking for capital gain and wanting to maximise it and prepared to spend the time on it, you should probably be trying to trade. Effectively by buying on dips it is a form of trading anyway - and wasn't part of grahams philosophy as far as I understand.

Also as far as I understand, Graham wasn't looking for capital gain, but it was often a by product of his investment strategy.

I vaguely remember Robert Kiyosaki in one of his books defining an asset and also talking about the importance of recognising the difference between making money and investing money.

I'm not a trader but if I was I'd still be investing the trading profits following a value investing approach in whatever asset seemed to offer the best value at the time (stocks, property, cash, fixed interest etc.).

 

[visual]

Re: Buy and Hope v Trading

For instance even if you were a buy-and-holder, simple technical analysis would have told you that the uptrend of most blue chip stocks was broken in May, and that selling out at the end of this trend, and buying at the resumption of the next uptrend (obviously you can't pick the start of a trend, but if we're talking long-term then its a given that you'll notice it eventually), then is that a more efficient use of your capital?

Ha but you would`ve had to get the timing completely right or substantialy right,otherwise you would`ve ended up paying capital tax and reinvested a part of your profits to buy back in and if you did it too early you would be sitting on a loss anyway,I know because I did just that,haaaaaaaaaa it`s not as if too many people saw this coming,cant wait for the end of the financial year,hoping its just tax loss selling

 

[dennisll]

Re: Buy and Hope v Trading

It is an age old argument because there is no right answer, but really the more important thing is for a person to choose which one would suit him, isn't it? There are many ways to make money in the market, so perhaps the best thing for one to do is to find the way that will allow him to sleep at night.

Cheers,

Dennis

 

[wayneL]

Re: Buy and Hope v Trading

The age old argument....

Does anyone agree that Buy and "Hope" (hold) is the most risky method?

I was reading Leon Wilson's "The business of share trading" book tonight and he believes trading is far less risky than buy and "hope". He was slagging the hell out of it as something only suitable for retired people.

How can buying an excellent bluechip that is not overpriced and pays good dividends be riskier than trading a speculative stock that has never made a profit?

His belief is people will hold on too long if the price is going down and they could lose all their money, HIH, OneTel, Enron etc.

Sure it is possible, but diversifying so that no more than 10% of your investments is in one stock you'll lose at most 10% in the worst case scenario. And few if any bluechips ever just go belly up.

The flipside is you don't pay tax, or brokerage fees, there is no slippage, and no stress, you reinvest dividends and large companies tend to get bigger, small companies are far more likely to go under. And you do not need a stop loss because you mostly don't lose.

Trading is so hard to make a profit, it takes many hours of your time, you get slippage on your buy and sell prices, you pay brokerage fees and get hammered with a large tax rate. You usally miss out on dividends as well.

Amusingly he quotes Warren Buffett in his book, does he not realise Buffett is a buy and hold man?

Hi Realist,

I can only re-iterate the point I made in another thread. It's the small business person, doing this for income + a bit of compounding, versus strictly investment for wealthbuilding.

I do this for income... buy & hold just don't cut it as far as that is concerned, though I have nothing against buy & hold per se'.

I get a bit disappointed with techies who go down this line of argumement, because its as much BS as them bagging trading.

Chalk and Cheese

 

[It's Snake Pliskin]

Re: Buy and Hope v Trading

Hi Realist,

I can only re-iterate the point I made in another thread. It's the small business person, doing this for income + a bit of compounding, versus strictly investment for wealthbuilding.

I do this for income... buy & hold just don't cut it as far as that is concerned, though I have nothing against buy & hold per se'.

I get a bit disappointed with techies who go down this line of argumement, because its as much BS as them bagging trading.

Chalk and Cheese

Yes one has to work out what they are in the market for. Trading to compound, or investing for income wow some oxymorons.

 

[wayneL]

Re: Buy and Hope v Trading

Yes one has to work out what they are in the market for.

I trade so I don't end up In the bookies ring at the races :

 

[It's Snake Pliskin]

Re: Buy and Hope v Trading

I trade so I don't end up In the bookies ring at the races :

Wayne,
Horses are boring.
Cockfighting in Indonesia is far more interesting. There ain`t nothing like it when the loser screams out after it is cut open by the winner.

 

[swingstar]

Re: Buy and Hope v Trading

Whatever you call it, investing or trading, I think it's insanity holding onto stocks when they're not moving or depreciating. It makes no sense.

As Ed Seykota said (told by Michael Marcus)...

Ed Seykota is a genius and a great trader who has been phenomenally successful. When I first met Ed he had recently graduated from MIT and had developed some of the first computer programs for testing and trading technical systems. . . .Ed provided an excellent role model. For example, one time, he was short silver and the market just kept eking down, a half penny a day. Everyone else seemed to be bullish, talking about why silver had to go up because it was so cheap, but Ed just stayed short. Ed said, "The trend is down, and I'm going to stay short until the trend changes." I learned patience from him in the way he followed the trend.

I don't care what the masses do or even what Warren Buffet does. The masses are poor and Buffet is an exception to the buy-and-hold rule.

 

[Realist]

Re: Buy and Hope v Trading

I think it's insanity holding onto stocks when they're not moving or depreciating. It makes no sense.

So if you owned a house and the price went down slightly for 2 weeks in a row would you sell it?


It makes sense to me, because Investors look at the company not the stock price, And traders look at the stock price not the company.

So the theory goes, the stock price is largely irrelevant, infact the less you look at it the better off you are. Over the short time the stock price is merely a popularity competition, just like house prices, if it goes up or down it is largely irrelevant - it is just people's perceptions that are changing not the great company you purchased. Over the longterm your great company will slowly grow and expand, it'll pay you good dividends and the price will go up. Sometimes it'll be winning the popularity competition and you'll contemplate selling because it is overvalued, sell, cash in, and then buy back later when its popularity goes down and it is cheaper again.

Do you monitor the value of your house on a daily basis? Does your real estate agent call you every day and say "Mate, it has gone down $1000 today maybe you should sell", or "Mate, it went up today by $2000, why don't you add an extra room?"

No of course not.

So the one and only trick to investing is buying a great company that will last the distance (or buying a solid house in a good street) and holding onto it. You of course need to pay a fair price at worst, if it is at a discount even better. And Do not pay too much for anything!!!

Great companies I like that I believe will still eb around in 30 years making profts are Fosters, Westfield, Woolworths, CBA, BHP, Coles.

It is also important to reinvest dividends - it is forced savings. Like paying off a mortgage versus renting, it is harder to save if you rent. If you do it and forget about it your portfolio rises, slowly but surely you'll become rich.

It is also important to regularly buy more, top up slowly over time, especially if the market is down, less so if you perceive it to be overvalued.

And never margin lend or have more than 80% of your capital in shares. You just never know what will happen.

 

[swingstar]

Re: Buy and Hope v Trading

I must admit I'm not an investor. I might look at property later, but by investing, I'm not going to increase my capital over the short term. I will put some of my pool in property and possibly shares later on, but I will always be a trader.

BTW, I've more than reached 10% for this month after this morning's open, and it's only the 14th. That's with only 10% exposure as well.

 

[the_godfather4]

Re: Buy and Hope v Trading

Anyone out there 50/50? ie 50% 'Buy & Hope' and 50% 'trader'???? Personally I see myself as 75%BH and 25% trader........

 

[professor_frink]

Re: Buy and Hope v Trading

It makes sense to me, because Investors look at the company not the stock price, And traders look at the stock price not the company.

Best comment I've read comparing the 2 yet realist. Like wayne said- chalk and cheese. Both have their good points and bad points. Both can vastly increase one's wealth. Which path is chosen is up to the individual.

 

[dennisll]

Re: Buy and Hope v Trading

And never margin lend

Hi Realist,

Gearing is a powerful way to build wealth. The key is to know how to manage it so that it doesn't work against you when times are rough.

I have had a margin loan for 6 years and have never had a margin call, even at the depths of the 01-03 bear market. It has allowed my capital to grow at a substantially greater pace, compared to how it would have grown had there been no gearing. The price one pays for not gearing to protect the downside is, IMHO, too great when education and risk management is all it takes to take advantage of this great wealth-building tool.

Put it this way, since you used houses as an example for not selling when the value goes down, I will use the same analogy. Would you wait until you have enough cash to buy a house without taking out a loan?

Cheers,

Dennis

 

[Realist]

Re: Buy and Hope v Trading

Anyone out there 50/50? ie 50% 'Buy & Hope' and 50% 'trader'???? Personally I see myself as 75%BH and 25% trader........

I'm 100% buy and "hope" at the moment. And my portfolio is sinking like the titanic just like everyone elses this month.

But I am studying trading and may move to 80/20 soon.

I can't get my head around trading yet, though I am trying.

I will never veer from buy and hold though, I believe in it so strongly - I just want to dabble in trading for fun. I like casinos too, investing is boring I agree.

 

[Realist]

Re: Buy and Hope v Trading

Gearing is a powerful way to build wealth.

I agree Dennis. Leverage is one of the true keys to wealth creation.

10% return on $10,000 is $1,000.

10% return on $500,000 is $50,000 (less the 7% $35,000 loan) is $15,000.

But...

A 10% loss on $10,000 is $1,000

A 10% loss on $500,000 is $50,000 (less the 7% $35,000 loan) is $85,000!!

That is the danger of course!!!



Without loans most people could never make money on property. Or even buy property in the first place.

But it is important to realise that most people with mortgages are not rich and most mortgage brokers and banks are.

You pay the interest on a loan whether your house goes up or down, or your porfolio goes up or down.

Some people may be getting margin calls soon.

I may get a margin loan in the future, and I will get a mortgage, but boy will I be careful.

 

[dennisll]

Re: Buy and Hope v Trading

Anyone out there 50/50? ie 50% 'Buy & Hope' and 50% 'trader'????

Hi godfather,

I am about 50/50, although it fluctuates depending on the market of course. I keep the two accounts distinctly separate. The long term portfolio is strictly buy and hold and is comprised of mostly blue chip, decent yield stocks. It also has a margin loan against it. The short term portfolio has no gearing, and has a completely different set of parameters vs the long term portfolio. Interestingly, my ST portfolio is 100% cash at the moment.

I have found it very advantageous to maintain two distinct portfolios as I get to practice trading whilst being able to build a good solid base of investments. It also keeps everything neat for tax time.

Cheers,

Dennis

 

[Ageo]

Re: Buy and Hope v Trading

I agree Dennis. Leverage is one of the true keys to wealth creation.

10% return on $10,000 is $1,000.

10% return on $500,000 is $50,000 (less the 7% $35,000 loan) is $15,000.

But...

A 10% loss on $10,000 is $1,000

A 10% loss on $500,000 is $50,000 (less the 7% $35,000 loan) is $85,000!!

That is the danger of course!!!



Without loans most people could never make money on property. Or even buy property in the first place.

But it is important to realise that most people with mortgages are not rich and most mortgage brokers and banks are.

You pay the interest on a loan whether your house goes up or down, or your porfolio goes up or down.

Some people may be getting margin calls soon.

I may get a margin loan in the future, and I will get a mortgage, but boy will I be careful.

I dont like Margin loans for 2 reasons:

1: They only offer a maximum LVR (usually 80% max on certain stocks).

2: You cant go short!


The 1 thing i cannot understand is the market goes up and down. Then why would you restrict yourself to only making money when it goes up? (it means already you have cut your chances by 50%). Buy and Hold for me will only be an option when i have a capital base of over $10million. Other than that the returns and waiting is too damn long.

My opinion of course


Adrian

 

[the_godfather4]

Re: Buy and Hope v Trading

I have found it very advantageous to maintain two distinct portfolios as I get to practice trading whilst being able to build a good solid base of investments. It also keeps everything neat for tax time.

I hope to get to about 50/50 with a bit more experience . I find that my 'hold' portfolio gives me a good base to work from while I (try to ) maintain a $15k 'trading' account which i pull profits from to grow my 'hold' portfolio....does not always run as smooth as i would like but generally it works for me.........ie except this week :swear: my 'hold' account is down by 34%
I agree it keeps paperwork much tidier at dreaded tax time.