Invest or Trade?

[Nick Radge]

so_cynical, Your logic is full of contradictions;

the main thing is to NOT SELL at the falls on the way up.

yet,

Buy at 40 cents in 05 sell in late 08 at $10.40 Plus...the only tactical way to do it is buy and hold...any sort of trading mentality will take u out at the retraces..

Somehow you have, using hindsight with this example, been able to distinguish between the final capitulation of the stock and the intermediate retracements. Indeed, the retracements you held through on the way up were 45%, which on that basis means exiting at $6.50 on the way back down, not up above $10.00. A true buy and hold does not make that distinction, indeed making that distinction is why extremely successful investors exist because the majority can't make that distinction, which is why/how a trend following system works.

You also quote...

buy at bottom for what ever reason, and hold (do nothing) then sell at spectacular profits...is only possible if u buy and do nothing

...what is a spectacular profit?

In 2002 you could have bought FMG for about 1c, then sold it 12-months later for 28c. Is that not a spectacular profit? I'd suggest it is, as would most.

When do you exactly decide to "only possible if u buy and do nothing" or "sell at spectacular profits"?

The other flawed argument with buy & hold is always the use of the historical perspective that is always used. Who here would think, 'gee, if only I had bought FMG when it was 10c..." Firstly you can't now. The logic stands then that you buy the 'next up and comer' but most people do not realize that FMG traded in a sideways band for 10-years before breaking out in 2002.

Which begs the question on 'when' to initiate a buy and hold, because you can't (yet anyway) buy FMG at 2005 prices so it's reasonable to assume that you would have bought higher. If so a true buy & hold would be still holding the bag, which I can assure is why most people's SMSF are hurting so much.

CBA has given back everything since 1999 which means, on an ex-dividend basis, that anyone who bought after 1999 is out of the money. Someone who touts the buy & hold strategy will say, "yes but if you had bought in 1992 you'd still be well ahead". Yes, but, you can't NOW buy at 1992 levels. You can buy at todays levels, last months levels, last years levels, 2007 levels, 2006 levels, 2005 levels etc etc etc and you'd be losing.

A good trend following system will outperform buy & hold on an ongoing basis from today .

Here are some CBA trades using my long term trend following model that is perfect for the SMSF. We'll discount the first trade on the basis that it wasn't important enough to be included in the universe (which is another reason why the FMG example is possibly flawed).



A $10,000 investment would now be worth $31,202.

A $10,000 buy & hold investment, assuming you made that in 1995, would be also be worth about the same, but the issue here is making that buy & hold decision after 1999 - that's 10-years ago, has been a losing proposition. It may eventually turn out that making that buy & hold decision in 1995 will also be a losing proposition.

 

[beerwm]

Look at the real time trading blogs...trend following still gets down to a decision,
at some point the trader makes a (trader) decision and takes the profit, and goes
on to something else...sure it "locks in the profit" but also (in the worst case
scenarios) locks out the future potential.

This is the trade off, of the trend following mentality....taking whats in front of u,
and forsaking what may come....the unknown.

I'd disagree with that,

If you're using stops to take you out of a position and 'some form of positive price rise to get you back into the position' then really you arent making decisions,

-the market is making the decision

you are right how stops, do lock in profits, but it far from limits future potential profits - which also depends on whether you have a re-entry plan after your stop is hit.

you really just have to ask..... does the market trend?

 

[Cooks]

Good luck to anyone that has the guts to invest in this environment. Clearly a trading / scalping ground. Have invested in some gold stocks as they look decent on longer term and shorter term time frames. As for holding anything else, no way until those weekly charts show some signs of life.

 

[gfresh]

It's is an interesting debate..

I think buy and hold is bound for some major problems eventually.. Assuming every X years there is some monumental market shift, you're going to run into something that significantly takes away your capital and/or capacity to invest most efficiently at these "once in xx year" lows.

Now if you are the "hold no matter what", more than likely, you will hold through and through as the shareprice drops 40-50-even 90% until you possibly panic and sell out at a very low. By then that is probably too late, or in fact this may be the best re-entry position.

The Babcock & Brown, Centro, and Macquarie stories are probably all excellent examples of this. Having given excellent returns for several years, the GFC has completely destroyed any capital in these companies. Buy and hold was clearly a mistake, and you really don't know until it's much too late.

Even if it's a very basic trailing stop, it could be enough to save you in these situations. It could be very large, accepting a 20% loss say, but if that prevents you from being wiped out in the long run, and giving up years of gains (e.g. the CBA example), using basic trading methodologies can save your bacon.

I'm not a very prolific, or gun trader (practise, practise, practise) but even following the very basics, such as not going against the trend, getting out quickly of failed trades, and using some form of buying at support and selling at resistance -- it's allowed me to collect a lot of "free" shares in the last 6 months.

There definitely isn't that capacity to do so with a true "buy and hold" philosophy, and it simply requires some basic understanding of technical trading.

As an added advantage you can also mitigate some major risk (I feel anyhow) in a bear market, if you can trade your way on a minor bear-rally on stocks you now believe *are already reaching undervalued status* (according to your own methods).. You may pick up 10% return. If you then match up 50% of your own capital on this "free" return then you have a 50% buffer from current levels. And of course you can lower your average price with rinse and repeat on the same stock.

If your fundamental analysis is reasonable, the stock will reach a bottom and other more orientated "value buyers" will step in when it also reaches their price calculations. But of course you don't discard the possibility of getting out if required or you think conditions have sufficiently changed. Probably not a strategy for specs either, don't bother with them at the moment.

That is the only form of "buy and hold" I am prepared to do in this current market, the rest is almost, suicide.

 

[gav]

What about the tax benefits of investing? Hold for more than a year, you only get taxed on 50% of your profit. Trade and you'll get taxed on 100% of your profits!

Don't forget the tax benefit of fully franked dividends also.

 

[MRC & Co]

lol, don't need to pay tax on capital losses though!

 

[nomore4s]

What about the tax benefits of investing? Hold for more than a year, you only get taxed on 50% of your profit. Trade and you'll get taxed on 100% of your profits!

Don't forget the tax benefit of fully franked dividends also.

Long term trend trading can also hold for 12+ months as well as receive d/e

 

[beerwm]

What about the tax benefits of investing? Hold for more than a year, you only get taxed on 50% of your profit. Trade and you'll get taxed on 100% of your profits!

Don't forget the tax benefit of fully franked dividends also.

how is a year defined?

12months? or cross-over the financial year?, and does it compound, like 50% 1 year, 25% 2 years?

i didnt really consider the tax breaks

 

[So_Cynical]

so_cynical, Your logic is full of contradictions;

Soz Nick i just don't see any :dunno: perhaps it was in your interpretation?

Somehow you have, using hindsight with this example, been able to distinguish between the final capitulation of the stock and the intermediate retracements. Indeed, the retracements you held through on the way up were 45%, which on that basis means exiting at $6.50 on the way back down, not up above $10.00.

And u totally lost me here....exiting at $6.50? - im saying u have to hold through those
downswings and im suggesting that most trend following systems wont do that, as it goes
against many trend following rules....as posted elsewhere, most trendy's would be happy
to take a good profit and move on.

how is a year defined?

1 year from date of purchase.

 

[prawn_86]

Soz Nick i just don't see any :dunno: perhaps it was in your interpretation?

I think what Nick was getting at is how would you know its the final peak in the example you used? Its only with hindsight that you can tell...

IE - why would you let it fall 45% in one of the first retracements, but then still manage to sell very close to the final, all time high?

 

[Cartman]

Soz Nick i just don't see any :dunno: perhaps it was in your interpretation?

And u totally lost me here....exiting at $6.50? - im saying u have to hold through those
downswings

what Nick is saying is --- how do u/we know to cash in at 10 bucks but not $6.50 ? ---- ie we dont know at what point a stock might be in a retrace or whether its the start of a bomb cycle --------

the main difference between a buy/holder and a trader is a trader tries to milk the chop ---- both systems work ---- a trader is just happy to back his analysis 'more often' ----

Sorry PRAWN ------ I posted this b4 seeing your post ----- saying pretty much the same thing

 

[So_Cynical]

I think what Nick was getting at is how would you know its the final peak in the example you used? Its only with hindsight that you can tell...

IE - why would you let it fall 45% in one of the first retracements, but then still manage to sell very close to the final, all time high?

Ah ok

The other question is why buy FMG at 40 cents in the first place...a long term buy and
hold decision/punt is the only thing that would get anyone in at that level...as for selling
near the top...i dunno. :dunno: there's no system that can do that.

I think the only way to do a super trade is belief in something...a cycle, person, commodity
etc...gold for example, will it go ballistic? where is the top for POG :dunno: LGL was 1.50 a
share a few months ago, what would LGL be with Gold at 2 or 3000 USD an ounce?

Luck is timing, both good and bad.

 

[Nick Radge]

a super trade is belief in something...a cycle, person, commodity
etc...

A lot of people believed in FMG at $8, at $9, at $10, $11, $12, $13, $12, $11, $10, $9, $8, $7.....$3, $2....they still believe...for all we know it will back to 10c.

I know people who bought CMR at $0.25 and still hold because they believe. Sure they could have cashed out above $5.00 but they believed it was a $20 stock. Belief also leads to denial.

A simplistic trend following system, such as a 13-week/35-week crossover will have long CMR at $0.53 and out at $3.80. Not the top, not the bottom, but a $69,000 profit on $10,000.

I spoke with a woman when ZFX was at $10.00 on its way back from $20. She bought at $19. She genuinely believed it would not only go back to $20 but go well beyond. She believed so much she still holds...whatever is left.

HIH was full of believers. OneTel was full of believers.

Yes, a super trade is catching a macro cycle before others do so and then exiting before others do so. For a non-skilled person like myself however, the only way to do that is use a trend following system.

 

[Wysiwyg]

Throughout the bull run different resources peaked at different times .... uranium one of them. Post no. 1. (note the date and 50% fib. retrace)

Another pullback opportunity(Missed by myself)

 

[beerwm]

Another question I'd like to add.

But maybe the process of investing was 'invented' to make the markets more stable and effectively reduce supply of a stock.
-I saw a bank advertisement on the TV awhile back which stated 'if you have withdrawn your money from the market and missed the best '50[or however many day]' you would have earnt half as much [in total capital gains]'

-although i guess they failed to meantion what the outcome would of been if the had missed the worse 50 days.

-i frequently run into people who tell me 'you never sell a stock' or except corrections/crashes as speedbumps that are unavoidable and unforseen.

-as the market started to retract early last year, you would hear pundits on the news saying 'mum and pa stockholders should not panic and sell out' - ever optimistic of a recovery and largely vocalised.

to me there seems to be alot of mis-information out there that have..
'persauded' people to invest long term.

Sounds all too much like a conspiracy

 

[gav]

lol, don't need to pay tax on capital losses though!

No, but at least you can use them to offset your profits

 

[MRC & Co]

No, but at least you can use them to offset your profits

Not too sure many buy and holders over the last 12 months have many of those profits you speak of

 

[tech/a]

One point missing in the arguement is that long trends happen in both bull and bear runs.

I certaintly didnt take advantage of the run down and am doing what most are-- trading shorter term.

But Sorros,and Radge and many here discussed and found the top of the market back at 6880.
Few hedged,many sold.
if you had purchased 1 Short SPI contract and kept rolling it over today it would be worth around $67,000 (from say 6000).

A short CFD trade on BHP or CBA or MQG or RIO or FMG or ZFX---you get the picture.
I'm sure most of us are at most times biased in market direction and as such miss these very rare opportunities.

Sure we have avoided much of the carnage but not taken advantage of the power of long trends.
Sure easy to see in hindsite but are they really that hard to identify once underway?

 

[Julia]

-as the market started to retract early last year, you would hear pundits on the news saying 'mum and pa stockholders should not panic and sell out' - ever optimistic of a recovery and largely vocalised.

to me there seems to be alot of mis-information out there that have..
'persauded' people to invest long term.

Sounds all too much like a conspiracy

I'm not sure that there's any conspiracy involved but I absolutely agree about the crappy advice that was being handed out in all the media.

There should at the very least have been some proviso added for people retired or close to retirement to make protection of their capital their first priority.

 

[Jikx]

For certain "superstars", trading is the way to go.

However, most people will never be able to beat a simple buy and hold (especially in index stocks), especially AFTER tax. That's a very key point, because even "professional" managers rarely out-perform the index when tax is taken into account.

Buy and Hold, with Sell triggers is probably a safer bet for normal investors. But if you want high risk, go ahead and trade!