Buy low, sell high. It is probably the most fundamental of all investment principles. The trouble is that it is hard to know what is low or high, except with hindsight. Warren Buffett’s answer to this dilemma was famously to urge investors to be greedy when others are fearful, and fearful when others are greedy. But even if you are Warren Buffett, there is nothing sure-fire about this strategy either. Because of the difficulty of timing the market, private investors are often urged by investment managers not to bother. Instead, a ‘buy and hold’ approach is generally advocated.
However, I think you also have to work out whether you’re a trader or an investor. Most investors are in it for the long run, and reacting to market events can sometimes distract them from their main aim of generating long-term returns. However, while investors can put the question of market timing to the back of their minds, traders need to make the right calls at the right time in order to turn a profit. There is no such thing as a buy and hold trading strategy.
Why spread betting? If you are a long-term investor with a portfolio of stocks heavily underwater you might be rightly questioning whether buy and hold is still a viable way for retirement. The wild market movements of today’s stock market make it ideal for holding onto trades for short periods, and with ever tight spreads, it has never been easier to speculate on short-term price movements. After all, if you go long with spread betting you can still participate in dividend payments and leverage your money – which means that gains and losses are amplified and less capital is required from the beginning. And if you know how to spread trade – how to react and what to do in any market situation, irrespective of whether the stock market is rising or falling, you will be better protected and even more importantly be able to sleep better at night.
But I am however also of the opinion that if a company represents good value that it should recover over time and price fluctuations should be ignored and your worst case scenario is it shall go bust. Maybe there’s a middle way!
In particular; two points:
1. Over time the fundamentals of a company can [and often do] change and a company that you felt from your analysis was worth investing in could gradually deteriorate over a decade or so. Would you prefer to wait until it went bankrupt or salvage a small percentage of your original investment?
2. If you buy shares in a company that you believe has good long term prospects and within weeks you have made a 10%+ capital gain if you sell then surely ‘a birdie in the hand is worth more than a potential dodo in the bush’?
But by-and-large I am pretty happy with an underlying buy-and-hold strategy for a raft of core stocks in my portfolio. It may not suit everyone and appears to be generally frowned on by all and sundry in these leveraged days – but we all have to find a way that works if we are to stay afloat in this game. But of course I do a bit of ‘pin-money’ spread betting as well 😉
My attitude from the perspective of a longer term investor would be that it would be sensible to buy for the long term, but to take a good profit at an early opportunity if it presented itself and also to sell a long term investment if the fundamentals you based your original decision on changed negatively.
I’ve also thought of either taking the profit out and leaving the original capital or taking the original capital out and let the profit run [in a hypothetical scenario].
You buy 10k of a share. It is now worth £12k. Why not take out your 10k to invest elsewhere and whatever happens to the remaining £2k you’ve lost nothing from your original investment as your original capital is secure?
I also believe that investing JUST for the sake of making money is a little sad.
In the above example if you took out your £2k profit instead of the original capital why not blow £100 on some luxury you don’t really need before reinvesting the remaining profit of £1.9k?
It’s good psychologically to reward yourself when things go well as you can’t guarantee always being a winner and by spending some of your good fortune can help oil the wheels of our pathetically consumer led society.
Investment strategy depends entirely on your objectives, I think.
If your objective is to achieve significant capital appreciation over a fairly lengthy period – say 5 or even 10 years – then there is some logic to “buy and hold”, provided that the investment case was strong in the first place and continues to be strong, irrespective of interim share prices. You also need to be able to lock that cash away without needing it, and feel comfortable with the knowledge that at any one time, you might be in a significant loss-making situation on some or all of your portfolio, due to market sentiment, macroeconomics, fluctuations in commodity markets etc.
If your objective is capital preservation as well as long-term appreciation, that’s a different case. You need to have stop losses in place and stick to them, other than in extreme circumstances. By “stop losses” I don’t mean automatic stuff done by your brokers, and still less do I mean the stops involved in controlled risk spread-betting. Both of these react instantly to intraday volatility and will stop you out unnecessarily. I mean proper manually/mentally operated stop losses which are totally within your own control, and which you operate according to “real” share prices rather than momentary blips which have no apparent cause. Preferably trailing stop losses, too, which move up behind the share price and help you lock in profit as well as avoiding loss. I once read a book about gliding (an old hobby!) which was called “Winning by not losing” – a perfect phrase to bear in mind.
If your objective is to make a decent income, along with preserving your capital, then you have to be even more disciplined about entry and exit points, and really take emotions – fear and greed, predominantly – out of the equation altogether. Trades should not be random, but where possible should be planned and even researched. Jumping on the latest bandwaggon – about which you know nothing – may pay off handsomely some of the time, but for many it is a recipe for disaster. A popular saying is that a long-term investment is only a short-term trade that went wrong. This is true in very many cases. One needs to act BEFORE the short-term trade “goes wrong” – and this is effectively achieved by applying and sticking to a stop loss. After all, would you keep paying £20 a week to BT if TalkTalk can do the same for £10? Of course not. So why throw money away on the stock market?
I began with an investment style suited to Objective 1. For the last few years I have combined that style with the one needed for Objective 2. I don’t think I have the discipline to fully achieve Objective 3, although I am slowly moving in that direction.
John Mauldin pointed out that the 2008 crisis demolished portfolio theory (which argues that provided you have enough diversification you can eliminate risk). In practice ALL assets fell in value with the exception of certain currencies and certain government bonds. Even gold fell to 600 and something an ounce in October during Lehman.