Long Term Investing Vs Short Term Trading

Long Term Investing Vs Short Term Trading

Jun.10, 2010

Investing into stocks over the long term and trading stocks are two conflicting points of view. So, which one is better? Well this really depends; each strategy has its advantages and disadvantages.

Long term investing is simply the process of buying strong companies and holding onto them for the long term. Because the companies are fundamentally strong they are unlikely to go out of business any time soon and in fact they are very likely to increase in price as time goes by.

Trading stocks in the short term is actually a completely different strategy. Instead of holding onto stocks for the long term short term traders tend to use things such as chart patterns and technical indicators to attempt to catch the short term movements of stocks and hopefully make a larger profit then if they were to simply buy and hold the stock.

Which strategy is best? There are defiantly advantages and disadvantages to each method. The best strategy for you really depends on you and where you are at.

Trading stocks in the short term does have a lot more potential then buying and holding. If you can make short term gains relatively consistent over the long term then you can do pretty well for yourself. However it does take a lot of work and there are no guarantees that you will make any money. It is like starting a business most people will fail their first time around, but those who can keep getting back up and learning from their mistakes will likely do well eventually.

If you are willing to put all of the time and energy into short term trading the rewards can be pretty nice.
However if you just want something that is considered to be safe yet does have some potential then you can take a look at long term investing. The main advantages of long term investing are that it is passive and it is a relatively secure way of making a decent return over the span of a couple decades.

Basically it comes down to this, if you want to earn a relatively safe return passively then investing in the stock market can be a great idea. If however you want to attempt to increase your returns and put some extra time into it then trading stock might be better suited for you.

Investment Strategies and Theories You Must Know for Greater Investment Success!

Warren Buffett once said, "To invest successfully over a lifetime does not require a stratospheric I.Q., unusual business insight or inside information.  What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."

Posted here are some basic foundations to help you develop your own investment strategy and to help you make better investment decisions.  These are also the investment strategies and theories you must know for greater investment success!


Investment Styles
"Your 'Basic Advantage' is to be able to think for yourself."  Wisdom from Benjamin Graham.

Different Investment Styles
Value Investing
Growth Investing
Core/Blend/Market-oriented
Stock Pickers
Market Capitalisations
Value and Small Cap Stocks
Top-down Approach
Bottom-up Approach
Benchmark Investing vs Absolute Return Investing

Methods of Securities Selection
Fundamental Analysis
Technical Analysis
Techno-fundamental Analysis
Limitations of Fundamental and Technical Analysis

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Investment Strategies and Theories
"You need a strategy and sound approach before you invest."  Anonymous

Short-term Strategies
Short Selling
Margin Investing
Momentum Investing - "Buy High, Sell Higher"
Sideway Trends

Long-term Strategies
Buy and Hold
Dollar-cost Averaging
Ladder Investing

Managing Risk 
Diversification
Danger of Owning Too Many Stocks
Modern Portfolio Theory
Limitations of the Modern Portfolio Theory
Asset Allocation
Criticism of the Asset Allocation Strategy

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Portfolio Management Strategies
"Successful investing is more than buy, hold and forget."  Anonymous


Static Asset Allocation
(i) Buy-and-Hold
(ii) Strategic Asset Allocation

Flexible Allocations
(i) Tactical Asset Allocation
(ii)  Dynamic Asset Allocation

Core-satellite Portfolio Management

Alternative Strategy - A Trader's Approach
Short Term Trading

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Limit Your Losses
"Survive first and make money afterwards."  George Soros


The Evolution of Buy-and-Hold Advice
Efficient Market Hypothesis
Random Walk Theory
Merits of the Buy-and-Hold Method
Weaknesses of the Buy-and-Hold Method

Forgotten History of a Sideways Market
Futile Asset Allocation Strategies

The Easy Way Out?
Transaction Costs
Limitation of Traditional Investment Funds

Market Anomalies
Value Investing
Neglected Stocks
Low-priced Stocks
Small Cap Stocks
Investors' Irrationality

How to Prevent Big Losses
Rule No. 1 - Set and Apply Stop-Loss Rules
Rule No. 2 - Do Your Homework
Rule No. 3 - Look for Margin of Safety
Rule No. 4 - Do Not Bet Too Much at One Go
Rule No. 5 - Do Not Over Diversify
Rule No. 6 - The Trend is Your Friend, Until It Bends
Rule No. 7 - Avoid Deadly "Price Bubbles" When They Pop


Ref:  How to Be a Successful Investor by William Cai

Short-term Investment Options

Investment question:

I have a short period of time (1 year or less) during which I will have money to invest. What are my investment options?

Answer:

If you only have a short period of time in which to invest your money (i.e. less than one year), there are several investment options you should consider outside of the typical checking and savings accounts, which pay very little or no interest. These alternative short-term investments are known as money market securities.

For example, you might want to consider a Treasury bill (T-bill), a U.S. government debt security with a maturity of less than one year. T-bills ares one of the most marketable securities around the world, and their popularity is mainly due to their simplicity. The maturity for a T-bill is either three, six or 12 months, and new ones are typically issued on a weekly basis. The constant issue of new T-bills and the competitive bidding process mean that T-bills can be easily cashed in at any time.

Furthermore, banks and brokerages traditionally charge a very low commission on trading T-bills. You can purchase Treasury bills in the U.S. through any of the 12 Federal Reserve banks or 25 branch offices.

Commercial paper is another investment you might want to consider. It is an unsecured, short-term loan issued by a corporation, typically for financing accounts receivable and inventories. It is usually issued at a discount to reflect current market interest rates. Maturities usually range no longer than nine months and, because of their slightly higher risk, they usually offer a higher rate of return than a T-bill.

Certificates of deposits (CDs) are time deposits at banks. These time deposits may not be withdrawn on demand like with a checking account and are generally issued by commercial banks, although they can also be bought through brokerages. They carry a specific maturity date (three months to five years), a specific interest rate that is slightly higher than T-Bills and can be issued in any denomination. However, the amount of interest you can earn depends on the amount and length of the investment, the current interest rate environment and the specific bank. While nearly every bank offers CDs, rates can vary widely, so it's important to shop around.

Banker's acceptance (BA) are short-term credit investments created by non-financial companies and guaranteed by a bank. They are traded at a discount to face value in the secondary market. For corporations, a BA acts as a negotiable time draft for financing imports, exports or other transactions in goods. This is especially useful when the creditworthiness of a foreign trade partner is unknown. The advantage of BAs is that they do not need to be held to maturity and can be sold off in the secondary markets where they are constantly traded. (For further reading on these subjects, check out Money Market Tutorial.)

http://www.investopedia.com/ask/answers/109.asp

'The risk of losing money in the short-term is high'

'The risk of losing money in the short-term is high'

The stock market, that maddening babble of millions of differing points of view, has done it again.

By Ian Cowie
Last Updated: 1:07PM BST 11 May 2009

Just when many people decided never to have anything to do with shares, prices took off.

This is good news for millions of people hoping endowments will repay mortgages, pensions will fund retirement and unit or investment trusts will prosper. Even if it is also rather galling for anyone who shunned their individual savings account (Isa) or annual pension allowances last month.

So the index of Britain's biggest shares soared by 25pc in two months. When you consider how many "experts" have produced books on economic meltdown in recent weeks, you would need a heart of stone not to laugh.

Perhaps the market will be higher still by the time the more ponderous pessimists have published. Nor is the Footsie's progress being driven by obscure stocks which few people hold. Barclays Bank, for example, has seen its share price rise more than six-fold this year from 47p, when doom-mongers feared bankruptcy, to 291p this week.

Nobody knows if this will last but I draw comfort from the fact that so many experts remain bearish. The same people were bullish before the crash.

It is human nature to assume that the future will be like the immediate past. But, as the bar chart on this page demonstrates, a longer term view is more encouraging. M&G looked at 20 years' returns from the British and global stock markets, measuring hundreds of periods starting at the beginning of each month.

What comes through loud and clear is that the risk of losing money in the short term is high. Where shares were held for only one year, losses were suffered a quarter of the time. However, where holdings were extended to five years, the risk of loss fell to one in five.

Most reassuringly, where shares were held for a decade, losses were suffered less than 1 per cent of the time. That illustrates what an extraordinarily dire decade we have lived through, since the FTSE peaked at 6,930 in December 1999.

It even suggests, dare I say it, that we may make further progress before that decade is complete. Most importantly, it illustrates that long-term investors are not taking the same risks as short-term speculators.

http://www.telegraph.co.uk/finance/personalfinance/comment/5305053/The-risk-of-losing-money-in-the-short-term-is-high.html

Greater Fool Theory

Greater Fool Theory

One of the assumptions of the discounted cash flow theory is that people are rational, that nobody would buy a business for more than its future discounted cash flows. Since a stock represents ownership in a company, this assumption applies to the stock market. But why, then, do stocks exhibit such volatile movements? It doesn't make sense for a stock's price to fluctuate so much when the intrinsic value isn't changing by the minute.

The fact is that many people do not view stocks as a representation of discounted cash flows, but as trading vehicles. Who cares what the cash flows are if you can sell the stock to somebody else for more than what you paid for it? Cynics of this approach have labeled it the greater fool theory, since the profit on a trade is not determined by a company's value, but about speculating whether you can sell to some other investor (the fool). On the other hand, a trader would say that investors relying solely on fundamentals are leaving themselves at the mercy of the market instead of observing its trends and tendencies.

This debate demonstrates the general difference between a technical and fundamental investor. A follower of technical analysis is guided not by value, but by the trends in the market often represented in charts. So, which is better: fundamental or technical? The answer is neither. Every strategy has its own merits.

In general, fundamental is thought of as a long-term strategy, while technical is used more for short-term strategies.