By Paul Price
Frantic in-and-out trading is a very popular technique for those who like to feel they are making a living while sitting at home in front of their computers. Scalping a percent or two on huge principal amounts seems tempting when you simply total up the dollar amounts of gains as they are booked.
What could be simpler? But what happens when your $200,000 block of shares gets caught in a downdraft before rising? Do you get stopped out and eat a big loss? Or do you turn your ‘trade’ into an ‘investment’ hoping it rebounds before getting worse?
Unless you have sufficiently large trading capital, it won't be possible to diversify adequately with positions that size ($200,000).
What if the company announces an earnings miss? What if Japan craters or some European bank or government goes does in flames?
It might be difficult to sleep at night worrying about what might happen on the next day’s opening. It might be even more difficult to sleep the next night after seeing what did happen.
Proper portfolio construction and patience allows for a saner existence, much lower trading expenses, and improved mental health.
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While “You’ll never go broke taking a profit,” you will also never have the chance to make big percentage gains.
Our Virtual Value Portfolio is profitable in large part because we had an investment horizon that allowed that to happen. Buying value means picking stocks that are underappreciated by others at that time. Typically, it takes months to years to realize your expectations. Market Shadows has been lucky, good or both since we started our portfolios last fall. The most important decisions we made were to get invested and to stay invested. We didn’t try to time the market. We ignored Fiscal Cliff, Sequestration, and other assorted media scares.
Trade less, make more, sleep more.
Your psychiatrist will be the only one who suffers from the change in technique.
See full details of our Virtual Value Portfolio and our Put Selling Portfolio.