Trading vs. Holding - A Primer from Hopin+Prayin on RB
{Really read paragraphs 5&6 and my Note at the bottom, please!!}
In the past two years the Internet has changed the lives of 99% of Americans, generally for the better. Internet stocks, in particular, have changed the lives of many Cabot subscribers for the better.
But there is one so-called Internet improvement that has brought a mixed blessing. It's online trading.
On the one hand, we welcome the lower commissions. They make buying and selling more cost-effective, especially for the smaller investor. But the unwelcome side effect of this increased ability to trade cheaply is that smaller investors, as well as bigger ones, are trading more frequently. And that, we believe, is seldom wise.
Consider the words of wisdom found in that classic investment book, Reminiscences of a Stock Operator, which profiled the life of Jesse Lauriston Livermore. First published in 1923, the book recounts the gaining and losing, several times over, of millions of dollars (back when millions were real money!)
He writes, "After spending many years in Wall Street and making and losing millions of dollars I want to tell you this: It was never was my thinking that made the big money for me. It was always my sitting. Got that? My sitting tight! Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end."
We agree wholeheartedly. The big money is made by the patient holders, not the impatient buyers and sellers. Sure, when you sell a stock in which you have a profit you reward yourself. But you also reward the broker with your commission and maybe the taxman as well. More important, you automatically forgo any future appreciation in that stock. And as we know from the huge long-term successes of stocks like Amazon, EMC, Microsoft, Qualcomm and Yahoo, these long-term profits can be stupendous.
So next time you're tempted to play a short-term trend, ask yourself if it's really worth it. Even better, look back over the trades you've made in the past year, and analyze whether simply holding would have been better. We believe you too will agree with Jesse L. Livermore that sometimes the best course of action is inaction.
copyright 1999 Cabot Heritage Corporation
ragingbull.com
Note by Me: If you sell, not only are commissions and (for most) taxes due but you have anywhere from 25%-50% less 'principal' to generate an equal long term return on another investment purchase. That means in order to earn the equivalent long term yield to what you would have earned on the investment you sold (in this case WAVX) you are going to have to have a Long Term Growth Rate of more than twice what you were earning on your original investment! Think before you do something! Think carefully about all the parameters of your decision! |
