Hi. I hope I can set you on a good path. I was with Smith Barney in Williams Tower, but, it turned out that stock broking wasn't for me or I wasn't for broking. I just care about investing and am a lousy salesman. The other way around makes a good broker, though it is better to be a good salesman AND a good investor. <G>
Learning to trade is a tough concept. There are books that are good, but none of them teach you all you need to know. Only experience does that and pain is the best teacher. Immediate success usually screws you up forever, as you think you have the knack and there is not really a knack.
Some of the books I would read are "The Money Masters" by John Train and "Options as a strategic investment" by John McMillan. The first is fun and easy. The second is advanced, dense and less than fun to read. "The Intelligent Investor" by Ben Graham is great, but kind of long in the tooth.
Although I'm a trader, I also consider myself an investor. Your comment about "long term investment" reminded me of a friend from the 1970s. He told me he never lost money buying and selling mutual funds. He was a smart guy, but nobody always makes money. How did you do it, I asked? I sell the ones that go up and hold the funds that lose until they get even again. <G> There is a lot of debate about whether trading works and whether long term investing works. The answer usually favors long term investing, but, right now, we are in a period of time where those who invested in the long term via the most common stock indices are losing money for the past ten years. That hurts the long term case, a bit. However, that being said, I think long term investing has deceiving results and short term trading has deceiving costs. There are also definitional problems. What is long term and what is short term? I don't use tax definitions, which are that a one year holding is long term and less is short. I would say that 3-5 years is more like it for long term.
I would guess that the best investors are both traders and investors. Just like the best air forces have bombers and fighters.
There are two huge traps to avoid in each style: 1. Trading is expense generating. Commissions are obvious, but so is the pricing of the securities. You will buy for more than you will sell for at exactly the same time for the same security. That is how scalpers on the floor and at trading desks make their money. Being a specialist or a market maker is usually a very lucrative career and every trade helps pay for that career. And hurts your returns. Then there are taxes. A good trader will pay a lot of short term taxes at maximum rates. A bad trader will be able to deduct a crummy $3000 from his net income for his losses. That's not very much if you have a net loss of $20000. The more often you trade, the more you pay in commissions and markups/markdowns (together, referred to as "friction") and join in that losing game with the tax man. 2. In standard long term investing, you will diversify and asset allocat and buy into the concept that the average investor can beat the averages, even though he pretty much owns the averages. Illogical and it doesn't happen. The winning long term investors hold for the long term, but they don't diversify a lot. The best I heard of was a guy who delivered packages for UPS and bought with a little bit of his paycheck every two weeks. He retired with a net worth of $52 million. Better than most wage slaves. However, those who do not diversify are also the biggest losers, sometimes tragically. And there are more big losers than winners. I met enough here in Houston who had their life savings in what they knew was a great company, Enron.
IMHO, buy a few names (minumum 5, maximum probably 12) for the very long haul, but don't be afraid to sell them if the story changes drastically. The difficult part is to know when the story has changed drastically vs. what may be a short term opportunity to buy more low. For example, when the Tylenol killer was on a rampage, Johnson and Johnson stock fell in price. The folks who panicked thought that over-the-counter medications were dead meat. But JNJ simply found safer ways to package its many otc medications and Tylenol sells more than ever today. And that was not a time to sell JNJ, it was a time to buy more. On the other hand, when Bear Stearns became unable to sell short term paper to finance its trading, that turned out to not be a short term problem, but a drastic change. People who can tell one from the other make tons of money.
Then, around the long term holdings, do some trading. I always recommend options and ETFs and, for some people, futures. With these instuments, you can play themes and hunches, but dont' bet the ranch on them. Remember that trading costs money and you can be wrong. Even when it seems like you can't possibly be wrong. So, live to fight another day. Look at the notes on my 90/10 strategy for a way balance risk vs. reward.
I hope this helps a little. |
