A good post from BRational at TMF. I think you'll find it interesting:
Catching up on many days of missed posts, I read some of the exchange between the usual suspects on short term trading vs. long term holding, role of TA and other much-debated topics in the (aptly-named?) Riggsy thread.
This is one of those where you both agree and disagree with every post as you read it. Yes, ST trading can make sense, in some situations, as would holding over a longer time frame. TA could be useful, but of course the past can never exactly predict the future. There was something that I felt needed to be said though, that may be the missing piece in this discussion (at least missing from explicit mention, though I'm sure not missing from readers' analysis).
Because market prices fluctuate, it is a simple mathematical fact that if you buy at the bottom of every zig and sell at the top of every zag, you could attain a higher payoff than if you simply buy the beginning point (even if it is a market bottom) and sell at the endpoint (even if it is a market top). But this is a big IF. Much research has shown that while someone may be able to call these zigs and zags over a “short” stretch, virtually no-one can make these calls correctly on a consistent and continuing basis. In other words while one might have a good streak, eventually the market will get you, and you will miss some major move. When you consider that most people, including professional traders, do rather poorly at predicting the market's every move, the case for understanding fundamentals, and holding through fluctuations starts making more sense—over the long run (which would certainly have to exceed two years!), one would tend to outperform frequent trading version of oneself. Up moves, and many times down moves, tend to take place in spurts over a short time. Timing these spurts consistently appears to have defied most professionals, let alone you and me.
Having said that, for a holding strategy to pay off, there needs to be a positive trend, and there needs to be a fundamental reason that makes the likelihood of a higher price over time more likely than a lower price. In an essentially flat but fluctuating market (“trading market”), ST trading becomes a more compelling strategy than holding. From what I can tell this is Rat's approach—take what you can, there will be no more good money-making companies like Microsoft and Dell and GE were at one time. From here on, the market will remain flat. To base this kind of conclusion on the past year and a half seems about as rational as concluding that the so-called dot.com bubble would continue indefinitely.
Obviously, those who believe prices will stagnate forever (or at least over their investment horizon), should look to aggressive trading to eke out whatever gains they can. On the other hand, those who believe that people will continue to seek to improve their quality of life and hence both produce and consume, and will wish to take advantage of the wonders of modern technology for education and entertainment, may take a longer term perspective and ride out the waves without risking regret and second-guessing on a daily basis.
One thing that is extremely dangerous in these kinds of discussions is to base conclusions on single examples. The kind of logic that says “those who bought XYZ at 95 and look at it now sitting at 3”—and offering that as “proof” that holding is a bad strategy. In any trade, whether ST or LT, there is such a thing as buying “low” and selling “high”. Why did people buy at 95? If they did based on hype, hoping that the 300% gain attained in just one month would continue indefinitely, then their mistake was in poor timing and poor stock selection. Holding over some period does not exonerate one from understanding valuation, and risk.
Someone noted that TA works because pattern recognition techniques have been successful in predicting certain responses in biological systems. While the market may be technically a “biological” system in the sense that it the accumulation of decisions made by human beings, it is a particular system where any form of reliable predictability is self-destructive. Let me explain. The only reason we expect the kind of returns that Lok wishes to get out of the market (even “over the long run”) is because of the considerably higher level of risk it carries than alternative investment vehicles. Whenever any form of TA becomes “foolproof”, the very rapid spread of information in today's market will almost surely render it useless (if everyone read and interpreted the signals in exactly the same way as Rat does, then the smart strategy would be to play contrarian to these indicators). Any technique that can eliminate, or even significantly reduce market risk in a consistent manner over the long run is inherently self-defeating. Any statistical tool will do a reasonable job of interpreting history, after it has occurred, and may indeed help make sense of prevailing patterns. Whether these patterns will continue is another matter altogether—that is where the fundamentals are likely to provide more reliable guidance.
One thing that is clear is that when every one throws in the towel and starts believing what goes against their better judgment because of the market's behavior over the few months—that is a good sign that the market is shifting. When hard core holders decide that it's time to trade aggressively (Rex?...), the bear market has likely run its course. Just as when aggressive traders decide that riding out the waves beats the heck out of wrong-way guessing, then chances are the bull market may be out of steam.
Back to QCOM and wireless: interesting times, indeed. Having just returned from 10 days in GSM-land, I noticed that GPRS (now widely deployed from an infrastructure standpoint) remains largely outside the collective awareness of most consumers (this is anecdotal, not scientific evidence). The focus has remained on business consumers, marketed directly to companies. In places where cable and DSL-based broadband has limited penetration, and where people pay for local landline service by the minute (i.e. most of the world outside the US, in my case Europe and the Middle East…) GPRS is being marketed as a cheaper alternative than dial-up for internet access. The main feature marketed to both consumers and businesses is the “always-on” feature, definitely a selling point. While speeds are no better than landline, always-on means you don't have to dial every time to gain access. I did see some new Nokia phones with GPRS capability, though their owners appear to have bought them because they were “the latest” rather than to use GPRS. Sprint's initial focus on 1x as voice capacity enhancer, and marketing focus on small business as target for data services, seems to be a prudent strategy. However, over time, as wireless content increases, the way it has in Korea and in Japan's i-mode, we will likely see stronger consumer-centered focus. |
