Investing Vs. Trading: Where Do You Stand?

You’ll hear financial pundits say that buy and hold investing is dead or encourage you to bounce in and out of stocks as if many that have come before have been successful at doing so. The reality is that being successful at short-term trading is extremely low to impossible. Even if you could beat the market in absolute return, after you deduct trading fees and taxes, your return will diminish significantly. A buy-and-hold investor and a trader who both earn 10% before trading fees and taxes will have much different returns after them. The trader will just have worked a lot harder during the year constantly looking at headlines and charts. The buy-and-hold investor will have done his or her work upfront and have rest assured that his or her investment was a good long-term holding with good long-term economics.

Long-term investing is essentially business investing. If you’re in it for the long-term, think of buying a stock as buying a part of a business (because it is) and not a piece of paper or lottery ticket. In the long run, the best businesses will outperform and the subpar businesses will underperform. It’s as simple as that. Coca-Cola, Johnson & Johnson, General Mills, General Electric – these companies have been around for a long time – and they all have had their stocks rise, fall, go sideways, downgraded, and upgraded throughout their histories. Yet, their stock prices have all risen in the long-term because they reflect the essential values of their businesses. In the short-term, anything can happen.

Echoing Benjamin Graham, the market is a voting machine in the short-term and a weighing machine in the long-term. Stocks can get bid up to astronomical levels or fall to ridiculous levels in the short-term just because their underlying businesses are in a “revolutionary industry” or because they’re expected to make a few pennies less on a per share basis. Those in the market are essentially “voting” on what’s popular and what’s not popular in the short-term. In the long run, however, the stock’s true value or “weight” is reflected in its price. The market will reflect psychology in the short-term with stock prices reflecting investor emotions more than economics or value. In the long run, however, stock prices will be more in line with underlying value and reflect the economics of the underlying business.

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