Why the Best Investing Strategy Is Not Always the Best Trading Technique
by Alexander Green, Chief Investment Strategist
Wednesday, March 24, 2010: Issue #1223
At the Investment U Conference in San Diego last week, I gave a talk called, “The Secret of the World’s Greatest Investors.”
What is that secret? I’ll give you three hints:
- Lord Rothschild said, “The time to buy is when there’s blood running in the streets.” He added that the way he got rich was he “always sold too soon.”
- John Templeton, the man who almost single-handedly pioneered the field of global investing, said the best bargains can only be found “at the point of maximum pessimism.”
- Warren Buffett, the world’s most successful investor, says, “You want to be very fearful when others are greedy and very greedy when others are fearful.”
In other words, the great investors have a contrarian spirit. They draw their own conclusions, not caring about the consensus…
Going Contrarian: The Difference Between An Investor and a Trader
For example, many investors scoffed at Warren Buffett ten years ago when he warned of dangerously overvalued tech stocks. They said he didn’t understand the technology revolution, the so-called New Era. They laughed that he was missing the boat.
Buffett just smiled, noting in Berkshire Hathaway’s annual report that, “We have embraced the 21st century by entering such cutting-edge industries as brick, carpet, insulation and paint. Try to control your excitement.”
Oh, and by the way, that ship he missed… it turned out to be The Titanic.
Contrarians know that fear and greed cause people to push prices too high or too low. So the key is to look at market fluctuations as your friend rather than your enemy. You want to profit from folly, not participate in it.
But there’s something else important to note here…
- True investors think long-term.
- They often hold their stocks for years.
- Indeed, Buffett says his favorite holding period is “forever.”
When you have this long-term perspective, you can sit comfortably when things are going against you.
But a trader is in the game for short-term profits. He doesn’t want to wait years for profits. He wants to generate them quickly.
If You Want Short-Term Trading Success, Don’t Be Contrarian…
For this reason, he should not use a contrarian approach. Here’s why …
Some analysts make a big deal of investing against “the consensus.” But the average investor – who is following the major market trend – is actually right most of the time. It is only when the stock market goes to extreme highs or lows that the consensus opinion is wrong.
So if you want to be a good short-term trader, buy the best companies that are moving up (always using trailing stops, of course), or short troubled companies that are breaking down (always using a buy stop, of course).
I know some analysts, for example, who have been resolutely bearish on the market not just for years, but for decades. They relish the fact that they’re outsiders and that they get to call equity investors “chumps, patsies and fools.”
They relish this point of view even when they have egg on their faces. That’s because they’re really more interested in being contrarian than in being right.
That’s not the way to make money.
A smart trader invests with the trend, always strictly limiting his risk with trailing stops. A smart investor goes with the trend sometimes and against it only when the market is experiencing extremes in both valuation and sentiment.
As Warren Buffett famously said, “You’re right not because you agree with the crowd or disagree with the crowd, but because your facts and reasoning are right.”
Good investing,
Alexander Green
Related Investment U Articles:
- Three Investment Lessons I’ve Learned From Warren Buffett
- CEOs Are Gloomy, So Buy Their Stocks
- Buying Stocks: Don’t Succumb to The Siren Song of the Naysayers
- Warren Buffett Just Said “Buy!”
- Are These Five Mistakes Killing Your Investment Returns?
2 Responses to “Why the Best Investing Strategy Is Not Always the Best Trading Technique”
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Alexander Green is the Chief Investment Strategist of Investment U. A Wall Street veteran, he has more than 20 years of experience as a research analyst, investment advisor, financial writer and portfolio manager.
This article is right on target. It is the way I have felt for many years but this article verbalized what I could not put into words. I bought my first stock 45 years ago.
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I agree with the general premises. But after the 2009 meltdown, I read a lot about investing for the long term is dead. I don’t know who to believe. Hindsight is 20-20. Had I held on to some of the stocks I bought in March or April of 2009 I would be way ahead. But, I listened to the traders, economists, etc.
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