Saturday, 2 May 2009

Buy and Hold v Trading

I like to mess about with shares from time to time, although the time I used to spend looking for bargains is now mostly spent investing on sports, and as I have mentioned many times before on here, there are many similarities between financial investing and sports investing.

Financial experts have for years recommended a Buy-and-Hold strategy, but caution that this doesn’t mean “buy and forget about it”. The “buy and forget about it” strategy can be compared with outright punting on sports, whereas active trading can be compared with, well, active trading.

In financial investing, there is a not insignificant cost associated with frequent forays into the market; commission on each trade, tax implications etc., whereas (for now at least), no such penalty hits someone doing the same in sports.

Whether you buy a stock that has performed well in the past, or you back the highly rated favourite in the 2:30 at Epsom, the principle is the same. The time-frames are rather different, but if it makes sense to sell your stock that is no longer performing well, and move the funds to another investment choice, then surely it makes sense to trade out your position on the horse if it starts to lose ground?

In the old days, sports investors didn’t have the option to trade out of a position, and in truth, many don’t even care to today, even though that option is available. For a lot of people, a bet is not an investment. They want the thrill of the action rather than the responsibility of trying to make money from it. If it wins, that’s great, something to tell your mates about at the pub, and if it loses, no worries – on to the next race, and forget it.

For me, the ability to trade has been the single most important factor in making investing consistently profitable. Pre-market, the prices are usually about where they should be, (the markets are efficient), and unless you have some inside information there is no long-term benefit to betting on these events. With trading however, opportunities for finding value occur much more frequently and, you can combine your experience of the markets and reading of the game to take advantage.

1 comment:

PhilipH said...

I like to have a small punt on the "penny shares" now and then. A few years ago I bought a couple of thousand shares in "First Pacific" trading on the Hang Seng. Divis were by way of scrip issues and I just forgot about them after receiving their extra "shares". After about 6 years I tried to sell them but was told they could not be sold right then. I left it for a year or two and then tried again, via a different broker. I virtually trebled my investment, mainly because of the high increase in the number of shares I'd accumulated and also because the company had diversified. I have not ventured into overseas companies again.

My present punt is Nighthawk Energy, an AIM oil prospector. I bought a few at 23p a month or two back on talk of the sale of part of one of their oil acreage (The Jolly as it's called). On Friday they closed at 37.75p, a 63% gain so far. The talk is of finalisation of the asset sale in a week or two, whereupon the price should be bumped up considerably. Of course, like trading on Betdaq nags, it's a question of whether to trade out at a certain profit or let it run a bit more... Hmmm, I'll give it a fortnight more I think.

Cheers, Phil