Today’s comment is by Eric Roseman, our Investment Director and editor of The Sovereign Society’s trading services, Commodity Trend Alert and Global Mutual Fund Investor.
Dear A-Letter Reader:
Are investors really better off timing the market or staying invested for the long-term? That’s a big question which has persisted for years as investors and traders grapple with what works best on Wall Street. Personally, my vote goes to investing. (But that’s because I’m an investor – not a trader.)
I like to compare investing and trading to the old fable about the turtle and the hare. In my eyes, “slow and steady” wins the race every time.
Most investors are long-term oriented and typically hold their securities for many years. Some of the world’s greatest investors include Warren Buffet (Berkshire Hathaway), Peter Lynch (Fidelity Magellan’s skipper from 1977 to 1990), and Marty Whitman of the Third Avenue Value Funds, to name just a few. These investors typically buy growth at a discount, meaning they bought the stocks trading below their intrinsic value and harboring above-average cash-flows, and solid earnings prospects.
Traders, on the other hand, look to book profits regularly and well, trade. Please don’t misunderstand me - trading does work for certain types of individuals. I know some traders who earned a quick fortune buying and selling stocks every day, reacting to ticks in a stock, while glued to the computer screens looking for a momentum-based breakout.
But for many traders, including the infamous “Day Traders,” trading is a mug’s game. Lots of people who trade quickly lose money just as quickly. That’s because there is a huge difference between investing and trading.
For starters, it’s a challenge for most traders to break-even because buying and selling stocks often means fees absorb your capital. Any trader has to take that into account when making their trades. You have to allow for losses.
Even hedge funds, lightly regulated investment partnerships marketed to high net-worth investors, have failed to beat the market over the last 12 months – and they trade excessively. And historical evidence for mutual funds, which usually trade, also shows that over 85% of all actively-managed mutual funds have failed to beat the S&P 500 Index over the last ten years and beyond.
Investing, I think is more about patience than anything else. Here’s an example…
Peter Lynch, probably one of the greatest fund managers in the business from 1977 to 1990, earned a cumulative 2,700% running Fidelity Magellan. But the average investor in his fund during that tenure only earned 5% per year! Incredibly, most investors in the fund traded units often and for the most part, failed to stay invested for the long-term.
My advice is that unless you’re a seasoned trader, buy good mutual funds, index funds, and stocks, and then just sit tight. If you buy mutual funds, make sure the fund manager’s portfolio turnover ratio is less than 30% per annum. Portfolio turnover refers to how often your fund manager is trading; a 100% ratio implies all stocks are bought and sold in a calendar year. Anything above 100% means that manager is churning excessively.
Be an investor. Over time, compounding can work magic.
ERIC ROSEMAN, Investment Director
on behalf of The Sovereign Society
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