Trader or Investor?
Stockscores.com Perspectives for the week ending October 10, 2010
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In this week's issue:
Should you be a trader or investor? It is a question that is being asked more often because the performance of long term, buy and hold strategies has been disappointing over the past 10 years. Is buy and hold a dead strategy or is timing the market a fool's game?
People often confuse trading with day trading, but being a trader does not mean you are moving in and out of stocks in a very short time period. The aim of the trader is to own stocks when they are outperforming the overall market. Typically, that outperformance can last a few months but it is rare that it last more than 18 months.
Buy and hold investors don't typically have a plan to exit the stock; their intent is to buy good companies and hold them forever. Since a taxable event only occurs when you exit a stock and crystallize the capital gain, the buy and hold strategy has tax advantages. However, the strategy is also attractive because it forces the investor to ride out the inevitable ups and downs that the market makes in the long term appreciation of stocks. This is why many experts still promote a strategy that has not performed too well this millennium.
Indeed, most stocks do go up over time. I used Tradescores.com to go through the 10 year, weekly charts of all the companies that make up the S&P 500 index and would estimate that only about 10% of the companies in the S&P 500 are trading at a lower price today than they did 10 years ago. A good example is the shares of Eastman Kodak (EK) which were trading in the $60 price range in 2000 but are now below $5.
With about 90% of S&P 500 stocks higher today than they were 10 years ago, it would seem that advocates of buy and hold strategies would have a pretty good argument. However, if you take the time to look through all 500 charts as I did today, you will see that how they get their makes a very good case for timing the market.
Most stocks, most of the time, do not outperform the overall market. Instead they match the performance of the underlying index, demonstrating what analysts call the stock's Beta, its correlation to the overall market.
In the last 10 years the majority of stocks have had a short period of outperformance. Lasting typically 18 months or less, these stocks trade on their Alpha factor which is the price performance attributed to the company and not the overall market. Traders are in constant pursuit of Alpha for it is the factor that allows individual stocks to outperform the index, the goal of every money manager.
All market participants should be working to capture Alpha. The difference between traders and investors is that traders are willing to sell stocks when they cease to outperform with the possibility of buying them back again during the stock's next Alpha phase.
This means that traders move in and out of stocks, ensuring that their capital is always working its hardest. The investor who bought Boeing (BA) in 2000 paid $60 and in ten years would be up about $10 (BA closed at $69.23 on Friday). However, the trader who moved in and out of BA on a simple trend line break strategy would enter BA in 2003 at $35 and sold late in 2007 at $90. This strategy then got them back in to BA in 2009 at $50 for a relatively short ride up to $70. Even after paying the taxes on the capital gains, the trader dramatically outperformed the long term investor.
The problem, of course, is that there is a good deal of skill required to time the market. Many claim that it is too difficult to do well and that is a good enough reason to not do it at all. Following that logic, we should have never tried opening heart surgery as a way to save lives, since it too is a hard thing to do.
The real problem is that people try to time the market without the skill to do so. Unlike cardiology, there are few barriers to entry for traders. To do anything well requires skill. Is it simple? Yes. Is it easy? No.
Market outperformance does not happen forever. There was a time when Eastman Kodak was one of the great market success stories. Today, they are used by market timers to demonstrate the danger of buy and hold.
And who do the investors point to as the greatest buy and hold stock of the past 10 years? Apple (AAPL) is certainly a candidate since it has gone from trading in the $7 range in 2002 to where it is now pushing toward $300 a share. However, even the mighty Apple did poorly for about two years out of those 8. Those are two years where the capital could have been working harder in an Alpha stock.
This is really what trading comes down to. Put your money in stocks that are out pacing the market and when they cease to do so, sell them and move on to something else. What buy and hold investors seem to forget is that there is no rule which says you cannot buy back something that you have sold.
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I used the Chart Watch tool on Tradescores.com to look through the 10 year, weekly charts of the 100 most active stocks in Canada. I wanted to find some names that had good long term charts for the more conservative investors who are looking for good long term trades. When inspecting the charts, I checked for stocks that were breaking from good chart patterns. Here are some stocks to consider:Back To Top
1. T.BPO
T.BPO has been a strong performer over the past year but has trended sideways for a number of months, building a good base of support. This week, the stock broke through resistance and appears likely to move higher from here. Support at $15.50 needs to hold.
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2. T.PWT.UN
T.PWT.UN broke its downward trend line earlier this year and this week is breaking to the upside from a pennant pattern on the weekly chart. Support is at $19.25.
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3. T.BNS
The Canadian Banking sector is looking good and T.BNS is the leader of the group. This week, it breaks out from a cup and handle pattern that has been building since 2007. Support at $49.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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