Long Term Investing Vs Short Term Trading

Do you believe in long term investing? Or is it that you do not believe in short term trading? 
 
Irrespective of what you and I believe in, the fact remains that it’s a big mistake to simply ignore short-term(ism). Short term trading can deliver quick returns. Period. But are these (eye-popping) short-term performances sustainable over long term? And why is it that after every crash (2000, 2008, etc), it is the traders who are wiped off and it is the long term investors who are not? There must be some reasons why traders have such high (market) mortality rates?
Lets look at it from another perspective. When we talk about investing or trading, what we are indirectly referring to are the time horizons. Now these time horizons are relative. Your long term can be short term for someone else. One of my close relatives has been investing for last 30 years. According to him, anything less than 10 years is short term!! And just one of the stocks in his portfolio happens to be HUL (Hindustan Unilever Ltd). After adjusting for bonuses, splits and dividend re-investments, his average price per share works out to be Rs 2.00/- (No…it’s not a typo); and HUL is currently trading at around Rs 570. Add to it the current annual dividend of Rs 7.50 per share. i.e. He has a capital appreciation of 28,400% and earns 375% (on his original investment) in form of dividends every year. Now can a trader match that? That too, year after year? One may argue that one can. But figures like 28,400% & 375% make it really hard for traders to challenge this long term investor’s approach of terming anything less than 10 years as short term. 🙂
Now these time horizon also depends on one’s risk appetite. It is a known fact that in short term, markets are volatile i.e. risky. So if one cannot take much risk, then he is not suited for short term trading. He is better off investing for long term by picking up good, solid companies or investing systematically in mutual funds. The longer you have to invest your money, the bigger risks you can take. If you need money in next few years, you should take a more conservative approach and put it in banks or other safer investment products like Bonds, RDs, FDs, etc.
For an average investor like you and me, anything more than 5 years can be termed as long term. Five years is a long enough time to assess whether a company is doing good or not. I personally define my long term as more than 10 years. What about you?
 
Disclosure: No positions in shares of companies mentioned above.

Written by Dev Ashish

Founder - Stable Investor Investing | Personal Finance | Financial Planning | Common Sense

3 comments

  1. Let me tell you from where this notion of trading has taken birth. People, from all walks of life, indulge in the stock market speculation at some point. But, the ones that earn money during the uptrends lasting 5 to 8 years, become role models and stand-out. However, this success if almost certainly shortlived as it has no solid ground. When the downtrend starts, surely, each and every one of them falls even worse. However, only the persona of success seems to linger. The loser gets forgotten.

    Therefore, people, largely, think that the concept of trading in the stock markets exists and it is feasible and even possible. But, the fact is it is not. It is only a mirage.

  2. Well said Amit. And that is definitely one of the reasons why people tend to loose more during downtrends than what they gain in uptrends. As Warren Buffett has rightly said, that we only know who is swimming naked when the tide is low. 🙂

Leave a Reply