We learn that there are two main schools of thought in investing in the market. The first is to invest in the long term, and the other is to invest in the short term.
The first method is what we are traditionally taught and told to do. The second is what we later learn outside school or what we discover during practice and aspire to do.
Investing in the long term may take a few months to several years. There are many stories of how good and great this method is. Listed firm Philippine Long Distance and Telephone Co. (TEL) is one example.
Its stock price has gone up by no less than 10 times or 1,000 percent over the years. This means that on top of the cash dividends regularly earned from the company, your P1 million would have been P10 million by now.
Sweet and good as it sounds, holding on for the long haul is difficult to do. The many times the market has gone through volatile incidents in the past may have led you to sell a long time ago and never see the desired result in your hands.
Because we can’t see the future, investing in stocks in the short term becomes attractive and handy.
The basic short-term methods of buying and selling stocks can be as short as one day to several days.
When a stock position is held for a few days, it is called a swing trade. And when a stock position is opened and closed on the same day, it is called a day trade.
Day trading does not necessarily begin with buying first, and then selling second. It can begin with selling first—as in short-selling—and then, buying later (to cover and complete the trading cycle).
Day trading is further refined to include what is called scalping or spread trading. Here, the trader makes an attempt to make a spread or profit out of the small price gaps of a stock. This involves buying and selling in a matter of minutes or less.
As advised, one should open and close a stock position one at a time when day trading or doing its variant. Making simultaneous positions is too cumbersome. It may prove confusing and lead to disastrous losses especially when the market becomes volatile.
Last week
After the market meltdown on Monday afternoon, the grandson of a friend called me up to ask what stocks I would recommend for him to buy. He remembered one of the investing tenets he read. This was to “buy when there is blood on the street.”
As an old-school person, I told him to stay away. The market is too volatile. It is better to observe and wait. Keep a safe distance. By the sound of his voice, he found my advice disappointing and confusing.
As the days passed, I found myself regretting my advice to him. The market bounced in big leaps as do other markets around the globe.
The market meltdown was initially sparked by the devaluation of the Chinese yuan. This was followed by the reduction of interest rate and liquidity requirement on banks, which appeared not enough to stem China’s economic slowdown.
New statistics on the state of the US economy, however, reversed the global market downturn. As reported, the US economy grew 3.7 percent in the second quarter. This was faster than the previous estimate of 2.3 percent.
A fall in the data on joblessness was more than expected and this further supported the belief that the ongoing US economic recovery is sustainable. This gave renewed confidence worldwide.
For instance last Friday, the spreads in Nickel Asia Corp. (NIKL) was astonishing. At its closing price of P8.05 per share, it made a spread of P1.23 from the previous day’s close, or 18.04 percent.
Another is listed 8990 Holdings Inc. (HOUSE). At its closing price of P6.78 apiece, it made a spread of P0.48, or 7.62 percent.
A lot of other second and first line stocks made good spreads last week. The daily variance ranged from 2.8 to 7.8 percent in one day.
My friend’s grandson is now confused. If he did not follow my advice, he could have caught one of those stocks that did well during the week. He holds some of them and he could have sold and bought them back last week either by swing or day trading.
Bottom line spin
Missing the opportunity to trade based on the big price swings last week might look regrettable. Those price swings are hard to come by.
On second thought, I have learned that investing in stocks is not a matter of technique but of individual temperament or personality. Based on stories of those who made good in the stock market, they say that success came to them only when they fully understood their own personal traits.
Long-term investors have longer patience than short-term investors. They also have an exact entry or “buy” and exit points and protective stops. All of which are determined by fundamental valuations and considerations.
Short-term investors, on the other hand, are a little restive. They want to be on the constant move. They rely more on technical considerations such as price chart patterns and the likes.
To my mind, being patient or restive is not the deciding factor that makes you successful in your chosen investing approach or strategy. It is also about being able to react properly at the right time.
This distinguishes one’s ability to trade or invest successfully in the stock market. It is not by being proactive for the future, but by being good in reacting in the present. As what author and investing adviser Toni Turner said, “the stock market flows like a river. You cannot push it in the other direction. You can cannot disagree with it, or demand it behave differently. You can only control yourself and your reaction to it; [so] don’t push the river, swim with it.”
(The writer is a licensed stockbroker of Eagle Equities Inc. You may reach the Market Rider at marketrider@inquirer.com.ph, densomera@msn.com or at www.kapitaltek.com)