Photo Credit: killthebird
As a trader, I do not only study about trading alone. It is equally important to understand other perspectives of investing, for e.g., the popular buy and hold strategy. This is to find the possible weaknesses of trading and how to prevent them. In this article, I will share one weakness of trading against the buy-and-hold strategy.
We start off with Burton Malkiel quoting Prof Negat Seybun:
“Professor H. Negat Seybun of the University of Michigan found that 95 percent of the significant market gains over the thirty-year period from the mid-1960s through the mid-1990s came on 90 of the roughly 7,500 trading days. If you happened to miss those 90 days, just over 1 percent of the total, the generous long-run stock market returns of the period would have been wiped out. The point is that market timers risk missing the infrequent large sprints that are the big contributors to performance.”
You realise a buy-and-hold strategy would not miss a single day of the 90 profitable days (provided they hold on to their stocks for the entire thirty-year period). As for traders, we enter and exit the market frequently, and at other times, we may sit out the market to anticipate the next trend or avoid a whipsaw market. Our risk appetite may also prevent us from participating in the market at certain times. Hence, there always pose a chance that we may have caught with inactivity on any of the 90 days, which translates to missing out large profits.
Taking a look at the richest investor in the world, Warren Buffett, is a true blue buy-and-hold investor. Does it mean that a buy-and-hold investor will be better off than a trader in the long run? It is supposedly so according to the academics. Trading always look good as compared to the buy-and-hold group in the short term. Especially the ability to short and make money during a downtrending market makes every trader proud and happy over their counterparts. However, we must look over a longer horizon, such that we ensure our long term profits are comparable if not, better.
I believe it is indeed a weakness for traders and it reminds us to keep invested consistently, according to the rules of our systems. This goes to the extent that we have to persevere through losses, which makes cutting loss ever more important.
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