| Recently, have you run across a growing number of | | | | investor is to establish a set of rules and principles |
| references to the virtues of being a "committed" | | | | that are intelligent and fact-based, and then execute |
| investor instead of a "speculative" trader? I know | | | | them according to plan. Every so often, take a step |
| that I have. | | | | back to re-examine your goals and strategies to see |
| Here is a typical statement: "You cannot succeed if | | | | whether they still make sense. The bottom line is to |
| you trade a lot. You can only succeed by being an | | | | take a long-term view, but recognize that will |
| actual investor. You must realize that by owning a | | | | sometimes lead to short-term activity. There is no |
| share of stock, you are in fact a partial owner of a | | | | logical contradiction in that. |
| real business. No business owner wants skittish | | | | The Sensible Stock Investor holds some stocks for a |
| investors. Corporations want committed, interested | | | | relatively short time (measured in weeks) and other |
| investors who are going to look to the long term, | | | | stocks for years. What label should be put on that? I |
| support the company through thick and thin, and not | | | | would suggest a label like "sensible." Or "buy-to-hold," |
| sell the stock at the first sign of short-term problems | | | | meaning that the intent when purchasing a stock is |
| or bumps in the road." | | | | to hold it for a long time, but that you will sell it when |
| Well. As they say in The Godfather, "It's business, | | | | it stops achieving the goals you set for it. |
| not personal." Let's look at a few facts. | | | | From the corporation's point of view, what I (as a |
| First, some of the points in the statement above are | | | | small investor) do with my shares of stock is |
| true. If you buy a share of stock, you are, in fact, | | | | irrelevant. Owning a tiny share of a business is not |
| part owner of the business. Corporations generally | | | | the same thing as having a controlling interest in the |
| would prefer shareholders with a long-term point of | | | | business. If I buy 100 shares of AT&T, I own |
| view. A long-term view does look right over and | | | | .00016% of the business. My ownership of those |
| beyond mere bumps in the road. | | | | shares gives me zero control over how the business |
| But other ideas are false or misleading. For one thing, | | | | is run. I don't have a seat on the Board, and |
| many active traders are, in fact successful. You can | | | | management doesn't listen to anything I say. |
| succeed or fail if you trade stocks. It is probably true | | | | Now if I were just starting out my own business, |
| that the majority of hyperactive traders do not beat | | | | and I had five angel investors, of course I would |
| the market, but that simply means they have faulty | | | | want them to be committed to my business, stand |
| strategies, or that they execute their strategies | | | | behind me, and not pull their investments out at the |
| poorly, or both. Many traders do beat the market, | | | | first sign of trouble. They would want me to do well, |
| handily and consistently. Poor traders are often | | | | and they would recognize that the best chance for |
| people who have insufficient knowledge, don't do | | | | me to do well is for them to help me. |
| their homework, do not have a strategic approach | | | | But with a large public corporation, the trading of |
| that suits their goals and personality, and are | | | | their shares does not affect the running or financial |
| impatient. | | | | foundation of the corporation in the slightest. The |
| The "trading versus investing" dichotomy sets up a | | | | corporation got its capital at the IPO, via secondary |
| false premise: that there are only two ways to | | | | offerings of its stock, or by borrowing. If you and |
| participate in the market, by being a "buy and holder" | | | | your neighbor trade the shares back and forth, the |
| or by being a "trader." The word "trader" often | | | | corporation isn't affected and shouldn't care. There is |
| carries a negative connotation while "investor" has a | | | | nothing morally virtuous about being a buy-and-holder. |
| halo. | | | | Trading is morally neutral. The question whether to |
| Where does one cross the line from being a "trader" | | | | trade or not is a business decision, pure and simple. |
| to an "investor"? Must you only buy--but never | | | | Each party acts in his or her best interest as each |
| sell--to be an investor? If I turn my portfolio over | | | | perceives it. It is true that many investors who trade |
| ten percent per year, does that make me a trader? | | | | a lot, or who react emotionally to short-term "noise" |
| Twenty percent? One hundred percent? If I buy a | | | | in the market, do worse than others who hold their |
| stock and then sell it ten days later because its CEO | | | | investments longer. But so what? That does not |
| just got indicted, does that make me a trader rather | | | | mean that you have to make those mistakes. At |
| than an investor? Or does it make me a smarter | | | | other times, traders do better than buy-and-holders. |
| investor? If I hold most of my stocks at least a | | | | Neither approach is inherently better than the other. |
| year, does that make me an investor? Three years? | | | | The fact is, "investing" is the buying of a security. No |
| Five years? | | | | more and no less. If that security serves my |
| The fact is, there are places all along the spectrum | | | | purposes for a long time, I may well hold it for years. |
| between the extremes of "buy-and-holder" to | | | | But if the security fails to meet my reasonable |
| "trader." It does not advance the analysis to force | | | | expectations for it, or if the corporation that issued it |
| any person into one category or the other. And | | | | screws up and starts to hurt me, I owe no obligation |
| self-defeating decisions are not limited to traders. | | | | to continue to hold that security. I can sell it and look |
| Sometimes the most reckless thing you can do with | | | | for a better place for my money. In fact, my |
| an investment is hold onto it. The bubble proved that. | | | | fiduciary duty to myself demands that I do so. |
| To me, the most sensible approach to being an | | | | |