What’s The Problem with Taking Profit as a Short Term Trader? Understanding The Power of Value Investing
Aug 14th, 2007 by AhYap
The market is very hot in the pass few months. Almost all people are talking about the stock market. The newspaper even make a few headlines for the market plunge last week alone.
Most people don’t understand what is stock and what they are buying. All they know is that there is a counter NAME and then there is a PRICE. And what they need to do is to speculate the movement of price, hoping to buy low and sell high to make some money.
They can use numerous techniques and most of them rely on rumors and tips. Some that are more advanced might use charting techniques which is know as technical analysis. Tips or charts, they are the same gang. They try to speculate on the price movement to make money.
Let’s say you have RM100,000 to invest in KLSE.
You speculate all in 1 counter and your investment go up to RM110,000 in 1 month (you may have used tips or charts in making the buying decision). Speculators believe that stocks are only paper money and only cash is the real money. When they hold stock, they feel risky. They believe that their money is in ‘unsafe’ position. So in order to see the real money and to protect their profit, they need to sell the stock and get the cash. After selling, they think their profit is now ’safe’. This is called ‘profit taking’ or ‘taking profit’.
The problem IS -
What are you going to do with your RM110,000 ’safe’ cash now? It might be safe now, but what do you want to do with it now? You might spend a few hundred or a few thousand to celebrate, but most probably you will still end up having RM100,000+ in cash.
So probably you will have to buy another counter (using another tip or chart). And this is irony because at first, you sell a counter because you believe holding a stock is risky and you must take profit. Now after you sell one, you have to buy another one and put yourself back to the ‘risk’ of holding a stock!
Are you sure you can pick a new one that can make you money again? If you invest based on pure luck, you can still be lucky for a few times but not definitely not forever. If you have to switch from 1 counter to another every month, you have to switch 12 times a year and 120 times in 10 years! Can you have a lucky streak of 120 times based on tips and charts? And most of us have more than 10 years to live!
While you can make money in stock, you can also lose money! You can always lose $10,000 instead of making $10,000.
This is the problem with short term trading. You didn’t reduce your risk in anyway because after ‘taking profit’ you still need to buy another counter. By thinking that ‘taking profit’ make your money safe, you are just lying to yourself. Your money is never ’safe’. You are just transferring the risk to another counter.
What do you need to do with your money after you sell is the biggest problem for a short term trader.
You need to trouble yourself in making new decisions and selections every time after you sell. And you won’t be lucky every time with your new picks. When the market is hot, you might have more luck on picking the next right counter. But in a sideway (now) or bear market, I don’t think you will have much luck speculating.
—
A long term value investor, on the other hand doesn’t need to do much with his investment. The market is so red on the week I went to Sipadan, and yet I can dive happily without looking at the market.
Long term value investors are buying for the long term. They don’t need to adjust their portfolio daily, weekly or monthly. And because they only buy GOOD businesses at DISCOUNT price, their risk is minimized. They don’t chase price upwards and they will even refuse to buy GOOD businesses that is not selling at DISCOUNT. They will stay away from BAD businesses that don’t have a good future. They don’t speculate on the next BIG thing, e.g. the next Microsoft.
You might argue to me that it is very hard to know the value of a stock. I FULLY agree with you because after I read 20+ books on investing, I still don’t know exactly how to evaluate a business. It does require a lot of work just to understand a business before you can put a value on it.
After reading 20+ investing books doesn’t make me a super investor that can pick and evaluate stocks. But, it let me know exactly what is the RIGHT STRATEGY for investing. It is not tips, not charts, not short term, not speculating. You also don’t need to guess who is in the next Microsoft or Bill Gates. That strategy is called ‘Value Investing’. It can be explained in 1 short sentence -
“Buy wonderful businesses at discounted price.”
People like you and me don’t have much time in evaluating businesses and calculating their value. If we believe in Value Investing, then all we need to do is to find a fund manager who practice value investing, who has a good track record for the pass few years (the longer the better) and have him invest the money for us! They are professionals, they spend all their time on evaluating businesses. Let outsource the job to them and have them work for us!
That explain why most of my money is in ICAP and why I can still dive happily in Sipadan when the KLSE dive 100+ points to below 1,300 last week. It only screws short term traders and speculators, it doesn’t screw value investor. Irony, value investor are more happy when the stock market dive because that’s the time when lots of wonderful businesses are sold at discounted price!
It takes me 4 years to fully adapt to value investing. I have been a short term trader and speculator. I have used tips and charts. I have been an active options trader for 2 years (buy and sell for over 1,000 times). I have attended several seminars and read a few books on trading, options and technical analysis. I have gone thorough a lot before I come to this understanding. For most of you, I don’t think you can understand the power of value investing from this post alone. Most people have to go through things themselves before they can understand. And unfortunately, most will never understand.
Good luck with your money!
—
Related Post:
Value investing has a lot to do with Price and Earning. Earning let you know the value of a business while the price let you know if it is selling at a discount.
Subscribe to My Blog in a Feed Reader or simply
Subscribe by Email
Really smart and confident but dangerous post. If someone read this and followed your advice “carelessly” and lost money, he will be cursing because it was money lost. I am not in the position to talk about stocks because I have a little idea about it. I did not even browse a single book about stocks. But would it be safe if you put disclaimer? Anyways, read at your own risk. Cheers!
It’s ok for them to blame me as long as they don’t sue me. But in Malaysia culture, suing is very rare. So I am very safe.
KLSE is in FireSale right now!
Experience is the best teacher in the world , if someone is not prepared to lose money in trading then he will not have a start in learning anything about trading…the trick is not to lose more than you can afford.
~ a thousand mile journey begins with a single step…(confusius)
I think the best teaching of Confusius is still, “Don’t Get Confuse!”
hehe, post more about the investing..very interesting topics but hard to apply..if you could digest the 4 books and try to break it down like “dummies” books, that would be great…lol..
I like Azlan_Lee commented that experience is the best teacher in the world but hopefully still manage to get up after the fallssss…KLSE is still in big sale and HKSE as well..
Hi Ahyap, i agree with you on this value investing. Now that the stock market is down, there are a lot of stocks at bargain price. However, you mentioned about fund manager that practices value investing. Do you have any suggestions? And do you know where I can find information on the earnings per share? Thanks!
not just KLSE, most currencies in the world are having a downfall , such as AUD and NZD, however in currency trading, trader could also make a huge profit by going short (you have to pay interest of coz).
I think a couple of Malaysian trader have become a millionaire last month as the price plunge down like a roket!(unfortunatly I was facing Mei semester final exam last month…urgh!! )
@chy, if you are a OSK brokerage or HLeBroking.com customer, you can get the info free form their platform. It is provided by KLSETracker.com.
@Azlan_lee, a lot of people has forgotten that trading is a 2-way street. You can make money and you can lose money. The question is, what is the probability of you making money in the long run? Is trading profit sustainable and consistent for the long run? Do you need to lose sleep over it?
na I dont mean short as in short term’ , I mean short as to gain profit while selling currencies in behalf of our broker (its like borrowing their money first to be in selling position, ). When the market is up automatically our posiition are turn into profit. (this method does not apply to stock however)
it is however a long term trading (entry on one day and dont trade for several month ~ we just trail our position) .
yes I understood what you mean , alot of trader are scalper, some even dare enough to gain in high vilolity short position (while in multiple major news release!) , sacraficing your health for money is not the way of a real investor…
Long term trading ~ the way of the dragon
Hi Azlan Lee,
“Experience is the best teacher in the world , if someone is not prepared to lose money in trading then he will not have a start in learning anything about trading…the trick is not to lose more than you can afford.”
I still think the best way to learn is learning from others’ mistakes. I prefer people paid tuition fees, and we learn.
I do hope you can become a successful trader. As for me, I will just choose the value investing style, slowly and surely.
Value investing might be good today and turn bad in the future. Look at cold storage,a blue chip favourite counter many years ago or the recent tranmile group, another hot stock amongst local and foreign fund managers for instance. Even the fund managers make bad decisions caused by false reports on the financial accounts, directors of companies misused of funds.government policies.global market,etc. .The best investment strategy is to hold on to your monies until there is a major plunge in the stock market. This is the time to shop around for fundamental stocks and of course with the advice from your investment adviser.
Risk come from not knowing what you’re doing! Many people lose money in stocks is bcos they don’t really study much in stocks. So, when they lose money, they will say investing in stocks is very-very risky. But, the fact is, if you’re well prepared, then, there’ll be very little risk!
@Leong, not all investment adviser are good and not all are using value investing as their strategy. As a value investor, you need to buy a wonderful company at a discount price. Is Tranmile and Megan a good company? Most people who buy Tranmile don’t even know what this company do. As an ordinary person like me, I have avoided Tranmile for very simple reasons:-
1. With such a ‘good’ company on paper, they don’t even have a website.
2. Google doesn’t return a lot of search results for Tranmile before the SCAM.
I remember reading a about Tranmile on Newspaper and an investment adviser rate it a strong buy. What that means? That means most investment adviser don’t really know what they are doing? And most of use our money to buy mutual fund which are managed by these fund managers!
But of course, I definitely agree with waiting for a market plunge to buy a lot of fundamental stocks. This is called fire-sale. But Peter Lynch said that the best time to buy a stock is when you find a wonderful company at a discounted price. So you don’t really need to wait for a market crash. It is just that in market crash, there are more choices.