Trading stock more quickly vs. holding it

Question

coming from the ETF-world I seem to be getting the advice: buy a solid stock like $AAPL or $AMZN and hold it for years to come. In the case of Apple you at least get dividends. But they alone are not really substantial, when you are looking to increase your overall portfolio value.

I keep wondering if buying, holding for a month or two and selling again is maybe a better strategy.For example: buy a stock for $100 automatically put a sell when the stock reaches $105. Then you wait for a small dip and get back in at i.e. $103 and again place an automatic sale for $108. That way you would have 2x +$5 opposed to 1x $8, thus netting 20% more returns.

Obviously there will be more fees through the buying/selling. But isn't that a better way to multiply capital while, instead of waiting for a stock to go gain 10-15%?

Or am I missing something here? Thanks

Answer 1

What you are missing is that over the long run, the market expectation is positive, and for the S&P, about 10%/yr. But, day to day, any given day is very close to a flip of a coin. When you take your tiny gain at $105 (your example) and the stock continues to rise, what then?

Your plan requires you to be right, not once, but twice. I remember the crash of ‘87 (I am Old) when a few talking heads took credit for having predicted it. Never heard from most of them again.

I propose you “paper trade”. Just keep a notebook or spreadsheet for a year and make a note of your buys and sells. Let us know in a year if you’ve changed your mind.

Answer 2

Joseph, I've read the other answers and your comments to the answers, and I think I might be able to shine a light on something you're missing (and that the other answers don't directly address)

What you're describing is gambling.

Let me describe why. Your algorithm is: Pick a stock to buy, add 5% to the price, and simply sell when it reaches that price. Your mental model is "I'll earn a 5% return on my investment - it might happen rapidly, or it might take a bit - but worst case, I'll simply be in a buy-and-hold for a stock over long term."

What you're doing is actually a remarkably similar model to this:

Play roulette. Bet a dollar on black. If you win, pocket the dollar and start over. If you lose, bet on black again for $1 to recoup your loss, and start over. If you lose again, keep doubling your bet until black hits, and you recoup your loss, and start over.

(Of course, this doesn't work because, if non-black appears enough times in a row, the table limits will prevent you from betting enough to recoup your loss.)

Why is it similar? You've talking about a scheme that has a decent probability of 'working', and it earning you a tiny profit, that has a moderate chance of 'working slowly' and taking you a long time to earn a tiny profit... and that has a small chance of losing all your money.

It's not too difficult to find stocks that aren't at their all-time high, nor are they likely to ever reach their peaks. Eastman Kodak was at ~$37 five years ago, and is down to $2.50 now. NBC was at $7, but is now down to $0.70. Etc. If you happened to pick those stocks, you're going to lose all your money, because it's never going to get back up to Amount+5%.

Answer 3

In the case of Apple you at least get dividends.

Dividends provide zero total return.

Obviously there will be more fees through the buying/selling.

As of recently, there will not be more fees from trading because commissions are going the way of the dodo bird (extinct).

Sure - for example if I had bought Apple end of July for 199$ and sold it mid September for 223$. And again purchased it on Sept. 20 at 217$ and sold it October 11 for 236$

Trading the peaks and valleys works just fine if you magically pick those days to trade. The only way that you know where those ideal days were is in hindsight. Going forward, you have no clue whether the day you sell is too early, thereby under performing the holder.

Don't get me wrong. Trading isn't necessarily bad. It surely beat the falling markets in 2000 and 2008 that lost ~50% of their value. But as a general rule, for most people, it's not going to beat buy and hold.

Answer 4

The key issue with your proposed strategy is that after you sell your small gain the stock price may never drop to your buy point again.

Example you buy some apple stock at the start of the year in 2017 at about $116 per share. The price rises! lucky you! So you sell a month later for about $126 per share.

The next step of your plan dictates we wait for the price to drop a bit (say, for example, to $120). You would still be waiting for that price drop today nearly 3 years on. If you had held the stock it would be worth ~$243 per share.

Of course there is the scenario where your initial buy comes at a peak and only goes down from there but i think the results of that are fairly obvious.

Answer 5

I think paper trading accounts are a waste of time. The best learning tool is losing money. It's kind of like touching a hot stove, touching a toy stove just doesn't have the same effect. I say put your strategy to work, after you've lost some amount of money you'll lose interest. It's not as though you're talking about short positions and buying on margin, your risk is your cash; just be ready to kiss that cash goodbye.

If I were you I would read this comment you left to one of these answers, over and over and over again until you understand the problem with your strategy.

The "dip down a bit" part is not a contingent part of the strategy. In the case of Apple at one point I would notice that there is still upward momentum and probably have bought in again, even though it did not dip down. You could basically sum the strategy up with: look for and be thankful for small wins, cash in and try again.

I would sum this strategy with: I limited my upside potential, not limited my downside potential and realize that I may have to re-enter positions at an elevated price from my last exit, missing that gain.

This "strategy" stacks all of the odds against you. Then there are the tax issues.

Answer 6

To know if something like this will work is to go back in time and see how it would have worked for years. You need to see it under different conditions. You need to have a plan for when the price is trending down; or when it is moving sideways.

You need to know what you will do when you are waiting for the perfect time to sell or the perfect time to buy, because your decisions have to be made not knowing if today is the perfect time or should you wait until tomorrow.

From the coments:

Sure - for example if I had bought Apple end of July for 199$ and sold it mid September for 223$. And again purchased it on Sept. 20 at 217$ and sold it October 11 for 236$... I would have netted 43$ opposed to 37$. This way I would be earning 6$ more which is roughly only 16% more returns, but still.

This is an example where it worked, but it also supposes that you didn't own it at $211.75 on May 3rd waiting for $215 to sell; and then watched as it dropped steadily to $173 on June 3rd. What day in the middle would you have sold if you didn't know when the bottom would be.

You are trying to time the market. Over the long haul that fails.

Answer 7

Statistically, rapid trading by predicting shares prices (A.K.A stock picking) doesn't work.

There is research paper like Boys Will Be Boys: Gender, Overconfidence, And Common Stock Investment showing stocking picking or "active stock management" always perform badly in the long run. Daniel Kahneman himself has mentioned the paper in his book "Thinking, Fast and slow" and call this "illusion of skill".

Tim Harford explains the logic behind the stock exchange randomness in his book The undercover economist: When a group of people apply the same stock-picking strategy, they must outsmart each over in the market, thus render the strategy useless.

Answer 8

I read a report from broker that said their customers who had the best returns were those who were dead. OK, those who had not logged into their account for years.

The point being that holding for a long, long time, without tinkering does give you the best returns. Its documented in many places, possibly the best-known one being Doris. Selling and buying may be a good option when a company gets into trouble, or changes its business, but generally you cannot tell if a stock that's gotten into difficulties will rebound stronger than before or if a stock you think has peaked contineus to grow (seen this in my portfolio, sold and watched it rocket)

So my advice would also be to hold the majority of your portfolio and forget it. Unless you have some particular strategy of holding stocks according to some mechanical metric, buy and hold works.

Answer 9

This is tax suicide

You are manufacturing short term gains (you hope lol), and those will be taxed at the same rate as salary. If you are paying 25-30% tax on the gains, and you could've paid 10-15% in the long-term capital gains structure, then the gains need to be 15% better just to pay the tax on them.

This is similar to the "managed mutual funds" problem where you have a high expense ratio because of the costs of the genius stock picker. The picker beats the market, but only by 0.6%, and that doesn't cover his 1.5% costs.

At such a short interval, this is gambling.

The market has both growth and volatility. As an endowment fund manager, managing "forever funds" where we only spend 4-7% a year, my mandatory mission is to fully embrace the growth while ignoring the volatility. Our investment is so long-term that volatility simply does not matter. What we must do is diversify, so we don't find ourselves deep in a PG&E or Theranos, and lose our shirts.

Your short-term strategy pursues the volatility. The problem is that volatility is impulsive and seemingly random but not, and is driven by much deeper data than you have access to. Those with better access eat you for breakfast. They trade better than you. Yes, in the long term the stock market is a rising tide floating all boats. But in the short term, it's nearly a zero sum game, so their win is at your expense.

Also, you're at the World Series of Poker

And there's Chris Moneymaker and Johnny Chan.

There's only one market. It's like sharing an MMO that only has one server realm, which means you're all in the same game. I realize I'm stating the obvious, but it means you're squared off against every funds manager and his research staff, and the best AI in the world.

Answer 10

Trading by the week, month, or quarter will work much better than trading by the second, minute, or hour. Profitable operations that trade by the second or minute are selling at the Ask and buying at the Bid and even doing that simultaneously.

Trading by the week, month, or quarter will be either a systematic method, the judgement of an individual, or the judgement of a committee.

Answer 11

As you can see from most of the answers, the market participants are biased toward holding due to taxes, fees, and maximizing the amount of money invested. (short term vs. long term capital gains, deferral of taxes over multiple years gives further tax advantage).

However, if you trade within a retirement account for which long term versus short term capital gains are irrelevant, and for which any taxes are deferred until withdrawal, you theoretically should be able to take advantage of the tax-induced bias of the other market participants.

Answer 12

To simplify concepts, let's look at a single decision point in your strategy:

You buy at $100, then sell at $105 because you're hoping the stock price will fall.

Why?

There's slightly over 50% chance the price goes up tomorrow. It'd be even higher if you wait longer to decide you were wrong and buy at a higher price. That means there's a better-than-even chance selling at $105 is a bad decision.

You could say: "I'll know whether it's a good time to sell". But do you really have more information/insight than, say, Goldman Sachs and their army of analysts and algorithms?

Even in the remaining 48% chance the stock goes down, it might not go down enough to trigger your "buy" rule. It might also go down enough but then continue falling (where you said you'll essentially become a buy-and-hold investor, but I doubt you won't be tempted to sell). And we haven't even considered taxes, transaction costs, and your own time and effort.

Your strategy, absent key info or insight that you have and the market doesn't, is a guaranteed way to lose money.

Answer 13

The main thing to understand about the stock market is that one players win is another players loss.

Except for dividends, that is. Dividends is the only way the stock market as a whole earns money.

When you trade on short-term price changes, you are basically betting that you are better at it than the average trader. And believe me, you are not better than the average!

There are basically three ways to earn money on the stock market:

• Buy shares in a number of different companies, sit back and wait for the dividends.
• Be the broker. Prices go up or down, the fees come in either way.
• Be a big funds trader. Spend your entire long working day making sure you know more about the companies you trade in than the average trader. This is hard work! These are the guys who will pick up the money lost by the small amateur traders.

I'd go with the first one, if I were you.