Three reasons why trading is hard for most

  • Avatar

    Posted: 06 May 2009 08:50 PM

    Glenn Neely’s three reasons:

    First, even if you are good at forecasting, you probably won’t be right more than about 50% of the time.

    Second, even if you are right about the direction of the market, your entry price may be too high or too low, preventing the trade or reducing future profit potential.

    Third, even if your entry was great, your stop placement may be too close or your exit too early.

    If you give each step of this process a 50% rate of success (probably too high), by the time you reach the end you will achieve (at best) a 12.5% success rate.

    Signature

    Stay Hungry. Stay Foolish.  - Steve Jobs

         
  • Avatar

    Posted: 06 May 2009 10:58 PM #1

    What do you tell someone that bought AAPL when it was @ $200 as they saw over half of their investment disappear. They did their homework and chose a great company that is growing, with a great product and with great management, but their account still shrunk.
      Going long is great, when you buy-in at the beginning of a bull market. Any average Joe (Me) can do it if he’s lucky enough to have picked the right company. You can just sit back and check your account balance every month or so and brag about how easy it is to make money in the market.

      But, in a bear market, the only way to make money is to trade, learning from your mistakes and from the mistakes of others. If there is one thing that I have learned is that buy and hold is not for me.

    :apple:

         
  • Avatar

    Posted: 06 May 2009 11:05 PM #2

    MacCube - 07 May 2009 01:58 AM

    What do you tell someone that bought AAPL when it was @ $200 as they saw over half of their investment disappear. They did their homework and chose a great company that is growing, with a great product and with great management, but their account still shrunk.
      Going long is great, when you buy-in at the beginning of a bull market. Any average Joe (Me) can do it if he’s lucky enough to have picked the right company. You can just sit back and check your account balance every month or so and brag about how easy it is to make money in the market.

      But, in a bear market, the only way to make money is to trade, learning from your mistakes and from the mistakes of others. If there is one thing that I have learned is that buy and hold is not for me.

    :apple:

    Your issue had been answered by academic long long long ago.  DCA purchasing is the approach.  You would be laughing your head off if you’ve started the first purchase at $200.  DCA purchasing approach is at its best when price is declining.

    Edit:  Your sincerely had started investing in AAPL using DCA purchasing since 1997.  My first purchase is near year high in 1997 and share tumbled by more than 80% by end year.  Were very happy from 1998 to 2000, but hold and behold, another catastrophic tumble in year 2000-2003.  All the while, I continue to DCA purchase without fear (nah, were very afraid).  My investment see light only after 2004, seven years from the first purchase.  Well, I stop DCA purchase in 2004 and began selling some each year, kind of reverse DCA purchase, DCA selling.  There is only one regret, only if I know SNIPUS and his LEAPS strategy, I would be at least 100 folds richer.

    [ Edited: 06 May 2009 11:15 PM by Mace ]

    Signature

    Stay Hungry. Stay Foolish.  - Steve Jobs

         
  • Avatar

    Posted: 06 May 2009 11:24 PM #3

    From The Merits of Dollar Cost Averaging .

    Discussion
    The results of the assessment of real stock returns clearly show that DCA is mostly not superior to lump sum investing. We analyzed returns following a lump sum and DCA strategy over a ten year period. We can observe that when the volatility of the stock market is increasing DCA can offer better returns than LS investing. Anyway, even if the volatility does not increase we can notice, in the period we studied, that the average annual gains are higher with DCA than with a LS. In spite of this the highest gains and losses are obviously belonging to LS investment. Investing according to LS strategy is more efficient than using DCA. However we can consider DCA as a suitable investing strategy for those investors who either do not have a lump sum to invest or want to save money for their retire without facing up to high risks.

    DCA strategy is definitely better than LS strategy if the date of the first purchase falls right before a dramatic crash or at the start of an overall twelve month slump. But unless we can predict these downturns ahead of time, there is no scientific reason to believe that DCA will make investors saving money.
    The literature we discussed is very consisted with the results of the assessment of real stock returns. From both our assessment and the literature we can conclude that the DCA strategy can minimize the risk of investing at an inappropriate moment, but is not offer good overall results. Considering this advantage of DCA, we still find some very strong evidence that DCA is not the optimal strategy when investing in capital markets over a long period of time. In the literature review we already tried to find an explanation of the use of the DCA strategy by many investors. According to behavioral theories investors are not fully rational and will sometimes make investments which are sub-optimal according to standard financial theory. Psychology plays an important part in behavioral models and subsequently also in the investment decisions people make. In our opinion, the behavioral model developed by Statman [1995] gives some useful theoretical concepts that help explain the widespread use of DCA.

     

    But this has little to do with the subject of trading.

     

    :apple:


    Edit: My investment story started in mid- 2006, out of desperation. And I consider the buying and selling of options as trading. And SNIPUS is my hero.

    [ Edited: 06 May 2009 11:36 PM by MacCube ]      
  • Avatar

    Posted: 06 May 2009 11:36 PM #4

    MacCube - 07 May 2009 02:24 AM

    From The Merits of Dollar Cost Averaging ... DCA as a suitable investing strategy for those investors who either do not have a lump sum to invest ... DCA strategy is definitely better than LS strategy if the date of the first purchase falls right before a dramatic crash or at the start of an overall twelve month slump ...

    First sentence describe my situation in 1997.  Second sentence is the answer to your $200 question.  In any case, it is unwise to use LS strategy when bull market has been long in the tooth ... should either stay out or day trade or hedge your LS with puts (or equivalent call replacement).

    Signature

    Stay Hungry. Stay Foolish.  - Steve Jobs

         
  • Avatar

    Posted: 14 May 2009 11:28 AM #5

    DCA is still a flawed system. It is based on two assumptions. One that the markets always recover and go up over the long term, and two, it is still based on buying and holding. Any system that only focuses on the buy side is stacked against you. Why?

    a) Markets do not just go up and up over decades with just minor pull-backs.

    b) If your timing is wrong, you still loose because you run out of time.

    I’m sure there are people who used DCA in the decades before ENRON’s collapse to prepare for their retirement.  Even with a company such as Apple, who knows for certain if it will ever reach $200 again? That depends on the economy and broad markets. Someone who bought at $200 and DCA all the way down, may still find that when it is time to cash out, they still loose.

    The only way to profit in markets over the long term, is with some system that goes long and short FOLLOWING the market movements over time. I.e. a Trend Following System or timing the market (for the few who can do it). Timing is still everything, and if you are only on the buy side, it is better to be in cash when markets are dropping instead of DCA on the way down. But since market timing is consistently beyond mere mortals, a trend following system is still the best.

    The book Trend Following shows that the really successful and rich investors do follow the markets up and down.

    Signature

    “Whatever happens in the stock market today has happened before and will happen again.”    - Jesse Livermore

         
  • Avatar

    Posted: 14 May 2009 01:46 PM #6

    cramar - 14 May 2009 02:28 PM

    DCA is still a flawed system ... The book Trend Following shows that the really successful and rich investors do follow the markets up and down.

    All systems are flawed :bugeyed:.  Any system works within certain assumptions and have limitations, and are suitable for certain folks (and not suitable for other folks rolleyes).  What is best for you is not necessary best for most.  I’m talking about a lifetime wealth building approach.

    Top five richest men, Bill Gates/ Warren Buffett/ Carlos Slim/ Lawrence Ellison/ Ingvar Kamprad employ buy n hold approach.

    Trend is a big word.  Is as vague as strategy.  Anyhoo, I’ll get that book and see what it has to offer.  Stay hungry, stay foolish.

    Btw, no need for AAPL to reach $200 to make money using DCA purchasing approach with initial purchase at $200.  Also, always need an exit for any stock regardless of whether you’re trading or investing.  There is no such thing as buy n hold forever.  Is buy n hold for a certain timeframe.  If timeframe is short, is called trading.  If timeframe is long, is called investing.

    Signature

    Stay Hungry. Stay Foolish.  - Steve Jobs