To Trade or Not To Trade?

There has been much debate about which of these systems work best in stocks: value investing or trading.  For me, these are both sciences, designed to help us maximize our profits in the equities market.

I myself believe so much about value investing.  At the start of my quest for ways to make my money earn, the first book I read about stocks is about the Wisdom of the Oracle, Warren Buffet.  I agreed with his beliefs and understood the quantitative and qualitative analyses required in deliberately choosing the best business to buy.  I have become a fan and immediately believed his ways.

My goal then, was just to make my money and earn more than what the bank deposit interest rates are giving and beat the inflation while I save money for my old self.

However, my needs, wants and even I have changed. 

I started having short-term wants.  I started dreaming of huge purchases say in 3 or 5 years and had this crazy idea of fast tracking my money accumulation through stock trading.  But I was so unsure of this idea because it is not encouraged by Mr. Warren and his mentor Benjamin Graham.  So I decided to make a comparative analysis of what my returns could have been in one particular stock.

Let me choose one stock that I got myself last 2010. I choose MEG (Megaworld). What could have been the gains of say a P100,000 if I took either of the following routes of making money in the equities market?

My Possible Gain By Holding

I bought MEG last June 7, 2010 at P1.18.  If I held it until today, at last week’s closing price of P2.23, my P100,000 would have grown into P188,983 without doing anything in 2 years and 3 months.  That’s 88.98% growth.  You won’t find that in banks.

My Possible Gain If I Traded

If I used this P100,000 to trade within 3 or 6 months period, given my current trading skills (I am new to trading) and after setting myself to forcefully sell my shares once price went down by 5% to cut my losses, this could have been my return per trade.

With that, assuming that I have “reinvested” my proceeds from my last trade in full, my P100,000 would have grown into 197,341.32, after two failed trades or mistakes due whatever reason and a number of missed shots.  That’s 97.34% growth, 8.36% higher than the assumed return if I held it until today.

Not quite higher if we compare it with the buy-hold, but I guess it would have been much higher if I left this stock when it started to show a downtrend pattern to find another one in an uptrend.  I would have profited much much more.  If you want less work, listen to professionals’ advice to trading newbies – “trade only in an uptrend”.

My Actual Profit When I Traded

I stopped holding this stock last August 2010 after two trades.  You see, I had this habit of jumping from one stock to another at that time, after I get satisfying gains.  I made 50.87%, not bad for a short-term position of only 3 months (June to August). If I can only spot the best stocks to give me 50% per quarter that would be 200% gain in a year.  (I am daydreaming again.)  But I won’t discount the fact that this requires lots of training, patience and study to make a goal like this one work, once opportunities arise.

Opportunities are there, but if I am not prepared and educated enough to at least recognize these, I will fail to ride those 50% gain chances. (OK, I am beginning to get afraid of the 50% goal per quarter, I should set a lower one.)

These were my actual trades:

How Careful I Was In Choosing Which Stock To Buy

I am not confident to trade companies which I do not know, do not like and whose business models I do not understand.  Believe me, I have purchased companies many people like but I don’t, I just itched getting it off from my portfolio, even at a loss.  I chose MEG, because I love real estate business.  I remember choosing to be employed in a real estate company once, just to learn the accounting processes and systems involved in that business.  I deliberately submitted my profile to all huge real estate companies just to get this knowledge hands on.

I also look at financial ratios in qualifying which stocks to buy.  Sorry, I did not keep a record of MEG’s ratios.  I depend on my broker’s research and analyses.  But I think, that time, MEG was trading way way below the 15x price to earnings ratio and was cheap to trade at a price very near its book value.  I also look at the return on equity.  I always check these three ratios.

I also considered the time required, the effort I was willing to put in and also took into account my own personality and or tendencies in making decisions.

I don’t know technical analysis back then.  I was just lucky to make that much profit by using my own judgment, backed by the amount of knowledge I had that time.

Should I Trade or Not?

After comparing results and weighing the possibilities under each of the above methods, I arrived at my own conclusions which were the following.

Buy and hold, usually the method of value investors, together with cost averaging, is good for my retirement fund accumulation plans.  For me, it is not the best fund creation system to provide for my short term or medium term wants, because accumulation is much slower compared to trading.  It is slow but sure!  That’s why I won’t defer on using this system for this purpose.

In value investing, highs in prices, even if followed by a change in trend – from an uptrend to a downtrend, won’t be a signal to sell, if the stock is still trading within acceptable fair/intrinsic values.  While in trading, I could choose to profit or sell my shares near  the peak of an uptrend (usually after, if trend breaks).  This keeps me away from losses in a downtrend while I search for another springing uptrend in a different stock.

In trading, after seeing the benefits of it, if done within an uptrend, can give me more profit in the short term.  This can definitely help me accumulate more funds immediately.  Sounds easy?  It may sound like it, but it is not!  I admit that I should devote much time in understanding the psychology of the market, supply and demand, and learn how to interpret charts.

Ohhh charts…  After attending that technical analysis in COL Financial last July 2012 and after a few days of analyzing charts…  I started dreaming of charts in my sleep…  So this is what happens when you set a goal like this.  It is my desire to fast track my profits by applying this science.

I believe that value investing, when supported by technical knowledge, will reap greater results.

These are just my thoughts – which system works best for you? 

A guest post by Precious Mary Eugenio. She currently provides accounting management and consultancy services to an animation studio in Pasig City and a Sun Life Advisor. She is not your regular career woman. She is adventurous and intentional in creating the kind of life she wants and she believes she deserves. You can get in touch with her at pmaeugenio@yahoo.com

Image [Investment Yogi]