A Long Term Investment is a Short Term Trade Gone Good!

Have you heard the phrase: “A long-term investment is a short-term trade gone wrong!”? It refers to many people’s natural tendency to hold on to an initially poorly performing trade in the hope that it eventually recovers; thus promoting it inadvisedly from a speculative “trade” to a serious “investment”.

When it comes to winners, novice traders tend to do the opposite: they bank their profits quickly, because it feels nicer to bank a profit than to crystallise a “paper” loss. Some successful traders do this too, but this unfortunate fact doesn’t help me to make my point 😉

The end result is that you end up with a portfolio of losers which never recover, while the winners that you let go prematurely just keep on winning.

An Analogy

When not trading or writing articles, I publish books and e-books. When I see that some of my publications are selling well while others aren’t, I turn my marketing efforts to the ones that need most help, right? Wrong! I’ve found the best approach to be to plug the best sellers more and more as they keep on selling, and to let the “dead wood” publications fall by the wayside. And so it is with stocks.

Run Your Winners; Cut Your Losses

When a stock price is heading higher and higher, it’s best to keep on holding and maybe even pyramiding while protecting some of the accumulated profit with a stop order. A rising stock will most likely (but not definitely) keep on rising, and the sky is the limit.

When a stock price is going lower, it’s best to cut your loss until such time as you might be able to buy even lower.

While you can’t control how much profit you will make (you just have to try and hang on in there) you can control how much loss you take!

The Short Term Trade Gone Good

My philosophy is to treat every new position as a short-term trade, with a view to getting out quickly for a small loss if it goes the wrong way. He who trades and runs away lives to trade another day.

If my short term trade goes the right way, I’ll hang on to it for as long as I possibly can… thereby promoting it from a “trade” to an “investment”. So for me:

“A Long Term Investment is a Short Term Trade Gone Good!”

Here is an example of a recent short term trade gone good (on Tullett Prebon) thus rendering it a long term investment. It’s not a recommendation for you, so note the risk warning.

Tony Loton is a private trader, and author of the book “Position Trading” (Second Edition) published by LOTONtech.