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Long Term Holdings and Short Term Trades: Having the Best of Both Worlds!
Holding for the long term and taking advantange of short term swings.My very first investment in the stock market was placed when I was ten years old. Since then I have been hooked! Now I check out hundreds of trades, each year, with the same excitement and enthusiasm. And with each trade I try to find that one market, at the right moment, that can dramatically create wealth.If you had been fortunate enough to invest $1,000 in Microsoft when it first went public, that initial investment would be worth close to $300,000 today. And here is another example of the right stock and right time (sometimes): In the last 10 years, America Online (AOL) has been up 12,000% and it has come crashing down as well! Statistics like these are promulgated regularly by journalists and brokers, as examples of what a great wealth builder the stock market is. But the majority of investors have a very difficult time staying in an investment for that long of a period of time. Even when they know, they are invested in a good company. The financial markets are a never ending source of temptation. New stocks and oppportunities lure you towards a new position with each passing second. Here is an important lesson: The belief that the grass is always greener, in another market, is a distraction that every investor has to deal with. Even if you are a MUTUAL FUND investor (and not looking at individual stocks), the fact is that you are always looking for the BEST return available.
Years ago, when I worked as a broker, I was confronted with the following dilemma. One of my clients told me that he knew the BIG MONEY was made in holding on for the LONG TERM, but that he liked trading the short term swings. He asked for my advice. I had to think long and hard, for several days, before I could respond. Eventually, I presented him with the following strategy that literally combines the best of the TRADER and INVESTOR worlds. Traders are looking for the quick hit and run. Investors seek their advantage by looking at the long term. Long term investors quite often benefit from letting dividends be reinvested into purchasing more stock in the company. Add that to the very real possibility of the stock splitting in the future, and you can have substantial gains over time. If you put both of these apparently opposite strategies together (Trader and Investor), you end up with a very unique viewpoint that eliminates a lot of stress associated with decision making. This strategy will bring home the perspective that within every seed that you plant in the financial markets, lies the promise of ten thousand forests. I refer to it as my FOREST STRATEGY! This is another way to make your short term efforts as a trader pay off while also recognizing the importance and significance of long term investing. But let me show you what I mean with an example. Let's say that your initial investing capital is
$10,000. 2) Study the companies Price Earnings Ratio. Where is the Price Earnings ratio now? What has been the highest and lowest points of the price earnings ratio over the last five years? Look to buy a company with a historically low price earnings ratio that is a leader in its industry. Use the Price Earnings Ratio as a guide. Don't try to pick bottoms. 3) Look at a chart of prices to see what has happened recently and to determine where a good buy point is. 4) Place your trade with the intention of a 10% profit objective. Once you reach your profit objective, sell enough shares in the company to remove your initial $10,000 investment and only leave your $1,000 profit in that stock. This will be your long term investment. 5) Take your reclaimed $10,000 and repeat steps 1-4 as you search for another company to trade for a 10% profit and then plant that remainder profit for the long term. 6) Repeat, Repeat, Repeat. The drawback on this type of trading is that when you are with a great company you do give up a lot of upside. However, if you look at the PROBABILITIES, how many IBM's, Aol's, Yahoos! or Microsofts are there out there in relation to the entire universe of stocks? What I personally like about this style of trading is that it eliminates the GREED factor that most investors have of trying to hold on for the top tick. Secondly , it also allows you to build a nice diversified portfolio. Thirdly, trading becomes a very fun game with potentially lucrative long term implications. It is very possible to trade this way once a month planting a seed in a quality company that can easily become a Forest of Wealth for you. Some trades might take the better part of a year to pan out. Some trades might achieve your profit objective in a matter of weeks or days, if you are really fortunate. Keep in mind that you still have to manage your risk on each and every trade. Let me be perfectly blunt, if you don't manage your downside there will not be an UPSIDE... It is acceptable to use any of the RISK Management Techniques that I advocate by doing Partial Covered Calls and other Option Selling Techniques. When done correctly those techniques can dramatically accelerate your returns. I must admit that I truly enjoy this type of trading. (My broker likes it as well as it generates many more commissions for him.) However, part of the reason that this method works well for me is that I hardly pay any attention at all to my profits, after I take them. It becomes very stress free to know that you have increased your wealth 10% and are just interested in planting seeds all over the financial landscape in companies that meet your criteria. A 10% that should be growing over the years. I must however stress the point that you make sure that you are aware of the downside. This method is by no means RISK FREE... but for the individual who likes to trade and invest simultaneously it truly is ideal. Guard your investment principal at all costs and let your profits run. Just one more way to look at the bigger picture. This is kind of like a Johnny Appleseed meets the financial markets. Many extremely successful investors do this with Initial Public Offerings as well. Study away and remember, let's be careful out there. About the author: Harald Anderson is the founder and Chief Analyst of eOptionsTrader.com. Publisher's Note: Visit the In The Trade Bookstore! for the latest in investment and financial resources.
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