Heed the advice of Charlie Munger. Stop active trading!
The Big Money Is Not In The Buying And The Selling But In The Waiting
In my recent Focus On Total Shareholder Return post, I discussed why fixating on dividend metrics to make investment decisions is ridiculous. In this post, I touch upon why you should stop active trading (unless you are a trading professional).
Active Trading Strategies
Active trading entails buying and selling securities based on short-term movements with the goal of generating a quick profit. Common approaches are scalping, day trading, and swing trading.
- Scalping involves profiting from small price movements in a security. Trading positions are typically held for a few seconds to a few minutes.
- Day Trading is where the aim is to profit from price movements in a security. Positions are typically closed by the the end of the market trading day.
- Swing Trading involves buying and holding securities for a few days to a few months. The goal is to gain from short term price movements in the market.
These strategies can be rewarding. The number of investors who consistently generate outsized returns from such short term strategies, however, likely pale in comparison to the number of investors who employ these strategies with little consistent success.
Such strategies entail risks many do not consider such as:
- stress (emotionally draining);
- tax implications;
- transaction costs;
- the need for solid risk management to juggle multiple positions and limit exposure to market risk; and
- sudden market events that can cause significant price movements.
These active trading strategies require a time commitment the average investor can't meet. If you are employing such a strategy, you need to be glued in front of computer screens (one is generally insufficient). You had also better be certain that your system won't crash at the most inopportune time.
I remember the height of the 'dot com' bubble where some of the clerical staff at a Commercial Banking Centre were taking turns day trading. Some members of the group would do legitimate work while other members would actively trade. The roles would then be reversed a few times daily so everyone had an equal opportunity to gamble.
Compounding - The 8th Wonder Of The World
Exponential growth happens over time. Jump in/out of equity positions and you lose the benefit of what Albert Einstein termed the 8th wonder of the world...compounding. The very act of active trading eliminates this 8th wonder.
Achieving multi-baggers, a 10-bagger investment returns 10 times the initial purchase price, do wonders for a portfolio. From personal experience, owning several multi-baggers dramatically shortens the journey to financial freedom. Trade actively and the probability of shortening the journey to financial freedom diminishes dramatically.
Mitch Rales, the co-founder of Danaher Corporation, states that greatness is a journey that takes an unusual time horizon. A great business leader makes investment decisions with a time horizon measured in decades. It, therefore, is totally insane that investors should make investment decisions based on short-term investment time horizons.
Final Thoughts
Want to work hard or hardly work?
Unless you are a rare breed of investor with an abundance of time allowing you to be glued to the markets, with a ton of capital, a lot of skill, the necessary infrastructure, and loads of luck, being an active trader seems like an insane means by which to achieve financial freedom.
Sure...you're busy when you actively trade but is this really the best use of your time?
Time is valuable. You can't buy back time. If you are an active trader, have you really freed up time?
High returns do not actually require high effort. Put in the work once, make the right decisions, and let the magic of compounding work in your favor.
Naturally, things change over time and what may have appeared to be a decent investment might be anything but. We inevitably make investment mistakes through omission or commission. What is important is that we learn from our mistakes and not replicate them. Active trading strikes me as a great means by which to increase the odds of making mistakes. Go to a casino if you want to lose money.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
