Investment vehicles: long-term vs. fast returns

Money Matters: Dec. 2009/Jan. 2010

André Kostolany one of the most famous Stock Experts of the 20th Century once said, “Buy the stocks you like and go to sleep for 10 years, when you wake up, you will be rich”.

This certainly was the right investment style in the 20th Century and beginning of the 21st Century, however is this still valid advice in modern times? This is Richie Rich in volatility. Opinions are diverse regarding investment styles.

Some investors are long term, some are short term, others are a mix of both, the main question is who gains the most?

The previous episodes we have spoken about portfolio diversification, greed and fear, depositing your money with one bank. The stock market is not rocket science as we have explained, however there are certain aspects which should be in line with your investment style. Investors aim at purchasing stock for a long period of time, picking stocks that have a great long-term potential, under the assumption that over time, the underlying investment will increase in value, and the investment will be profitable including the gain from Dividends which Blue Chips should payout in comparison to yearly return well above the interest rate Banks offer on deposits.

Traders, in contrast to investors, make their profits from maneuvering between today’s and tomorrow’s stock prices trying to make that fast money. If you are looking to invest for a short term, you will need to do a lot of research, focusing on news flow of your underlying and have a clear picture of the general market.

There are a number of investment vehicles that will suit you well if you have specific short term investment goals. Some stocks that have higher volatility will offer you great short term investment opportunities. In stock investment, both short term and long term investments come with risks attached, and therefore nothing is truly guaranteed in the stock market. Short and long term investing are both valuable tools, however, both must be used correctly to achieve maximum benefit.

Looking at an example of a long term investor, over several years, the classical buy and hold Kostolany style and a short term trader being active on a daily basis.

A long term investor, 10 years plus, would have invested in 2000 and would still be invested. In 2000 Voestalpine, stock listed Austrian steel manufacturer traded at approx €8. In 2007 the Stock was trading near €65, more than 800% from 7 years back, giving an average return of 114% per annum. If the long term investor had not sold in 2007 but stuck with the investment style, the price would be back near €9 in 2008.

Excluding dividend payments, the return on stock price gain was nearly 0% which is rather disappointing. Investors anticipate declining markets with fear and anxiety, but usually do not plan ahead of time how they will respond to them. When faced with a declining (bear) market, they hold their positions and continue to lose. On the other hand traders take a proactive approach to their investing.

Traders have a defined plan and invest with one goal – to put their capital into the markets and profit. They trade with a plan that tells them what to do in any situation – when to enter and when to exit. They never allow large losses. Looking at the chart again from 2000 to 2004 clearly a trader could have outperformed an investor as the market was moving in a narrow sideward’s range, however from 2005 to 2007, where the investor gained the big profits, the trader might have sold his position too early and missed the re-enter point.

There is no right, no wrong – styles are as different as investors are. Traders can be surprised by a trend and miss out on long term gains, however buy and hold is certainly the old school-style and no longer efficient regarding both current and previous financial crisis. Patience and alertness should be the right mix for profits.

Follow the market and keep an eye on your investments. It’s your money and your responsibility. This was Richie Rich taking it easy.

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