I write a version of this column pretty much every year. I think it is one of the most important subjects in all of investing.
Over the years, I have met a lot of people who work in and around the markets. I have a huge network of friends and acquaintances and I am not the least bit shy about picking their brain -- nor they mine -- about making money in the markets.
Many of the people in my network are value types, but many are shorter-term traders, momentum investors, futures and options traders, macro types who invest based on the big picture and even a couple of day-trader types. All of them have been successful at their craft for a long time and have picked an approach that fits their personality and skill set.
Whatever your time frame, if you bring emotion to the game you are probably going to be a losing trader or investor. Emotion leads to what some call swing trading, but in reality is just stock swapping. If you panic when prices move against you, you'll inevitably sell at the wrong moment. The excitement of a small profit will lead you to cash in your chips just before the real fun begins. Getting caught up in the hype of the big, exciting stocks is almost inevitably going to make you pick the burning match and get blistered.
This is especially true of futures and options traders. They are all highly mathematical and statistical in their approach. Some trade a dozen markets, some just trade one. In either case, they are calm and methodical, and at the end of the day you couldn't tell from their faces whether they had won or lost. Probably the most important thing about these more leveraged traders is that every single one of them is a full-time trader.
I prefer the value approach and, to be more specific, I prefer the Walter Schloss style over the Warren Buffett or Bruce Berkowitz concentrated approach. Owning a lot of cheap stocks keeps the odds of higher returns solidly in my favor, but horrific losses form on particular security. I can be a lot less emotional and rational when a 1% to 2% position tumbles than when a 20% position falls off the ledge.
There is a classic example of that today. LeapFrog (LF) was trading at 80% of book last month with a super-strong balance sheet but some problems with an inventory hangover from last year. The stock was cheap and the balance sheet is safe. There is no real risk at this time of this company going out of business. There were two possibilities with LeapFrog: If they had a strong holiday season, the stock would soar. If it fell below expectations then it would tumble and I could double down at a lower price.
The latter is what happened and the stock was down big Tuesday morning. I doubled down, bringing my overall position back up to 1%. It would have been lovely to see the company exceed expectations and ring the bell on a quick 50% to 100% gain, but I am quite content to buy more lower and hold the stock for a few years.
This approach fits my skills and lifestyle. It is based heavily on research and investigation. It does not require a rigid pose over the keyboard every day. I am highly confident that the companies I own will trade at fair value at some point in the next few years and I will sell them at a good price. In the interim, I do not care that much what the daily price swings are.
Most people are not wired to do this. The pain of the short-term loss is just too much for them to anticipate the long-term gain potential. Another approach might be better for them. The important part is to have an approach that fits who you are. Investors, especially newer ones, need to have a proven approach to investing that they are comfortable with and fits them. You need to read the writings of successful investors to find the one that is best for you.
In your search, you need to read about the different methods of investing, even those you don't necessarily favor. For long-term success, I think you need to have a sense of market history and how various people have made or lost fortunes.
If you step on the field to make money in financial markets and cannot tell us who George Soros, William O'Neill, Louis Navellier, Guy Wyser-Pratte, James Montier, Richard Driehaus, Jesse Livermore, Walter Schloss, Charlie Munger, Phil Fischer, Howard Marks, Peter Lynch, John Calamos, Nassim Taleb, Lawrence McMillan, J. Peter Steidlmayer and Edward Altman are and how they trade and invest, you are probably going to lose. You simply have not studied enough to find the right approach for you.
Find the approach that fits your lifestyle and your personality and your odds of success go up exponentially.