Finding an investing or trading style that suits your personality and situation is at the heart of producing exceptional returns on your capital.
Last week I discussed some of the different approaches that you might consider. You should already have some sense of the approach that you find most appealing, but the key now is to do an assessment of not only the amount of time and capital that you are working with, but your personality and temperament.
What is it about stocks that you find appealing? Do you enjoy doing deep research into fundamental factors, or do you like the excitement of navigating short-term movement?
There is no inherently superior approach to the stock market. What works best is highly subjective and depends on good execution more than anything else. You have to find something that makes sense to you and produces good results.
Time and capital will have a profound impact on how you approach the market. Typically, a new investor, with little capital or experience, will approach the market as a long-term investor. That is what we are taught by traditional Wall Street, and it is the easiest approach to implement when you first start. All you have to do is find a 'good' stock and then hold on while it goes up.
"Buy low, sell." What could be more logical?
However, this approach often leads to boredom or underperformance. Long-term investing takes a long time to work and if entry points are poor or the market is at a peak, then capital can languish for many years. If you aren't extremely patient, then you will struggle with this approach, especially if you have an itch for action.
Some investors battle the boredom of the long-term buy and hold, but constantly research the stocks they own. This leads to cult favorites like Apple (AAPL) and Tesla (TSLA) , which isn't a bad thing when they are working, but it can lead to emotional attachments that may be a problem when a stock no longer performs as anticipated.
Much of financial journalism is built on serving this audience of longer-term investors that like to read about the big cap, well-known names they hold. There is entertainment value to it, and most people like to think they possess some special insight that will reward them longer term.
If you like to dig into financial statements and consider the fundamental story of a stock, then you have to take a longer-term approach to the market. It isn't possible to determine short-term movement using valuation metrics.
There are often market players that seem to think the market is going to suddenly recognize the brilliance of their fundamental research, but usually fundamental stories are something that develop over a long period of time.
The polar opposite of longer-term investing is short-term or day trading. While some market players try to deny it, there is a gambling element to this which is what can make it so appealing. The odds are better than at the casino if you put forth some effort, but in the very short term you are at the mercy of luck quite often.
There is nothing wrong with being a professional gambler, but make sure you are aware of that fact.
Short-term trading relies on game theory to a great degree. The stock itself can be secondary to trade management, but if you do the right research then you can find an edge. Sometimes the word 'speculation' is used for this approach, but it is all about placing a bet and then managing it the best you can.
If you enjoy chess and psychology, then shorter-term trading can be very entertaining as well as lucrative. The biggest mistake that many people make with this approach is style drift. They let the longer-term fundamental arguments sway them when it comes to managing a trade. Rather than focus purely on price action and trade management, they start to let the big picture fundamentals influence shorter-term trades.
The short-term trading industry isn't as high profile as the big cap, fundamentally-based, Wall Street industry that dominates on TV, but there are many resources that will help you not only learn various approaches to the market in the short term, but help you find the right stocks to trade. That is my primary goal on Real Money.
Short-term trading requires a substantial amount of time and energy compared to longer-term investment, but you can produce some good returns with small amounts of money if you do it right. Too many people underestimate how hard it is to trade short term, but there is no question it is a skill that can be learned if you put forth sufficient effort.
As you grow as a trader or investor, the goal is to find the niche that works best for you. You may want to use some capital for longer term and a separate amount for shorter-term trading. Also, elements of both technical analysis and fundamental analysis may come into play as you evolve.
The most important issue when you are developing your style is to be clear about your approach. The worst thing you can do is to constantly change your mind before you have clarity about what you are going to do. You will need to experiment with different things but define exactly what you are doing upfront and then execute the plan.
The greatest thing about the stock market is that there is a new crop of opportunities every day. There is always the potential to make money.
You just have to find an approach that works for you.