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Long-Term Strategies in a Short-Term World

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By David Popper

You've seen the commercials. You've heard the arguments. Indeed, the buzzards are circling. The message is simple, "Now that you novices have messed up your accounts, let a professional handle it for you. After all, you are not equipped to handle your own account. Remember, you should not be concerned with short-term market movements because real money is made over the long haul. Further, a ten percent return per year is what you should expect."

This logic may have been true at some point in history, but that time is past. There was a time where long-term holding made sense. Thirty years ago, a person leaving high school could expect to take a job and have a career with one company. Most of his/her friends would work at the same company. When times were tough, the company would tighten their belts but they did not fire people. There was loyalty between employee and employer. Companies saw employees through the hard times and on the other hand employees did not leave to make an extra thousand dollars. There was loyalty and long-term commitment. Finally, company officers were compensated with reasonable salaries. They personally benefited if the company performed over the long run. Therefore, a long-term strategy was employed.

What about now? Companies that once considered employees as family will not hesitate to send jobs overseas to save money. Employees, even top level executives will not hesitate to leave for even slightly greener pastures. How often have we heard, especially in the high tech world of executives leaving their old company in which they played a key role to join a perceived better opportunity. Look no further than MSFT, DIS and ORCL. Further, executives are often paid with stock options with short exercise periods as a major component of their compensation. This method of compensation gives them every incentive to perform in the short-term, while disregarding the long-term consequences of their decisions. As long as the stock price is up when they are able to exercise their options, they will be fine. Investors are also different. My grandfather bought stock in a company and continued to buy shares in the same company at every opportunity. Diversification was never considered and selling was not an option. Shareholders were fiercely loyal. Today, the conservative players are in mutual funds and more adventuresome traders such as ourselves can be in and out of stocks in minutes, days, or weeks. There is little stockholder loyalty.

Don't get me wrong. I do not bemoan the changes. They are exciting. It makes trading a dynamic hobby. It is almost a contact sport. It is important to recognize the environment and realize that everything can change and change quickly. Executives, employees and shareholders turnover rates quickly change. Industry prospects change from read hot to dead in a matter of months. Remember those AMZN investors who were "long and strong forever?" In such a setting, it is foolish not to evaluate your equities on at least a weekly basis. Going to sleep at the wheel because you purchased a one decision stock may give you an unhappy surprise. Lucent and Xerox used to be considered growth stocks safe enough for widows and orphans. Now look at them. Sometimes in the law it is said that bad facts make bad law. This means that an extreme set of circumstances can lead to the creation of law which does not make sense in normal situations. So too, a bad year in trading can lead some to assume that it is safer to hold for the long-term. No, it is not better to hold for the long-term, it is better to evaluate your trading and eliminate as many mistakes as possible.

What changes am I going to employ in my trading next year? I am going to slow down the action to better fit my time limitation. Specifically, I plan to limit my trading in the high fliers. CHKP can yield tremendous gains if you catch it right but you can get clobbered quickly. Look at JDSU on Friday, December 22nd. It ran up 12% with everything else, only to turn down 12% on an analyst warning. It was a good day on the Nasdaq, but a terrible day for JDSU and SDLI shareholders. How would the normal trader know Thursday night that Friday would be a rally and that NTAP would be up 20% while JDSU caves? How would the normal trader who can't watch the computer all day know when to sell JDSU on Friday while it was still profitable? You wouldn't. In the mean time, the QQQ's performed well. Since the QQQ's are a weighted composite of the top 100 Nasdaq stocks excluding financial stocks, bad news on one stock will not hurt you too bad. Since the Nasdaq is still oversold, I am planning to scale into the QQQ's and trade them with the majority of my funds. I won't get that one big day, but I won't get that one big fall either. The QQQ's also still have enough fire to yield good returns if traded properly. Does this mean that I will abandon the high fliers? No, but I will trade them with less capital. Will I stick with my plan? Only as long as it works. It works if I can successfully achieve an overall 33% return on my portfolio while trading on a part-time basis.

I have found that trading requires constant learning and constant maintenance of the account. I am convinced that a reasonable trader can beat a mutual fund's return. I am convinced that long-term strategies are not best employed in a short-term world.

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