Because I am a capital markets guy, whenever I speak with somebody, the conversation usually gravitates to the markets, the economy, investment philosophies and so forth. It’s like the old saying “When you’re holding a hammer, everything looks like a nail.” All my world views (and most casual conversations) tend to be reflected through the prism of the capital markets.
Not too long ago I spoke with someone about my personal trading discipline. I buy stocks that I think are undervalued. I tend to sell only when 1) I think a stock has been overvalued, 2) a stock has appreciated so much so as to represent an uncomfortably large part of my portfolio or 3) the fundamentals of the story change in a meaningful and clearly negative way. I tend to hold my stock positions for a long time, but may trade around them for the occasional short-term profit. I don’t think I invented this discipline nor do I dare hold it out as the “best” way to trade. It simply works for me.
When I explained my method to my friend, he suggested that I must really trade a lot. I inferred that he thought I traded way too much for what he thought was optimal. I guess he imagined a “buy and hold” strategy when one never (or rarely) trades as being a better way to invest. Indeed, many studies exist showing the merits of a “buy and hold” strategy, which appears quite effective, especially over long holding periods. I tried to defend my approach as best I could, but the sense that I was somehow doing something wrong lingered after our chat.
A few days later I had occasion to speak with another friend and, lo and behold, our conversation drifted into the realm of investment philosophy and trading techniques. After once again explaining my way, a vague sense of disapproval appeared in the visage of my friend. “Why don’t you trade more?’ he asked, “You could do much better if you traded more often.” Here too, he could produce compelling research supporting his notion that more trading is better. Once again I left the encounter with the sneaking suspicion that I was somehow mistaken in my approach.
As I reflected deeply on these two exchanges, I concluded a number of things: 1) most professional investors are a bit neurotic (in a good way, of course…); we are probably never as certain about anything as we profess, nor as calm as we may appear on the outside. 2) It’s important for me to find “my way” and not “THE way” when it comes to investment style. There are innumerable ways to invest, all with strengths and weaknesses, but the best way for me is the one I am most comfortable employing. Whether or not one is a professional or not, understanding and being comfortable with the way one’s portfolio is being managed is critical. Otherwise, one is apt to be blown around by every popular and “reasonable” investment fad of the moment. 3) I need a new topic of casual conversation. Maybe politics… That sounds like a nice, cordial choice…