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One question I’m sure many of us have asked ourselves before at the start of our investment journey is whether we should go long term or short.

There are certainly many arguments for and against on both side of the fences.

To say either one of them is the best solution is definitely being biased. This is because every individual is a unique. The decision to go either way really depends on his investment personality and risk profile.

In fact, even in trading itself, there are people who differentiate between long and short term trading.

While we won’t venture in depth to that, let’s do a heads on analysis between long term investing and short term trading shall we?

Pay attention now….you are about to discover where you stand…

Long Term Investing vs Short Term Trading

Long Term Investing

Pros

• With a longer term horizon, you will be able to reap the magic of compounding effect. The snowballing effect can turn your puny portfolio into a MONSTER!
• When you think long term, you will do fewer trades. Fewer trades = less commission paid.
• You can take advantage of dividends payout.
• Generally, volatility and risk diminish over time. The longer you hold on to your investment, the higher the probability of you earning a profit.
• You need not monitor the price all the time. That’s a big plus. Monitoring is tiring. You can just let it run on autopilot and look in from time to time.

Cons

• Lots of patience required. Sometimes, it may take years to earn a significant gain.
• Test of your emotions. You have to endure the high and lows of price movements which are bound to happen during a long time frame.
• You wouldn’t be able to see immediate profits.

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In the previous post, we gave an introduction of how greed and fear can cause massive havoc in the market.

Today, I’ll go in depth, and do a case study of emotions gone wild in the market - and the resulting destructive effect!

Before we touch on that, let me share you a quote by Sir John Templeton, the legendary investor of Templeton Growth Fund’s fame - “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.”

Wise words indeed!

If you notice, the stock market history is a never-ending cycle of boom and busts. And when we speak about boom and bust, few come any bigger than…

Monday, 19 Oct 1987…

That fateful day, also known as the ‘Black Monday’, saw the second largest one-day percentage decline in stock market history. Ever.

The S&P 500 fell 20.5% while Dow plunged by a monstrous 22.6%!

The carnage was not limited to the United States alone. The intense fear and panic was elsewhere, spreading without mercy. Regional markets such as Hong Kong, United Kingdom, Canada and Spain all took crushing losses of an average of 22% by the end of October.

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There is an old saying that markets are driven by just two emotions: Fear and Greed. While this may seem over-simplified, it’s often true!

To a large extent, greed and fear indeed drive the buying and selling actions of investors, traders, hedge funds and institutions.

You see…Greed is an extremely powerful emotion - as is Fear. Make no mistake about it.

It’s unbelievably easy to get caught up in our emotions, and end up letting them dictate our thoughts and actions. Just ask any experienced investor or trader and they will tell you.

It’s really important that you understand how succumbing to these two emotions can have a huge effect on investors’ portfolios and the stock market.

So let’s take a look the perfect example:

The Dot Com Boom of the Late 90s

Intoxicated with greed, investors fell over one another to buy Internet-related stocks - although many of these companies were not even profitable!

The frenzied buying drove prices to ridiculous levels and created a huge bubble, which finally burst in mid-2000.

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Dear readers,

How’s everything? This is a note from your ever dependable Mr Stock.

Well I know, I know pal…

Market ain’t doing too well. Bloodbath everywhere. You are probably blaming me for the 57% reduction in your portfolio value.

Wait! You can’t do that to me. Don’t forget I’m single-handedly responsible for your 258% charge up in your portfolio value during the bull run last year? You were very happy with me then. Quick to forget already?

Anyway, if there is someone you have to point you finger to, point it at my old friend, Mr Interest.

Mr Interest - He Is A Sneaky Cheat. Let Me Explain…

He has always wanted to see me down. It’s like his personal life mission. To watch me fall is his greatest pleasure. Cos that’s when he is rising.

You know what? I’m don’t take that lying down. When I go up, no more party time for him - he goes down!

If you realize by now, our fortunes are always the opposite of each other. We have an inverse relationship. Weird but true.

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