The Case For Short-Term Investing

We who inhabit that universe known as Wall Street are often told that "speculation" is bad while "investment" is good, and to most people, "speculation" is the jungle of money management where ordinary people are apt to lose their shirts. In contrast, "investment" describes a benign and friendly territory full of promise and profit.

To be sure, speculation at its extremes, and particularly when it involves a lot of leverage, does differ materially from investment. But there is a large gray area, where speculation and investment overlap and are, for all practical purposes, the same thing. Each entails substantial risk and the possibility of great gain.

Risk is often in the eye of the beholder, and investors are often ambushed by a paradox: Very often the stocks perceived as the "safest" are risky because they are already universally accepted and richly priced, while a great many stocks that are perceived as "risky" are, in fact, quite safe because they are owned by investors who are aware of the stocks' problems, but feel these are already well discounted.

Then there is the contrast frequently drawn between the alleged vice of short-term investment, otherwise known as "trading," and the process of long-term investment, which carries with it the happy connotations of patience, wisdom, and prudence, not to mention profitability.

Great profits are frequently earned over the long-term. But what about the silent legions of long-term investors who are underwater on their favorite growth or undervalued stock? They may only be waiting to get out even, but will the gods hear their plea? And what about the round-trippers who have patiently watched their stocks go sky-high and then return to earth, or worse? Are they not also long-term investors?

A major question for the current market is whether investors should continue to follow a long-term strategy that has worked relatively well for quite a while, or shift to a strategy of taking some short-term gains when they occur. It is always hard to make a case for trading the market, and it is certainly difficult for most investors to trade successfully.

A classic indicator seems to confirm the wisdom of this theory. Politicians in Washington are often one of the great contrary indicators, reflecting as they do prevailing public sentiment. Whenever Washington zigs, it often pays to zag. But as we all learned while growing up, it doesn't always pay to do what you're told. And in the investment markets, it frequently doesn't pay to take the easy, obvious, or broadly recommended path, which may lead you over a precipice.

The average investor cannot hope to emulate the successes of famous investors such as Warren Buffett, Peter Lynch, or John Templeton, and shouldn't even try. For one thing, in the investment business, by the time they call you a genius, you are often only a few steps away from the banana peel. Even Warren Buffett may slip one of these days.

Nonetheless, there is a message here: Successful trading beats patient long-term investing without profit. So if you lack the skill to trade the market successfully yourself, then you need to hire a money manager who is capable of trading the market successfully. Otherwise you will likely languish in the land of mediocre single-digit investment returns in spite of your best efforts to do better.

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