Can't one trade with a long-term perspective and at the same time join day trading? I'm a newbie in stock market as well.
The problem with this notion is that it's too contradictory, simply because the "short run" and the "long run" are two opposing positions.
Most traders don't look at the fundamentals. They don't look "under the hood" to see how exactly the company is performing financially, operationally, and economically. They care about price and volume, and how these speak of the market's sentiments regarding the stock, using charts and patterns and technical indicators such as the MACD, the various moving averages, the RSI, et al.
If they look at the news at all, there's a good possibility it is focused on press releases and the speculation/rumor-mongering that follows, whether it is micro (company news) or macro (economy). Now if they have the background to understand the fundamentals, the best place to go to is some third-party provider (e.g. Bloomberg), go to the financials, and check out either the summary or the computation of ratios, followed by analyst estimates and opinions.
But even if they do this (fundie check, news check), all it does is make them comfortable about the business they're trading and influence the way they position themselves. They are still likely to trade frequently without recourse to how much they're overpaying for it and the process lies on handing the shares over to the next idiot who wants to sell it higher to the fool that follows. This also exposes them to the conflicts of interest beleaguering investment-rating businesses, corporate analysts, and actively-managed mutual funds.
The theoretical underpinning of the technicians is the efficient market hypothesis, which proclaims analyses are USELESS because the current price reflects known information. The market is therefore efficient albeit subject to irrationality and bouts of panic/euphoria, centralizing the key to success in the identification of the prevailing atmosphere and guesstimating its next move using trends and patterns, whose reliability are cemented by human nature itself.
Investors on the other hand, operate on the philosophy that the market is INEFFICIENT. That it takes some time before the collective opinion adjusts the price according to the economic reality, or that it would deliberately misprice a security because of its bouts of irrationality and panic/euphoria.
It is not about looking into prices and volume and chart patterns and tech indicators, but about knowing the underlying business inside and out, being conscious of the prevailing atmosphere, and EXPLOITING your fellow man, knowing you will be the one to make most of your returns over the next two to three years. After all, majority of your returns come from the price you pay and the performance of the very enterprise the stock derives its price from.
Why play the volatility, subject yourself to emotional stress on a daily, weekly, or monthly basis, and expose yourself or your tax preparer to the immense hassle of preparing your tax returns for the sake of a few units of currency in every trade at the end of the day?
(You can skip if it's too long)And if the answer's because you can make more money that way, then WHY haven't I seen any real day trader or swing trader in the investing news? WHY are all the rich people
the INVESTORS? In fact, if you think you can make 200% or so of your investment in almost every trade 70% of the time, do you think you'll be able to do this when you have MILLIONS or BILLIONS under your belt?
To make money, traders NEED to move money, to make their portfolios work themselves to the bone. If I can buy MWC at P25 and sell it at P26 by the end of the da, hey, I actually make P1 a day. To answer for transaction costs AND to make it worthwhile, I need to start moving a lot of shares. Since COL charges P22.5 minimum PER TRADE (not even including the %-based costs and taxes), then I have to move at least 45 P25 MWC shares at once. Why? When I sell it for a P1 profit, that's breakeven. But I want to PROFIT, so I have to move MUCH MORE.
This all looks doable with a few thousand or hundred thousand, yes? But what if you're managing a portfolio of, let's say, the USA standard of $5 million (the number most starting hedge funds begin with; roughly PHP215M). Manila Water at P25 is equivalent to about 50 billion pesos, so your entire portfolio is 0.43% of Manila Water's equity, or 8.6 million shares. Hell, EEI is SEVEN billion, so your portfolio's equal to 3% of EEI's business. (Your pot can buy Centro Escolar University outright, btw.)
You need to make a significant return on your investment, so let's say you get Manila Water. HOWEVER, you need to get a sizable return on your OVERALL portfolio. Going back to that P1 profit per trade example, let's see. If with a 2500 pesos, you can do something like buy 40 shares of MWC at P25, sell all at P26 by close, and score 40 pesos easy. Let's say you can do this multiple times successfully, but you fail 30% of the time. Let's say you've done it four times during the day: that's 160 php, and compared to 2500 that's 6.4% return. If you can do it for every workday, that's about P3200 ASSUMING you buy the same amount of shares every time (and you obviously won't!)
Now... what if you have 215M in your hands? To meet the same 6.4% return, you have to make P13.76 million by the end of the day. Divide that by 4, and that's P3.44 mil. You need to trade 3.44 million shares to meet that, or even a little more since the %-based trading costs will kill your profits somewhat. Average volume of MWC? about
983,000 shares per day according to Business week.
The fact you will buy 3.44 million shares -- 3.5 TIMES the average daily volume -- will lift the price and shoot it through the resistance level. YOUR move will trigger a bullish sentiment on the stock and cause the smaller traders to rally,
while you're still buying. Boom! You lose and you don't meet the same rate of return. It's even worse given that you have to do this multiple times over and over again.
If you try to do this through more surreptitious means (ala Warren Buffett), then you will spend considerable money processing the tender offer OR going to every MWC stockholder to get their shares UNDER THE TABLE. That's completely unacceptable from the traders' point of view.
If you try to do it anyway, but through MULTIPLE companies, you run the risk of exhausting yourself seeking opportunities (then losing clients and thereby the pot you're working with AND your own livelihood with it) AND you run the risk of losing all your money or most of your pot in a big gamble, which is what happens to MANY eminent traders who've risen to the spotlight.
Compare that to an investor who'd put in... say... 86 million (20%) into MWC at P25 (that's 3.44 mil shares, which he can buy piecemeal to mitigate SOMEWHAT subsequent price rallies), hits an average price of P30, waits five years, and sells it all at an average price of P50 (with selloffs beginning at P45 or something) thinking it's overvalued OR finding a better opportunity somewhere else.
67% ROI after 5 years -- 10.76% return
per year. Add the dividends (let's say, 3% yield at P25)... that's an additional 12.9 million. 79% ROI after 5 years -- 12.4% per year. Very, very few traders at that level of money would not be able to meet that. Not consistently.
For tl;dr:
My point is, when you're small, it's easy for you to make money. You might even be able to combine both schools of thought. The larger you become, not only does your universe of targets shrink, but so does your ability to stick with the trading camp, and it's all because of transaction costs and the "people factor".
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May 10, 2013, 12:51 PM
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