Some time ago I got a whatsapp message from a friend with a link to an article “What should you look for when making an investment?” published on Quora and a comment that it looks very interesting.
The first thought that came to my mind was – yes, in theory everything is "simple". As far as finding the next trend or the next “superstar”. It is easy to look back at the historical data, having no stress as oppose to deal with real time data and pressuring decision-making situations. It doesn’t mean I underestimate the value of historical data, not at all. What I am saying is that you have to use logic and maintain cool mind.
Think how simple and easy might be to find the next “superstar” if more than 90% startup companies usually end up bankrupt. So, assessing this harsh reality and having huge pool of companies to choose from, it would be logical just entrust this selection process to specialists like venture capital funds. And here comes another harsh realization – about 75% of startups in which specialists have invested go bust and only 40% out of those who survive actually turn into profitable companies.
Be realistic. These venture capital funds operate with large resources and are able to hire good specialists, analysts, and they are definitely smarter than me and most of "everyday investors". I am not that naïve to think that I probably can do better than them, I am just observing “dry” statistics and these percentages of failure speak for themselves.
What I dislike about such investment style is that money is frozen in the long run. I don't have the capital or the interest to "sit on an investment" that can end up with a loss. For example – if you made an investment in 2000, you had to wait 13 years for the profit…
Yes, you can tell me that there are long-term profits, and these investments would have made 120% return by now. It may seem a lot but then again, it took 20 years to reach that level. Now suppose the investment was made in 2002, then the return in 18 years would be about 250%. Is it a lot for 18 years? Perhaps but your circumstances might have changed a lot since it is a big portion of everyone’s life.
Another important factor to be considered – at what point would you record a profit? Would you be able to look at a non-profitable investment for so long? Years after years while inflation slowly eats your patience away… Perhaps you would prefer exit at “zero” point after 10 years of stagnation to move on, or you would fix a deal with a 50% profit. See, it is not that easy in real life to maintain a certain position in a long run. Historically yes, that’s always easy but in reality – never since there may be so many different living conditions that require different actions.
If we look at those who dwell on long-term investments – there are not so many traders or managers who succeed in the long run (not necessarily within a certain economic cycle). For example, let’s look at one of the best-known people in the industry Warren Buffet. There’s one good article which looks at the $ 1,000 investment in his Berkshire Hathaway. And there you can see a trend – the investment would be very successful if invested in the "early stage". If invested later, the results would be rather mediocre.
Starting from the 90s, BRK.A performance indicators are no longer so high. Of course, there are many explanations for this, but it is clear that everyone is having difficulty finding the best investment in the long run.
Looking at all this, I understand that I don’t want to be a long-term investor.
I honestly can admit to myself that I’m not fit for long-term investments. It is not in my nature, nor I have desire, aptitude or knowledge for it as well. I used to think that every good idea or project eventually will become a success. But, as we all know, it doesn’t happen that way. So, I realized that I don’t want to be “the first” . I’m not an inventor. What I am rather good at is that I am able to spot good and positive things in every project I choose to work on. Over time I realized that the key knowledge for me is to understand trends. I am rather content with catching such a trend and take some of the profits form it. Don’t be greedy and apply such aggressive strategy in a long term. My transactions last from a few days to several months the longest, so you can call me a “swing trader”.
What I like about swing trading is that fits my lifestyle – it is exiting to look for patterns, trends, looking for right opportunities and always having money at my disposal so I am ready to invest at any time. And in crisis situations, like now with COVID-19, my capital is not tied up in stocks or other instruments where I would have to wait for the opportunity to fix profits or pray for zero endgame. The fact that I have quick access to funds makes me very happy.
More aggressive trading or day trading is not for me either, I don’t want to spend the whole day starring at the screens. It is complicated but above all very stressful and psychologically difficult. So, the swing trading is right fit for me, that’s why I have chosen the middle ground for myself.
I follow the macroeconomic cycles and I trade within cycles. For example, if I believe that there is an emerging market, then I look only for “buy” opportunities. I am not looking for opportunities to "insure transactions". The most difficult circumstances for me are when the market is "standing still" or when the trend changes - then I either have a loss or I am at zero profit point.
So, to wrap this all up – I'm a trend following swing trader. And for now, I see no reason to change that.