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Tuesday, December 06, 2005

Short term or Long term Moves?

Question from Member:

You said, "I am looking for the big, long term moves, not the short quick gains. The big moves make you rich, not the quick little gains; they make you impatient and hesitant. Patience is the key to success if you want to make the big bucks on Wall Street."

You bring up a very interesting point and I just want to run something by you to hear what you have to say.

Say I have a portfolio of $10,000 and I'm trying to strategize how I will trade stocks with this money. And let’s assume, just for this example, that it is a bull market and I'm looking for a 100% return. Here are (2) examples:

--I could buy (1) quality stock, hold it for a year (long-term), and hope it goes from $60 to $120.

--$10,000 @ 100% = $20,000

--I could buy (3) quality stocks separately (short-term) and hope that when I hold them they go from $60 to $75 (a 26% increase).
--$10,000 @ 26% = $12,600 (1st stock)
--$12,600 @ 26% = $15,876 (2nd stock)
--$15,876 @ 26% = $20,003 (3rd stock)

Gotta love the 8th wonder of the world: Compound Interest. Do you see where I'm going with this? In one example you get to 100% increase in one shot, in the other example you get to 100% with only a gain of 78%. In both instances you get to your goal of $20,000. Now I understand that I'm not taking into account commissions, but would I have to if I had $100,000?

And then I also have to take into consideration, what are my chances that
(1) stock will go up 100% VS. My chances of (3) consecutive trades that will go up 26% each. It just seems to me that the (3) trades would be easier to accomplish. Can you shed some light on this?

I hope I don't seem like I'm rambling (I've been know to do so too often).
This has just been something that I've been thinking about more often, and especially after you stated the point above.

As always you comments are greatly appreciated.
MSW Member

My Answer:

MSW Member,
You are right and wrong at the same time. If you are trading $10,000, your scenario may work but what are the chances that 3 or 4 of the stocks you buy (anticipating they go up 26%) actually go down 7% or 10% before you hit the 3 winners. Not every stock will be a winner. Now you may need 5 or 6 consecutive stocks to go up before you hit that 100% objective. Your theory is not wrong and may be exactly what you want to accomplish and it can work.

It is very hard to find stocks that go up 100% and actually have them in your portfolio the entire time through all dips and corrections. This is why I like the $60-$100 theory because I can continue to grab gains in the range of 40%-65% with some small losses that average 5%-7%. My goal is to compound my gains with this theory as you can see that I am not looking for anything more than $100.

In an account that has over $100,000, the investor can sit patiently as their investments grow larger for the longer term gains. Keep in mind that capital gains are hefty when you have larger sums of money in the market. The short term capital gains and commissions will add up. Taking a 25% or 35% short term capital gains tax hit on any profit is hefty, especially when the gains are only 26% in size. Now, I don't make my buy and sell decisions based on tax implications but I never overlook them either. I hope this helps answer the question. Let me know.



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