Day Trading for Fun and Profit

You call yourself a buy-and hold investor, but you and I both know you're lying. A column in The Wall Street Journal recently noted that Sanford C. Bernstein's chief investment strategist has found the average holding period of a NYSE-listed stock is less than seven months. You might not be a day trader, but you're not a buy-and-hold investor, either.

Let's call you a "what-have-you-done-for-me-lately" investor -- WHYDFML.

How long is long?
You're buying a stock looking for it to move, and my guess is, you want it to move big. If it moves, then you might hold on to it. Even if it falls, you still might not sell, because you at least want to get back to breakeven. The worst thing the stock can do for you is move sideways. If it does nothing at all, you become positively impatient.

Yet by being so impatient, you miss out on lots of potential winners. Always looking for "the next big thing," you find yourself jumping from stock to stock. But look at some of these companies that you might have missed out on with your frenetic trading practices:

Company

Open Price 7/25/06

Close Price 1/25/07

Close Price 2/23/07

One-Month % Change

NTT DoCoMo (NYSE: DCM  )

$14.50

$15.50

$18.14

17.0%

Emdeon (Nasdaq: HLTH  )

$12.20

$13.33

$15.31

14.9%

Noble Entergy (NYSE: NBL  )

$48.13

$50.35

$58.65

16.5%

Bowater (NYSE: BOW  )

$20.70

$22.43

$25.20

12.3%

Exelon (NYSE: EXC  )

$59.76

$59.05

$66.93

13.3%

Part of the problem is the Internet. Online trading has made it very easy for the average investor to buy and sell stocks. Low commissions are another driver of increased turnover. When some websites, like Zecco.com, have completely done away with commissions, there's little thought of "friction costs" because there is little friction.

Yet unless you're trading in a tax-advantaged account, like an IRA, you might see any small gains you make in a stock trade virtually eliminated by the tax man. The short-term gains are taxed at your regular individual rate, which for most people is a lot higher than the longer-term capital gains tax rate.

A shot in the nose
Before it was acquired by GlaxoSmithKline (NYSE: GSK  ) , Tom Gardner recommended CNS, the maker of Breathe Right nasal strips, to Motley Fool Hidden Gems subscribers. For a year, the stock lay mostly dormant -- in fact, it was actually down a bit. Some subscribers were antsy, thinking of bailing out on the stock. Then the company reported quarterly results that surprised everyone, and the stock took off, doubling in less than a year's time. By the time Glaxo bought CNS, the stock had tripled in value.

You won't be able to achieve such results if you're impatient. If you turn tail at the slightest bit of trouble, you'll keep finding yourself in stocks that don't move.

A better way to trade
Want to break your nasty habit of being a WHYDFML stock trader? It's not that hard. Some tips:

  • Congratulations, you bought a business. You're not buying a pretty stock certificate. You won't even get to see it in most cases, anyway, as your broker will be holding on to it. So look at the company you're buying and think of it like you're part owner of it -- because, after all, you are part owner of it.
  • Ignore the market. Forget about the daily price fluctuations of your stock. Benjamin Graham correctly called the market "manic," and you'd do better determining whether the business is sound, instead of whether the stock is up or down a few pennies.
  • Focus on the real long term. Peter Lynch has noted that most investors realize the greatest returns on their stocks after three or four years of ownership. Think of that as your minimum time frame, but look at decades as the preferred holding period. As another investing legend, Philip Fisher, has said, "If you've done the right research up front, the best time to sell a stock is almost never."

Developing the ability to truly buy and hold stocks comes with time and experience. Every month, the team at Hidden Gems is turning up companies that have strong balance sheets, no debt, and owners and managers with a stake in the company. These are the foundations of a portfolio built to last.

If you want to stop fretting about your stocks on a daily basis and become a real buy-and-hold investor in the tradition of Graham, Buffett, Lynch, and Fisher, then check out the more than 50 stocks already recommended by the team with a risk-free 30-day trial. There's no obligation to subscribe.

GlaxoSmithKline is a recommendation of Motley Fool Income Investor.

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.


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