A Long Term Investor - Do You Want to Be One?

In this Edward Jones Perspective video, Investment Strategist Kate Warne makes the case for long-term investing and discusses these time-tested principles

Introduction
Generally, long term traders/investors hold their positions for a year or more. However in this article I am going to consider a long term trader as a person who holds his/her positions more than a day. This therefore, include those traders who consider themselves as swing traders. I believe that this modified definition is necessary due to these modern-day type of occurrences commonly known as 'flash crash', 'insider trading', fraud and 'hacking'.

Once you make the decision to be a stock market trader or investor it is important for you to choose what type of trader you are going to be. Assuming you have made the decision to be a long term trader you must pursue a line of study that will make you knowledgeable of the area of trading you have chosen. This line of reasoning is applicable to all forms of trading.

Fundamental Analysis
Go to investopedia.com and chartadvisor.com and learn as much as you can about stock fundamentals and at least the basics on technical analysis, respectively. A long term investor should focus on the story/plan behind the development of small and mid cap companies. Even some large cap may generate some interest due to management, unique products and/or service etc. In this case you purchase the stock of the company you researched and accumulate the stock over time, every time the stock price falls. Check out the blog post I wrote about Apple in Sept of 2007 at Investor Place Blogs.

Stock Split Strategy
Swing traders may study stock split strategies and implement their choice. Even though investing is risky, in a normal market environment you could make good profits with stock splits within a few months. My favorite strategy is buying stocks that are about to split. You monitor and research these stock split announcements at  The Online Investor and at Yahoo Finance, respectively.

You buy the stock before it splits. The more shares you get after the split the better. If the stock chart before the split was gradually increasing and lacks volatility the better. Hold the stock for up to a few months. In many cases if you did your research well you will double or almost double your money.

Obstacles and Concerns about Long Term Trading Success

Many traders adore Warren Buffet because of his success as a long term investor. I believe that what he has accomplished is remarkable. Given the distrust, greed, and immorality that are constantly showing their heads on Wall Street it is very difficult for a modern-day long term investor to replicate what Mr. Buffet has done. Frankly speaking, I just don't trust the market on the long term even though it has trended higher and higher over several years.

Therefore, given the above it seems logical to be a long term investor. Buffet's accomplishments and the history of the market are strong pros - in favor of the long term investor.

However, let us look at some cons that are obstacles that I can't get over to be a long term investor. First, to be such an investor you must have good tolerance for risk. I find it very difficult not to sell  when I see my stock price falling day after day. If you start with a small account and are faced with a series of stop loses in the beginning it could be very discouraging.

Secondly, insider trading and fraud are alive and well on Wall Street. Michael Milken paid a large fine but his family kept over half a billion dollars. The Enrons and the Worldcoms are alive as well so we heard of Bernie Madoff and the recent scams as discussed in the video above. Don't believe the commentators in the video who are giving the impression that the penalties are enough to halt insider trading and the mess on Wall Street. It was even legal for the members of our government to get rich on insider trading.

Thirdly, I do not believe any stats that comes out of Wall Street or the stats from our government. If the truth is known about the Federal Reserve Bank there will be an immediate international financial crash. The major accounting firms that audit the very large companies are not independent. If anyone believe they are, then I own the Brooklyn bridge and it is up for sale.

Fourthly, the Securities and Exchange Commission, the other security regulating bodies and our government are clueless about what is going on at Wall Street and on the Internet. This was shown in testimonies to Congress in the Madoff scandal and the recent 60 Minutes documentary of the $100 million stolen from the banks by hackers in 24 hours. The investment bankers and the hackers are so much smarter than the regulating authorities it is comparable to your kid little league team going up against the NY Yankees.

Finally, given the current financial environment of major insecurities a long term investor may wake up the next morning and find out that most of his/her portfolio if not all has disappeared overnight. Stop loss or diversification will not protect you against an overnight flash crash. In the latter part of 2008 when the subprime loans and credit default swaps became a part of our vocabulary reports show too many people who lost 33% - 66% of their retirement when they were about to retire.

Our best bet is to stay liquid and have accounts in various 'too big to fail banks'. In the interest of preventing a global financial catastrophe, the Federal Reserve along with the world governments will do what they always do to prevent such events from occurring.