Friday, December 03, 2010

Playing With The House's Money

If there is one phrase I hate from talking heads on TV is that when a stock has run up to sell your initial stake and then you are "playing with the house's money".

Excuse me, it is all my money and if I feel a stock has run to a sell point, I don't want to lose any of it. The whole connotation that the stock market is akin to gambling, also leaves a bad taste in my mouth. I don't even like to view stocks individually, it should always be about the entire portfolio.

That being said, I think the biggest mistake investors make is selling stocks that are going up too early and probably the second biggest mistake is buying stocks that are going down too soon.

Do Small Investors Have an Edge?

If you stop and think about us as small retail investors, what is our advantage, our edge? I think trying to count on speed or out-smarting the pros are very difficult to do. The pros are very smart. And they use high-speed trading and complicated trading algorithms, and thus are very fast.

I think we have two primary advantages:

  1. Being small
  2. Being able to take a longer term view
In being small, we can get into a position that is material to use, much easier than a multi million or billion dollar fund. So we don't need as much liquidity and our trades are not usually market moving. We can also ride coattails, such as I just did on CEU.

The longer view is something Greensblatt talks about in his book. For a large mutual fund or hedge fund, they really can not afford to under-perform the broader market for even a year, as investors will not have patience for that. So they are forced to move with the market. We can afford to buy a stock that is cheap and good and simply wait. They say the short-term market is a voting machine, but long term is a weighing machine. We can really take advantage of that. And with dividend stocks, where I am moving my portfolio, it is easier mentally to take advantage of that.

More later...

1 comment:

MagicDiligence said...

Marsh - that's perfect. I cringe every time I hear Cramer say this. You are spot on - this is not a casino, and you should not be willing to lose your gains just because they are not part of investment capital.