Section Items
Short Term Holding
Slightly Off Topic
Misc.

Share Trading - Why Short Term Holding May Be Appropriate.

The primary aim of the short term holding of shares is to reduce the risk that you are holding a share when bad news is announced unexpectedly followed by years of trading at the new lower level.

I know from discussions with people who are considering starting share trading that this is rarely regarded as a problem, but it is major one. "If it's gone down it will go back up again soon" is the answer, but that is not necessarily true and even when it is your pot is not growing until the recovery has occurred, 1, 2 or even 5 years later.

The downside is that short term holding can be quite time consuming, but financial independence is never going to be easy.

Reasoning

The basics of short term holding is to find solid companies, those whose business you understand and believe to be profitable now and in the future but whose share price is out of favour mainly as a result of overreaction to bad news but sometimes for "fashion" reasons.

Having found these companies you then sacrifice possible larger long term gains in exchange for exposing yourself to that company for as short a period of time as possible.

This caution is due the fact that as a private investor your knowledge of the true state of the company whose shares you are purchasing is very poor.

Yet it is often the case that once some bad news is out the share price drops and more of the bad news becomes public giving the investor a short window where many or all the issues are public.

However many of these companies also see further drops as a result of overreaction. The overreaction portion of the drop is often recovered over the next few months and the new price becomes stable possibly leaving long term holders with a capital loss of 20%-40% for years or even for ever.

Before jumping in and as far as is possible you need to understand why that company has dropped as often the market is right and new price is the right price.

There is a type of share called a Value Trap, these are companies whose shares you think are a bargain but the share price stays low for a long time and possibly drifts lower, the market knew more than you.

It is worth noting that many desirable companies can suffer from the results of automated trading tripping buy or sell levels, moving from one index to another forcing automated trading by tracker funds or being in an out of favour industry.

If you start looking for these type of companies your will find that they are more common than you might expect.

Clearly you can never entirely protect yourself from holding a share the day that the bad news is announced, but most investment strategies don't even attempt this.

I suspect this is because they are in denial about the level of knowledge that the investor has about a company.

Once you decide to buy a share you need to mentally set a sell price, typically this strategy suggests a value in the region of 105%-125% of the purchase price.

By taking a small profit you are able to trade frequently as 5%-15% profits are frequently available and once you have sold you have slightly more for the next trade. In some cases looking for a bit more than 15% can make sense but you need to exercise caution and for me 25% is the upper limit.

You can always find an exception, Indivior (Apr 2019, INDV) could have almost doubled your money in one day if you bought and sold at the right time, but you could also have been holding a share that was suspended and eventually lost all of you money.

Compound growth is central to this strategy and once you get into the idea you may become a convert.

It is important to actually sell otherwise you just have a paper profit that may disappear.

Taking a 10%-25% profit may seem to be lacking nerve or even overtrading but 50%-100% profits are rare and usually require either a long term commitment or trading in risky companies.

Two 10% profits within a couple of months are better than 0% because you were holding out for 25% before selling.

If a share is not returning a profit then at some point you must accept that you were wrong and accept a loss. If you don't you may end up with a 100% loss, but more likely you will just have a pot that is not growing.

It is reasonable to keep that company under review and rebuy at a later date.

Be careful about getting too blaze in accepting losses, think hard when you make a loss, are you repeating a mistake?

You may find that you are frequently trading the same small group of companies as their price oscillates around a semi fixed point. When this is the case you need to refresh your understanding of the companies involved occasionally.

I was holding Woolworths on the day it was wound up because I couldn’t believe that it would close just before Christmas.

Whilst no one can predict when the next big share price crash will occur, when company x will announce unexpected bad news or when a currency will change value massively, everyone who is investing money should be able to predict that it is likely to happen at some time.

Only Buy Shares With Real Money!

Whilst the rationale behind short term holding might suggest that CFDs could be used I am of the opinion that using such products is outside of my abilities.

If you are being truly honest with yourself it is highly likely that they are outside of your abilities too.

I understand the desire to try products that offer leverage (trading on credit) as they offer much greater potential profits. If you try them and the first few trades are a success then the temptation to continue to use them could be overwhelming.

Unfortunately the reality seems to be most people incurring big losses, so much so that even the financial regulators around the world have started to step in.

The last time I checked a CFD provider, the warning said 76.4% of retail investor accounts lose money when trading CFDs with this provider.

Remember those people who were gambling on currency and got hammered in Jan 2015 when the Swiss Franc was revalued significantly?

Loads of small traders started crying that they had lost more than they could afford and it wasn't their fault.

It is important to stress that short term holding is not the same as day trading, where shares are bought and sold on the same day.

Day Trading originated in the USA where they have no stamp duty so no need to cover the UK's 0.5% stamp duty and even then most people who try it lose.