by Charles Mizrahi
In 1983, I started my financial career as a floor trader "scalping" index futures. Back then, when I was a floor trader on the New York Futures Exchange (NYFE), holding a position for fifteen minutes was long term. Scalping was trader talk for buying and selling index futures as soon as they went up by the smallest increment (in trader talk - "a tick"). For example, if I could buy the index at 89.50, watch it move one "tick" (which was $25) and then sell at 89.55, I would make $25 less a $2.50 commission and net myself $22.50. The problem with scalping was that you were working all day just to grind out a few ticks. It was a lot of work for minimal results.
When the exchange was just beginning, a hallway was constructed connecting the NYFE and the New York Stock Exchange (NYSE). A very distinguished gentleman, who was well past retirement age, wandered into our exchange and saw traders screaming at the top of their lungs and waving their arms in wild gestures. He was just standing off to the side looking puzzled. I approached him and introduced myself as a floor trader. After explaining to him what I did, trading for ticks, he smiled and said, "Son, the big money in this game is made by sitting." Being young and na?ve, I took his advice with a grain of salt; he was a relic. The money was really made by trading, or so I thought.
It was many years later that I finally understood the old-timer's advice. Frequent trading is a very difficult game to win. When you factor in commission costs, the spread between the bid and ask, and taxes (short-term capital gains), there is a lot of friction eating away at your returns. In addition, you really have to be right many more times then you are wrong in order to make money.
The reason you should sell a stock should have nothing to do with the stock market. The goal should be to hang on for as long as possible. Only after examining the business fundamentals of a company and deciding that they no longer meet certain requirements for holding them should you sell. If an investor bought $1,000 worth of Starbucks in 1992, it would now be worth close to $40,000. I know it's not easy to find great companies and even more difficult to hold onto them when Mr. Market drives their price lower. But the rewards are that much greater when you stick with it. Imagine the investors who bought $10,000 worth of Berkshire Hathaway at $15/share in 1965 and held onto it. That $10,000 investment is now worth close to $6 million! When you feel like throwing in the towel on a great company simply because the price moved lower for no apparent reason, I will be there to remind you that the "big money in this game is made by sitting."
Charles Mizrahi is editor and publisher of Hidden Values Alert newsletter, which focuses on finding stocks trading significantly lower than their underlying business value. ?He has over 23 years experience in the financial world as a money manager and investor. Email: [email protected], Webpage: www.HiddenValuesAlert.com