If you currently have a job or have worked in the past then you know quite well how it feels to trade time for money. When you work for a business and get paid an hourly wage, that dollar amount is the value that has been placed on your time. It’s what the employer feels your worth for the services you’re providing. I tell you now there is a better way and that’s to put some of the money you earn to work for you. Investing in stocks and mutual funds are one of those ways.
Before you begin investing in the stock market I would strongly suggest that you ask yourself two questions. 1) Am I investing because I need quick money? Or 2) Am I investing because I’d like to start saving to accumulate wealth in the future? Which ever you decide will determine your investment philosophy and attitude.
If you answered yes to the first question I’d advise that you explore another avenue to save and invest for short-term capital, as the general market and individual stocks are quiet volatile on a short-term basis. You can consider yourself either a trader or a short-term investor if you are in the market buying and selling on a regular basis to turn a quick profit. If you answered yes to the second question you can consider yourself a long-term investor. A long-term investor typically holds stock anywhere from a year to a lifetime.
A trader by definition buys and sells throughout the course of the day to generate quick returns. Traders rarely carry a position (stock) for more than a day. The general rule according to a long-term investor is that short-term gain leads to long-term pain. A trader or investor’s profit from the sale of stock is shown on the 1099 tax form at the close of the year. When you sell a stock for a profit before one year you pay approximately 34% on the gain in addition to not qualifying for the company dividend (if one is paid). The long-term investor’s advantage is that you would qualify for the dividend which at year end is taxed at roughly 15% and if you sell a position after one year your gain is taxed at approximately 15%. Keep in mind those are just two reasons as to why it is advantageous to be a long-term investor. The tax and costs that are associated with trading often are the downfall to this classification. The founder of the Vanguard family of mutual funds, John Bogle compares frequent trading to gambling in Las Vegas: The house always wins in the end. A trader is notorious for viewing a company as a ticker symbol or an electronic blip. They watch streaming market graphs and study the company’s price fluctuation over periods of time to catch trends. They generally have no interest in the actual business, the management or future plans. In addition, a trader pays careful attention to the interest rate, inflation rate, industry news, and political events.
The second classification would be a short-term investor. A short-term investor may have some long positions but typically they have a high turnover rate within a one to three year period. Short-term investors dig into their companies, thoroughly read through news, and pay careful attention to market conditions and political happenings. These investors usually buy into opportunities that present themselves and bail out when the company returns to favor and taking their profit with them. One specific example is Brocade Communications System, Inc. Brocade is in the technology sector and is involved in data storage devices, which includes the creation and design of these systems as well as the marketing, sales and support aspect. The former CEO, Gregory Reyes was the first chief executive to be charged criminally for improper practices related to the account of stock option grants or better known as stock option backdating. Once the Securities and Exchange Commission discovered the news investors became fearful about the company’s future and started to sell their holdings. The opportunity: the company fell out of favor being the first to be involved in such a scandal that is now becoming rampant among corporate executives. The solution was to fire any and all executives who were involved in the backdating scandal, which was done shortly after. This is just a brief example of a short-term investor picking up on an opportunity that they can find throughout their daily research.
The long-term investor looks for something entirely different. This specific class is often focusing on the microeconomic factors of a sector, industry and specific company. When looking at the bigger picture to determine the future success of a business you aren’t governed by Federal Reserve decisions, temporary market slowdowns, tech rally’s, dot com booms, and many other macroeconomic factors that are to general to affect the overall future success of your company. Warren Buffett considers himself a long-term value investor that prides himself on focusing on the tree rather than on the forest. Mr. Buffett doesn’t concern himself with the short-term fate of the stock market instead he concentrates on the long-term prospects of the business. The long-term investor seeks out companies with products that will still be in demand five to ten years from now, with managers who are competent in their industry and innovative with their ideas.
It’s important to realize that a trader, short-term investor and long-term investor all follow a different market philosophy and attitude which drives their decision making on a particular position. Investing is an emotional game, with fear and greed constantly fighting for first. When you make the decision to buy stock in a company you are purchasing an ownership interest in an actual business. To limit the risk you need to control your temperament, be knowledgeable of your business and learn from experienced professionals.
