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Online Share Trading

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Thoughts on buy-and-hold

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richardw
Super Contributor
I'm just thinking this out - any alternative points of view appreciated.

If you trade a share and it goes up, you make money now. If you want to make money in the future, you have to trade again. You have to keep making correct decisions (overall).

If you buy-and-hold a good Buffett-type company, you're not buying to make money in the short term. You're buying for the dividends you'll make in 10 years. As long as the company grows with the market, compound growth should take care of you. Buying Standard Bank 10 years ago would be an excellent source of divs now. You won't even have to *look* at the market.

So, if you're trading, then you're not just betting against Simon's 90-percent-lose-money number, you're also betting that you can (overall) make money more reliably than compound growth will over time. To win, you don't have to beat 0, you have to beat the economic cost of compound growth.

What am I missing? Note - I'm trading and investing right now. I'm trading because I think I'll find a market point when I'm confident enough to leverage up, and also because I really don't trust the rally (as usual :) However, the above argument really makes me think I shouldn't try be too clever.
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29 REPLIES 29
Werner_1
Super Contributor
Richard, as you know i am a buffett-type long term investor. I agree on your points, selecting the correct companies and holding them, buying on dips and increasing ones shares over time also enhances the dividend income stream over time. If you really take the thoughts further, companies like JPMorgan run under Jamie Dimon use the very same strategy to grow their businesses, they say what Buffett does with stocks Jamie does with banks. Acquire when blood is in the street really works when you know how to select the correct companies. I am very impressed with my portfolio and how the dividend yield has increased over time, clearly the strategy works like a charm. Over the past 5 years that i recorded on this strategy i have a 24% compounded growth rate and over 36% this year - i dont think i need to risk funds to try to get the same (on average) with higher risk trading...
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theyoungster
Super Contributor
Yip contributing every month to a low cost portfolio such as Satrix Div/ STX40 over 10 years will give you the best growth, and the benefit is you dont need to loose any sleep over it
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theyoungster
Super Contributor
Yip contributing every month to a low cost portfolio such as Satrix Div/ STX40 over 10 years will give you the best growth, and the benefit is you dont need to loose any sleep over it
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Not applicable
and you don't have to worry about tax! But you are not using the right mindset regarding trading, so your comparison isn't correct. Effective trading doesn't require being right all the time, it is a game of statistical probability and expected return.
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richardw
Super Contributor
Sure, agreed. But whatever is in the 'secret sauce' of trading properly means you have to keep doing it, or move to something that leverages the compound growth at some point?
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richardw
Super Contributor
This year isn't really 'proof' because it's been an anomaly - if you'd leveraged your head off you could have made X times more. I certainly wouldn't have held through the crash - I was staying out specifically because I was convinced it was coming. Missed the turn, to be honest :) The U.S. markets are pretty much where they were 10 years ago so the only good from buy-and-hold would have been divs.
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john_1
Super Contributor
Richard, you are absolutly correct, however, your assumption...not yet proved correct or incorrect is that the companies will continue to pay dividends..take ANGLO...I know a very wealth man who worked for anglo his whole like that has a huge holding in Anglo and uses the divs to fund his life...So now what... they have not paid a div in 12 months...And that is SA largest company or was untill this happened...Also..there has been a huge move away from paying dividends in favour of retained earnings..just look at Berkshire that has never paid a div...so if he believes in owning companies that pay divs but does not do so there is a serrious conflict of stratergy,to all his would be followers...the larger the retained earnings the more reliant you are on capital growth..and thefefore trading...to extract value.
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richardw
Super Contributor
In America the prices have been so mad for so long that you couldn't really think about divs for most companies - you'd have to be super-selective. It could only be about capital growth in most cases!

Buffett doesn't pay divs because he thinks he can do a better job of it than you can. Frankly I think he's too big to really move the needle for smaller investors - you could likely do much better with a smaller similar company.

Mostly, your friends problem has been all-eggs-in-one-basket, more than 'divs'. But definitely point taken.
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john_1
Super Contributor
Richard ...the only way to extract value from berkshire is to buy and sell the shares... regardless of time frames..that is trading. Any questions
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Werner_1
Super Contributor
Buffett doesnt pay dividends because he believes he can allocate the funds to grow the investment over time, so Berkshire shouldnt be seen as a normal company, but as an individual portfolio, and that is exactly what we as investors do, reallocate the dividends. About the dividends, i believe it is important to have a bit diverisfication among ones investments, this will reduce the risk of total dividend reduction, and then select companies that are solid, stable in growing industries, e.g. the SA banks are very good, dividends quite good still, and other companies like GND do very well and manage the dividends, even though they were reduced still offer some good income, overseas AT&T offers excellent and consistent dividends, Miners are also quite volatile businesses so its possible that they cut dividends, even JPMorganChase which very well capitalised and solid reduced dividends, but this was to build reserves which isnt a bad thing, the money is still there and will be distributed in better times. US TARP funds also limited the dividend pay and was compulsory so i think that played a role as well. I have a plan that if i allocate dividends and additional investments to high dividend payers that also offer good earnings growth and market share growth when they offer good prices my dividend income should increase each year, so far its working quite well even though many companies reduced dividend pays this year, my income is still quite a step up since 2008. The idea is to also identify companies that will increase dividends in the future and not just pay good dividends now, so a bit research and analysis and knowledge into the business is required... for example JPMorganChase's CFO Mike Cavanaugh said at some conferences a while back that they have enormous reserves which will be released when the economy stabilises and starts to grow again, when this happens some good dividends will be declared, this could be expected in 2010... But i am not too concerned as a solid and stable company is more important for me...
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Werner_1
Super Contributor
yip, one could of made more, but the idea is to build a stable, consistent portfolio, leveraging up is not in favour of this...
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Pluto
Contributor
Here's my take on buy and hold: Using very simple techniques based on moving average crossovers it is very easy to see when a bull trend has ended and when a bear market starts. You get the confirmation after the top or bottom but you then are able to reap profit on say 80% of the bull trend and avoid 80% of the bear trend. This technique makes you wealthy because you start the new bull trend with all your capital intact instead of first trying to recoup your losses.
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richardw
Super Contributor
I agree, but then you're leveraging *his* ability to find income and then re-employ it as well as possible. In that case, you don't jump in and out of the stock, you leave it until you need it for a house or old age.

You also don't get money out of your bank account until you withdraw it, but that's not really known as trading :)
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john_1
Super Contributor
Richard... the point I am making is unless the market demands a dividend premium as was the case up until the 80's and favours capital growth..A TRADING STRATERGY IS REQUIRED TO EXRTACT THE VALUE. That does not mean day trading, and it may mean 50 years holds, but do you want to be holding Berkshire when Buffet dies in his sleep...No because it will lose 30% ..so a trading decsion needs to be made. I asspire to use monthly time frames to make my descions. and to hold for decades but I will still consider myself a trader.
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richardw
Super Contributor
Ok, I guess my point is that first prize still seems to be that compound growth is the more powerful force over the longer term. So trade/invest/shave/smoke/whatever, but keep compound growth in mind.
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richardw
Super Contributor
Fisher says something about missing those *really big* falls will improve your overall number over the long term. He reckons ignore all the smaller in-between ones, but then he has a ton of money so can't jump around like we can. He got it right twice, but messed up this last one - held too long.
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Werner_1
Super Contributor
I agree, many excellent companies were built up on the same principles as applied by long term investors, e.g. GND does it, JPM also, many of the famous US business people do it, and many here, Johann Rupert for example, etc. build something sustainable and solid over time the wealth will come...
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doomsdayza
Super Contributor
y4y you make me so happy...
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bangbul
Regular Contributor
When i started 16 months ago, had only one time frame in mind; long term 10-20yr or even for ever[till death]. But trading or rather the abillity to trade effectively, makes more & more sense, aspecially when you look at the 20y nikkei chart.
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