I think there are 4 features which are most important in successful investing. I call them LIVE. Last time I detailed about "Lonely". Today I will talk about "Inactive".
Not sure if you have the same experience. At least I had and I think most of amateur investors will have the same behavior. In the past, I just could not have cash in my hands. I wanted to invest them as much as possible. Otherwise, I just felt I missed some big opportunities and wasted my money. So I frequently traded, in and out all the time. Of course I won some trades but most of the time, I lost. I always ran into such a situation that when I did see some really great opportunity, I had no money to work for me. So why is active trading not a good investment behavior?
If you study the characteristics of most successful investors in history, you will find they have a very common nature: be very inactive. One of the greatest living investors in the world, Jim Rogers, once said something like: I don't move often and just wait until the time when the money is lying at the corner. I then simply go there to pick it up. So what's the magic of being inactive? There are four things you will achieve by being very active in trading: first, you are among the 80-90% of those so-called investors in the market. Statistics have shown that 80-90% of people who invest in the stock market will ultimately lose money. So in essence you have put yourself in the pool with a 80-90% probability of failure for your trading positions. Honestly ask yourself if you are a frequent trading person: have you made good money over time? Secondly, you simply give money to your broker as they are the most happy persons to collect trading fees with zero risk! Thirdly, you will most likely significantly increase your tax bill. Capital gain, if held for over a year, enjoys a lower tax rate. Frequent trading may give up much of that low tax rate. Lastly but not the least, you will not have the cash reserve to invest when a real great opportunity comes.
However, don't get me wrong. Being inactive does not mean you are really doing nothing. Actually you should be very active as well. What I really mean is to be inactive physically but very active mentally! While you should refrain from trading frequently, you should actively do your home work to read, digest, and analyze to identify what are the best investment opportunities you need to focus on and put your hard-earned money in. When such opportunities are identified, you should also determine when is the best time to get in. Even you put money with the best company in the world, you may still lose all your money if you invest at a wrong time, period!
You may notice that I haven't talked about investing in specific stocks in the past months. It is true that while I'm sitting in a substantial pile of cash right now, I haven't made any long trades for many months now. On the contrary, I have made several trades to short, as you should know, for Euro (EUO), the whole market via volatility index (VXX), gold (NEM), and rare earth (MCP). It dose not mean I don't have any long positions. Actually I have a lot of long positions, which I placed them 1-2 years ago. While I'm also enjoying the ongoing market rally for my long positions with quite hefty paper gains, I have become increasingly nervous of the extreme complacence of the market. I think we are very close to the tipping point for some very severe market correction, against which I only want to hedge myself with short positions. So personally I'm very inactive at the moment and mostly observe and sit at sidelines. However, I'm very active in thinking and researching to be prepared to get in with all the force when the moment is right. I advise you to do the same.
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