Make More Money by Not Trading at All (buy-and-hold investing vs active trading)

Smart Money ^ | 01/11/2011 | Jonathan Hoenig

[SeekAndFind]

It's now taken as gospel that buy-and-hold investing is dead. But on those rare occasions when an idea of mine is actually working, the best thing I can do is simply stay out of the way. Letting your winners run isn't a stock tip – it's a time-tested technique.

But for most people, investing comes solely down to making transactions. They manage their portfolio like they shop at the Gap ( GPS ) : impulsively buying new outfits while absentmindedly tossing out the old. Making money is an afterthought. They just want to acquire something new.

But it's not true that the more you trade the more you make. When it comes to actually managing money, not just " picking stocks " in a newsletter, it's oftentimes true that the best move could very well be no move at all.

Taking a risk is easy. Good technique helps us to take the right risks in the right way, including maximizing winning trades. The fact is that equities, even some of my favorite ideas have rallied sharply in recent weeks. When markets move, it turns out you often make more money by not making transactions than by trying to constantly jump in and out .

It's to our own detriment that the first human instinct we feel when an investment starts to show a gain is to immediately trade it away. That impulse stems from the fear of losing a gain, no matter how modest. Markets trend, but they rarely grow to the sky uninterrupted. Taking a profit feels really, really good, making it extremely difficult to hold onto stocks like Sony ( SNE ) or Canon ( CAJ ) – even knowing they'll likely correct after sharp runs higher.

I mitigate that fear in two ways. First off, I concentrate on taking what I believe to be the right risks; namely, ideas that aren't herd favorites . A decade ago, for example, most investors weren't funneling record amounts into commodities as they are right now. I'm much more nervous about holding ideas with high public participation, which is often a sign the real move has already been made.

Keeping Pace Without the Prattle

Mistui & Co. (MITSY), Itochu (ITOCY), Sumitomo (SSUMY) – 6 months

Despite 6-month returns that rival Apple's ( AAPL ) , Japan's " sogo shosha " – large multinational trading firms like Mitsui & Co ( MITSY ) , Itochu ( ITOCY ) and Sumitomo ( SSUMY ) – remain little followed and lightly traded in the U.S. A recent association with "rare earth" commodities has stirred some attention in the sector. This new fundamental data point hadn't even been considered when I profiled these firms a year back.

In addition, with a falling VIX and meager fund flows , which suggest increased complacency, I'll balance out a large winning position by adding a cash drag , mainly by sitting on new deposits rather than rushing them into something new. You only need a few good ideas a year from which to assemble a healthy gain.

Holding additional cash gives me the strength to trade with wider stops , a necessity when it comes to holding out for the big moves . Markets are like broncos – they try really hard to shake us off. If an additional 5% in liquidity allows you to widen your stop loss orders in winning ideas, I see that as a smart trade.

[DManA]

GM.

[proxy_user]

Buy stocks to hold.

But if one of your investment ideas turns out really good, and the market is offering crazy money for it, say 35 times earnings, then don’t be afraid to take your profits. Some of my dumbest mistakes were failing to sell an overpriced stock on which I had a huge profit, because I didn’t want to pay the tax.