Sunday, July 15, 2018

An Investment View of Trading

Imagine living your life jumping from one activity to another based upon what looked good at the time.  There would be no constraints; you could pursue anything at any time.  

At first blush that might seem like heaven, until you realize that, cumulatively, you would accomplish nothing.  You might have fun, but would your life be meaningful?  After a while, all the activities begin to feel the same.  Life wouldn't feel complete without some sense of purpose.  In pursuing what is meaningful, we postpone things that might be fun at the moment.  We invest ourselves in some greater set of goals.

A full life is one in which we derive both happiness and fulfillment.  We do some things for here and now fun and some longer-term things to achieve meaningful goals.  We know we have hit a sweet spot in life when we find enjoyable ways of pursuing our life purposes.

That means, in life, we are both shorter-term traders and longer-term investors.  Activities we get into and out of day by day are trades.  Goals that we seek over time are our investments.  The sum is our life portfolio, and we hope that all its components produce unique, positive returns.  When we find happiness in our fulfilling activities, the result is an unusually high level of well-being.

So it is with our financial lives.  There is trading for immediate gains, and there is investing for longer-term returns.  One pursues short-term opportunities; the other seeks longer-term growth.  Increasingly, I see a sweet spot of performance among those who find trades that align with a longer-term view.  When a portion of a portfolio can earn investment returns over time and another portion can benefit from the price path over this period, the total, risk-adjusted return can be handsome.  For that to happen, the shorter-term trading must be aligned with the bigger picture view.  

In life and in trading, there is much to be said for diversification across time frames--and the alignment of shorter and longer term pursuits.

I recently enjoyed the commentary on the week ahead from A Dash of Insight.  I won't steal Jeff's punch lines, but suffice it to say that he summarizes a wealth of economic data with conclusions that I just don't hear from the majority of traders.  The big picture he perceives in multiple data sets and multiple analysts has meaningful conclusions for those trying to trade stocks, stock sectors, and the overall market.

See also the recent perspectives from The Fat Pitch site, which looks at one data source after another to get a sense for the probabilities of impending recession.  There are important big picture market implications from this information that can inform trading *and* investment.

As a back of envelope calculation, I looked at the percentage returns from SPY each day since 2016, broken down by overnight change (yesterday's close to today's open) and day change (today's open to today's close).  The returns over the two time segments were pretty equivalent.  In other words, roughly half of all the recent bull market has not been available to the pure day trader.

There is an important message in that.

Further Reading: