Tuesday, 6 September 2011

Long term view vs short term view

A number of investors and traders will be questioning on the recent volatility in the market whether is it safe to go in and invest or trade. Gurus and experts had been shouting and screaming different perspective on the overall outlook of the economy. However, if we step back and think, most of them are talking rubbish. Why rubbish you may ask? It is because they did not fully clarified what is their true definition and explanation of their long term or short term view in a particular investment.

What is long term investment then? Long term investment is of a view of a particular assets or equities that have the potential for future gains over a long period of time. For a long term perspective, investors will tend to pick up stocks and assets which had their prices beaten down over a period of time. This method is known as 'cherry picking' for some of you. By purchasing it at different price level to average it out, investment profit tends to gain over a long period of time, but not guarantee. Long term investment maybe a method imposed by some well known fund managers, but does it also benefit fully for retail traders and investors? I do not agree with that because not alot of us really know how to apply it. Basic terminology on long term period is defined as a period at least 5 years and beyond. Do you have the patient to wait that long? No. Price actions and volume sometimes shown very clearly people act upon emotion and any immediate news to determine their trading and investment strategy. There are some who term it as very long period and long term should be anything above 1 year.

What about short term? Of course it means anything that is short time or period. You may term it to be just 1 week, 1 month, 3 months, 1 year, or even 2 years. Short term view tends to attract investors into buying assets that may enjoy a relief rally. This is quite dangerous, especially if you do not understand the underlying meaning from the price action, volume and sentiment. Of course some methods like 'cherry pricking' can be perform for short term, but to us it is purely suicide. Anything can happen every minute in the market to derail any bullish rally or any bearish move. There will be some who will enter the market based on 'expects calling'. This is the point which will cause people to be stuck as those experts did not clearly define their calling. End game, we called these experts lousy. That is an unfair statement. The problem is not with the forecast itself, but the implementation by investors incorrectly. Without clearly understand the need to set entry targets and exit strategies, you may end up stuck in the market, and inevitably transform into a long term investors.

Back to basic, market is operated by supply and demand law. Basic supply and demand law teach us that when supply goes up and demand goes down, prices have to drop in order to sustain the demand. If demand diminish at a certain price level, price will inevitable drop to another lower level to entice people to buy. Growing number of investors and traders concentrated more in daily news than understanding the current dynamic and sentiment that moves the overall market. Remember, there are many big time players in the market that move with volume, and hence there are seen sometimes as those who can manipulate the overall outcome. Even if you follow closely with their analysts calling, you may not get the same results as they does. By understanding your own risk level and investment logic, and also gauging for yourself the true investment horizon, you then can formulae out a set of strategy that suits your lifestyle and personality. With that, you can set entry and exit strategy for your investment and protect your capital, hence minimising the loses over time. Remember, market is still reacting based on demand and supply law, and the sentiment of the market force will act as a pushing or pulling effect.

Many of the retail investors have basic fundamental knowledge of how the market operates and their basic terminologies. They know very clearly on when to perform a trade or scoop up an asset at a low price. How many successfully did it? If many performed it well, we should have tons of billionaires out in the world, and inflation should have sky rocket to another dimension, which will kill people who are poor. In addition, No forecast in this world is 100% accurate, and there maybe event risks that derail these forecast away. That is nature. No choice. This is life.

No comments:

Post a Comment