Investors have a much easier job than traders. It comes down to playing the long game vs. the much riskier shorter version. The short term is all about predicting irrational human reaction to unpredictable and random short-term events. The long game enables an investor to make educated guesses on the most likely long-term probabilities. While the results are far from certain, the odds are much less daunting.
“You have the watches but we have the time,” is a quote from the book The Warrior Ethos by Steven Pressfield. This line is attributed to the Taliban and the current war in Afghanistan. Though the Taliban claim credit, we have seen this result many other times throughout history.
The quote is about guerilla warfare and the war of attrition. If one side is willing and able to wait their enemy out, they can defeat a far superior force. This happened in our own war for independence and, more recently, we were on the other side in the Vietnam conflict.
If one is able to withstand the suffering and live to fight another day, many battles can be lost while still achieving ultimate victory. American minutemen and North Vietnamese Army regulars are proof of what a well-planned guerilla war can achieve.
While the markets are nothing like real warfare, there are some striking similarities. Though there are many corrections, crashes, and other assorted mayhem in market history, the long-term diversified global investor has done just fine.
Absorbing the blows without catastrophic loss and having some dry powder on hand enabled Washington’s army to survive and fight another day. Not putting all your eggs in one basket and waiting for help to arrive is an excellent long-term investing strategy. Whether the help comes from the French Navy or an economic rebound, the results are the same: Ultimate victory.
Where does the trader stand in all of this? If he is an individual who tries to go it alone against the big boys, the probability of success is minimal. Instead of fighting a war of evasion, and waiting the enemy out, the naive day trader charges right into the teeth of a well-financed foe that is armed to the hilt.
Imagine trading against super computers, complex mathematical algorithms and information flow — both legal and otherwise — by using your lap top. It would be like George Washington giving up the element of surprise and meeting the British on equal terms in an open battlefield with no cover.
Why do you think he crossed the Delaware River in the middle of the night on Christmas Eve in a snowstorm?
The results for the day trader (and Washington’s army, had he chosen direct confrontation) would be easy to predict: Disaster! Not only does the day trader battle a well armed enemy, he must also navigate a sea of uncertainty which includes the following:
1. Paying attention to volatile quarterly earning reports.
2. Focusing on monthly economic statistics while ignoring the overall trend.
3. Reacting to international and political turmoil, which is ubiquitous.
4. Being at the mercy of natural disasters which have become all too common with the warming of the planet.
The short game is a sucker’s bet. You have to be right three times in order to win: When to get in, when to get out, and how to gauge other traders irrational responses to random events. The odds of getting all three right on a consistent basis are close to zero.
It is not surprising that very few professional traders make money after expenses and predictable ego fueled blow ups over time. The odds of an individual having a profitable career in this field are infinitesimally even smaller.
One would think it is an obvious decision on what strategy to employ for the average individual investor. Unfortunately, too many people give up the long game of guerilla warfare for the opportunity to be the next Paul Tudor Jones, or George Soros.
Barry Ritholtz gives an invaluable warning in his post, “Don’t Even Think About Trading Places in Markets.” He states, “The investor lacks the temperament for the ups and downs of daily market action. They are used to a longer timeline, slower turnover, lower taxes and smaller fees. Their folly is the arrogant assumption that they can adapt and exploit whatever they think those dumb traders are doing. Huge mistake.”
Often the warnings of experts like Mr. Ritholtz are ignored for the opportunity to pursue fools’ gold. This mistake is common because the individual investor’s greatest enemy is himself.
If you can control the addicting impulses of fear and greed, the opportunity to fight and win a long war is there for the taking. Over time, markets go up. The choice of not to play this long game because of the fear of losing some daily battles is a bad decision. This will have dire long-term consequences in your pursuit of creating wealth.
The value of time will overwhelm the worth of the fancy gold Rolex watch some traders can afford. While this trinket may purchase temporary status, it fails in its goal of securing a worry-free financial future.
When deciding what strategy to choose, one could do worse than heed the advice from the esteemed Wall Street Journal columnist, Jason Zweig, “In investing, only the survivors get paid.”
Your chances of surviving the long war of the markets is much better than the winner-take-all outcome of short-term market battles. Choose wisely and let time be on your side. There is no other rational alternative.