Long-Term Value-Investors Can Always Benefit from a Trader Mentality

Today’s guest post is by Michael Trinkle.

Long-term value-investors may be quite content to eke out small returns in the short-term because they know from experience that the compounding of small returns can lead to significant gains over longer periods of time. However, this past year, as well as the past decade, has been a long-term sideways “ranging” market where traditional long-term returns of 10% are anything but the norm.

No one is suggesting that all investors discard time-honored investment principles in favor of a trader’s mentality, but a sideways ranging market has generally been the province of traders that enter and exit the market at will, always searching for short-term profit opportunities. However, there are a number of technical skills that could benefit fundamentalists, if they only chose to investigate another investment discipline where active trading predominates.

One sad fact in our society is that very little investment training is provided in our hallowed halls of academia. Except for a small minority, the majority of us learn from reading books or attending special seminars on the topic, a real hit-and-miss approach. For this reason, we rarely get a fully-rounded comprehensive understanding of the art of investing, its many alternative forms, or the many tools designed after of years of study to assist an investor in the process.

It certainly does not require a lot of money, but a modicum of time is required that will pay dividends to any investor that is willing to make that investment. Commodities, futures and foreign currencies are the markets where active trading proliferates. Risks are high, and specialized training is a necessity, along with experience and emotional control, to be successful in these areas. One does not need to trade in the forex market to learn from it. Brokers will provide you with a free forex demo account and “virtual” cash to learn the basics and hone your skills. The key points to follow when actively trading are as follows:

• Always have a plan for entering and exiting a position before it is opened;
• Always place stop-loss orders below your entry point to mitigate risk;
• Always cut your losers off, and let your winners run with trailing stop-loss orders to lock in your gains;
• Use technical indicators to optimize entry and exit points.

These rules are very similar to longer-term investing techniques, with the exception of the last bulleted item. Many long-term investors have never learned the basics of technical analysis or have heard the process demeaned by critics. Technical indicators were never intended to be perfect. They can give false signals, but their consistency may provide an “edge” when an “edge” is all that is needed to execute and profit from a winning strategy.

The following chart provides an example to illustrate these points. In 2010, a value-investor would have heard much about precious metals being a “safe haven” when the debt problems surfaced in Europe and created a crisis felt the world over.

Market Chart

If the long-term investor had invested in Silver in late August, the rapid upward trend may have caused him to gulp hard. The RSI, a popular momentum/leading indicator, in combination with the MACD crossover, would have signaled an overbought condition. The insertion of a trailing stop-loss order would have locked in his gain.

Timing in sideways markets is critical, and learning how to read technical signals can optimize timing considerations and lock in ”paper” gains. Time spent learning the nuances of technical indicators can provide valuable benefits in ranging as well as trending markets. Always remember that “paper gains” are not real until realized and cannot be compared with a real trading experience in any way. And of course, historical and past performance is not in any way a guarantee of the future events and results.

Thanks Michael, for an insightful article!

Readers, What say you?  Do you agree with Michael’s approach?

I do see value in what Michael is saying about sideways markets (I which I had played it more this year)…

-MR