Trading

I am a long-term passive buy and hold investor.

I have found that this is the best way to build wealth in the stock market.

I look to acquire good businesses that fit my entry criteria, I try to buy those businesses at good prices, and then I leave those businesses alone for as long as my exit criteria are not met (a dividend cut or a company being acquired)

I try to assemble a portfolio those quality businesses over time, and I try to be diversified, while keeping costs/taxes/fees as low as possible.

I believe that time in the market beats timing the market. I also believe that trading adds a lot of uncertainties, and compounds mistakes.

These are the times when the ability to allocate capital to use in quality dividend stocks would seem stupid in the short-term, but potentially really brilliant 10 – 20 years down the road. When stock prices fall, there is an urge in the investor to protect their nest eggs from further price impairment.

This is a dangerous situation to be in because:

1) Noone knows in advance today when this correction is going to run out of steam or what its ultimate severity will be. So when you act on short-term noise, you are actually shooting yourself and those who will depend on you in the foot.

2) Therefore, if you act based on short-term price fluctuations, you are speculating and have essentially thrown out your edge of being a long-term investor. It is extremely difficult to win in investing as a short-term speculator – you will be in an out of stocks and paying taxes and commissions through the nose. Your main edge in the stock market lies in the ability to hold on to your stocks through thick and thin for decades, and cashing in those growing dividend checks ( or reinvesting them in the accumulation phase)

3) If you are in the accumulation phase, you should be praying for lower prices, because you are buying shares to provide for you in 20 – 30 years. A 200 point decline on the S&P 500 decline will likely look just like a blip on the charts 20 – 30 years from now. If you don’t believe me, check the 1987 crash. A lower entry price results in more future dividend income for you.

4) If you are in the retirement phase, you already have a plan to live off your assets. You are likely spending those dividends, and hopefully those dividends are coming from a diversified portfolio of dividend growth stocks. You are likely getting social security and possibly a pension. As long as there is some margin of safety in financial independence, and the dividend portfolio mostly consists of quality blue chips, the investor should be just cashing in their dividend checks and enjoy the fruits of their lifetime of labor.

I know that seeing unrealized capital losses hurts. However, the important thing is to just stick to your plan and stay the course. This is why I have chosen to be a dividend growth investor. When the stock market is going up, everyone is a total return investor and chases hot growth stocks and talks about how much capital gains they have made.

I have no doubt that there are people out there that will be able to buy and sell, trade well, and do really well over time. The problem is that these people are very rare, almost as rare as lottery winners.

I believe it is much easier to make money by regular investing in quality well known blue chip dividend growth companies, reinvesting those dividends, and staying the course patiently over the course of many years.

I have read research stating that trading is hazardous to your wealth. My experience confirms this to be true for me and most others normal humans. It makes sense that trading is hazardous to your wealth, because it takes time, it costs you in terms of commissions and fees and you also get killed on taxes on short-term trading profits ( provided you make money). There are also some claims that 90% of people who trade end up losing money as well, probably because they are chasing quick gains, they concentrate, use options and leverage, and are trying to get rich quickly in a hurry. There are some European brokerages that report percentage of users that lose money, and that number is close to 70%. (like this one)

If you try to get rich slowly, you will get rich faster than the fellow who is trying to get rich quickly.