Matching Stock Selection With Investment Style
Charles B. Carlson, CFA
Contributing Editor, Dow Theory Forecasts
I believe a big problem that often leads to disappointing investment results is that investors don't choose investments that fit their particular style.
For example, an investor who claims to be a trader buys stocks that show little price volatility and becomes frustrated. Or a long-term investor owns stocks that are jumping all over the place, giving him or her ulcers and gray hair.
If you are a trader, you need to understand that what drives your success is volatility, and the more the better. You want action from your stocks, big price swings that you can capitalize on both to the upside and to the downside.
Conversely, if you are a long-term investor, you want stocks that I call "easy holds." These are stocks that don't force you to make too many buy and sell decisions. Rather, these stocks show nice, steady, not-too-volatile price performance over a long period of time.
I truly believe that one of the worst things that can happen to a new buy-and-hold investor is that one of his or her stocks goes up 100% in a month. Why is this bad? Because such a price move generally forces an investor to do something, and that something is usually to sell the stock. After all, who wants to lose a 100% price gain in a month? Unfortunately, you might be selling a stock that may ultimately goes on to post even greater gains over the next 20 years.
For my money, give me a stock that goes up 15% a year rather than 100% in a month. The stock that goes up 15% per year is an "easy hold." The stock doesn't force me to make a decision. It fits nicely with my buy-and-hold strategy.
Am I missing out on big gains by owning a stock that rises 15% per year? Hardly. Now remember, the securities markets are subject to fluctuating prices and uncertainty of rates of return. But at 15% per year, no guarantees, my money would double roughly every five years. Over a 20-year period, that means my money could double four times.
Trust me. You can do quite nicely in the market if your money doubles four times in 20 years. You don't need to shoot for 100% monthly returns in stocks.
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