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In our First 2 Charts Above:
(Each of these 2 charts is actually 1 chart timeline cut in 2 with the second half of the timeline placed under the first half.)
We're looking at a 5 year period for a particular stock - this is an actual stock. However, I won't say which one. We did split the 5 years into 2 separate charts for the purpose of this video.
Observation: If we had bought this stock anytime between the latter part of 2008 to the present, either separately or as part of a mutual fund we haven't made a dime on it beyond the measly 1 cent dividends it was paying every quarter. It fact if we had bought it in 2008 when it was between $11 - $20, well 5 years later all we've done is lose money..
In the 2nd 2 Charts Above:
- Let's say we purchase 200 shares for about $10 a share July 18th (Point A)- cost $2000
- We have a movement up on July 18th of 25 cents - it starts to move down - after it moves down about 4 cents (Point B) it sells for a Profit of $42.
- Then on the 19th it buys again (Point C). It goes up - after it moves down about 4 cents (and sells at Point D) creating a profit somewhere between $40 - $50.
- Then on the 22nd it buys again (Point E). It goes up (and sells at Point F) creating a profit somewhere about $20.
- Then on the 23rd it buys again (Point G). It doesn't sell with the first drop because it hadn't made enough profit yet so it goes up creating a profit somewhere between $22 - $36 (selling at Point H).
- It buys it again most likely on the 25th (Point I) for around 10.25 a share and at this point on August 16th the position is still open down to about 9.80 a share.
- So let's examine our 2 scenarios - in the first scenario we buy the stock at $10 a share on July 18th, a month later it's down 20 cents per share if we were to sell it we would lose $40
- Our second scenario we buy it and sell it 4 times for a profit between $124 to $148.
- Now our open position from the last time we bought it is down 45 cents so if we were to sell our shares at this point we would take a $90 loss. However, we had already created a profit of $124 to $148, so net gain is actually $34 - $58.
- So in scenario 1 we are down $40
- In scenario 2 we are up between $34 - $58 ($124 to $148 - $90)
- Or $74 - $98 better than Scenario 1 which is basically a buy and hold strategy (single stock or a mutual fund).
So if we were to run this out over a year being $80 better off each month with trading S/W that would be $960 for the year. On our original investment of $2000 that represents a gain of 48% or right at 4% a month. At 4% you would double your money every 18 months.
Note this is a rather conservative example. The point is this - I can't really think of a case where a buy and hold strategy outperforms trading S/W but I won't go so far to say it doesn't exist somewhere.
The big banks and institutional traders use S/W to trade millions of shares of stock everyday. Why would we not want to do the same? If we're trading the old fashioned way and the big boys are using a computer we're at a real disadvantage.
Here's more food for thought:
What do most financial brokers advise you to do with your money. Well I can't speak for everyone but from my experience they advise you to put money in mutual funds or an annuity.
Let's examine mutual funds -
The whole great idea of mutual funds is you can diversify your investments over a whole range of sectors, etc.. On the surface that make sense.
However, there are many inherent disadvantages with mutual funds.
Right off the bat are the fees associated with them. And there's one fee the manager can't even tell you up front what it is going to be is something called a Turn Over Ratio fee.
This fee works like this. Basically whenever the mutual fund manager has to change the stocks or makeup of the fund to keep the fund profitable it adds this fee. The more times they make changes to the fund the higher the fees.
Other inherent problems with mutual funds are - let's say your particular fund is tanking one day like in 2001. Well you can get out of it until the end of the trading day. I had funds that lost 2/3 their value in 2001 due to this.
Another inherent problem is the make up of the fund - in many cases a fund will be setup to diversify over various sectors like Healthcare, Technology, Services, Utilities, Industrial Goods and even bond funds, etc.
Well let's say a particular area like bond funds for example are doing poorly. Well guess what the mutual fund manager can't just say we're not going to invest in any bond funds this quarter, we're going to divert more money to healthcare stocks because it's doing well. The fund manager just has to try to pick the lesser of several evils so to speak.