Wednesday, March 3, 2010

Why not just Buy and Hold?

Danish Kapur gets it right, when he asks:

"I have one question. You said that your annual return last year was 80%. Market as a whole returned more than 100%. So, would not it had been better if one had invested in market and left with some tracking here and there rather than spending day and night and still underperforming market as whole. I know one can argue against me giving example of 2007 when markets fell equally but let us take average of last 10 years returns and that will give better picture of one's performance rather than one year."

My Notes:

Most traders will underperform the markets when there is a secular bull run going on. I know this sounds surprising, but that's my perception. Now, markets also go through significant declines. These periods will allow the trader to gain more than the market, therefore giving a return that is likely to be superior to the Market's performance. My own experience is also what I have described here.

Why not just buy and hold? We cannot do so since we do not know in advance the periods from which buy and hold will outperform trading. But, sooner or later secular uptrends are detected and our investments are increased (for the buy and hold gains) from debt to equity. Trading funds are not touched.

Many readers should recall earlier posts where I have written about realistic expectations. If we do not expect too much from trading, then trading is likely to reward us more than a simple buy and hold strategy. If we want 100% returns every month, then we can quickly see our money vanish.

If we could detect the beginning of a bull market, then we can switch to a long only trading strategy. But, even this strategy will underperform a strongly uptrending market / stock. The reason lies in exits. Often, such systems will be flat while prices suddenly make big, unexpected gains.

8 comments:

Saurabh said...

With the benefit of the hindsight, we all would be Warren Buffet.

The proof of the pudding lies in the eating .

80 % return in a year through trading is unbelievably good .

Regards

Saurabh

anshul said...

thats true..experienced trader likes to make money with shorts...they all love selling stocks.when markets favors short selling..why??..because stocks takes very less time to decline compare to climb up..thanx sudarshan i got my own answer why i was under performer compare to markets in secular bull market...

paluri said...

Hi Sudharshan ji!

I am great follower of your tips and the way you analyse and explain the strategies is excellent. I have a small query on options ji.

whats the strategy for trading in nifty options. It looks really crazy sometimes. For example, before budget everyone said that the market is non directional and I have purchased put4600 and call 5100 when market was at spot nifty 4780.

I have purchased a 5100call lot at 63rs. Post budget when market was increasing, I expected the call to increase, but it was osciallating and it went down and closed below 50. Now the market has gone beyond 5080, still this call is at 73rs.

Whats the strategy and when to purchase a call option. I purchased at 63rs and after the nifty has increased by 200 points, but this call option went down and increased and now available at 73rs.

Please tell us the strategies about nifty options and the trading tips involved in that.

Regards,
Satish.

bala said...

good comment , I will suggest to buy and hold trades only when the 10&20 ema cross over in weekly basis, sell at 50ema in weekly. If 10&20 ema cross over 50 ema buy !. exit when the reverse of the former happens. enter when prices touches 10 or 20. market gives this opportunity. u can identify all the best performing & worst perf. stocks

Jagdish said...

Two comments
1. When markets fall, the trader makes money; the person who buys and holds loses money.
2. The trader keeps his risk under control - he knows when to get out. The person who buys and holds has no clue of the risk; rather he would add since the stock is being more valuable to him than it was at his entry price. Imagine him buying the sensex in 1992 at 4500 and holding it on till 2000. He would be starched and would promise never to buy and hold

Niftic said...

Can you provide us some Nifty Strategy: Like the trend(up or down) as it happens.

Pankaj Pandekar said...

What charting software do you use and why?
Do you use live nifty feed? If yes then what is your service provider ?

shan said...

80% out of possible 100% is an achievement. Nobody knew Nifty is going to rise that much. Besides, there were occasions like shock General election results. There were many occasions where a wise man would have got out of the market. 80% marks are one of the best! Don't go on numbers without going thru the difficulties and realities on the way!