Since there’s no way to tell whether a given stock will rise or fall tomorrow, it makes sense to invest in stocks with a long-term objective in mind. Not too long term, because stocks with a five-year gestation period could wear out your patience. So you look for a stock that will prove itself in a year or two.
3-D printing and package delivery by drones are examples of concepts that probably will take too long to pay off. If you happen to believe that shopping malls and newspapers are in for a long period of decline, you avoid stocks in those sectors – or even short them.
A word about shorting: Shorting means selling borrowed stock, on the hope that you will buy it back (and close out the position) at a lower price and thus make a profit. Shorting is dangerous, because the loss is theoretically infinite, but having a small part of your stock-market portfolio short is not a bad idea – if the shorts are in sectors that are in long-term downtrends. Risk-tolerance comes into play here; the shorts in my own portfolio are about 20 percent of the total.
Day trading – buying a stock in the morning and selling it in the afternoon – is something you should not even consider. Especially now, with the geopolitical situation so volatile, you can lose money for reasons that have nothing to do with your stock. The popularity of day trading probably has something to do with the rock-bottom commissions brokerages are charging.
It pays to be well informed. My own tastes center on the New York Times, the Wall Street Journal, and The Economist. There are others, but that’s all I have time for. I watch CNBC during the day – but very skeptically, because most of the people on that channel are “talking their book” – touting positions that enhance their own portfolios. That’s also true of the writers at the Times and the Journal, but they are more subtle about it.
As we saw in a previous blog on the subject, dividend yields are all-important. My trading portfolio is smaller than my yield portfolio, and the yield portfolio has done better for years. There is little mystery to this; we have been in a bull market for bonds for decades, but most people have been sure that runaway interest rates are around the corner – and most people have been wrong. Low-interest rates shift wealth from rich people (the lenders) to poor people (the borrowers), and that fits nicely into the Administration’s objective. As long as President Obama is in office and has a compliant Fed, the bull market in bonds will continue.