Day Trading

The reason I’m writing about day trading, although it contradicts the basics of what we’ve been covering so far, is to give the reader an idea about something that’s out there. An investment instrument that has been around for quite some time. It sheds more clarity on the original topic when you talk about its opposite.

So what is day trading?

A day-trader, as the name implies, starts and finishes his or her trades within one market day. An NYSE market day, for example, starts with the market bell at 9:30 AM EST, and closes at 4:00 PM EST.

A day-trader relies on the minor changes in stock prices throughout the trading day. In other words, he/she rides the fluctuation waves of share prices.

Let’s take an example. Suppose the day-trader got information that RIM is going to fluctuate a lot today. The expected scope of fluctuation is $2. So RIM’s share price will hover, say around 58-60 (remember, this is still a pure speculation, the price might take a different course altogether).

If the trader wants to ride the wave downward, he/she speculates that the price will go down from the time he/she buys the share. If the trader wants to ride the wave upward, he/she speculates that the price will go up from the time he/she buys the share.

Let’s, for the sake of explanation, say that RIM’s share price was 58.5 at 10:00 AM. The trader “expects” the price to go up, so he/she buys a 1000 shares based on that expectation. If the stock makes it up, and reaches, say, 58.7, the trader can sell the 1000 shares and make $200 profit. If, on the other hand, Mr. Market was in a bad mood that day, and wanted to punish RIM for some reason, and slams the price down to 56.87, oops, the day-trader has just lost $1,630 in less than an hour! Of course if he/she was nervous enough to sell.

Here comes the difference between a day-trader, and a value trader. For the latter, that drop in price is only a reflection of Mr. Market’s mood changes, and it means nothing next year, or even next month. The fundamentals upon which the value trader had made the decision to buy RIM (if he did) should still hold.

In conclusion: Even if a day-trader beats the market in a few trades, most of the time, at the end of the trading day, the house wins. This kind of business takes patience, discipline and a long-range view. Fighting Mr. Market on a daily basis, expecting big profits by riding price waves, reflects a micro-view, and ends in a lot of wounds..

I should also mention that day-trading is not restricted to the stock market. It could be done in a variety of markets like energy, metals, commodities, etc. Usually it’s referred to as future trading.

Till the next article, never lose money 🙂

Why Do You Invest?

Have you ever asked yourself this question?

Some people invest because they don’t know what to do with their money! Some to imitate their friends or family.

The reason we invest is two-fold: One is to grow our savings, and the other is to contribute to our society by supporting wonderful businesses.

As a value investor, you should not invest in businesses that harm the society, even if they pass the criteria for a wonderful business at an attractive price. There are hundreds, if not thousands of businesses that qualify without imposing any harm to the society.

Are there other reasons to invest? To put your money on the line? To allow others to make decisions, concerning your money, on your behalf, without consulting with you, most of the time?

Investment, when practised mindfully and full heartedly, gives you the opportunity to sharpen your intellectual faculties: You study, analyze, compare, make decisions, and so on.

You also get to have a broader view of the market and the forces that influence it, regardless of its moodiness!

You realize after a while, that there are businesses out there, you haven’t heard of before, especially if you had been a professional in a specific industry. Here, you almost know them all, but you don’t have to be an expert in any one of them. As a matter of fact, you shouldn’t, to avoid any potential bias.

In my opinion, if you reach that level of neutrality, you can call yourself: a businessman.

You no longer fall in love with technology, retail, energy, manufacturing, or whatever. Your main focus is on the business as a business: A vehicle to produce value to the society, the employees, the shareholders, and of course, to you!

And that value is not only money. It is also a contribution to productivity, to a stronger economy, and to the well-being of all involved.