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What Race Are You Running?

spamurthy

Updated: Aug 3, 2023


Usain Bolt, was listed at 6’ 5” tall and weighed 205lbs. Eliud Kipchoge, the marathoner was 5’ 6” tall and 115lbs. Two men, the most accomplished at their respective distances, cut remarkably different figures. Through a lifetime of training and their sports’ relentless Darwinian selection, each is a highly specialized human, almost designed for their racing distance. Although both are runners, their races are entirely different sports - different muscle fibers, different energy sources, different stresses and most importantly, different mental effort.


Another arena - the US stock market, the single greatest wealth building machine in the history of humanity – allows for vastly different approaches. As an investor, do you know what race you are running? Do you know what it takes to win?


If you are a day trader, you spend your day staring at charts, looking to profit off small price movements. You are a bundle of nervous energy – quickly trading in and out of positions. Your skills are pattern recognition, discipline, mental toughness, and risk management. And you better keep up with the news by the minute. The odds are against you, though. You are up against entire companies filled with math PhDs who build complex algorithms to extract profits from the same price movements you are hunting. They are so good, and so fast, that they even find ways to locate right next to exchanges, so their electronic trades get executed milliseconds before anyone else. Almost 60-70% of trading volume is driven by these algorithms. It’s no wonder that a large study in Taiwan showed that more than 80% of day-traders lost money.


If day-trading is the 100m dash, momentum trading is the 200m race. It takes many of the same skills, but it may take a few days for a trade to take shape. It too involves long days filled with technical charts and keeping up with the latest news. The odds are just as long. Market sentiment can change on a dime, and you had better have hair-trigger trading strategies. Of course, the key to beating the averages is to identify and act on trends before everyone else does.


If you like middle-distance approaches, you might be interested in picking stocks with excellent, under-appreciated near-term prospects. This can work, but you need to know the companies and sectors you play in better than others. You need the time to read and digest financial statements, keep up with the latest news and have the analytical skills to sense whether catalysts you have identified have already been priced in or not. Very few people, especially those who have day jobs, can devote as much time as it takes. I suggest you do this with only a small portion of your assets, and only in your sectors of expertise, while the rest of your money is broadly diversified in passive funds.


The 10k race is timing broad economic cycles. You will need a good understanding of macro-economics and keep up with several economic indicators. Even with these skills, the returns on your time will be quite small. It isn’t enough to identify economic cycles – you must trade ahead of the market’s ability to recognize and price the cycle in. A further challenge is that your results must be good enough to pay for taxes on recognized gains. Again, this strategy could work, but I recommend only doing this at the margins.


The surest way to garner healthy risk-adjusted after-tax returns is to run the marathon of investing – passive index funds. I have enjoyed distance running for most of my adult life - with over fifty marathon finishes. About a decade ago, I became a certified running coach. My investment advice is quite like my training advice – pick a plan, keep it simple, stick to it.


If you do choose a shorter race, know the race. The worst thing to do would be shift strategies mid-race. Don't be THAT momentum trader who sees a position go bad, and decides he likes the stock for its long-term prospects.


However, for proven long-term success, save diligently over your working life, invest continuously into index funds, and stay invested through the ups and downs. Be the Kipchoge of investing.

This material is intended to be of general interest, not personal financial advice or a recommendation to buy, sell or hold any security or adopt a particular investment strategy. Your circumstances and attitudes toward risk matter, and only an advisor working with you can give you specific advice. All investments carry the risk of loss, including loss of principal. Stock and bond prices can be volatile. Past performance is not an indicator or guarantee of future results. Diversification does not guarantee profit or protect against risk of loss. This material may not be reproduced, distributed or published without prior written permission from Sanjay Pamurthy/Artham Advisors LLC. Data from third party sources quoted here has not independently verified, validated or audited. Although information has been obtained from sources that Artham believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. Artham accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

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