What is in today’s market the real definition of a ‘long-term’ investment? This is confusing, because ‘long-term’ can be stretched like a rubber band, as far as I can see. It means different time frames for different people. For instance, a stock is starting in a severe downtrend, does one ride it out, no matter how far it would drop, or does one also set a stop loss, get out, then re-enter when it starts back up? Does the sentence “never let profits evaporate” apply to ‘long term’ investments as well?
You are so right. Long-term can mean anything depending upon what broker or investor you are talking to. But in reality, the definition of long-term depends upon the individual investor. Are you in your teens, twenties, fifties, what? Traders consider long term anywhere from a few days to a few weeks.
What do we consider long term? Many attendees at our seminars are surprised to find out that we look to buy stocks that we can hold for years; and we mean 10 years if we can. When the market is right, i.e., when what appears to be a new bull market is starting and stocks are breaking out and holding above their breakouts on their tests, we have an eye on holding these stocks as long as they continue to perform properly, i.e., rising on increasing volume and falling on lower volume.
We also know that even big winners can correct 30 to 40% after a solid breakout and run of 50% or more. If the overall market and economy still has solid underpinnings and the stock is still exhibiting leadership qualities (i.e., the right sales and earnings growth, the right leading sector and other items we cover in the seminars), we will let it correct, form a new base, and then blast off again, using the breakout as an add-to point. Of course, we have to have some gain built in it already when it starts this first correction. We did this with DELL, MSFT, CSCO, SUNW, etc. in the heyday of the tech run. We held these stocks 5, 6 and even ten years before the economy started to really tank and the stocks started to show very bad action.
Again, a lot depends upon the market. From 1992 on it was fairly easy to hang onto these, though we did sell out of some stocks prematurely, but then used the next breakout to buy in again. If the market is choppy, we will do what we have been doing: sell part of the position when the first strong move starts to fizzle while we hold the rest of the position for the test and then the move higher and beyond the breakout high. We want to hold these positions as long as we can, and we will add to them when the stock continues to perform and gives us the next entry point. That way we add to a winner.
At the same time, when stocks we own start to falter immediately after the first move, we get rid of them. We then use that money to focus on the winners or new stocks that we are watching to add that look as if they will be winners. We let them show us whether we want them. We will hold them as long as they continue to act right AND the market is more or less solid. Right now we are trying to emerge from a bear market. Some stocks are blasting off and rallying hard for 100% gains. Others start off with a 15% move and then give up. Which ones will win and which won’t? Hard to tell until they show some stamina. That is why we take some profit on the first run, hang onto some shares, and if it turns back up and starts to move again, we can add back to the position. If it fails to turn back up from the test, we get out and try for other fish.
