Is value investing even working for day trading?
Many times We have suggested traders to set part of their accounts to long-term investments. In short, We have asked traders to have two sets of accounts; one for trading and the other for investment.
In the first account, the trader should spend time coming up with short term trades and benefitting from short-term swings. In the latter, the trader should create a portfolio and monitor it periodically.
In this article, We will focus on the long-term investment account for a day trader.
› Which is your trading style?
What to do as a Day Trader
There are many ways of investing for the long-term. First, you can use arbitrage investing where you invest in similar assets and benefit from the spread. An investor who has benefited from this strategy is Ray Dalio who runs Bridgewater Associates, the biggest hedge fund in the world.
The second way you can do it is special events where you wait for events like mergers and acquisitions to happen.
The third way is value investing which has been advocated for years by people like Warren Buffet. As you know, Warren Buffet likes buying companies and holding them for decades.
Day trading vs value investing
There are differences between value investing and day trading, which means that participants use different approaches. In day trading, participants tend to focus on chart analysis because they have a short-term view.
On the other hand, value focus on fundamentals, where they look at things like revenue and profitability growth, valuation, and management.
The closest that day traders come to fundamental analysis is news. This is where you focus on companies making headlines.
A day trader planning to allocate part of his portfolio to value investing must approach it with a different mindset. For example, he needs to monitor its effectiveness and make rebalances when these are required.
Why you should split your account
Diversification is an important part of of good value investing. In most cases, most value investors allocate their capital to tens or even hundreds of companies.
For example, Warren Buffett owns tens of companies in his portfolio. The same is true among the best-known value investors like Bill Ackman and David Einhorn.
The same is true for day traders. First, you should always diversify the stocks that you day trade every day.
For example, if you decide to trade a company like ExxonMobil, you should diversify it with firms in other industries like finance and technology. Exxon and oil and gas companies like Chevron tend to move in the same direction.
Second, you should diversify the mix of companies that you trade. In some days, you can mix mega cap companies like Apple with small cap ones.
Further, you should diversify the assets that you day trade. In some cases, you can diversify in terms of assets like stocks and commodities.
So..what are the high points of diversifying your portfolio?
- Secure you from volatility risks – This is the perfect situation to generate huge profits, though it’s also riskier. Having a dedicated investment side helps you mitigate risk.
- Create a fund for your retirement.
- Choose different assets/stock – Not all the assets are viable for day trading. There are some that perform better in the long run.
So..How then do you become an incredible value investor?
Identify Companies
First, you should identify companies to invest in. As you already know, there are tens of thousands of companies that are public around the world. These companies are in different industries like technology, industrial, and utilities.
You should first identify the industry you are interested in investing in. You can decide to focus on one industry or a combination of several.
Ideally, We suggest investing in companies that are in different industries. This is because doing so protects you as it protects you from putting all your eggs in one basket.
Research
Second, you should conduct in-depth research. This is important because it helps you identify companies that are undervalued. Valuation is important! You don’t want to buy an overrated stock, do you?
For example, when you go to a market, you expect to pay an item at the lowest price. You should never buy something that you believe is very overvalued. This research should involve looking at the company’s valuation, its business, and its management team.
Asset allocation
Asset allocation is an important part of any value investing. Most value investors allocate their capital after assessing various factors, including their goals and conviction rate.
The same is true with day traders. You should allocate your capital well based on several factors, such as your rate of conviction, time before the market close and the strategy you are using.
However, what percentage of your account should you allocate to value investing?
Generally speaking, being a day trader, you should allocate a smaller portion of your funds to this activity. But we cannot give you an exact percentage because this depends on some personal factors.
What are your goals? What is your risk tolerance? How resilient are you to market changes, knowing that you cannot dispose of (and thus trade) those assets right away?
These are some of the questions you need to ask yourself before deciding what portion of your portfolio to lock into investments.
You should sit back and look at the future
Here, you should look at the next ten years and ask yourself whether the company and its products will still be relevant.
For example, 20 years ago, a company like AT&T was one of the largest company in the United States because of its wireline technology. Homes and offices relied fully on wired telephony services. However, today, most people have mobile phones, the industry has changed, and companies like Apple have become bigger than AT&T.
Today, you can look at it in terms of electric vehicles and crude oil. Tesla became the first large company to come up with electric cars. It is in the process of releasing electric vehicles for the mass market.
It is therefore evident that in the next ten years, electric cars will replace the oil-powered ones. In fact, some countries have started to phase out gasoline powered cars.
Therefore, if you are investing for the long-term, you should look at companies that are pioneering the new phase of electric vehicles.
The same analysis is true even in other fields like beverages. In the past, people loved Coca-Cola. Today, most people in the U.S are trying to avoid Coca-Cola because of its impacts on health.
Be Visionary
To be a long-term investor, you must be visionary. You must look forward and imagine how the world is changing. Look at the millennials and the young people and see their behaviors.
Look at how fast they are changing and the interests that they have. Then, invest in these companies and the trends that will change the future.
External Useful Resources
- Define value investing in simple terms – Finance Strategist
- Can you use value investing principles for day trading? – Quora
