A question constantly asked to understand the best way to make money as a money manager
People from all around the world are different in so many ways (and they are also similar in very many ways). One way that makes people similar is their quest to succeed. In many ways, success is measured using money.
This is the main reason why Forbes Magazine is one of the best-selling magazines in the world.
Forbes has made money by ranking the world’s wealthiest and displaying their lavish spending. There are many ways of making money; Most of the wealthiest individauls in the Forbes list have made money through entrepreneurship. They have made money either by discovering something or by coming up with a product and selling it globally.
In the list however, there are people who have made their money by starting their own hedge funds, mutual funds, and other money management services. People like Warren Buffet, Bill Ackman, and Carl Icahn are such people.
So..Is it a better strategy to buy companies or other asset classes and hold them long-term or to day trade?
We will attempt to answer this question based on our years of experience.
The first thing about long-term investing is on uncertainty of the future. A few years ago, Nokia was the world’s largest mobile phone developer. The company was so large that many ‘experts’ predicted that it would surpass Exxon Mobil as the biggest company in the world, and Billions of dollars were invested in the company.
People hoped that the company would continue with its innovative nature. However, when Apple came up with the iPhone, Nokia dismissed it saying that people would not shift to such phones. Today, Nokia as a mobile company does not exist, and its value has been washed away.
Another important case is Dell. Dell was once a listed company worth billions of dollars. However, the decline in PC sales affected the company’s sales that the founder delisted it. IBM is another example. In the past, this company was the leading computing brand. Today, its value has continued to decline significantly.
The essence of all these is that while long-term investing has made people a lot of money, it is surrounded in uncertainty. No one can accurately predict how a certain company will perform in the next 20 years. Those who do often find themselves suffering massive decline in value.
On the other hand, day trading removes the uncertainty aspect. Day traders don’t necessarily look to invest their capital for the long term. Their goal is to enter a long or short trade in the morning and exit it after a few hours (at times minutes).
Amount of work needed
To be an effective long-term investor, you need to do a few things. For instance, you need to have your views brought up in the company’s management. This can be done by being a member of the board of the company.
Alternatively, you can achieve this by being an activist investor by publicly airing your views to the management.
Some of the best activist investors today are: Dan Loeb, Deavid Einhorn and Bill Ackman. The challenge of doing all this is that you need to have a certain amount of ownership to the company. An individual who owns less than 1% of the company will most probably be ignored by management.
The challenge in all these is that you first need a lot of money to hire lawyers and investment analysts. You also need to have some media connections to ensure that your views are heard by the management. At times, you will also need to have specific industrial knowledge of the firm.
All this is too much!
As a day trader, you will never need these. You will not need to do a lot of research about a company.
For instance, during the earnings season, all you need to do is to analyse the company and buy or sell and wait for the announcement. In short, We believe that day traders are at a better place to maximize opportunities that long-term value investors.
However, this long-term value investing has its own advantages in the amount of work one is required to do. For instance, Warren Buffet does not need to look at his trading dashboard on a daily basis. He is comfortable with dips during his trading.