Winning Edge Trading: Successful and Profitable Short- and Long-Term Trading Systems and Strategies

CHAPTER 3

Pitfalls of the Old Investing Paradigm

To appreciate the major changes that have taken place in our investment world, you should be cognizant of the old-paradigm investment traits. They include buy-and-hold strategies, investing for the long term, using mutual funds as major investment vehicles, heavy reliance on fundamental analysis, light portfolio monitoring, and asset selection based merely on asset-specific risk. Let’s review the main traits of the old paradigm.

BUY AND HOLD

As mentioned, one of the signature elements of the old investment paradigm is an almost obsessive fixation on the buy-and-hold strategy. Every investment book and college course has always taught that you should buy a good stock and hold it until you retire or need to sell it. What the books and courses didn’t tell you, however, was that by the time you sell your stock or investment portfolio, its value may be even lower than the price you paid for it.

The problem with the buy-and-hold strategy preached by universities and investment academies is that it pays no attention to an investor’s particulars, such as personal needs and timing. I don’t know about you, but I’m not sure I would want to hold my investment through unexpected events such as death, illness, or job loss. Or, conversely, what if I’d retired sometime in 2002 and had to pull out my investment and liquidate my equity positions only then? I’d have lost about 40 to 70 percent of my portfolio value if all of it had been invested ...