Length of stay is important in anything in life. For example, when you have out-of-town company, there are people who you wish would hang around for a long time, others you want to move on pretty quickly.
Investing in stocks is similar. We live in times of fast-food, instant gratification and quick responses necessary. This has made some investors quick on the trigger, wanting profits and wanting them immediately. They will invest in a stock on Monday and be disappointed if they haven’t made a nice profit by Friday.
And do you know what? Sometimes that happens. You certainly can buy a stock on a tip, on news, on a hunch that something dramatic is going to boost the stock price. You have no plans to stay with the stock for months or years; you just want to make some money and sell. You don’t even care that you would be paying short-term capital gains tax on the profit, the highest tax hit you can engender. Why don’t you care? Because profit is still profit, and if you wind up with an extra $500 after taxes in your pocket or in your brokerage account to reinvest elsewhere, you are still ahead of the game.
For example, there are those stocks that flare up on any given day because good news comes out about them or they are the “hot” picks somewhere in the investment world. They are right in the middle of discussions, analysts’ recommendations, newsletters, etc. They are the topical stocks of the moment or of the month or even of the year. I can give you a good example: Google. Google is a stock that represents a hot product — the search engine is rapidly becoming a household name for most of us. In fact, you can now use the word “Google” as a verb, as in: “I’m going to Google this to see what I can link to.” Amazing.
The stock has become a darling of the investment world, but it is also one of the most volatile around, moving in double digit points up or down on any given day or week. So let’s say you buy Google (GOOG is the symbol) at $500 per share. You know it might go up to $550 before it corrects back to $485, so you determine ahead of time that you’ll sell when it gets to $550. Sure enough, it gets there within two weeks (hypothetically) of your purchase, so you sell it. You make a quick profit of, say, $200.
It’s good to remember that profit is profit, whether you have to pay short-term gains or not. Now you can take that money, along with the profit you’ve made, perhaps less the tax consequences (keep that cash in the money market of your brokerage firm so you can use it when you pay taxes but allow it to make some interest for you), and buy either something you can get in and out of again quickly or something more long-lasting.
So, don’t overlook the stocks that are quick potentials in this market. The old theory of buy and hold until you need dentures and Depends is no longer valid. Why would you do that when you can make some quick profits on in-and-out stocks?
However, there are those stocks that you want to buy and hold. You want to do your research, find stocks that look to be profitable in the foreseeable future — say, the next five years — and just not have to think or worry about them. Every year you take a look at them, do research again as if you were looking to buy the stocks for the first time, and make the decision as to whether or not you want to hang on or sell. After a year and a day, if you sell at a profit, you will be hit with long-term capital gains tax consequences, which are much nicer to your checkbook than short-term.
These might be companies that have long-range possibilities, either because they are in a product or sector that might hit in the future (i.e., ethanol-producing companies, in case the U.S. goes to alternative fuels for their homes and cars in a big way sooner rather than later), or because the products they make will be needed and used no matter what happens to the economy or geo-politics or anything else that can sabotage other products. For example, won’t we always need toothpaste, toilet paper, cleaning products? And, if we don’t need them anymore, I suspect the world situation, your personal situation and mine have been changed so drastically that winning stocks will be the smallest problem you will have.
So, whether short term, long term, quick and profitable, or long and profitable. Take your pick. There’s no right or wrong way to buy individual stocks; you must suit your purchase to your needs, your psychological makeup, and what works for you in the moment.
And I hope you never need Depends or dentures.