by Jon D. Markman
(John Wiley & Sons, New York, 320 pages) $29.95
reviewed by Gregory Bresiger
Hold your positions through thick and thin. And one will make money over the long term. This will happen, in part, because your steady as she goes style will keep your costs low.
Such has been the conventional wisdom of modern portfolio theory. It was a religion many professional traders adhered to up until about three years ago.
That's when a protracted bear market led many professionals to question the wisdom of the temple, especially some of its high priests who said that the Dalai Lama of our economy, Alan Greenspan, had abolished the business cycle. The buy and hold strategy was a can't lose position, said many investment heavyweights. Most of these fellows are probably related to the guys who said the Oakland Raiders were "a can't miss" to win the Superbowl.
But men and women of doubt have appeared over the past few years. They have asked some discomforting questions. What if we are in the middle of a long-term bear market? What if this market bears striking similarities to 1933 instead of 1983? What if the buy and hold idea is the reincarnation of the Irving Fisher analysis of the early 1930s. Fisher was the economist who said that stocks had achieved a permanent plateau, a plateau from which they would never slip.
In the case a 1930s market, one is playing a losing game because there are years of red ink ahead. Many investors and traders, the author of this book would argue, will drop out and take their losses long before the market recovers. So what is an investor or a trader to do?
The author holds that the professional should consider another style, which is neither the guerilla warfare of day trading nor the Buddha/Joe Torre like stoicism of the investor who holds on forever. (The Yankees can be ahead or behind by 20 runs and he always looks the same. Gee, what is the guy drinking on the Yankee bench?)
Sure, if this 1933 investor had 20 or 30 years, he would do fine. But not everyone has either the time or the stomach to glide through disasters, the author warns. This is true. So many investors perform worst than their investments. How is this possible? Because investors – and I suspect more than a few traders – have a tendency to jump ship at the first sign of trouble and, of course, pour too much money into their investments as the market is headed up, but about to peak.
This book explains a third way of trading. It's not day trading. It's not trading for a portfolio that one will hold forever or until pols keep campaign promises. In between these two extremes is swing trading. Swing traders aren't holding their positions like Warren Buffett. And they're not trying to exploit momentary opportunities, writes Jon Markman, who is senior investment manager and portfolio manager at Pinnacle Investment Advisors.
Those following the latter discipline aren't buying and selling stocks over the space of a few minutes or a few decades. Swing traders buy and sell equities over weeks and months, the author explains.
"Conventional wisdom says that long-term holders are the likeliest to succeed, since they lose the least to such money drains as commissions, bid-ask spreads, and taxes. But conventional wise men have had the owl feathers kicked out of them in recent years, as quick-changing technology, an uncertain economy, and manic consumer tastes have made it harder than ever to figure out which companies have so lasting an edge over competitors that their shares merit long-term holds," writes Markman.
One key of this unconventional style is not to fall in love with a holding. Buffett will probably hold Gillette, Coca Cola and Disney until the day he dies. Markman cites swing traders who say they only wanted limited information about the stocks that they own. These traders are cold and unemotional. To them, their holdings are just stock symbols, not companies they've married.
"After identifying a company for purchase or sale through a combination of fundamental and price/volume analysis," Markman writes, "a good swing trader tries to determine the direction of its very next move and to avoid hanging around during inevitable reversals. Swing traders try to take profits quickly after a significant pause in upward momentum, and reinvest them in new opportunities."
Nickels and Dimes
Markman seems interested in distinguishing this style of trading from day trading than from the long-term buy and hold trader. "They [day traders] get crazy for nickels and dimes, while week-focused swing traders play strictly for the $100 bills."
Fair enough. I'd never mistake Markman and his cohorts – many of whom are profiled in this book – for the short-attention span day traders of this world. However, although Markman does a good job of explaining how swing trading works, and making a case for why it may be appropriate for some, the book has one weakness.
Reading this book I started asking myself what is the difference between swing trading and market timing? This is an issue that Markman didn't seem to address. To me, swing trading is a form of market timing. Is Markman telling us that swing trading is an elaborate form of market timing that can work? By the end of the book I wasn't sure. I'm also not sure that buy and hold isn't the best strategy for the average trader and his conservative client.
Still, if Markman's intent is merely to explain how swing trading works and not to proclaim it as the one true religion for all investors and traders, then I think this book works as a textbook for those who have had enough of modern portfolio theory. They've been looking for a religion for the past three years now. This may be it.