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“By timing we mean the endeavor to anticipate the action of the stock market—to buy or hold when the future course is deemed to be upward, to sell or refrain from buying when the course is downward. By pricing, we mean the endeavor to buy stocks when they are quoted below their fair value and to sell them when they rise above such value. A less ambitious form of pricing is the simple effort to make sure that when you buy you do not pay too much for your stocks. This may suffice for the defensive investor, whose emphasis is on long-pull holding; but as such it represents an essential minimum of attention to market levels.”
Benjamin Graham, The Intelligent Investor.
Ben Graham is the father of value investing and was the mentor of Warren Buffet. So you would think he is the absolute last person in the world that could provide insight into successful day trading – but it’s actually the opposite. Graham’s view stated in plain English is that there are really only two ways to make money in the market. You could focus on timing or you could focus on price.
Value investors, of course, focus only on price. As long as an asset is below “fair value” they will buy it and will hold through thick and thin until it moves above “fair value” and which point they will sell. Let’s put aside the idea of “fair value” which can be as arbitrary as a movie review, and let’s just appreciate Graham’s definition of speculation – trading is timing.
This is a deceptively simple yet highly accurate description of what we do. Graham was convinced that timing is impossible, but I want to sidestep that debate and think about the cardinal sin of trading – switching to a pricing model when you should be trading a timing model.
All of us. Every single one of us is guilty of making the following mistake – I am buying/selling this asset because it is too cheap/expensive.
In trading, there is no such thing as too cheap or too dear. Price as a function of valuation is utterly irrelevant to the success of your trade. They only question that matters in trading is – will it continue or will it reverse? Can my timing model catch the move? The beautiful thing about such an approach is that we have objective points on a chart that could tell us if our timing model is right or wrong. But the moment we anchor ourselves to pricing model we are now trapped into the “Ben Graham/Warren Buffet” mindset.
The quickest way to lose money as a trader is to start thinking like an investor.
Price is only relevant as an input to your timing model. The moment the market blows through that price level you need to close your trade and adjust your timing model for the next trade, otherwise you wind up paying the ultimate price – blow up.