Myth - High Return Equals High Risk

I met a gentleman this morning at an international university gathering. He told me how interested he was in growing his money through 'investing' - but not for the long term.

After further investigation, it was revealed that anything over a year was long term for him! His idea was trading leveraged instruments like Forex and options with a holding period of days, sometimes hours!

I had to share with him a few key points.

• In the short term (under a year), the market is a voting machine with negligible reflection of the fundamentals of the underlying assets. Over days, weeks or months, the markets can go for or against you almost at random
• Every time one enters a trade, one has to pay not only the brokerage commissions but also the bid-ask spread. This stacks the odds against the trader from the very start.
• In trading, one does not give time to grow significantly for example, threefold, because the power of compounding does not get to do its magic.
• Trading is a tremendous mind game with a lot riding on emotional as well as money management. It can be a roller coaster ride from jubilation to depression. 
• Last but not the least, trading is time and mind intensive. Traders often burn the midnight oil (depending on the markets they trade in). This is not a direct path to true freedom.
  

The fact is the longer you invest in an adequately diversified portfolio, the lower your chances of loss and the greater your chances of significant gain. This has been empirically proven with a study of the S&P500 - an index that tracks 500 of the biggest companies listed in the USA. This is because the biggest companies continue to thrive with an entrepreneurial drive out pacing even the broad economy. And the best part is once you invest in good assets bought at reasonable prices, you can let time do its job. The investor may have to look up the fundamentals and valuations of his assets as little as once every few months. 

Indeed, Benjamin Graham defines investors as ones who are certain of making a profit on their investments because of thorough analysis of opportunities and always maintaining a margin of safety in their buying decisions. The rest are speculators. That includes most traders. 

Research (evaluating opportunities) reduces risk and time (holding period) reduces risk. Money managers like Warren Buffett and Peter Lynch show us over decades that by following some simple rules, we can deliver massive returns with little or no risk. 

That's the essence of Value Investing.