Trading pattern

Trade pattern means trade in long-term or short-term form. Unlike capital allocation that CFA's often describe what percentage of capital can be allocated to what sectors, trade pattern is a very personalized issue. It can be related to investors' personalities. At the same time, it is critical to investors' success.

Maybe an example can well illustrate this issue. Let's say an investor put money in XYZ and he originally plan to hold XYZ for a few years to at least double it.  However, after just a few months or weeks, XYZ already up 20%. He then is swaying between taking the "quick" (relative to a few years time span) profit and waiting for a few years more. Interestingly, if XYZ is down 20% in the first few months/weeks, most investors would not pay too much attention as their plans were to hold it for longer. We don't include the fall case here in this example. So in a sense, this is how to handle the unexpected.

Most experienced investors would say stick with your plan. Patience and discipline will eventually pay off. Weaker voice would say secure the profit and rotate to others. I guess there is no black and white answer to this. Some considerations maybe treated as guidelines.

• The most important one, I believe, is understand the reasons you take profit. Is the exit because of market risk, fund rotation, or simply nervousness, or both? A short term sharp rise will increase market risk. It is reasonable to take profit. If at the same time another better opportunity appears, it is also a good idea to phase out XYZ. If the future trend makes people sleepless, it is better to take profit too. 
• If after taking profit, there is really no other options to go but just idling. It is better to take partial profit and remain the rest in the game. One famous investor used this strategy: he would exit any position if that position realized 10% gain. He would sell everything and not linger on that anymore. This limits any further upside. If the stock didn't reach 10% in 3 months, he would sell every share in the position too. This limits any fund idling.
• One should maintain long and short profit possibilities at the same time. What this means is that one has the flexibility to take profit at shorter time frame and longer time frame. What Peter Lynch said 10x is rare in short time. However, it is worth waiting for it while there is a stream of cash flow.
• Most people aren't very good at dancing between short and long time frames. Day traders, according to studies, find it extremely painful to wait a week to make a sell. On the other hand, longer time frame investors find restless trading is a huge disruption to life style. I think the 80-20 rule can be applied: put 20% capital on the side you're not favor, if situations allow. For example, day traders put 20% funds in long term investment.

Trade pattern question is always hard. A rigid pattern is simple but not efficient. To achieve bigger success, however, this question must be faced sooner rather than later.