In this blog post, we’ll explore the timing of selling stocks and the dilemma of prioritizing the liquidation of profitable versus loss-making positions.

Long-term investing vs. short-term investing—which should you choose?

Every time my stocks drop, I tell myself, “I’ll sell as soon as they rebound.” But when they do rebound, I hold on for a day or two, hoping they might climb even higher. Then they drop again.
With this constant up-and-down, when is the best time to sell stocks? And should you cash out profitable stocks first, holding onto the losing ones until they rebound? Or should you sell the losing stocks first and keep the profitable ones?

First, decide whether you’re investing for the long term or short term!

Stock prices rising and falling is perfectly normal. But for ‘newbie investors’ who’ve just stepped into the stock market, the frustration of losing hard-earned money in an instant is overwhelming.
Many ‘newbie investors’ are probably losing sleep right now and struggling to focus at work. They’re likely agonizing over whether to sell their remaining stocks and walk away cleanly, or wait for the day they rise again.
This issue requires discussing which path to take: long-term or short-term investing. Long-term investing involves predicting a stock’s bright future prospects and not being overly affected by its price fluctuations. You buy the stock when its price is relatively low and prepare for a long-term investment. Generally, anything over one year is considered long-term investing.
Short-term investing refers to investors who are uninterested in a stock’s fundamental situation and primarily rely on technical chart analysis to pursue quick profits. For the average investor, short-term investing typically means holding for about one to two weeks, and in extreme cases, it can be limited to just two or three days. If there’s no profit or the stock price falls, they boldly sell to buy other stocks.
Where does the profit from long-term investing come from? It stems from the increase in the stock’s intrinsic value. Therefore, selecting excellent companies means that as the company’s value rises, the stock price also increases, making long-term investing more aligned with the fundamental principles of economics.
The profit from short-term investing comes from the short-term fluctuations in stock prices. The difference generated by buying low and selling high does not come from the growth in the stock’s intrinsic value itself, but from the other party in the transaction. You can only buy if someone sells at a low price, and you can only sell if someone buys at a high price. Strictly speaking, this difference is money taken from someone else’s loss.
This is the difference between long-term and short-term investing. As Warren Buffett said, ‘The market is a voting machine in the short run, but a weighing machine in the long run.’ Long-term investment money represents a ‘win-win’ scenario, as it shares the fruits of market expansion and corporate growth among all shareholders. Short-term investment money, however, is a kind of market game where one takes from another’s loss. It’s a zero-sum battle where every dollar earned by one party means a dollar lost by another. Because the source of money differs between these two approaches, their operational methods also diverge. Let’s look at an example.

‘The market is a voting machine in the short term, a weighing machine in the long term’: Warren Buffett, known as the ‘Sage of Omaha,’ likened the stock market to a voting machine because stocks that rise in price reflect short-term popularity, showing what many people favor. He compared it to a weighing machine because stock prices rise long-term based on a company’s intrinsic value.

Consider Company A. Its stock price was $1 on January 1, 2020, and by January 1, 2021, it had risen to $3 over the course of a year. So, how much did long-term investors earn? The price went from $1 to $3, meaning they earned $2. Since they held the stock continuously, no trading occurred during the holding period. Therefore, they earned $2.
However, in reality, Company A’s stock doesn’t grow steadily and linearly over the course of a year. It fluctuates repeatedly. This fluctuation process creates opportunities for short-term investors.
What effect are short-term investors aiming for? They buy when the price hits its lowest point during these fluctuations and sell when it reaches its highest point. The profit they earn is precisely the difference between these lows and highs. For the first fluctuation period, buying at the low of $1 and selling at the high of $1.5 yields a difference of $0.5. They earned $0.5 in the first fluctuation period.
What is the total sum of all differences between lows and highs along Company A’s one-year fluctuation curve? $0.50, $0.60, $0.70, $0.80. The total is $3.60.
An investor who chose short-term investing in Company A over one year, perfectly following the ‘curve’ by buying at the lowest point and selling at the highest point, earned a total profit of $3.60. This is significantly higher than the $2 profit from long-term investing.
Thinking this way, short-term investing appears to yield much higher returns than long-term investing. However, as mentioned earlier, the profits gained from short-term trading do not come from the company’s stock price growth but from the counterparty. In other words, if you want to perfectly follow the curve graph, buying at the absolute bottom and selling at the absolute top, there must be someone in the market perfectly selling at the absolute bottom and buying at the absolute top. This is because the total profits of all short-term investors come from the losses of others. For example, if you make $3, someone else must lose $3.
But can anyone perfectly hit every single bottom and every single top? Fundamentally, it’s impossible. It’s especially difficult for ‘newbie investors’. Therefore, you must calculate the average. The probability is fifty-fifty. A 50% chance of success, a 50% chance of failure. Averaging it out this way results in neither profit nor loss.
In other words, those who choose short-term investing effectively have an average profit of ‘0’ across the entire market. When the total profit is ‘0’, the winner is determined by who ultimately takes that 50% probability at the end—and that money is ultimately taken from someone else’s hands.

Who wants short-term investing?

Now, let’s look at who engages in short-term investing. The method used by short-term investors is called ‘high-frequency trading’. It’s an algorithmic trading method where computers rapidly repeat orders thousands of times, devoid of any emotion or human touch. So, what do they primarily do to make money?

First, market information

They strive to gather and prepare for information before any market fluctuations occur. For example, they uncover the details of an event, anticipate it will cause violent waves in the stock market, and prepare in advance.

Second, speed of execution

They uncover relevant information as quickly as possible and execute trades using high-performance computers, profiting within extremely short timeframes inaccessible to ordinary people. Especially when sudden events occur that cause market turmoil, they react within seconds.

Third, institutional investors or major players

They are entities capable of exerting significant influence on the market in a short timeframe. A prime example is short-selling institutions. They manipulate the market, exert influence, and profit from it.

Which type do you belong to? If you don’t fall into one of these three categories, your success rate in short-term investing won’t exceed 50%. That’s why for the average ‘stock newbie,’ making money through short-term investing is practically like cutting your own flesh. Yet, some ‘stock newbies’ actually exist who sell immediately upon seeing an uptrend after buying, securing profits. How is this possible?
In reality, the money they made cannot be called short-term investment profit. This is because the market value of stocks also continues to grow, and in this process, they share in the long-term investment returns generated by some of that value appreciation.
Let’s look at an example. In 2020, a ‘newbie investor’ named Mr. Kim made a 100% return on Company A’s stock through short-term investing. However, Company A’s market price actually grew by 200%. Since the profit from the short-term trade was only 100%, the net gain was actually reduced. Even though it seems like you’re making money through short-term trading, it’s essentially just a result of the overall market value growth, meaning you’re actually losing out. This doesn’t mean you should never do short-term investing. In an ideal situation, you can make a lot of money through short-term investing.
However, relatively strict conditions apply to short-term investing. This is precisely why large institutions and financial firms, not individuals, engage in short-term investment operations. They possess powerful IT capabilities and utilize top-spec computers with ultra-high-frequency trading software to react in the fastest possible time. Furthermore, they maintain teams of experts composed of the absolute best elites in their respective fields.
Wall Street gathers the world’s sharpest minds. They analyze global trends and developments, create diverse trading models, and react at lightning speed. Furthermore, they use their immense capital to influence market shifts. That’s how these players profit from short-term investing. For ordinary investors like us, especially ‘newbies,’ diligently pursuing long-term investing is a far more valuable strategy.

How to Excel at Long-Term Investing

There are generally two approaches to navigating stock market volatility.
First, predict stock trends. Overall, stock fluctuations always show ‘signs’ beforehand. Changes in interest rates or exchange rates, shifts in national macro policies, or transformations within specific industries emerge, accompanied by a flood of predictions from countless analysts. This is why many ‘newbie investors’ become engrossed in data like K-lines. Sometimes, their predictions about the overall market trend even happen to be correct. This fuels their confidence in short-term forecasting.
However, when evaluating this information, you must realize the success rate isn’t as high as you might think. First, these are predictions about broad trends, not specific, detailed forecasts. Additionally, an unconscious ‘confirmation bias’ can lead to the illusion that your predictions are highly accurate. Finally, in many cases, they believe their predictions were highly successful, but it’s really just a case of ‘a bull backing up and accidentally stepping on a frog’.
Why is predicting the stock market in the short term so difficult? All stocks, including individual ones, should be judged based on long-term trends. Short-term trends are often driven by crowd psychology. Market participants react to certain information, creating abnormal movements in the market and individual stocks over the short term.
There is still no precise theory or law that can accurately judge crowd psychology. That’s the stuff of science fiction novels or movies. Isaac Asimov’s Foundation and Empire features a setting where, ten thousand years in the future, psychohistory has advanced to the point where it can predict the psychology and reactions of crowds. However, the result is that only a minority controls this power and uses it unfairly. This is because once the crowd knows the outcome in advance, they react even more intensely, rendering the prior prediction useless.
Ultimately, we see that analyzing stock market trends and avoiding risks through prior prediction is only possible within specific probability ranges. Therefore, investment institutions and large investors generally adopt the second approach. That is, they abandon attempts to grasp or predict short-term trends and stop obsessing over ‘gains and losses’. Instead, they focus on the long-term changes brought by macro policies and improve their investment portfolios to achieve long-term, comprehensive returns. This is precisely what we call ‘value investing’.
There’s a saying in the stock market: “Short-term investing is silver, long-term investing is gold.” It’s an expression that perfectly captures value investing. However, while long-term investing may seem simple on the surface, it’s actually quite complex.
Holding a stock for several years means enduring the various fluctuations and waves that occur in the stock market. In the short term, you may face numerous losses. Even if you choose long-term investing, you might suffer losses for 11 months of the year, only to barely recover profits in the last month. Yet, without an understanding of long-term investing and the patience to endure, it’s difficult to persevere through that final month.

“What works in the long run often fails in the short term. When investing in listed companies, believing the stock price will always rise makes it hard to profit. Stock prices inevitably fall. No matter what methods investors employ, periods of declining performance are inevitable.”

These are the words of renowned fund manager Zhang Kun.
Therefore, long-term investing requires silently enduring short-term performance fluctuations. Moreover, you can skillfully utilize short-term fluctuations to ‘enter’ when the market is undervalued.
If you don’t enter when the market is undervalued, you cannot realize high returns. One of Buffett’s favorite things to do is actively enter when the market is undervalued and buy at low prices. After buying at low prices and waiting for several years, the market suddenly rebounds from its irrational state.
Strictly speaking, long-term investing is far more challenging and demanding than short-term investing. This is because long-term investing requires observing major trends and possessing a fundamental understanding of the market.
Therefore, if you wish to engage in long-term investing, or if you want to start when the market is in a downtrend, you must first be able to answer the “Three Questions of the Soul” posed by Zhang Kun.

• Do I trust the ideology this company pursues?
• Do I trust long-term investing?
• If the stock market were closed for three years with no trading, would I still buy this company’s stock?

Only if you can answer “yes” to these three questions should you begin long-term investment in that company. And once you’ve bought the stock, you must hold it long-term without giving up.
Not long ago, a news story set the internet ablaze. It was about a taxi driver who bought Samsung Electronics stock whenever he had money over 20 years and is now a tremendous asset holder. This is truly a victory for value investing. It perfectly illustrates that if you resist the temptation of price fluctuations, you can ultimately taste a huge victory.
There’s also the case of someone who bought stocks, ‘forgot all about them,’ and then sold them 10 years later for a 100-fold return. Of course, forgetting about them isn’t easy, making this a difficult example for ordinary people to replicate. However, it implies that a formula exists in the A-share market to multiply your money 100-fold.

1% probability of luck + 10+ years of time = 100x profit

Of these three elements, the 1% probability of luck is something everyone possesses. The difference lies in the 10-year timeframe. In reality, many people haven’t even been in the stock market for a full decade. The reason for consistently failing to profit is the inability to endure until the end, being swayed by every temptation that comes along. Even if someone claims to be a long-term investor in their heart, they must actually practice it to ultimately achieve that 100x return.
Therefore, the best stock investment approach for ‘newbie investors’ is as follows: First, select a few companies with excellent current performance and potential. Then, keep an eye on companies that are socially promising now or in the foreseeable future. When the stock price falls below the stock’s intrinsic value, buy boldly. And even if there are fluctuations in the meantime, don’t fret; endure. You must hold on unless there is a fundamental change in the company. If the answers to the three questions above remain unchanged, the stock price will inevitably rise. Time will bring you a tremendous gift.
Our task is to hold onto quality stocks and wait patiently. Everything in the world changes. Rather than fretting over the unseen, do your best in all visible matters, eat well, sleep well, and stay healthy. I hope you live a happy today.