Active Investing Over the Long Run Works. I'll Show You With Nvidia

Last week, I discussed how keeping your portfolio and investing accounts as close to highs as possible is the key to producing exceptional returns. This gives you the power of compounding and avoids the unproductive work of making up losses.

This is simple logic, but once you understand it, the issue becomes how to accomplish it. The hard part of keeping accounts close to highs is finding the balance between patience and action. Without patience, some of the best stocks will never fulfill their expectations, and without action, you may be stuck in underperforming stocks for a very long time.

Passive long-term buy-and-hold investors hope their superior stock selection will do the hard work for them. As long as these names trend higher over the course of many years, then you should do well.

There are two problems with the long-term approach. First, not everyone has the time or patience to make long-term selections for work. Investors like Warren Buffett are willing to sacrifice short-term performance for extreme patience, but most people don’t have that luxury.

Second, if you don’t recognize a poor long-term play at an early stage, you will pay a very hefty price for tying up your capital for long periods. This danger of long-term investing is greatly overlooked. The reason so many people never produce good returns is that they don’t recognize their poor stock selection and hope that the market will discover the stock and bail them out in the long run.

Being too patient can be a problem, but being too active creates a new set of complications. Hyperactive trading is often a sign of a gambling mentality. The focus becomes the game of trading rather than a strategy that produces the best returns. The problem is that when someone is sitting in front of the screen all day, they feel that it is a job requirement to always be doing something. There is always movement that can be traded, but most of the time, there isn’t an edge, so it isn’t much different than playing a slot machine.

Finding that balance between patience and action is the key. You want to avoid having capital sit too long in a situation where nothing is happening, but sometimes you have to position carefully and then wait for upcoming catalysts to develop.

The best solution to the patience versus action issue is to make sure you are focused on the best stocks and then trade them in multiple time frames. The biggest mistake that many traders make is that they are constantly looking for the next day trade. These stocks make a sharp move, and then they are done, and very few of them will ever do much longer term. They are constantly searching for new ideas when they may already own some of the best ideas

What costs long-term buy-and-hold investors the most is that they don’t take advantage of the inevitable volatility of their favorite stocks. They just sit there and hope it works out.

The way to keep accounts close to highs is to be an active, long-term investor who holds core positions but varies position size as conditions change. I’ve been following some small-cap biotechnology stocks for years and am convinced that they have a tremendous future, but these stocks can languish for a long, long time. Rather than just dump them, I will maintain a position but then ramp it up or down as conditions change The goal is to be small when things are tough, which will keep the drawdown in my accounts smaller, but be big when things are working, so I can ramp up returns.

I am a patient, longer-term investor, but I’m also a very aggressive trader who will make substantial changes in position size in the blink of an eye.

Example: Nvidia

Let me use Nvidia NVDA as an example of a stock that I plan to hold long-term as an active investor. 

I believe that the valuation is very attractive and that it will continue to produce exceptional revenue growth for a while as it develops new chips. But I am not going to tie up a substantial amount of capital and just sit and wait. When it starts trending in the right way, then I’ll leverage up.

My plan is to establish a smaller core position and then trade around it as things develop. Initially, I’ll be looking to add on further weaknesses. I’ll be looking for strong action as we move into the end of the year and the next earnings report approaches. I’ll likely try to sell some into that strength as it develops. I’m going to ignore all the folks gushing over what a great company is, and I’m going to ignore the bears who say that it is no longer a great company. I’m going to trade the price action, but I have the added confidence of feeling that the stock will perform longer.

At the time of publication, DePorre was long NVDA.