I want to preface this article by saying that I’m an amateur investor. I’m just now getting into investing my own money and I’m taking a value investing approach.

I want to cover the things I’m learning about short vs. longterm investing in individual stocks and the trading strategy that I’m developing.

In case you’re wondering, yes, I do have an IRA and index fund for my serious investing. This post is about a small fund I’m using to experiment with investing in individual stocks. I don’t expect to beat the market with this small fund, but it will be interesting to record my results.

I think that one of the biggest reasons that investors lose money in the stock market is due to emotional interference. Take a smart person and rile them up emotionally. The logical or “smart” decisions that they would normally make go out the window. Instead, they make stupid decisions.

Aside from going after stocks that I consider to be undervalued, I’m also setting a specific sell price for each investment. This means that I MUST sell if the stock reaches this price.

This will help me to stay away from “hoping” that the stock will go even higher and keeping my money in the stock for “fear” that I would lose out on returns.

I can choose to re-purchase the stock, but it must be a re-purchase decision, not a continue to hold decision.

Honestly, I don’t know if this strategy will work. I do know that for many investors, a BIG winner in a company like Apple or Google can comprise the majority of the returns for their portfolio and therefore it might make sense to simply double down on the companies I think will outperform the market and just hold them.

But, that’s why I’m writing this post. To discuss short-term vs. long-term investing.

For this example, I’m going to be using a purchase that I made on 5/10/2016.

Date	Stock	Shares	Market Price	Start Value
5/10/2016	TWTR	32	$14.61	$467.52

Terms

Short term: Stock held for less than 1 year.

Long term: Stock held for more than 1 year.

Target Gain: ROI before taxes and fees.

Total ROI: ROI after taxes and fees.

How fees and taxes affect your investment.

Okay, so let’s say that I’m going to wait until Twitter reaches $18 per share and then sell it. This would yield a 23.20% return, taxes and fees not included.

If I held this stock for under 1 year, I would be hit with income taxes (let’s say 30%), which would affect the overall return of my investment. Here’s the breakdown.

Short-Term Gain

Date	Stock	Shares	Market Price	Start Value	Sell price	Sell Value	Gain
5/10/2016	TWTR	32	$14.61	$467.52	$18.00	$576.00	23.20%

Capital Gain: $576.00 – $467.52= $108.48 

Cost of Fees: $108.48 – $8.95 trading fee = $99.53

Cost of Taxes: $99.53*.70 = $69.67

Total Return: $69.67/$467.52*100 = 14.90%

If I sold this stock and I held it for less than ONE year, although I might think I’d get a 23.20% ROI, it’s actually 14.90%.

Long-Term Gain

If I sold this stock and I held it for more than one year, I’d only get hit with the 15% capital gains tax, rather than the 30% income tax.

Cost of Taxes: $99.53*.85 = $84.60

Total Return: $84.60/$467.52 * 100 = 18.09%

As you can see, taxes will affect your ROI.

Let’s say that you’re trying to EQUAL the return that you’d get by holding this stock for more than one year. By that I mean that you’re trying to sell a stock in the short term and shoot for 18% returns after taxes and fees.

In order to meet this return with a short-term sale, you’d need to shoot for a ~30% return, taxes and fees not included.

Date	Stock	Shares	Market Price	Start Value	Sell price	Sell Value	Gain
5/10/2016	TWTR	32	$14.61	$467.52	$19.00	$608.00	30%

Capital Gain: $608.0- $467.52 = $140.48

Cost of Fees: $140.48 – $8.95 trading fee = $131.53

Cost of Taxes: $131.53*.70 = $92.07

Total Return: $92.07/ $467.52 * 100 = 19.69%

Basically, if you held the stock for more than one year and sold it with a ROI of 23% (Before taxes/fees), you could only replicate that ROI in the short-term if you had instead sold it with an ROI of 30% (before taxes/fees).

Long-term sale: 18.09% Total ROI with 23.20% gain target in stock price

versus….

Short-term sale: 19.69% Total ROI with 30% gain target in stock price.

You need to get higher returns than you think

So, what if you actually wanted to get a 24.4% total ROI (after taxes/fees) on a short-term investment in this stock? How much would the stock need to grow in price?

Date	Stock	Shares	Market Price	Start Value	Sell price	Sell Value	Gain
5/10/2016	TWTR	32	$14.61	$467.52	$19.00	$640.00	36.89%

Capital Gain: $640.00 – $467.52 = $172.48

Cost of Fees: $172.48 – $8.95 = $163.53

Cost of Taxes: $163.53*.70 = $114.47

Total Return: $114.47/ $467.52 * 100 = 24.4%

You’d need to shoot for a 36.89% price increase in the short-term (ROI without fees and taxes) in order to get an actual total return of 24.4%.

My thoughts

Let’s assume you’re aiming for a 24.4% annual return for a given stock/company.

If you’re looking to do short-term trading, and by that I mean holding a stock for less than one year, then you either need to shoot for high returns for each stock (36%) or get multiple stock decisions right in a year for that money you used to buy the initial stock.

If you make 2 successful investments with the initial money used to buy the stock in the course of a year and shot for 23.20% each time (before taxes/fees), you’d end up with about a 30% overall ROI (after taxes/fees) for that money for the year.

Keep in mind that this does not take into account the value of YOUR time, which you’re using to research investments or keep up to date on investments.

Obviously, your overall return must take into account each stock in your portfolio, but this is how I’m approaching the stock investing game at this point and I wanted to share my thoughts!

What do you think?

Things I haven’t considered: 

• Annual return of stock averaged over many years.
• How fees don’t factor in as much as you invest larger sums.
• Cost of my time