Thinking Long Pays Off

Short-term or intermediate-term price moves, while way more exciting, are more random in nature. It's usually just a matter of mispricing of stocks by traders who experience extreme pessimism or extreme optimism combined with technical reasons.

This article reprinted with permission from InvestmentU.com.

Three years after starting my Wall Street career, the white-haired market veterans began calling me "Little Jacob Little."

When I heard this, I was only 21 years old. So I cautiously maintained my respectful smile, chuckled and went about my business. But, secretly, I wondered if I was being praised or dissed.

My new name hadn't instilled a drop of confidence in me. And the day that my mentor quietly pulled me to the side to explain who Jacob Little was, I felt both proud and embarrassed.

You see, Jacob Little was the dominant figure on Wall Street for about 25 years in the mid-1800s. Known as "the first great speculator," he would bet millions while his peers would bet thousands. He quickly became one of the richest men in America... again and again... enduring several bankruptcies along the way.

What makes his story so fascinating - aside from being a pioneer in stock speculation (andmanipulation, which was legal back then) - was the frequency and the degree to which he would fail and rebuild his empire.

He repeatedly invested everything he had into just a few or even one position. And as many times as he went bankrupt, he would eventually bet big, win big and pay off all of his debts.

One famous remark about him was: "Jacob Little's suspended papers were better than the checks of most men."

A speculator to the core, Little sold stocks short in the panic of 1837, which earned him the title The Great Bear of Wall Street. Then he earned the title of The Railroad King after making massive, early investments into the railroad construction industry.

So how is it, after 25 years of repeating the ultimate comeback story and earning those grandiose titles, that this stock market heavyweight's name was relegated to obscurity?

It's because his brazen trades ultimately landed him where everyone with his behavior lands - in the poorhouse. And a few years later he died.

Why I Was "Little Jacob Little"

I first discovered the power of leverage during the dot-com bubble - boy, was that a fun ride.

My net worth would multiply tenfold and would then drop 90%. It didn't faze me, as I was earning a healthy living and knew the funds would be replenished.

But in a brokerage firm environment where it was all about earned respect, I was embarrassed by my reputation - to the point that I changed my whole style of trading. I had to. Those white-haired Wall Street veterans worked on my firm's trade desk and executed every trade I made. There was no hiding.

I changed my ways.

That's when I started accumulating real wealth. Instead of plugging so much money into one to 3 positions, I started diversifying. Instead of buying on Monday and selling no later than Tuesday, I focused on intermediate peaks and valleys to time investments into long-term trends. And today, I implore you to do the same.

There are simple market indicators that you can use to keep a cool head during short-term market declines. For example, the simple strategy I told you about in July could have kept you from selling in a panic last month.

The reason it pays to focus on long-term trends is a long-term trend is the result of billions or trillions of dollars being invested based on real long-term developments in the global economy. Those developments or trends don't just go away in a couple of weeks or months. They are reliable trends, and you can see them changing from a mile away.

Short-term or intermediate-term price moves, while way more exciting, are more random in nature. It's usually just a matter of mispricing of stocks by traders who experience extreme pessimism or extreme optimism combined with technical reasons.

One example of this was the Deepwater Horizon oil well accident in 2010. The disaster unfolded in April. That created a climate of fear in the market - and that fear was heightened by a technical glitch in May, prompting a flash crash.

Another memorable example is what occurred back in 1998 when the Russian government defaulted on its bonds. The market was destined for a decline, but it got much worse for simple technical reasons.

The default caused huge losses in a highly leveraged hedge fund, Long Term Capital Management (which held arbitrage positions that weren't "long term" at all). After losing more than $4 billion in 4 months, this $130 billion fund, leveraged 25-to-1, was forced to liquidate, creating an awesome buying opportunity.

The short-term trades are fun and can certainly generate gains as quickly as they can bleed you dry. But the short-term trader is prone to extreme emotion and irrational decisions like overleveraging.

Thinking long is the best way to accumulate real wealth, as unexciting as that may sometimes seem. Personally I'd rather be wealthy and boring than trade like I'm in my 20s.

At this point, with a wife and 2 kids, I absolutely must "think long." Because when it's time to drop the curtain and pass your dollars on to your loved ones, you don't want to end up like the guy from the story I've just told.

What was his name again?

Christopher Rowe is a technical strategist at InvestmentU.com The information contained in this article should not be construed as investment advice or as a solicitation to buy or sell any stock. Nothing published by Physician’s Money Digest should be considered personalized investment advice. Physician’s Money Digest, its writers and editors, and Intellisphere LLC and its employees are not responsible for errors and/or omissions.