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Why Time Frames Matter to You

Posted By Barry Ritholtz On March 12, 2013 @ 7:22 am In Apprenticed Investor,Financial Press,Investing,Psychology,Trading | Comments Disabled

Do you suffer from Time Frame Confusion?

That question came up recently after a media appearance where the host asked about a specific stock (which we did not own). The way this investor asked the question was “You mentioned this stock could do THIS — how does that square with your long term view of THAT?”

The short answer is that most of our clients’ investment profiles are looking out years or even decades, but the anchor asked what was essentially a trading question.

Consider for a moment what your time frame is and you will figure out what your answer should be. Indeed, much investor confusion (and many investor errors) involve making the mistake of investing for one time frame and behaving in another.

Perhaps a few examples might help to illustrate this.

The classic rule “Never turn as trade into an investment or an investment into a trade” reveals the shifting of time frames for the exact wrong reasons. If your time frame is that of a trader — you are seeking to take advantage of volatility of daily price fluctuations — then you stick to your expected holding period. Any trader who extends this into a longer frame (usually because the trade went against them) is making a classic error. How many traders who shift a trade into a buy have done the requisite research, thought process, and planning for a longer term hold?

Investors make a similar mistake. They own something with an expected multi-year holding period, only to bounce on some very short term news — a critical review of a product, a negative research report, a 5% price drop. I doubt any of these investors has in their plan “I will sell XYZ if an analyst downgrades the stock.

Good investors must learn to contextualize (i.e., mostly ignore) the Daily Background Noise. That is my phrase for the never ending proliferation of economic releases, media broadcasts, technical updates, etc. that are more or less meaningless time fillers. Television and radio have 24 hours per day to fill — do you believe that all of that content is meaningful? Newspapers and magazines have a specific number of pages that requires ink be spilled on them — are they all worth your time to read? The modern internet has an infinite number of pages to fill (guess how many are truly valuable).

Consider these various time frames, and what they mean to your investing or trading approach:

Minute-to-minute: A very noisy and constant flow of prices, rumors, and chatter about stocks; if you are a day trader, then this is your pond. If you are an investor, there is nothing more meaningless to you.

Hourly: Similar to minute flow, with opening and closing behavior (“strong open in XYZ” or “I hate the way the ABC closed”) and a similar fractal chart.

Daily: Very noisy. Filled with random gains and losses, driven mostly by the overall market (my guess 35%) or the equity’s sector (~30%).

Weekly:  Begins to smooth out the noise factor. Informative charts, overall trend beginning to develop. Still contains lots of noisy economic chatter.

Monthly: Provides a window into secular cycles. Most traders ignore the monthly charts — too slow they say — but these can give you some insight into real (versus false) reversals.

Quarterly: Valuation data comes into focus via earnings. Longer term view allows potential mean reversion to be taken advantage of  (via re-balancing).

Annual: For retirement planning, and life events. Yearly data puts the rest of the noise into perspective. Most of the daily or even weekly up and down movements get smoothed out. Ultimately, where long term investors should be focused.

Decades: The market historian’s friend.

 

What’s your time frame like?

 


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