The concept of investing for the long run has been a solid bedrock of investment strategy for virtually generations. It basically says that the investor should select a strong company, in a strong industry, with good management history.  They should then make the investment and essentially live with it for a long time. The basic idea is that over time the sound management and the industry will end up ahead of or at least even with other returns on assets, and it should not matter what your time or price of entry was, in the long term. This style of investing has been advocated strongly by the likes of Peter Lynch and Warren Buffet, and was especially prevalent in the early and middle stages of the recent bull market.  And it was sometimes used to dissuade people from selling at high levels.  "You're in for the long haul, aren't you?"
   
A pure trader or market maker, conversely, is concerned only with very short-term price movements, and is willing to buy or sell on a moments notice. Literally, he or she is willing to buy at $10 and sell at $10.10, and could care less about the fate of the company or industry in fifty days, much less fifty years. This style of trading has expanded from purely professional specialists or market makers (who are responsible for making a simultaneous buy and sell, or two-sided market), to some of the legion of stock day traders that have grown in the last decade.

So what can the long term investor learn from the crazy trader who is happy to sell his or her prized stock a minute after the purchase, or worse still, to sell it first and buy it back later? I think that there is a lot to learn, and it also may help to decipher some of the mindless drivel of some of the media stock pundits.
   

• Despite the teachings of the buy-and-hold purists, it makes a huge difference over time what the entry price was. There may be some who still think that if a stock is purchased at $90 and your great-grandson sells it 30 years later for $91, you made money, but let's hope there are not many. The recent problems with valuation and the resulting sell-off are too painful to have been forgotten already. The simple fact is that an investors view of the economy, company, industry, and management implies a value going forward, and it is the relationship between that value and the market value that should determine action.
  
  For instance, I may have an idea that GE is under-priced at $37, and wish to purchase the stock at that price, presumably for the long run. It can only help, even in that instance, to also have a neutral price and sell price in mind, much like the short-term trader. If I am really right, or lucky, and GE has a ferocious rally in the next several weeks, at what price do I think it is now overvalued, $50, $60? It is this lack of two-sided valuation that causes investors to not sell at the appropriate time, and become slaves to outside influences like "I will have tax problems if I sell" or "GE is a great long term holding".
      
• Does any company really deserve the long-term devotion the classic buy-and-hold trader is being asked to deliver? While I may not be advocating the total lack of faith the market-maker demands, who is less subject to making a bad investment due to emotion? It is not even necessary to revisit the current crop of broken dreams, just look at the previous generations list of solid buys, with Polaroid, Xerox, Eastman Kodak, Litton Industries, etc, etc.  The bottom line - I think it pays to have sell targets as well as buy targets.

Over time I think it is possible to become very comfortable with the mentality of always thinking in terms of both buy and obvious sell prices. It is also possible to use other means of hedging to simulate these two-sided valuations. We will discuss those in later articles.

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