There are many schools of thought when it comes to investing in ASX shares. Some of the most prominent boil down to long-term investing or short-term investing, and day trading is an extreme version of the latter.
While market watchers might find day trading tempting, it's rarely a useful wealth-building tool. In fact, research conducted between 2013 and 2015, cited by CNBC, found 97% of persistent day traders lose money.
It's also the opposite approach to that which billionaire investing great Warren Buffett recently touted as the stock market's "secret sauce". That is: time.
Let's dive into the wisdom that helped Buffett build his US$104.6 billion fortune, and that might help me build mine.
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Warren Buffett's 'secret sauce' to wealth building
Buffett's recently released annual letter to Berkshire Hathaway shareholders once again reiterates the billionaire and his partner Charlie Munger are "not stock pickers; we are business pickers".
And on that note, he delved into some of the massive wins he's chalked up over the decades.
The first being Coca-Cola. Buffett's listed holding company snapped up 400 million shares in Coke for US$1.3 billion over the seven years ended 1994. Similarly, Berkshire Hathaway bought US$1.3 billion of American Express stock over the years to 1995.
Today, those respective holdings bring in US$704 million and US$302 million in dividends. Not to mention, they were worth US$25 billion and US$22 billion respectively at the end of 2022.
Such massive wins bring a key lesson to investors, says Buffett:
The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders.
Investing for the long term
Even Buffett admits his investing results are "the product of about a dozen truly good decisions". But, perhaps more importantly, they're decisions he has stuck by.
That means investing for the long-term, rather than a day. It also means he's seen his wealth compound over and over.
Meanwhile, Arizona State University finance professor Hendrik Bessembinder's widely-cited research, later replicated in Australia, found just 4% of US stocks were responsible for all of Wall Street's gains.
Bessembinder advises that building a diverse portfolio of shares is often the best way to build wealth on the stock market.
My takeaway from such advice is to invest in a diverse range of companies you truly believe can outperform when they're trading at a reasonable price, then sit back and watch them do just that – a strategy that is quite the opposite of day trading.
Munger's 2-cents
Buffett's business partner Munger has also weighed in on what he thinks is the key to investing. He said the pair avoid the market's 'froth', continuing:
The world is full of foolish gamblers, and they will not do as well as the patient investor.
Munger also pointed to a quote from Ben Graham, who is widely regarded as the father of value investing. He once said:
Day to day, the stock market is a voting machine; in the long term it's a weighing machine.
In my opinion, the two quotes perfectly encapsulate the difference between day trading and long-term investing.
In the short term, investing is arguably a game of popularity. However, over time the market will typically weigh a company's fundamentals, driving the value of quality businesses higher to the benefit of patient shareholders.
