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Subs:Trader / Investor …. Tomato /Tomaaato

Yup, I said it….is there really a difference? Or is it  just that our time frame and decision making metrics are different…Think about it.

I think we are all agreed that the “buy and hold/forget/never sell” mantra is really not working out there. The last decade in the market has been a series of round trips for the markets themselves and most of the components in it. If that is true then it is pretty safe to say that simply buying and S&P or DJIA index ETF and letting it ride, at least for the last ten years was not a profitable transaction.

With that being said, if we buy anything, we then need a metric to sell it. When that is triggered and we sell, we have completed the selling portion of the trade, no? Now, we can call it an “investment” because that makes us feel like we are taking less of a risk, right? We really aren’t, we are just taking different risks.

Let me explain (in simple terms).

For the day trader who simply trades symbols based on chart signals irrespective of the what the company does or what its fundamentals are, their risk is simply the price for whatever reason moves against them and they exit it the trade for a loss. They have little if any risk in regard to fundamentals since they are virtually never in a trade long enough for them to matter (unless they are trying to trade earnings)

For the swing trader, who tends to trade on macro-conditions and has a longer term time horizon, the risk is that the anticipated macro events do not develop or worse,  emerge contrary to the original thesis. For that reason they have a lesser risk to daily price movements and a greater one the political/regulatory ones (this is especially true today).

The momentum folks have less day to day risk that the day trader, less political risk that the swing traders but greater, shall we say “the party’s over risk”. Momentum traders operate on the “stock making new highs continue higher” mantra.  Their risk is that they are buying in when there “isn’t another high coming” in a particular issue.

Value folks. Our risk is simply that our analysis of the company is wrong. Since daily price fluctuations mean little and in all reality can present better buying opportunities for us, we can ignore much of it.  If we do it right, macro considerations ought not be at the top of the concerns after the purchase decision. Why? Well, if we are looking at a housing stock, but think the housing market still has considerable downside, we wont be buying the stock, correct?

Which is better? None of them really. Each group can point to a member of it that has trounced the averages and each group can point to a spectacular blowup in another group. The point is they all work if done well. You need to find the one that best fits your personality and ability.  If you have an irresistible urge to trade every day, you will not succeed as  a value investor. If you cannot watch a trades all day, day trading will be a failure for you.

Back to the point…

Many folks like to say they are “investors” because it has a nicer connotation that trader. In my book, we really aren’t investors unless we can take a significant stake in a company. Right? I mean if our share of ownership can’t effect any change other than a card vote at a annual meeting, isn’t what we want to call it simply semantics? We may think we are an investor because we are longer term in orientation but on any given day there may be hoards of day/swing/momentum traders who takes far larger positions than us. Aren’t they making a  larger “investment” that day?

Look at Buffett. Despite what he says, Berkshire’s (BRK.A)  portfolio is traded on a regular basis every quarter. Does he have some “investments” he has held for years and has no intention of selling? Yes. But even Buffett said he should have sold Coke (KO) in 1999 when it sold for 80 times earnings. The market was so hysterical then he could have sold and not spooked it causing a sell-off (remember in those years was was “out of touch”). Now, he can’t as with his large stake, when word gets out he is selling, the price of Coke shares would tank. Same holds with American Express (AXP) and Wells Fargo (WFC).

Most of also do not have the same advantage of billions of dollars of fresh capital to invest each quarter that Warren does.  Many need their money for certain life events (college, retirement, new home etc) and cannot afford a decade of negligible results.  That being said, we cannot just sit back and watch.

Websters defines investment as: 1 : to commit (money) in order to earn a financial return

They define trader as: b : a person who buys and sells (as stocks or commodities futures) in search of short-term profits

Now, time bias aside, to me, the two definitions are the same. Call it a “trade”, “investment”, “position” or whatever. Does it really matter?

I think part of the problem with calling it an “investment” for many people is it denotes the lack of a plan for selling. It then becomes an “open ended purchase” doesn’t it? While I am not a day trader and a short term guy, I do admire the discipline for selling those who are good at it have. “Investors” need to develop that selling plan.

If I buy a stock thinking based on fundamentals it is worth twice its current share price, should it hit that in a month or two for whatever reason, should I not sell it because that might make me a “short term trader”? No.  I buy based on fundamentals and have no control over when the market recognizes what I see.  I’d love it if it always happened right away but reality is often far different. If it does though, I’m out and onto the next opportunity.

Point is, do not pigeon hole yourself into holding something after it has recognized its value or hold onto it when the fundamentals are deteriorating because you want to be an “investor” vs a “trader”. Decide before you buy what will trigger a sale and then stick to it.

As long as you have a defined reason for buying and a defined reason for when you will sell, isn’t it all just a trade irrespective of time frame?