Trading versus Investing
You’ve seen the glamorous Hollywood movies about trading, the insider calls, the 50% swings in the market, ruining a megacorporation, the jaded look of the evil bastard that started it all. To the untrained public eye, trading and investing are the same thing. I want to be a trader, but I don’t want to be an investor. The two words are used interchangeably, but no one seems to correct them.
Let’s not quibble. Let’s get that definition right out there. Investing, in finance, means the purchase of a financial products or other items of value with an expectation of favorable future returns. In general terms, investment means the use money in the hope of making more money. Old Warren Buffet comes to mind. Sitting in a cigar filled room, talking to a board of other old white guys that barely breath, a long dark table separates them all. Hardly the glamorous picture Hollywood paints. Trading is buying and selling securities or commodities on a short-term basis, hoping to make quick profits. The old pits, with people yelling, middle aged white men having heart attacks right on the trading floor, weird fingers flying in a semi sign language fashion, while the brokers sits with the phone receiver to his ear sideways. Who knows what’s going on? No one, especially not Hollywood.
I have, in my mind, a picture of investors as slow moving cattle, dimwitted and only able to understand one sentence at a time, so you have to speak slow and carefully to them, lest they become befuddled. I have, in my mind, a picture of a trader as a super nerd kid holding a 5 dimensional rubix cube and the other kids keep handing him broken off pieces of their own cubes and he’s trying to attach them to his. [if you got the physics reference in that joke, give yourself one cool point and one nerd point] Neither picture is glamorous, but I do prefer trading than investing. For all the nerd teasing, I’d much rather that, than being a cud chewing cow. Besides, I’m not female.
So what is with this image of trading? Trading takes far more effort, knowledge and luck than investing. Literally, you could buy land in Wisconsin and sit on it for 20 years. It goes up by 1% after accounting for inflation and consider yourself a genius investor. Or, you could buy a painting and hold it for 15 years. The artist dies and you cash in thinking you’re a super trader, only to find out, he was too obscure for anyone to even care about. Trading on the other hand is way more modern, fast paced, requiring voodoo and chicken blood to pull off successfully. Unless, you’re Goldman Sachs and just cheat. [oh did I say that?] Goldman Sach’s board is now even angry with them. How do you win a fight against your board? Who gets their board angry with them, even when being profitable?
I think investing and trading are so emotional and so very centered on your own psyche that it has to match your personality for you to choose which one you prefer to do. I think that you should decide this early on, before you try to dabble down a road and lose your shorts and wonder what happened. Some investment advisers try and simplify it by saying that everyone should start out with investing and then “graduate” to trading when they are ready. I think that is hogwash. The two are so dissimilar that going from one to the other is starting over. There are things in trading that you would never dream of, nor need, in investing. An investor might hear of Quants, but a trader might have one sticking out of his back pocket, they are so close.
I say, choose your weapon and learn everything about it. The grass is not greener on the other side. I have a friend who is a great case in point. He could tell me the history of 100 companies off the top of his head, and all of their financial offerings, short comings and best quarters. But, he loses his shorts when he tries to trade. He literally needs a week to tie his shoelaces. He thinks traders are demon possessed creatures that are set on wall street to torment the weak. However, he is great at investing. It is like he has a crystal ball. Conversely, I have only had success in short term trades. I feel a special exhilaration when shorting. But, my idea of investing is a saving account at a podunk bank. Silly, I know, but I just don’t have the patience. I don’t buy the whole hogwash of a well rounded portfolio. Do people get rich by having a well rounded portfolio? Last I checked, a well rounded portfolio, makes the broker rich, and you invested in the safest [read minimal return] products available on the market.
In my opinion, why bother pretending to make money, when with a little training, you could actually make money. Besides, I think brokers are the ones that come up with these wise sayings, to get you to invest in a wide variety of products, so they can spread out their commissions. It might sound stupid, but the latest darlings of wall street that turned iron into gold have been traders, not investors. You’ve seen them, “I turned $10,000 into 1 million in one year.” And, you hear their quips, “doesn’t matter what the market is doing, but where’s the trades.” Even crazy man Cramer has said that at one point, at least his material says that.
Learn stuff outside your broker first. Your broker is not going to make sure you get rich. Shocking news I know, but there it is.