Trader vs Investor : Exploding a Myth
How many times have you heard the words, voiced with pride: “I’m an investor, not a trader”. Usually the statement is made at a time when the person making the statement has just suffered a large loss on his investment. and is courageously “braving it out” while waiting for the (perceived) inevitable correction. Traders, in this person’s view, are spineless fools who should be viewed with scorn or pity, as they sell at the worst possible time – when the market has reached its lowest price. Additionally, they don’t have the integrity of sticking with their beliefs and supporting a good company until its fate rebounds. So not only are traders stupid, but they are perceived as beneath contempt.
This view of “buy and holding” and “investing for the long run” is also the gospel of financial institutions, preached by all the high and mighty experts of the market.
Don’t be fooled by the intuitively valorous notion of “supporting your team” and “sticking to your guns”. It can not only be wrong, it can be suicidal to your financial health and harmful to your loved ones, as well as to society at large.
Do not be lulled by the words of the experts, without at least questioning their motivations. About 90% of Americans invest all of their savings in mutual funds. The management companies who run these portfolios earn between 0.45% and 2.5% per year on investors if these investors “stay the course”. Financial advisors and their parent brokerages earn trailing fees of around 0.25% each year you leave your money in the funds. So they do not want you to pull your money out of the fund at the first sign of trouble. Yet If you call them often to reallocate the monies to more defensive portfolios within the same fund (at no cost to you), this is just extra work for them which does not earn them extra pay. It requires them to be actually paying attention to your portfolio and to the complicated twists and turns of the economy at large.
This is not to say that no financial advisor has your interests at heart when he or she tells you to “stay the course”. There are a lot of ethical, hard-working advisors out there who have clients’ best interests at heart. But there are also those who are unethical, or lazy, or malinformed.
But if you look at a list of the really big winners on Wall Street, you will see that most of those who make big profits, list themselves as “traders.”
By “big profits” we mean doing better than the S&P 500 Index or Nasdaq 100 Index by a substantial margin over any three year period.
Who are some of these people? They are Jamie Simons,George Soros, Julian Robertson, Seth Klarman, Ken Fisher, Bill Ackman and Warren Buffett.
“Warren Buffett? “: you protest. Isn’t he the guy who buys and holds until eternity? Check closer. This legendary investor buys companies that are undervalued and certainly does not chase the latest fad. However, he also very much believes in selling at the right time, when the price is high. And he does not hesitate to do that in less than a year, if the gains are there. Now that he is in charge of investing billions, as opposed to mere thousands and millions, his investment style has become more ponderous and his trading less frequent. But he himself laments this fact, and frankly admits that has a negative impact on his performance. The sheer size of Bershire Hathaway’s portfolio prevents prevents him from even considering smaller companies for his portfolio. That same size -as well as his coterie of fans and emulators – makes him a market mover. Even with larger cap holdings, the minute Buffett starts to buy the price of the stock goes up, forcing him to overpay for additional shares. Vice-versa when he starts to sell the stock can nose-dive, before he can unload all his shares. This precludes taking a more active approach.
“Investors” put their money into stocks, real estate, etc., under the assumption that over time, the underlying investment will increase in value, and the investment will be profitable.
Typically, investors do not have a plan for what to do if the investment decreases in value. They hold onto the investment in hopes it will bounce back and again become a winner.
Traders, on the other hand, will cut their losses quickly, at the first sign of trouble. They will look at technical indicators such as Bollinger Bands, Relative Strength Indicators, Elliot Waves and Resistance Levels to judge when a stock is overly ripe and ready to fall.
What is the most powerful, most pervasive trend in the few centuries? Arguably, It is the increasing pace at which change occurs in the world. This pace of change is frenetic, pervasive and mind-boggling. It is increasing at a geometric pace, not an arithmetic one.
The faster things change, the more important it is to remain nimble. Look at Google, a company that did not exist 10 years ago, leading an industry that had not yet been invented. Today, it is already the fifth largest US company by capitalization, and probably the most influential company in the world by its role in society. When whole industries come and go in the blink of an eye, is it really wise to buy and hold a company for decades on end?
Our strategy: choose stocks like an investor, buy and sell them like a trader. In other words, use fundamental and qualitative criteria to pick the best possible investments, but use macro-economic trends to determine the best countries, regions or market sectors to invest in and use technical criteria to decide when to load and unload those investments.