Subscriber Only - Trading vs. Investing: Which Is Better?

Coke or Pepsi?

Chocolate or vanilla?

In-N-Out or Shake Shack/Five Guys/White Castle/Whataburger/Rally’s/Culver’s, et al.

Which is better?

Today we live in a world where, thanks to the media – both social and mainstream – we’re conditioned to evaluate things only in binary terms.

Yes or no.

Good or bad.

One or the other.

No matter what the debate is you’ll find mobs on each side, screaming at the other, insisting that their position or viewpoint is the only correct one.

I see this dynamic all the time when it comes to the stock market, particularly surrounding the question of whether it’s better to be a trader or an investor.

I have definite opinions about this, but before we get to them, let’s define our terms by looking at the major differences between trading and investing.

Timeframe

The most successful investor of all time is Warren Buffett and he holds positions based upon one of three timeframes: years, decades, and forever.

That’s the hallmark of an investor, they have long time horizons.

Traders on the other hand operate in much shorter timeframes, often measured in weeks, days, or even hours.

Methodology

Investors use fundamental analysis to try and determine the underlying value of a company and its stock’s future price potential.

Anything you find in a company’s financial statement or hear on a conference call falls under the heading of fundamental information.

This information is subject to change, the news of which will usually come public after it’s already influenced a stock’s price, so investors have to hold their positions for a long time to see if the narrative or story they’re buying into plays out as they hope it will.

Traders use technical analysis - indicators, studies, and chart patterns, all of which are based upon one of two variables, price or volume.

Technical analysis attempts to discern the footprints of greed (buying) and fear (selling) so that a trader can capitalize on them.

Technical analysis is objective and fundamental analysis is subjective

Engagement

Investors don’t have to watch the market closely or make frequent changes to their portfolio as most employ a “set it and forget it” approach.

Traders must be attentive to the movements of the markets and actively manage their positions and portfolio.

Now that we know the difference between traders and investors, which is it better to be?

As you might have guessed from my intro, it’s not a binary choice.

100% of market participants should be investors.

History has shown that there is no better – and reasonably assured – way to accumulate wealth than to be a long-term investor.

Over the past one hundred years, the market has returned between 9%-11% annually, and in that context, 401k’s, IRAs, retirement accounts, dollar-cost averaging, indexing, dividend reinvestment plans (DRIPs), and other long-term investment vehicles/strategies should be a part of everyone’s portfolio.

The question then is not which is better, trading or investing, but what portion of your investment portfolio – and your time – should you allocate to each?

For some, the amount of money they allocate to trading is zero. For others, it’s a ridiculously irresponsible amount.

The rest of us fall somewhere in between.

That could mean using 5 or 10 percent of your funds to trade, just so you can “scratch that itch” and see what you can do with it.

For others, who can spend more time watching the market and want to take trading a bit more seriously, it might be 25 percent or higher.

A good rule of thumb is that if you want to trade, determine the amount of money you’ll use based upon your comfort and risk tolerance levels.

Just don’t fall into the binary trap.

It’s an immature, ignorant, and lazy approach to the market – and life - that can lead to distorted thinking and a disconnect from reality.


Weekend Strategy Video: 10-23-2021


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