Trading vs. Investing

The Short-Termism Epidemic

Globally, there’s a growing trend of investors holding onto stocks for shorter periods, driven by a desire for quick gains.

In 2016, for instance, Indonesian investors expected high returns of 12% per annum but only held investments for about 2.3 years on average, among the shortest holding periods worldwide, according to The Jakarta Post.

This is not to say trading, which by nature is short-term, is in any way inferior to long-term investing. But the irony arises when so-called "investors" have holding periods mere months (less than a year).

Know which game you are playing. Many confound themselves, thinking they are investors when they are actually traders, and vice versa. Again, know which field you are playing in. To read more about what Buffett's mentor had to say about speculating, click here.

Here is my case for Trading vs. Long-term Investing.

A word of caution. While the comparison of profitability between swing trading and long-term investing remains a subject of debate, several studies have shown day trading to be financially deprivative.

Firstly, investors should not generalize all traders to be individuals who carry out the gambling-esque act of day trading. For there exists nuanced categories of trading: swing trading, position trading, and momentum trading. All of which offer a certain level of safety which seem almost absent in day trading.

On the other hand, traders must also understand that a certain level of speculation exists in every one of these trading approaches, which I suspect exists at varying degrees. That is, swing trades that, by nature, are done within shorter time sequences than position trades, demands more speculative judgements to be made by the trader than the latter method.

Second, whichever strategy we choose, it is imperative that we are able to have the following over time:

1. A systematic approach.

2. Meaningful profitability caused by (1). Conversely, the risk of loss is mitigated by (1).

3. (1) influences (2) in a relatively predictable manner. That is, (1) has more than a 50% likelihood of causing (2) to occur. Hence, the word "relative", to imply that we cannot expect any system to work 100% of the time (a 60% likelihood is exceptional).

   
   

Having understood the above, only then can we begin to choose the path between investing and a trading.

Trading

Objective: Primary or secondary source of income.

Method: Take advantage of opportunities to capitalize on in the next few years, next month, next week, or even the next few seconds.

Experience: Like surfing. It's thrilling and addictive, especially once you get better at it. You might even look cool doing it (yes, surfing too).

Does not tend to: Buy illiquid stocks.

Cost: Substantial brokerage and transaction fee incurred.

Investing

Objective: Preserve and grow generational wealth.

Focus: Owning good businesses at good value for as long as fundamentals and prospects remain acceptable.

Experience: Like watching grass grow (Euphemism for boring.) But that means you can also leave the grass to its growing while you do something else more exciting (like surfing?)

Does not tend to: Use leverage.

Cost: Relatively far less brokerage and transaction fee incurred.

So... a Winner?

Being asked to compare trading to investing is like asking which generally taste better: spicy fried rice or hamburgers?

Trading and investing can both lead to financial growth, but the experience and outcome will depend on three key determinants of your success that ironically does not come from the markets, but from your deep self:

1. Temperament.

2. Preference.

3. Willingness to learn.

If you do find studies that prove the profitability of trading over investing, please share them! I too am still learning after all.