Value Investing Versus Trading - Simmons & Buffet

Any person interested in the financial market has information on who Warren Buffet is. To many, Warren is the best investor of all time. His story has been written and rewritten many times. How he has managed to build a multibillion dollar company consistently over the years has been amazing. On the other hand, there is James Simmons who runs a trading hedge fund. Renaissance Technologies has had an excellent track record. It has done extremely well during times when the market is bearish. In 2008, the company made more than 80%. These two are the best examples of how different the financial market is. On one hand, we have a trader who has achieved great success and on the other hand we have a value investor who has been very successful. If am told to become one of the two people, I would prefer being the latter.

#1 - Challenge of Finding Value

The first reason I prefer being a trader is that finding value these days is one of the most difficult things to do. Finding a good company to invest in is really difficult especially today when companies are expensive. For instance, a company such as Tesla Motors which is just a few years old is valued at more than $30 billion. On the other hand, a company as Ford that is more than 100 years old is valued at $50 billion. Remember, value investor aims to buy a company cheaply and then wait for it to gain in value. This is the main reason why hedge fund managers have failed to achieve alpha in the recent past. As a day trader, I am not focused on the fundamentals of a company. Instead, I am just aiming to make money when a company follows a certain trend.

#2 - Difficulties in Projections

As a value investor, you must be excellent in company valuation. You must be good at understanding when a company is over or undervalued. The challenge is that projecting the future value of a company is very difficult. For instance, a few years ago, shale was the top sector which investors were flocking to. Investors put in billions of dollars. However, as oil supply increased, the investors lost money because of falling oil prices. Today, many shale producers have gone bankrupt. For a trader however, it was easy to make money during this period by shorting the shale producers. Another example is in the communication space. In the past, Nokia was the leading device maker. No one ever predicted a time when Nokia would be dethroned. Today, Nokia’s mobile division is no more and investors who put in money have suffered huge losses.

#3 - Stake in the Company

To be as successful as Warren Buffet is, it is important to have a say in the running of the company. As an investor, you can buy shares in a company and assume the top management will do a good job or buy shares and have a say in the running of the business. Furthermore, as a shareholder, you own a part of the company. Right? No. You only have a say when you have a valuable stake in the business. To do this, you need to invest millions of dollars in the company. For a trader, you don’t need to have any large stake in the company. You only need to identify a trend or a news update, enter the trade, and leave when your thesis is proven right.

#4 - Automating Trading

For value investing, you need to do intense research on a certain company. This research will involve looking at a company’s books, management, projections, and competitors. After doing this, you can invest in the company if it meets your criteria. On the other hand, in trading, you can easily automate your trades by creating algorithms. After you create and backtest your algorithms, they will be trading for you. Alternatively, they will be sending alerts to you if a certain instrument matches the criteria. Therefore, in automatic trading, your task is to monitor the performance of the instrument and then make corrections when necessary.

Value Investor Versus Trader - Useful Links

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