Trading Instead Investing – Introduction
In the financial world, you can decide to follow a number of strategies to make it. One, you can be a sell-side analyst (which means providing reports and analytical numbers to investors), an investor, or a trader. The difference between a trader and an investor is in their approach to capital allocation. An investor looks at the intrinsic value of assets and then allocates capital with a long-term value. On the other hand, a trader looks at a market with a view if identifying short term opportunities.
When I was starting my trading journey, I was deeply inspired by careers of Titans such as Warren Buffet who is without a doubt one of the best money managers in the world. My goal then was to become a value investor. However, along the way, I realized that long-term investing was not for everyone. The reason why Warren is so successful is that he has a war chest of money which enables him to acquire a significant part of a company. For a person with a few thousands of dollars, it would be difficult to do that especially when using leverage. In this article, I will highlight a number of key reasons why you should consider trading rather than investing.
Trading Instead Investing – Market Cycles
As I have written before, markets move with cycles. At one point in time, asset prices will move up while in other times, markets will fall. As a long term investor, you will not be in a good position to adapt to the market cycles. For instance, during the financial crisis of 2008, most investors lost money. Titans such as Warren Buffet and Ken Griffin lost double digits. On the other hand, Renaissance Technologies which is a hedge fund that trades had its best year, earning more than 80%. This is because as a trader, you can make decisions within a short period of time. Also, you are able to enter and exit trades depending on the direction of the trend.
Trading Instead Investing – Difficult to Predict
Markets are difficult to predict. A good example is in the oil prices where no sell-side analyst correctly predicted the drop in prices. Again, in 1999, sell-side analysts were busy producing reports praising tech companies they believed would be the next Coca-Cola. In 2000, the bubble bust and investors who had listened to these analysts lost money. Thing is, things change. In the 80s when Warren made his investment in coca-cola, the market was enthusiastic about it. Now, with the health concerns of Coke, people are shifting allegiance in favor of healthier drinks.
Trading Instead Investing – Capital Requirement
For an investor, to make money you need significant amount of money. This is particularly because you are an owner of the company. Therefore, if your investment is little, large investors will not listen to you. As stated above, the reason why Warren Buffet has become so successful is that he has billions of dollars at his disposal. Therefore, he can easily buy any company and influence decisions. For an ordinary trader, it makes no sense of owning a company that you don’t have a voice in.
Trading Instead Investing – Opportunities in Trading
Another reason I opted to be a day trader rather than an investor is on the number of opportunities that arise when trading. Investors don’t have the advantage of shifting their allegiances within minutes or in often cases seconds. We all know how the market reacts when there is an important news such as a jobs number. The perception of an investor who buys a stock or currency for the long-term is that they understand how the numbers will move. Unfortunately, not even the brightest stars in Wall Street can accurately predict these numbers. Therefore, a trader will always have a lot of opportunities to trade during such times.