tRADING vs iNVESTING
So I've been getting myself into a few discussions online lately which largely stem from a difference of opinion around different methodologies for engaging with the markets.
Before I start off let me be clear, I have nothing against any particular method of engaging with the market. Be it long term buy and hold, fundamental analysis, technical analysis, trend-following, chart patterns, fibonnaci numbers, all these methods have adherents and basis for them to be correct. Some would probably argue that they all can't work because some of them are mutually opposed, think fundamentals and trend following. And some would argue all forms of technical analysis are bunkam and voodoo and they shouldn't work. From what I've read and understood, this viewpoint is often based on the Efficient Market Hypothesis/Theory, and that there is no edge for an individual in the market, as it's all "priced in".
In my opinion, the biggest flaw in the efficient market hypothesis is that humans are rational participants in the market. They are not. If they were would things like the GME short squeeze happen, would pump and dump schemes work or would trend form? I'd argue not.
Anyway, I digress; I think when discussing different approaches to the market, the critical differentiator seems to be timeframes, activeness and goals. The comments below are intended to be general in nature and reflect my opinion. I don't recommend anyone use the below to decide how to approach their market participation 😊. I'm also only going to talk about 3 views here, basically to stick within my swim lane.
For someone who wants to have limited involvement in their "investment", has a long time horizon and just wants to see steady growth, perhaps buy and hold suits their goals and temperament. There is nothing wrong with buy and hold, it's got a proven track record, and it's relatively easy, even more so with index-tracking ETFs which remove a lot risk (company-specific risk) for an investor. To my mind, it's just not a terribly efficient way of using capital to grow your wealth. Essentially the edge for this methodology comes from the long bias of the markets overall. However, depending on your timeframe, this may or may not work in your favour. I.e. you need the capital invested when the market is down. However most proponents of this methodology will say only invest what you can afford to lose as a risk management technique, which is fine.
If someone wants to actively manage their investments, pick their stocks has some time and perhaps something like trend following might be suited. Mainly using daily and weekly chart bars. For me this method seems to be a good balance between managing your investments, managing risk and efficiently using capital. What I mean by this is that if you use a longer-term active system/method, you're likely to be using position sizing and risk management techniques.
For many traders, including me, I think the starting point is as a day trader. I suspect this is for several reasons, among them that movies and tv shows that feature trading tend to focus on day traders and secondly, brokers want people to day trade. Why because most day traders over trade and generate lots of profit for the brokers. Anyway, this isn't to say that day trading can't be profitable, but in my experience it takes lots of time (both at the screen and learning the trade) and experience to make it work for you. It's certainly not going to make you rich quick.
Personally, I have chosen to build my methodology around trend-following, partly because Covel's Trend-following was the first trading book I read and partly because it just made sense to me. However, as I have gained skill and experience, I have realised that managing my investments requires less time in front of the screen with a longer term trend following system. As I've said before, my screening process takes around an hour to an hour and a half each weekend and maybe 20 minutes a night during the week. This is ideal for me currently as it allows me to work a job and to trade. I also include a bit of fundamentals in my analysis, essentially I just avoid trading around news events (particularly earnings).
So in my view, there isn't really a huge difference between a trader and investor, particularly once you move outside the realm of day trading, its around the level of involvement. Essentially as far as I'm concerned, we're all in this to extract a profit from the market via an edge, and some us do it over the short-term, some over the long term.
Anyway I hope you've found this rant interesting.
Cheers for now.
Nick the Trader