I’m An Investor, Not A Trader

Foreword from ShareInvestor

This article “I’m An Investor, Not A Trader” by Jonathan Kwok was first published in The Straits Times on 24 Nov 2013 and is reproduced in this blog in its entirety.

For regular folks, holding stocks over the long term may offer a better chance of making money

To the layman, the terms “investor” and “trader” may appear to mean much the same thing – and I couldn’t really tell them apart either when I started as a financial journalist four years ago.

Fortunately, a remisier contact told me the difference before I could make a fool of myself.

“Investors” refer to people who buy and hold shares for the long term, probably years or even decades, he said.

“Traders”, on the other hand, take a short-term view and look for quick profits – their holding period is minutes, hours or days at the most.

With this in mind, I’ve been content being an investor, and a recent opportunity to trade currencies and stock indexes using a demo account has convinced me that trading is probably not my cup of tea.

To each his own, of course. But no matter what you choose, you should be very clear from the get-go in deciding whether you want to be an investor or a trader.

The tools involved in performing each role are as different as chalk and cheese.

Investors look at the health of a company – its financial statements, business prospects and dividend yields – in a field of study known as “fundamental analysis”.

Traders, on the other hand, use “technical analysis” – the study of chart patterns to determine where the price of an asset is heading.

One trader’s comment sticks in my mind. He said he didn’t care about the quality of the asset.

“I could be trading jellybeans, for all I’m concerned,” he said. “All that matters is where the price is headed.”

Put a trader and an investor in the same situation and they may take exactly opposite action. If a trader holds a stock which plunges, he will deduce that the tide has turned against him and sell the stock quickly to cut his losses.

But an investor in the same situation may well look to buy more stock at the cheaper price, if he is confident about the company.

All the books I read when I started out were on investing rather than trading – so I’ve always been more concerned about the company prospects for the shares I buy, rather than what the price will be in a day or a week.

Last month, though, I got my chance to try out trading.

A brokerage offered a crash course to journalists, and opened demo accounts for us to try trading.

We were given $100,000 in fake money to trade on the platform, which offers trading in foreign exchange (forex), commodities and stock indexes.

Clueless as I was, my first trades just followed the tips in one bank’s technical report, which I received in my work e-mail. They involved betting that the New Zealand dollar would fall against the US and Singapore dollars – asset classes which I knew very little about.

But the experts were right. Soon I was $4,000 in the black – and the thrill of making money, even fake money, got me quickly hooked.

“Hey, this is easy, I’m making money just by following the experts,” I told myself.

I wasn’t the only one getting into it. A colleague who went with me for the talk told me “this is really addictive”, as he actively monitored his trades on his phone.

That night, I spent hours reading up on the tools of traders, such as chart patterns with bombastic-sounding names.

But before I could celebrate, things started souring and I began to lose much more money than I made.

“Perhaps it’s because I don’t understand forex enough,” I thought, as I started betting on the Tokyo and New York stock indexes as well.

That hasn’t helped much, unfortunately. At the time of writing, my account is down to $79,500 – meaning I’d lost more than 20 per cent of my seed capital in one month.

I cannot help but compare this to my long-term stock portfolio – many of my shares are in the black and have provided me with healthy dividends to boot.

Why the difference? An explanation may lie in the fact that trading is largely a zero-sum game – if you win on a trade, there will be another trader out there who took the opposite position and is nursing losses.

Considering that the forex and stock landscape is increasingly dominated by ultra-fast computers that can react faster than you can to data and chart patterns, you are almost definitely going to be on the losing side.

Traders claim that the tools of technical analysis give them an edge but they’re really swimming against the tide.

New York-based online newspaper International Business Times said in 2011 that 70 per cent of retail traders lose money, while other articles claim higher figures of more than 90 per cent.

My colleague compared trading to gambling and his analogy makes sense. Both can be addictive and tend to make people lose money over time.

For novice traders like me, making a trade is taking a stab in the dark, like placing a bet at the roulette table.

Compare this with investing.

Stocks can generally be expected to grow in value over time owing to economic expansion, which will improve the profits of companies.

So, while traders will find it hard to tell what a stock’s price will be in a day or two, investors can reasonably expect their holdings to go up over many years.

This difference means that investing is no longer a zero-sum game – all parties can win from it.

Considering that regular folks like you and me are at the bottom of the food chain, investing long term is probably one of the better ways to avoid being eaten up by the experts and computers for a quick profit.

The longer holding period for investors also allows more time for you to recoup your losses. Of course, you must keep to the basic rules of diversifying and buying some dividend stocks to ensure a flow of income.

Still, trading can be fun if I don’t lose actual money.

So while my real money will continue to go into long-run investments, I’ll keep on trying to make fake money – or minimise the losses – on my demo trading account.

I intend never to risk any of my hard-earned savings in trading forex or stocks.

It’s just like the Blackjack game on the mobile phone – not involving real cash and played only for fun.

So, excuse me while I study the charts of the US dollar-Japanese yen movements. I’m down to $79,500 in my demo account, and just hope that I won’t slide to zero.