Investing and Trading

By: David Van Knapp
Recently, have you run across a growing number of references to the virtues of being a "committed" investor instead of a "speculative" trader? I know that I have.

Here is a typical statement: "You cannot succeed if you trade a lot. You can only succeed by being an actual investor. You must realize that by owning a share of stock, you are in fact a partial owner of a real business. No business owner wants skittish investors. Corporations want committed, interested investors who are going to look to the long term, support the company through thick and thin, and not sell the stock at the first sign of short-term problems or bumps in the road."

Well. As they say in The Godfather, "It's business, not personal." Let's look at a few facts.

First, many of the points in the statement above are true. If you buy a share of stock, you are, in fact, part owner of the business. Corporations generally would prefer committed, long-term shareholders. A long-term view does look beyond mere bumps in the road.

But other ideas are false or misleading. For one thing, many active traders are, in fact, successful.

You can succeed or fail if you trade stocks. It is probably true that the majority of hyperactive individual traders do not beat the market, but that simply means they have faulty strategies, or that they execute their strategies poorly, or both. Many traders do beat the market, handily and consistently. Poor traders are often people who have insufficient knowledge, don't do their homework, do not have a strategic approach that suits their goals and personality, and are impatient.

The "trading versus investing" dichotomy sets up a false premise, that there are only two ways to participate in the market, by being a "buy and holder" or by being a "trader." "Trader" often carries a negative connotation while the "investor" wears a halo (as in the quotation in the second paragraph of this article).

Where does one cross the line from being a "trader" to an "investor"? Must you only buy--but never sell--to be an investor? If I turn my portfolio over ten percent per year, does that make me a trader? Twenty percent? One hundred percent? If I buy a stock and then sell it ten days later because its CEO just got indicted, does that make me a trader rather than an investor? Or does it make me a smarter investor? If I hold most of my stocks at least a year, does that make me an investor? Three years? Five years?

The fact is, there are places all along the spectrum between the extremes of "buy and holder" to "trader." It does not advance the analysis to force any person into one category or the other. And reckless investment decisions are not limited to traders. Sometimes the most reckless thing you can do with an investment is hold onto it. The dot.com bubble proved that.

To me, the most sensible approach to being an investor is to establish a set of rules and principles that are intelligent and fact-based, and then execute them according to plan. Every so often, take a step back to re-examine your goals and strategies to see whether they still make sense. So I take a long-term view, but that sometimes leads to short-term activity. There is no logical contradiction in that.

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