Investors vs Traders
Ask the average person how to invest in the stock market and you will get one of two answers.Fundamental analysis or technical analysis, and never the two shall meet.
It all goes back to Benjamin Graham who wrote ‘The Intelligent Investor’ in 1949, the bible of fundamental analysis. There was this quote, in the introduction no less, talking about speculators: Most of these people are guided by charts or other largely mechanical means of determining the right moments to buy and sell. The one principle that applies to nearly all these so-called “technical approaches” is that one should buy because a stock or the market has gone up, and one should sell because it has declined. This is the exact opposite of sound business sense everywhere else, and it is most unlikely that it can lead to lasting success on Wall Street. In our own stock-market experience and observation, extending over 50 years, we have not known a single person who has consistently or lastingly made money by thus “following the market.” We do not hesitate to declare that this approach is as fallacious as it is popular.
The Unintelligent Investor - The Bible of Fundamental Analysis
The Bad Bits
Traders will tell you that investors are embarrassingly bad at a lot of things. Such as:- Timing the market. Investors think it can’t be done. So they are going to wear the next GFC right on the nose.
- Selling. They don’t. They don’t know how. They think everything is forever. They think the Warren Buffett way is the only way. They buy and hold. Or is that, buy and deny?
- Being disciplined. They don’t have any discipline. They’ll watch stocks get destroyed without doing anything about it, and the bigger the loss, the more likely they are to persist with it.
- Being vigilant. They ‘set and forget’. Forget! About their money! What planet are they on?
- Having a Trading Plan. They don’t have one. Net result, they let their losses run. The complete opposite of what they should be doing.
- Being objective. They aren’t. They are the herd. They never see the herd.
- Being unemotional. They lie in bed in fear when share prices go down. Paralysed.
- Taking the blame. Everything that happens is someone else's fault. The whole stock market is a Machiavellian plot against them. Nothing is their responsibility.
- Being lemmings. They get in when it’s obvious and get out when it’s obvious. Put another way, they buy at the top and sell at the bottom.
- Thinking investing is all about value. Do you know how many flawed assumptions go into fundamental analysis, into those high-brow calculations of intrinsic value? Rubbish in, rubbish out, no matter how smart the calculation.
- Rely on past prices as a predictor of future prices, which is ridiculous.
- Know nothing about a company. They might as well trade cabbages.
- Are short-term, which means they’ll never see the magic of compounding returns.
- Don’t care about dividends and miss out on franking.
- Will never hold a great stock and keep it forever because they fidget.
- Can’t actually time the market anyway, despite professing to do so.
- Are lemmings. They just look at what everyone else is doing and follow them.
- Have to spend all day doing it, so don’t have a life.
- Have you ever met a rich technical analyst?
Marcus Today contains stock market education, commentary and actionable ideas.
Sign up for a no-obligation 14-day free trial - click here.
The Good Bits
Traders:- Are not just technical analysts, they are traders (there’s a difference), which means they have trading skills. These skills are universal and are as useful for investors as they are for traders.
- Are not short term. Trading techniques can be applied over any time frame. Apply them over minutes and hours, and yes, it is gambling. Apply them over days and it is trading, apply them over weeks and months and it is investing. You can easily adapt trading skills to any investor.
- Have exactly the same ambition as a long-term investor, as Warren Buffett even, the ambition to buy a stock that goes up forever. They are doing exactly the same thing.
- Have a trading plan, and because of that, they never miss a night’s sleep. They know what they are going to do before it happens. They have 'certainty of outcome'.
- Are unemotional. They are objective. Evidence based. Not hoping. They know what they are going to do at all times because, from the moment they buy a stock, they have a system.
- Are decisive. Traders never prevaricate, they never agonise, they know what to do, they decided way before the trade was even opened.
- They are honest. They know that making money in the stock market is about buying stocks with a high probability of going up. It's not about predicting the future. No one can do that.
- Are not proud. They know that things will change, and that some outcomes will go against them. The difference is that when they do, they act, they don’t stand by some grand but flawed declaration about the future through thick and thin.
- Are not lemmings. On the contrary, they see the market as a battlefield, as combat, one on one. They know they are in a war with the herd and because of that, they retain an independence of mind and action.
- See trading as a business and they analyse their success and failure like a business. They constantly adapt, educate and improve.
- Are good at identifying companies that make money.
- Are good at identifying rubbish companies.
The Bottom Line
As any experienced trader will tell you, there is no Holy Grail for success, no one approach that works. Amidst so much grey and so little black and white, the game is simply about trying to get an edge on random outcomes, and to do that you would be a fool not to use every tool in the shed. And that’s the point, every tool. Not one or the other but every. You dismiss nothing and learn everything, and this is where so many people go wrong. Thanks to the perpetuation of that stupid declaration on page two of a book written in 1949, pre-computers, pre-software, pre almost all technical theory, most stock market users, often at the outset, decide they are an investor and de-cry traders, when it would be far more effective to be both. Trading skills are plain common sense, can be tailored to any style of investor, and are the difference between being in control or out of control. As an investor, you would do well to learn them. And for traders trying to narrow down the odds, don’t you think it would be better to trade in successful companies and not unsuccessful companies? The fundamental investors are doing so much work finding good companies, you would do well to listen to them. And if you can’t bring yourself to do that, at least listen to which stocks they don’t like and avoid them. The bottom line is that you make a big mistake writing off traders as an investor or investors as a trader. They both have some good bits and some great bits. You would do well to explore both.
More about the author – Marcus Padley
