In a recent post, Chad at the Periodot Capitalist put up a post which talked about things in terms of trading and investing as separate operations. I am always curious to hear how folks differentiate the two, so I left a comment asking his opinion. He actually went so far as to write a whole new post on the subject: Differentiating Between Trading and Investing.
Chad starts off by expressing the view that he defines the difference basically the same way as everyone else, but that’s exactly why I asked the question. It’s been my experience that people have an array of views. In particular, a lot of folks I would call stock traders refer to themselves as investors. So when I hear someone say they are an investor, I try to get clarification.
Chad then goes on to define investing, as he sees it, in this way:
The main difference between “trading” and “investing” is time horizon. Investors are long term players. They are investing in a business and are making an optimistic bet about the fundamentals of that business in the future.
Personally, I don’t like the first part of that definition related to time, but I do like the latter part about the fundamentals of the business. I won’t make an issue of the fact that he used “investing” to define investing. 🙂
The reason I don’t like the time part of differentiating the two groups is because traders can just as easily hold positions in the long term as hold them for the short term. Similarly, investors can just as easily get out of a position in a couple of days as a couple of years. I will agree, though, that in most cases the anticipated holding period of an investor when entering a position is much longer than when a trader enters into one.
In The Essentials of Trading I talked about the difference as being mainly in terms of the exit plan. Traders generally have them going in, meaning they have a specific set of criteria which will trigger an exit – often something related to price action, but not always.
Investors, though, handle things a bit more nebulously. They will exit a position when the fundamentals no longer support their being long. That, however, isn’t something which can easily be defined since there are so many factors involved. It’s not usually as cut and dried as falling short on the latest quarter’s earnings.
Chad also differentiates traders and investors by saying the former don’t concern themselves with fundamentals. While certainly there are loads of traders who focus only on technical analysis methods, they are only part of the story.
For example, I consider myself generally a stock trader (though I do sometimes invest) because I enter positions with a specific exit plan, but that doesn’t mean I ignore the fundamentals. Quite the opposite, in fact. I will rarely trade a stock in which the fundamentals don’t back up my technical view. Also, some of my exit criteria are usually based on the fundamentals.
How do you define trading vs. investing? Leave a comment and let me know your views on the subject.