Are you a trader or an investor?
Trading implies buying and selling regularly. While investing usually means buying and holding.
But what if you plan to buy low and sell high quickly, but your trade only heads lower?
At this point if you decide to hold on and maybe even buy more to lower your average cost does the trade become an investment?
The truth is there is no clear distinction between trading and investing.
When you buy a stock there is only one button to press. 🙂
You don’t have the option of choosing “trade” or “invest.”
The transaction is exactly the same for both traders and investors.
The only difference comes down to psychology.
Where it would make sense to have a distinction between the two is for portfolio risk management.
You can dedicate 80% of your holdings for long term growth, and maybe have 20% of “play money” of which you can use to time the market and not worry about losing too much of it.
What about speculating vs investing?
The fundamental idea of investing in any asset is to buy low and eventually sell high. Even if you’re a long term investor you or your will’s executor will have to eventually sell your assets.
Speculation implies the same idea of selling high after buying low.
Perhaps the only difference between the two methods is duration. But if speculating is meant to be a quick flip, at what point during the holding period does it become an investment?
Or maybe speculating means gambling with your money because the asset you buy doesn’t have strong fundamentals backing it.
But fundamentals are subjectively perceived. Some believe gold is an investment and it’s historically been sound money for centuries. While others believe gold is nothing but a speculative piece of metal.
Some believe a real estate investment that doesn’t generate a positive cash flow is speculation. Robert Kiyosaki goes as far to say a house that is cash flow negative is a liability. And you don’t invest in liabilities. But if that was true then almost no one in Vancouver or Toronto can call themselves real estate investors because it’s been nearly impossible to cash flow a new rental property over the last decade, unless the buyer puts up an unusually large down payment.
Maybe the difference between speculation and investing is simply one’s understanding of the asset. If you do no research into a stock and buy it, you are speculating. But if you conduct extensive due diligence first then you are investing. If that’s the case then at what point during your research do you turn from a speculator into an investor?
At the end of the day I don’t think it really matter what labels we give to these actions as long as we’re making money. 🙂
Random Useless Fact:
Batman doesn’t kill criminals or hired goons. But he’s totally okay to rack up their medical bills.
“Investing is betting on the company, trading is betting on the chart”. As someone who was able to retire way early because I learned to invest early and often I took up trading and the returns are way way way better. But the learning curve and journey to profitability is long…5000+ hours minimum.
Thanks for the insight, Brett. 😄 That’s a great quote. As a beginner trader I can attest that it’s not easy to make a consistent profit. Steep learning curve for sure.
I still consider myself a beginner also. Still risking less than 1% on a trade. I’m double digits green % on the year though and I’d be triple digits if I was risking 1%…1 more year I figure till I’m ready. “I will continue to limit the moments when inexperience shows”
Hey Liquid, very intersting post.🙂 As I grow older, I find myself becoming more of a long term investor than a trader. Though I must admit your monthly posts showing your trading profits is very tempting.😆 I know it sounds easy but I am sure you have put a ton of time and extensive research to get to where you are with your profitable trades. Keep it up, man! 🥳👏
Thanks Moe. It feels like the more trades I do the more I realize there’s so much more to learn. 😁
One thing I’ve tried to do in the past was divide my stocks between two categories.
1) Stocks I will hold long term. These are typically dividend growers, utilities, staples.
2) Stocks for active trading. These are energy and technology companies.
Over time I’ve noticed that more of my investments are going into the second bucket, lol.
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I love the 80/20 example you’ve given in the post. The 80 being the stable part and the 20 unconstrained.