Anyway, recently I have been thinking about this and refining the idea in my mind and I have sort of come to the view that the Trader / Investor thing is really a ‘Spectrum’ with varying degrees of each and most of us will fit somewhere on this Spectrum.
- Levels of Activity required.
- Returns that should be generated by a good proponent of the Style.
- Risk levels acceptable to the Individual.
- Degree of Technical Analysis / Fundamental Analysis used.
- Skills and aptitude an Individual has for a particular Style.
- Attitudes and Preferences of the Individual.
- Level of experience of the Individual.
- Time available to devote to the activity.
- Interest and commitment of the individual.
Here is my fairly simplified view of the Spectrum - starting with the extreme end of what I would call ‘Trading’ and ending with the extreme form of ‘Investing’ (when you consider this approach, ‘extreme’ is probably not the right word !!):
- Daytrader - this is someone who is glued to their Computer Screen all day long and who can put many Trades on during a day - perhaps as many as 20 in some cases. This approach is very much Technical Analysis based and uses all the accoutrements of Trading such as Stoplosses, Adding to Winners (‘Pushing the Position‘), Scaling in, Scaling out, Full Risk Management, Technical Trading Signals, etc. Daytraders will jump across Assets and trade stuff like FOREX (Foreign Exchange), Commodities, Stocks, Indexes, Options, etc. Daytraders will hold a small number of Positions open - maybe as few as 3 or 4 at any one time. The Returns should be enormous - quite frankly, if someone is Daytrading on Margin there is no reason why they should not be making multiples of their Capital every year - maybe as much as 10 times or more. This is where the Big Money is made but it is extremely difficult and VERY FEW PEOPLE ARE SUCCESSFUL AT IT. It also takes immense dedication and commitment and is very hard work - you cannot do this with a normal Job. It takes a huge amount of Learning and you will run the risk of losing all your money if you screw it up. Dave Atherton (@adatherton) on Twitter is a very successful Daytrader and a ‘must follow’ if this is your thing.
- Position Trader - these types are very active Short Term Traders but unlike the Daytrader, they might hold a position for several days. Like Daytraders they might hold just a few Positions open at any one time - maybe 4 to 6 or something. Again it takes commitment and focus but it is a little less full-on than Daytrading. Similarly the focus is on Technical Analysis and Trader techniques but perhaps with slightly more of a Fundamentals flavour. Returns here should be big - maybe many multiples of the Starting Capital each year - but nowhere near what the Top (but rare) Daytraders can make. Like Daytrading, it takes a lot of Learning and Understanding and the Risks are huge while you are starting out and you could risk going bust before you get anywhere. It only suits certain characters and personalities - again, most people are useless at it. From observation, I would class Nicola Duke (@NicTrades) on Twitter as someone who does a bit of this - although I think she also does Daytrading.
- Investor / Trader - ok, I made this name up. This is a sort of hybrid really which is probably more on the Trader side of things and uses Technical Analysis to a large degree. Fundamentals are important though but probably more on a Quantitative Basis than by a Qualitative Basis - i.e. it is less Subjective than the pure Investor types below and uses Objective Numbers such as ‘Net Debt’, ‘Net Profit’ etc. to give precise analysis. Trader Tricks are used like adding to Winners and Stoplosses but it is nowhere near as focused and frantic as either of the 2 Trader types above - in fact, it is much more relaxed and Investor / Traders will often keep Positions running for months if the Trends are still in their favour. It is very much about Trend Following and Momentum. I would guess these kind of People have perhaps 10 to 15 Positions open at any one time - it is certainly a focused approach. The Gains here can be very good - especially when you consider the level of effort required - probably in the region of 40% per year on your Starting Capital must be possible for a Good Proponent of the approach - and that’s without using any Leverage. I would classify @stealthsurf, @YaiLondon, @A1Mhigh, @TheDIYTrader and @Chrissayce as people on Twitter using this approach extremely well.
- Active Investor - I see this as really a Fundamentals driven approach and pretty lazy really. It is Quantitative as well as Qualitative with regards to Fundamentals but also using Technical Analysis to sharpen up timing of Entries and Exits to Positions, and uses some Trader Tricks like adding to Winners, Chopping Losers, Topslicing, Risk Management through Position Size, Stoplosses in some cases, etc. Positions can be held for months to years or in some cases for much shorter periods - it tends to be pretty flexible. It suits people who are interested in Businesses and the ‘Future-gazing’ of picking out the Winners of the next few years etc. It is very well suited to people with a Job and needs much less time than the Approaches mentioned above. The number of Holdings probably varies a lot here - it has become clear to me over recent months, particularly after writing a Blog about ‘How Many Stocks should I hold?’ (please see below for a Link) that some People may have as few as perhaps 12 Stocks but others (like me !!) have as many as 25 to 60 or more - I have met many People with over 100. In terms of Returns it should be possible for Very Good Active Investors to make 20% a Year on Capital without Leverage - the key to this approach is Compounding of Capital over many years (please see my Blog on Compounding - Link below). I would describe myself as sitting in this category but I am probably more at the less active side of it. People like Robbie Burns (the Naked Trader) are probably in this type but are more active than I am - Robbie claims in his book to get 20% to 30% Returns per year - in reality I suspect he does more like 50% - but this is very difficult for most people to achieve. Most people who regularly appear on Twitter like @paulypilot, @JohnRosier, @CompoundIncome, @reb40, @SmallCappy, @conkers3, @RebelHQ, @GrindertraderUK, @Macroval, @groupstageexit, @jpsc01, @DianaEPatterson, @smarkus, @sholdsworth1963, @SandyMidd, @treesieT, @imranyawan, @nicktudor100, @BenSharman, @MBroomSmith, @zygsuzin, etc. are variations on this theme (sorry if I missed you out - too many great people on Tweets to remember !!).
- Passive Investor - I was going to split this into 2 types - because some are more Passive than others. My distinction really is between very inactive ‘Buy and Hold’ Investors who just hold stuff forever and probably pick up the Dividends, and with people who just buy Funds and sit on them forever. Probably most people actually fall into this category but I expect very few of them are reading my Blog (shame !!) - lots of people have Company Pension Schemes that put them into Funds which they have no idea about and they rarely tweak. I would expect these kind of People to have maybe 15 to 20 Stocks or Funds. These kind of approaches are very easy but the Returns will obviously be low. Maybe you can make around 7% a year doing this if you are lucky and good - but Costs will be chewing away at your Returns anyway if you rely too much on Funds. Money will probably be spread across main Asset Classes such as Equities, Bonds, Property, Cash, Gold etc. and often on the advice of an Industry Professional (Financial Adviser). I often wonder if many people doing this have a false sense of security - they think it is low risk but how can it be when mostly they have no idea what they are actually putting their money into and it is entirely on trust that the Adviser is any good (probably not)? It never surprises me when I hear that people are unhappy with their Adviser just after a major Market Meltdown !! This approach seems to be a ‘comfort blanket’ retreat for people who don’t understand Investing and can’t be bothered to take the time to learn about it. Very silly if you ask me.
The Blog ‘How many Stocks should an Investor hold? Are you drowning in Stocks or is there a drought in your Portfolio?’ can be found here:
The Blog ‘Why Invest? The Power of Compounding’ can be found here:
I hope you found this Blog got you thinking - I am quite pleased with it as I doubt it is a concept many people have really considered before - and even if they have they will not have read something like this I suspect.
In Part 2 I will look at Differences and Commonalities between the different types of Traders / Investors, and also cover what is best for Beginners and some Warnings around mixing styles.