It is vital in my opinion that you decide very early on what your comfortable basic approach on playing the Stockmarket actually is. I will make an attempt to define an ‘Investor’ and a ‘Trader’ in a moment, but it is important to realise that lacking clarity on this key issue will be a major reason if you find the Stockmarket a painful experience and you make losses.
I count myself as an Investor. Unfortunately, the terms Investor, Trader, Dealer, Dabbler, Gambler, Player, etc. are often used interchangeably. I think the only valid terms in a theoretical sense with regard to the Stockmarket are Investor or Trader. Anything else comes under the umbrella term of Gambler and if this is your approach then you should forget stocks and get your butt down to Ascot.
Undertakes detailed, lengthy, Fundamental Analysis of potential Investments and believes very much in a Value based approach - the Investor is trying to buy £1 coins for 50p. This might mean using metrics like Price to Book Value, P/E (price / earnings) ratio, Dividend Yield, etc. and could also be a growth approach with a focus on PEG (price / earnings ratio divided by growth).
Holds a fairly large portfolio - maybe 15 shares or more and has a ‘Buy and Hold’ strategy looking for big returns over perhaps many years. Very inactive with just a couple of trades perhaps every week. Realises importance of reinvested Dividend Payments compounded over time and uses market pullbacks to topup. Tends to buy Shares and maybe Funds and has a very diversified portfolio. May use spreadbets for controlled leverage and occasional Hedging of Long Term Portfolio when markets generally in difficult periods. Could use Bonds where value arises. Focus on Costs and understands compounding damage of unnecessary Costs over time.
Only looks at stocks occasionally during the day and only makes slow and thoughtful decisions. Long term outlook. Does not use stoplosses and only exits positions after Profit Warnings if it looks like company will get into Financial Distress which might mean it fails.
Probably avoids very small companies although some Investors are very specialist and may only buy Microcaps (I am not sure exact definition, I guess companies under £30m ish). Often attend Company AGMs and events where they can meet with management to get improved understanding of business. Big risk of falling in love with a company which can influence objective, rational, thinking in a detrimental way.
Has a very clear view of a price target over a couple of years or maybe a shorter time frame - regularly monitors individual stocks with regards to operational progress of the business and with regard to need for top slicing winning holdings or adding to smaller stakes.
The Mantra is ‘Get Rich Slowly’.
Short term outlook - focussed on a small number of positions (perhaps less than 10) and tends to be riding price momentum. Can go Long or Short (buy or sell) on trades and will place positions in many asset types in addition to stocks - common ones being Foreign Exchange (forex) and Commodities. Emphasis on Technical Analysis and Chart Patterns - Fundamentals of minor importance - some Traders don’t even know what a particular company does !! Usually trades on Leverage using Spreadbets and CFDs (Contracts for Difference).
Trades very often - Daytraders may open and close many bets within the trading day - possibly as many as 10 trades or more. Glued to the computer screen for much of the Day and alert to opportunities and risks that present themselves constantly.
Uses a strict Stoploss Policy (please see my recent blog on stoplosses if you require more details) and looks to exit losing trades quickly to take small loses and let winners run and add to winners when appropriate - ‘push the position’. Use Trailing Stoplosses which are moved up behind the price to make sure profits are locked in and not carelessly thrown away.
Needs strict discipline to manage money resources to ensure leverage does not endanger capital. Tend to make fast decisions and act on limited information - often based on Technical Analysis of Price Chart patterns with particular regard for Support and Resistance levels. News used where it creates opportunity for trades. Looks at tools such as Heatmaps to see which stocks are ‘hot’ and will jump on momentum bandwagons to ride for profit.
Needs very resilient character and ability to handle long losing periods without losing confidence or allowing stress to affect objective decisions.
Essentially, the Mantra is ‘Get Rick Quick’…..although very few ‘Traders’ do.
Why does it matter to understand style?
In my view, it is clear that these different styles are like Chalk and Cheese - they do not mix.
For instance, if you are a Trader YOU MUST USE STOPLOSSES as part of a defined, rigid, Trading Plan. So, if you find that you put on a Short Term trade and find that it goes against you and then you dilly dally and fail to make a decision to close it and take the loss according to your Stoploss Policy, you are not cut out to be a Trader - unless you are able to change this behaviour and execute the discipline that is required.
If you do not have the patience for thorough desk-based research and an interest in analysing company statements, you will struggle being an Investor. If you like to make quick decisions and can act on limited information then maybe you are best suited to being a Trader.
It really is a case of deciding what you are comfortable with - it is probably an inherent personality trait that will lead you either way. The biggest impacts are with regard to Psychology - a Trader will be mostly unsuccessful if they do not have the mental strength and rigid discipline required.
A key thing I want to stress here is that it is my view that it is impossible to be a Trader if you are in Full Time Work. It is utterly unrealistic to think you can do this. You will lose money. Not only will you give your job very little focus, you will also give your Trading inadequate attention - it just cannot be done successfully. You will hear people tell you they do it but, frankly, you should not believe them. People are great at telling you about their successes in the Stockmarket but never tell you about their failures - ask yourself, “if this chap is so good at this, then why is he still working?” (I use the example of a male here because you can bet every penny you have that females tend to be far less arrogant and would be far more honest !!! Such humility often makes women far better traders than men).
I do however think it is entirely possible to be a Great Investor whilst holding down a Full Time Job - not easy, but possible.
My own Painful Experiences
It’s funny over the years how I have struggled with this Investor or Trader dichotomy (is that the right word? Probably not but it seemed to fit what I wanted to say !!).
This especially hit me about 5 years ago when I gave up Work (hurrah !! for that day, the Lord be praised…….) as the unfortunate downside of having more time convinced me I could become more of a Short Term Trader and I must have wasted bags of cash and time and effort mucking about trying to do this - the truth is that I am useless at it.
However, I am at danger of doing myself down somewhat unfairly. THE BALD TRUTH IS THAT VERY FEW PEOPLE MAKE SUCCESSFUL TRADERS - despite what the Promoters of the latest whizzy Trading Platform or FOREX nonsense will have you believe. 90% of Traders lose money.
I read loads of books on it and tried loads of methods but I just could not get it to work. So, after much pain and Cost in pound note terms, I have finally come to the conclusion that it is not for me. I feel a lot happier about my Stockmarket activities as a result and I am far more successful.
If you do wish to become a Trader then go for it - but I suggest you tread carefully and don’t put in big money until you have absolutely proved you can do it. And don’t be disappointed too much if you fail - it takes a special kind of Robot to succeed in my view. It is also worth appreciating that running a ‘Paper Portfolio’ of fantasy trades is very different from actually having money in the game - you will behave differently I guarantee.
A Slight Paradox
However, despite my clear distinctions, I think there is some overlap from the Trader style to the Investor style.
I cannot sensibly speak the other way around, but I see myself very much as an Investor but I know quite a bit about Trading and I use many techniques that are really Trading related to enhance my Investing activities.
For instance, I use tricks like ‘Push the position’ all the time. For example, I will buy some shares in a particular stock and if it starts to go well and it looks like I have entered well, I will buy more - often as a small Spreadbet. This is a trick that Robbie Burns uses all the time - and it is more superb advice from the true genius of Investing.
I use chart patterns such as Candlesticks, MACD (Moving Average Convergence Divergence), RSI (Relative Strength Index), Support and Resistance for timing and love Trading tricks like buying a Breakout of Resistance.
Sometimes I will use stoplosses but its rare. If I need a Stoploss, then I probably have not researched the Buy or Sell properly.
So the nub of the issue is that I recommend everyone needs to decide early on in their Stockmarket ‘career’ whether they are or want to be, an Investor or a Trader. Failure to make this vital distinction will cause lots of sleepless nights and monetary loss - and we don’t want none of that silliness !!
I think you can mix techniques to a small extent - but you must be very careful to avoid over doing it and losing a clear focus on what you really are comfortable being.
For myself, Investing is a pretty easy life - I get the impression that Trading is flippin’ hard work and when the Sun is Shining there are other things I would rather be doing with my valuable days.
That’s enough for a Sunday Evening……Happy Hunting for the week ahead…..
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