Investing & the Investor versus Trading & the Trader

Dear PGM Capital Blog readers,

In this weekend’s blog edition we want to discuss with you the differences and similarities between Trading versus Investing and an Investor versus a Trader.

INVESTORS & INVESTING:
Investing and trading are two very different methods of attempting to profit in the financial markets. The goal of investing is to gradually build wealth over an extended period of time through the buying and holding of a portfolio of stocks, baskets of stocks, mutual funds, bonds and other investment instruments.

Investors often enhance their profits through compounding, or reinvesting any profits and dividends into additional shares of stock. Investments are often held for a period of years, or even decades, taking advantage of perks like interest, dividends and stock splits along the way.

While markets inevitably fluctuate, investors will go back to their fundamental research, don’t let emotions get involved “ride out” the downtrends or even add to their portfolio with the expectation that prices will rebound and any losses will eventually be recovered.

 

There are three types of investment styles that can be applied to securities, as well as sectors.

• Value Investing:
  Value investing is an investment style that focuses on buying securities that are undervalued according to a fundamental analysis, and to hold these securities until they have reached their true value. Accordingly, value securities are presumed to be traded at discount to their true value.
  • Value securities are typically identified by using ratios such as low price-to-earnings (P/E), price-to-book (P/B), P/E-to-Growth (PEG) and furthermore high dividend yield.
• Growth Investing:
  Growth investing consists of identifying securities that have exhibited faster-than-average earnings growth over the previous few years, compared to the market, and are furthermore expected to continue this earning growth in the coming future.
  • Growth investors seek to make capital gains from a higher share price, as opposed to for example receiving dividend payments for income.
  • Since the P/E ratio does not account for growth it is not a very appropriate measure for growth stocks. In order to account for growth, the P/E ratio can be modified into the Price/Earnings to Growth (PEG)
• Income Investing:
  Income investing consists of identifying securities that pay relatively high and regular dividend payments to their shareholders. It is not sufficient to only look at dividend payments in ‘dollar’ terms, rather income investors look at:
  • Dividend yield, dividend payout ratio and most importantly, history of increasing the dividend.

TRADERS & TRADING:
Trading, on the other hand, involves the more frequent buying and selling of stock, commodities, currency pairs or other instruments, with the goal of generating returns that outperform buy-and-hold investing.

While investors may be content with an average 10 to 15% annual return over 8 to 10 years, traders might seek a 10% return each month. Trading profits are generated through buying at a lower price and selling at a higher price within a relatively short period of time.

The reverse is also true: trading profits are made by selling at a higher price and buying to cover at a lower price (known as “selling short“) to profit in falling markets.

Traders often employ mathematically based technical analysis tools, such as moving averages and stochastic oscillators, to find high-probability trading setups.

 

Traders generally fall into one of four categories:

• Position Trader: Positions are held from months to years
• Swing Trader: Positions are held from days to weeks
• Day Trader: Positions are held throughout the day only with no overnight positions
• Scalp Trader: Positions are held for seconds to minutes with no overnight positions

THE DIFFERENCE BETWEEN INVESTORS & TRADERS:
Where buy-and-hold investors wait out less profitable positions, traders must make profits (or take losses) within a specified period of time, and often use a protective stop loss order to automatically close out losing positions at a predetermined price level.

PGM CAPITAL COMMENTS:
Successful investing and trading starts with preparing yourself and your mindset for it by knowing what you want of your life, how you want to reach it and the price you want to pay for it.

This price is not measured in money but in time you need to invest in order to maintain your knowledge and mindset up to date.

If you want to be a successful investor you educate yourself in order to be able to understand financial and market news accordingly and control your greed and fear.

In his book “Think and Grow Rich” Napoleon Hill stated that most Investors give up 3 feet before reaching their goal.

If you want to become a successful trader you must be aware that trading platforms are open 23 hours a day,  six days a week.

INVESTING / INVESTOR:
Successful investing starts with determining your risk profile, choosing the right plan of action, investment style and advisor with knowledge and experience with the type of investment you want to do and the sector you wish to invest in.

Secondly it is important to understand the different routes in fundamental analysis to create a positive return on your investments within your investment horizon and risk profile.

Critical Success factors:

• Knowing yourself and your Risk profile and Investment Knowledge
• Control your Greed & Fear
• Doing your homework and own research to be able to understand, the advice of your Investment advisor, financial news and the media.
• Attending Investment seminars on a regular basis or subscribing to Investment magazines.

 

Difference between Investor and Trader:
Investors have a long term horizon, invest in the next thing of tomorrow invest proactively and normally don’t use margin to invest and take their time to build their investment portfolio. Traders on the other hand are highly leveraged, have a short term horizon and follow market trends via mathematical techniques, models, algorithm and charts.

Over the long-term a well diversified value portfolio will overcome all market correction and will outperform saving, trading or real-estate investing.

Trader by being market followers can push markets as well as securities to extremes on both side. Due to this they create the volatility that Investors love.

Due to the fact that traders use high leverage in order to maximise profit, they also maximise their loses, if the market does behave in line with their trades.

In one of its articles a very prominent European Trading Bank, indicated that 90 percent of all traders lose it all with their first month of trading.

Normally Investors buy when Traders are Selling and visa versa, which makes the below stated quote from Warren Buffett appropriate:

BE GREEDY WHEN OTHERS ARE FEARFUL AND FEARFUL WHEN OTHERS ARE GREEDY.

The two other quotes of Warren Buffett, world’s most successful (value) investor might also be applicable:

PRICE IS WHAT YOU PAY, VALUE IS WHAT YOU GET.

IF YOU DON’T FEEL COMFORTABLE OWNING SOMETHING FOR 10 YEARS, THEN DON’T OWN IT FOR 10 MINUTES.

We of PGM Capital are an Investment Advisory Organisation, with the mindset of a Value Investor, and a BUY and Hold Strategy of 8 – 10 years, which uses Technical Analysis, to determine the optimum entry (and eventual exit) point.

Last but not least it is worth mentioning that the price of a security at the end will always reflect its real (intrinsic) value, according to fundamentals which are used by a value investors.

Until Next Time

Yours sincerely,