Both investors and traders have one thing in common: they both want to make money. That’s where the similarities end. For the most part, these are two different animals.
Here’s a brief chart showing the differences that stand out:
| INVESTOR | TRADER | |
| TIME HORIZON | Long | Short |
| ANALYSIS | Fundamentals (P/E Etc.) | Technical (Trends Etc.) |
| ACTIVITY | Sloth-like | Frequent |
| PROFIT BY | Buying low & selling higher | Buying low & selling higher OR Selling high & buying lower |
It is important to define what you are doing. Perhaps you have a retirement account for long term investment and a trading account for short term cash flow. Mixing the two can get you into hot water quickly. Its easy to confuse the two, leading to a mixed strategy.
I recently watched the CNBC show Fast Money. The desk folks are introduced as “traders at the desk.” Then I watched in amazement as they talked about interest rates, employment numbers, housing data and a litany of macro data that doesn’t mean a hoot to a trader. I heard price to earnings ratios, book value of banks, and net profit margins ad nauseum. All of these suggest a fundamental analysis of an investor. Wanting to be a trader and making fast money and using fundamental analysis will lead to a disaster.
Traders are seeking a rapid gain in profit in a short period of time. Fundamentals sometimes takes years to pan out. Placing a short-term trade using fundamentals is like watching the night sky for the next passing of Halley’s Comet. It may take a while. The markets are frequently irrational for years, thus eroding your account.
The market can stay irrational longer than you can stay solvent.
John Maynard Keynes
Both approaches have their place. Most retirement accounts only allow a long-term holding period for investments. This is on purpose because people are notorious for losing money in the wrong trades. Investments in 401(k)s for example are taken from one’s bi-weekly paycheck and are directly deposited to a fund for investment. Since 1950, the S&P500 has grown the most for an annualized return at the end/beginning of each month (+21.38%, 26th – 6th) and mid-month (+12.96%, 11th – 18th). These time zones correlate well with one’s paycheck distributions. In contrast the other periods of the month have annualized negative returns.
If you want to be an investor, be clear on your objectives. Fundamental analysis has proven to be a superior approach. Place your bet and sit on your hands.
If you want to be a trader, a more technical approach using indicators is in order. Either one is useful, but just don’t be fooled by being in between or listening to those who are.
Enuf said.