Friday, May 25, 2007

Comparison between trading and investing - A personal view

Today I had the wonderful opportunity to view the inner workings of a professional trader, and to see how his mind works and also view the strategies and concepts involved. This person has been consistently posting on the CNA (Channelnewsasia) forum and his daily trades are almost always on contra. For privacy reasons, I will not be stating his nickname on my blog but most of you readers who visit and post on CNA forum will know who this person is.

Suffice to say that I observe and read his postings as a matter of interest, to so-called view the opposite side of the looking glass to see how life is as a trader. After all, value investing and trading are as different as night and day; so it can be very interesting for me to view another perspective. The even better part is that this person is articulate and not afraid to speak his mind about how he trades, and is even open enough to show the world his gain/loss record. I admire him for his transparency and his tenacity, as well as the hard work he has put in. Even though out methods are totally different, we both have a common goal which is to work towards a steady return and to achieve financial freedom.

What I would like to comment on is the difference in the nature of trading and investing (as observed from this person's comments), and why this difference has made me choose the path of value investing. It's more like a life choice which one undertakes because of his character and outlook; there is no "right" or "wrong" to it. It's a personal choice and I respect that.

The first distinctive difference is the amount of time devoted to the market. A trader has to be constantly watching the market in order to trade successfully. I have not met a successful trader who uses some built-in software to help him decide on buy/sell timings. Traders track prices, not companies; thus their attention must always be on the screen to look for breakouts or flags (I am not a TA person, so just quoting some terms. I apologize if I have misused them !). For investors, much of their homework is done at their own time, and once they buy into a company, they can usually just forget about the market and live their own personal lives.

According to the person's account, there is sufficient "emotional turmoil" and a deterioration of his personal life which transcends the money aspect. Thus, for those seeking quick wealth, just remember that sometimes life is really more than just about the money (and this top trader makes an average of about 40-50k per month, not a small sum by any standard). I have a wife who loves me and my family whom I still visit 3 times a week, and I truly enjoy my job now and the travelling opportunities it offers cos I am able to see the world around me. Sometimes, when I am in a reflective mood, I question what my objective in life is. Yes, investing can get me rich slowly, but ultimately I wish to enjoy what life can offer: food, friends, love, children, travelling, karaoke and many other aspects. By choosing the value investing path, I sincerely believe that I can have the best of both worlds, namely to build my wealth (albeit slowly and not as swiftly as the top trader) and to be with the people I love doing the things I love.

Thus, in summary, all I can say is that if you choose to be a trader, make sure you know what you will be sacrificing and also take note of the cost of your choice. Which is to say that investing will also take a toll (the research) and sometimes my wife will also complain that I am so busy researching companies that I spend less time with her. Currently, I have the ideal portfolio till the next market crash (during which I will pick up the companies which I have researched cheaply) and thus I do not have to spend time doing research. Another thing about trading: what I've heard is that about 5% win big (in this case, this top trader is part of the 5%), another 20-25% barely break even with a small profit or loss, while the rest end up with massive losses.

The reason is simple. Traders need the following to survive and be successful:-

1) The technical knowledge to read charts, interpret patterns and recognize trends
2) Mental fortitude to take advantage of crowd psychology and not succumb to it
3) A strict cut-loss rule, while letting your profits run (top traders have mastered this to near perfection)
4) Learning when to put down 10 lots to contra and when to put down 100 lots. In other words, the strength of conviction in your abilities (1 big bad trade can cancel out 10 good ones).
5) Be alert, nimble with a keen eye and fast fingers, not to mention in depth knowledge of how buy/sell queues work and market knowledge as well (this includes economic trends, inflation, Ben Bernanke spouting doomsday stuff etc.)
6) To give up most of your daytime (during trading hours) to constantly monitor the market. In other words, this MUST be your full-time job as one can't possibly trade if one already has a full time job doing something else.
7) The humility to accept mistakes and not get carried away with arrogance.

To be fair, to be a good investor, you would also require the proper psychology with regards to market movements. Generally, being an investor will require less actual time WATCHING the markets, and this is why I prefer it.

That said, I would like to take this opportunity to congratulate this top trader as his record is really impressive ! But, the bottom line is I would rather stick to what I am doing now as it gives me more personal satisfaction. Money is important yes, but it's not everything in life.

5 comments:

Mitch said...

Some nice insight. I have also looked at the market for years and tried to decide on a trading strategy that doesn't suck my time, or large cash reserves and I am busy learning CFD trading. Have a look at www.mitchrankin.com, might be something for you

kleer said...

musicwhiz,

One reason why I chose to be an investor instead is because it takes up less time.

But the bigger reason is because my phychological makeup is more geared towards long term investing - I generally have a lot of patience and am able to see the big picture clearer than most people.

Ultimately, the secret is in finding the strategy that works best for yourself!

fishman said...

well said! "Money is important yes, but it's not everything in life."

and I agree it's a personal choice and no "right or wrong"!

Hope you don't mind I write a post and link to this.

musicwhiz said...

Hi fishman,

Sure, please go ahead. Glad that my post has stimulated more interest in such topics. :)

8percentpa said...

Very interesting post! Very surprised that your trader friend can make 40-50k a month! If he is in the job for 5 yrs, he would be worth 3mn by now, not to mention the principal he needs to make 40-50k per month. But I guess this is the essence of his dedication and hardwork to trading. As you mentioned, only the top 5% of all traders/investors can achieve this.