TME 034: Trading Vs Investing


Today we are going to talk about trading vs investing. On a side note all of our systems are trading systems. They are not investing systems. With that in mind we will try to be as unbiased as possible and show the benefits and drawbacks of both styles without bias.

How To Invest

There are different types of investments but the most popular is mutual funds. Most 401k’s are loaded with mutual funds. In some plans mutual funds are all that the 401k will allow you to invest in unless special permission in granted.

So why are mutual funds so popular?

Mutual funds track different sectors of the market. Some mutual funds track emerging markets. Some mutual funds track small businesses. Mutual funds vary in variety but as a whole they have a good track record. One good thing is that they do not require much thought or time and effort. Just pick one with a good track record and let it run. That style of investing requires little effort and it appeals to the average person.

Stock Investing

The next type of investing that some choose is stock investing. This requires research. It is the Warren Buffet style of investing. It should include many companies so that you have diversification. If you are going to invest in a company for years you don’t want all your eggs in one basket so spread it around.

One-way to pick stocks to start investing is look up a mutual fund. If you look at a quote it will tell you the top ten holdings. You can start building your stock-investing list from there.

Learn To Trade

The next strategy when we are talking about putting our money to work for us is trading. Trading requires a lot of work on the front end. Most of the work is spent building the system. Once the system is built then the trader just does what the system says.

The extensive work is in the system development stage. What formula will you use? Is price the main variable? How will you back test your system? Once that work is done it becomes easy to follow the system.

When I went hunting as a boy many times we would go on flat ground. The good thing about hunting flat ground is it is easier to walk on. The bad thing is if the sun is not up or the clouds are covering the sun then you can get lost very quickly. For that reason we always took a compass with us. When you are walking in the woods and you feel lost it is a bad feeling. Even when you have a compass if you feel lost you want to argue with the compass. No matter how much you want to argue with the compass it is very important to follow the compass.

It’s the same with a trading system. If it is proven there will still be times when you want to argue with the system but it is always best to follow the system.

Difference between Trading and Investing

What is the difference between trading and investing? The main difference is probability vs time. The trader builds a system that shows a probability of success over time. The investor buys stocks or mutual funds and holds them for an unspecified amount of time. Most investors are in mutual funds and they may check their accounts once a month or once a year. They are not necessarily worried about what happens today. They are more concerned with the price 10, 20, 30 years from now. The trader takes one day at a time and try’s to gain from up and down trends in the market.

The life of a trader can be more stressful if they allow the daily grind to get to them. Its like the old saying death by 1000 paper cuts. The investor gets nervous when the market crashes while trader makes money to the short side.

So death for the investor is like getting hit by a truck. It is sudden. Both options can make money. The easiest route is probably investing in mutual funds. The most financially rewarding is trading if you have a good system that you are confident with.

Make Money Trading

Making money trading starts with a willingness to learn. I’m not talking about the interview question are you a good learner? I’m asking do you really want to learn. To make money trading you have to spend months if not years building your system. When building a system you will build, mess up, rebuild, then finally after a lot of work the system is made. It takes hard work. That is why buying mutual funds is a much easier alternative.

Once the system is built that is when you start to see the reward. That is when you start to understand the system. That is when you start to trade like a robot.

When that happens you may never want to go back to the old way of investing.

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