Trading or Investing? It’s your choice
When I first started buying investments on my trading platform I took the ‘trading’ word to heart. I was of the opinion that I could buy low and sell high each and every time and make a nice tasty profit in the process. However this plan never really worked out and I’ll explain why in this article.
The main tools in the trader arsenal are knowledge and temperament. The knowledge to know which stocks will likely increase in value and which stocks will likely decrease in value, and the cool-headed temperament to cut the losers and let the winners run.
These tools sound simple enough but in practice, they’re anything but. If you’ve just spent 4 months working hard to save up enough spare cash to buy some shares, how will you feel when the value suddenly plummets after the company posts a profit warning? What will be your first instinct? Sell up before you lose any more of your hard-earned money, or hang on in there in the hope that it’s just a bump in the road for the company and the value will eventually recover?
I’d suggest that quite a few people will sell up, count their blessings that they didn’t lose any more money and vow never to touch this stock market business ever again. That thought certainly crossed my mind on more than a few occasions after I came to the conclusion that it really is quite impossible to time the market, even with hours of research on Google.
Now sure, some people are just plain lucky and pick some really great winning stocks and make a whole heap of cash, but I bet those same people go on to lose all their gains a few trades later. I know I have. If you have the correct temperament to sell your losers and let your winners run, and you can consistently make more gains than losses, then good for you (and can you email me a list of your daily trades please?!). But if you’re like me, the archetypal average trader, then I think it’s only sensible to adopt a different strategy.
What I decided to do is to stop trading and start investing.
My philosophy on this is simple. If you can find a really great stock that you’ve researched and have the conviction that it will increase in value, then stop worrying about it’s day to day value. Just buy it, hold it and let the dividends roll in whilst occasionally checking that there’s still some capital growth going on.
When I was trying to actively trade stocks I was constantly worried about the daily changes in the stock market and I’d fret over the slightest change in the value of my shares. This would cause me to commit the single biggest failure of the stock market trader- I’d over trade. Not only would I cut my losses before my shares even had a chance to recover, I’d incur all the buying and selling fees without recouping enough to cover my costs.
By buying good quality shares and letting them run you not only save on fees but you also save on sleepless nights. Much better! In my opinion, if you hold shares in a really great company and it’s making money year after year then there’s no point in selling them unless your research tells you that the company is turning into a lame duck. After all, when the famous investor Warren Buffet was asked when is the best time to sell stocks, his answer was ‘never’!
The aim of the game is to make money, and by buying more shares of the company on a regular basis- a technique known as pound cost averaging– whilst also reinvesting any dividends it may pay out, then the value of your portfolio will surely increase. Instead of wanting to get rich quick I’ve chosen to get rich slow. To me, this is what it means to be an investor rather than a trader.
Follow this link to my discussion on Pound Cost Averaging