Wait a minute!
Aren’t both the same?
After all, both investors and traders do buy, hold, and sell stocks in the markets. So, how could they be any different?
Well, if you are in the opinion that both investors and traders are the same, it is normal. This is because most people are not aware of such distinction and thus, will not be able to tell them apart. To add into the confusion of a complex topic, like investing and trading, there are individuals who introduce themselves as an investor cum trader who can do both simultaneously.
Meet Zhou Bo Tong
Personally, when I found a person who says that he is an investor and trader, he is, in my opinion, belonging into one of the two categories:
1. He is inherently a stock trader who opines that trading is a form of investing.
2. He is a Zhou Bo Tong.
Who is Zhou Bo Tong?
He is a Chinese fictional character of two popular martial art novels namely, the Legend of the Condor Heroes and the Return of the Condor Heroes. Basically, in both novels, Zhou Bo Tong is a highly-skilled old martial artist, who was trapped in an island owned by a greater martial artist known as Master Huang for a long period of 15 years.
To combat boredom, Zhou Bo Tong self-taught himself the technique of combat by using a certain martial art with his left hand and another martial art with his right hand simultaneously. Think of it this way. If you fight Zhou Bo Tong, he will fight you in such a way that he uses Karate with his left hand and Tai Chi Boxing with his right hand. Impressive, isn’t it?
Thus, a person who says that he can invest and trade at the same time has, as a matter of fact, reminded me of Zhou Bo Tong, a fictional character in novels.
Can’t Anyone Be a ‘Zhou Bo Tong’ in the Stock Market?
Here is my answer:
‘Are you Dr. Jekyll and Mr. Hyde? Do you have a split personality?’
This is because if you are, it would be more likely for you to have better success in becoming both an investor and a trader. The reason is that, if you strive to be a good investor, you would need to adopt the right mindset, skill sets, and tools to do well as an investor. The mindset, skill sets and tools used by a stock trader is very different, or in fact could be a direct opposite, from a stock investor.
Let me explain:
In general, investors like to build long-term sustainable wealth via accumulation of shares of great businesses, which have great business models, great financial results, great management teams and have clear directions to sustain growth in the future. Investors focus on accumulating them if their prices offered are low, cheap or undervalued. To sum it up, a good investment is:
Good Investment = Good Business + Good Price (Low)
Meanwhile, traders aim to profit from stock price movements. Their focus is on having more money, not accumulation of stocks. Their eyes on the money.
So, their objectives from the get-go are very different. It is helpful that you have a clear understanding of what is more important to you: Is it shares or cash that you would like to have from the stock market?
Here, I’ll list down a number of instances that will prevent a good stock investor from making good stock trades or vice versa. They are as follow:
1. Methods of Selecting a Good Stock
What a good stock is to a stock investor may not be good to a stock trader. They would likely have different views on the same stock as an investor will study the stock differently from a trader.
For instance, an investor may view a stock to be good, if it has a strong business model, an economic moat, stellar financial results and have plans to expand for the future. Hence, he will spend time reading through a stock’s annual reports, quarterly reports, investor’s presentations, press releases, and announcements to assess the fundamental qualities of a stock. You could be spending hours and days to study through these documents before deciding on 1 stock.
Why? This is because an investor would like to own the stock for a long time. As for a trader, he is likely to hold onto a stock for a shorter period of time, such as a second, a day, a week, a month, few months, or anything below 1 year. In that case, would it be practical for the trader to study in detail on just 1 stock before he makes his trade?
2. Average Down or Cut Loss?
Let’s turn back time to March 2020, when we had a stock market crash.
What will you do when the price of your stocks are moving southwards?
Typically, if you are a stock trader, you will most likely cut your losses as you will put in stop-loss orders for your stockholdings to ‘protect your downside’.
But, if you are an investor, you will see the crash as an opportunity to hunt for a series of bargains for stocks in your watchlist as you intend to accumulate them for the long-term.
Of course, a Zhou Bo Tong would say that he can time the market with accuracy so that he can sell off his stocks before the market crash and eventually buy the stocks back at large discounts and hence, amassing more shares of these stocks from the stock market. An incredible feat, indeed! So, can this be achieved?
Here is my answer: ‘Ask Zhou Bo Tong’
3. Conflicting Criterias and Signals
Let’s say, you intend to be a stock investor cum trader.
You found a stock that is trading at a very high P/E Ratio and low dividend yield. But, based on your preferred technical indicators, they reveal strong buy signals on it. Will you buy the stock?
You found a good stock that you love to keep for the long term. It is trading at a low P/E Ratio and is offering a high dividend yield. But, the price is depressed in the present and your preferred technical indicators reveal strong sell signals for the stock. Will you buy the stock?
What if the two scenarios stated above happen simultaneously and at the point in time, you have enough capital to buy 1 of the 2 stocks above?
Which of the two will you go for?
Conclusion: A More Practical Approach to Investing or Trading
This is especially, if you are new to the stocks and sincere in building something concrete from the stock market as a long-term player. I believe, if that is you, I’ll encourage you to first understand yourself by knowing what you intend to have or achieve from your participation in the stock market. In that light,
a. Learn to be a Good Investor, if you want to invest.
b. Learn to be a Good Trader, if you want to trade.
c. Find Zhou Bo Tong, if you want to be an Investor cum Trader.
As such, my personal view is to the above is this –
Nope, I don’t believe that a good investor can be a good trader simultaneously. This is because the personalities of the two are too vastly different.
What do you think? Maybe, you can post your comments on the topic below: