Investors and traders buy, hold, and sell stocks in the markets. So, how could the two 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 to the confusion of a complex topic like investing and trading there are individuals who introduce themselves as an investor-cum-trader.
Personally, when a person says that he is an investor and trader, he belongs in one of these two categories:
- He is inherently a stock trader who opines that trading is a form of investing.
- He is a Zhou Bo Tong.
What or who is Zhou Bo Tong?
He is a Chinese fictional character in two popular martial art novels called ‘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 15 years.
To combat boredom, Zhou Bo Tong taught himself a certain martial art technique with his left hand and another with his right hand.
Think of it this way. If you fight Zhou Bo Tong, he will use 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 is similar to the fictional Zhou Bo Tong.
Can’t anyone be a ‘Zhou Bo Tong’ in the stock market?
If you are Dr Jekyll and/or Mr Hyde (split personality), then yes, you can be both an investor and a trader.
If you strive to be a good investor, you would need to adopt the right mindset, skill sets, and tools. However, the mindset, skill sets and tools used by a stock trader are very different, and in fact, could be a direct opposite of a stock investor.
Investors versus traders
In general, investors like to build long-term sustainable wealth via the accumulation of shares of great businesses. Investors focus on accumulating them if their prices offered are low, cheap or undervalued.
Meanwhile, traders aim to profit from stock price movements. Their focus is on having more money, not the accumulation of stocks. Their eyes are on the money.
It is helpful to 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?
To break it down, here are what investors and traders would do differently in different situations.
- Methods of selecting a good stock
An investor may view stock to be good if it has a strong business model, an economic moat, stellar financial results and has plans to expand for the future.
Hence, he will spend time reading through a stock’s annual reports, investor’s presentations, press releases and announcements to assess the fundamental qualities of a stock. 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. It could be a few months to anything under a year. In that case, would it be practical for the trader to study stock in detail before he makes his trade?
- 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.
- Conflicting criteria and signals
In one scenario, you find a stock that is trading at a very high P/E Ratio and a low dividend yield. But, based on your technical indicators, they reveal strong buy signals on it. Will you buy the stock?
In another scenario, you find 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 only one?
Which of the two will you go for?
Conclusion
If you are new to the stocks and sincere in building something concrete from the stock market as a long-term player, try to first understand yourself by knowing what you intend to have or achieve from your participation in the stock market.
Simply put:
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.
This article first appeared in kclau.com.
Ian Tai is a financial content machine, dividend investor and author of over 450 articles on finance featured in KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’, and ‘Small Cap Asia’ in Singapore. He is a regular host and presenter of a weekly financial webinar with KCLau.com.