| | | Thursday, August 27, 2015 | Issue #2618 | |
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The Difference Between What Traders and Investors Should Do Now Alexander Green, Chief Investment Strategist, The Oxford Club
 Over the last couple weeks, the market has rallied, plunged and rallied again.
Should you buy into this craziness right now? That depends on whether you consider yourself a trader or an investor.
There are a lot of opportunities out there right now for medium- to long-term investors. But it looks dicier for short-term traders.
Let's start by defining our terms.
An investor strives to earn returns that are measured in years (or decades) and generally ignores short-term fluctuations. A trader, on the other hand, measures his returns in weeks or months. He doesn't ignore short-term fluctuations. He seeks to capitalize on them.
(A speculator, in my view, is someone seeking high returns but who is willing to take on a lot more risk - including complete loss of principal - in order to earn them. I would put option traders, penny-stock buyers and venture capital investors into this category.)
How can the same stock - at the same time - be a great buy for an investor but a poor one for a trader?
Look at it this way. Imagine that you are trying to swim across a bay. You have a choice. You can swim when the tide is against you or you can wait and swim when the tide is with you.
Obviously, it would be easier (and safer) to swim with the tide.
Right now there is no tide in the market, only rip currents. Sophisticated traders - like experienced swimmers - know this is no time to jump in.
Sure, you could get lucky and buy something just before it rallies. But you could also see it brutalized a few hours (or a few minutes) later.
Investors, on the other hand, have the luxury of time. Since they are investing to meet financial goals three, five or 10 years out (or longer), it really doesn't matter whether the market - or the stock they just bought - plunges.
Yes, there is the psychological regret of knowing that you bought a stock at $32 that is $24 two days later. But if you truly bought a great company, time heals wounds like this. A few years from now, it probably won't matter.
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Prices fluctuate more than values. This is the key point. The liquidation or ongoing business value of a company doesn't change nearly as rapidly as its daily share price, especially in times like these.
Great stock pickers follow a similar formula. It doesn't matter whether they | "Prices fluctuate more than values. This is the key point. The liquidation or ongoing business value of a company doesn't change nearly as rapidly as its daily share price, especially in times like these." | |
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use a growth methodology or a value methodology. They make an independent calculation of what a company is worth based on sales, earnings, cash flow, dividends and prospective profits. Then they check the market price.
If the stock is trading above their valuation, they give it a miss. If it is trading at a substantial discount to this valuation, they generally buy.
It makes absolutely no difference whether the market's next move is higher or lower because they aren't looking to sell it short-term anyway.
A long-term investor buys based on known facts and reasonable projections. If the market acts silly in the near term, he may have an opportunity to buy more at an even better price.
He averages down to lower his cost basis. And if he's right, his eventual gains will be bigger still.
Why can't a trader do this? Why doesn't he jump in and then average down?
The difference is the time horizon. If you're a short-term trader who is looking to lock in a fast profit and then move on to something else - presumably something better - you don't want to put yourself in a hole where your short-term losses mount.
The short-term trader needs to wait until he can swim with the tide again. Or at least until the rip currents are gone.
When market participants become emotional - as they have over the last couple weeks - prices get distorted. Sometimes wildly so.
That's a green light for investors... but a flashing yellow one for traders.
Good investing,
Alex
Editorial Note: In these markets, the idea of closing a big triple-digit gain may seem impossible. But as Alex explained above, it's that sort of thinking that separates traders from investors. If you're willing to adopt a long-term view, he can show you a simple and direct route to achieving true financial liberty. All that's required on your end is a few minutes a day. With that, Alex can teach you how to build a multimillion-dollar portfolio starting from zero. Interested? Click here to learn more.
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Protecting your capital is vital when markets crash. But what if you could make a quick 10% or 20% when they do? There's a strategy for that. Read On... | |
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If you were a day trader, the market's big drop was a gift. For everyone else, it was frustrating and insane. But there are some important lessons to be learned. Read On... | |
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For investors looking to get into discounted - yet high-value - stocks, down markets are a blessing. Today, Investment U Plus subscribers are discovering an in-demand organic food company that's taken a hit and is now officially "on sale." To find out how you can get all the details, click here. | |
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