Trading vs. Investing

Trading vs. Investing

| February 16, 2021

I remember just a few months ago really looking forward to 2021.  I had so many expectations for the new year.  5 weeks in and it feels very similar to 2020.  Including all of the volatility within the financial markets.  The 2020 shutdowns sent shockwaves to the markets in the Spring.  In-fact it was one of the fastest periods in which the stock market fell into and recovered from a Bear Market.  This year, we are seeing a wave of small investors "fighting" against Hedge Funds by buying up stock where funds are betting against that company's business.  With so many headlines on Gamestop and AMC; I thought it would be good to discuss the difference between trading stocks and investing in stocks. 


At its core, Trading's primary goal is to generate income for the trader.  They tend to look for volatile stocks that might be underpriced in the short term.  The trader would buy the stock at x and sell it a y for hopefully a profit.  The "trade" typically has very little to do with the long-term prospects of the company and if it will be a good investment over time.  Additionally, I view trading as more of a job.  You are constantly trying to find the next trade in order to create an income for your short-term needs.  Also, this type of strategy leaves the trader vulnerable to significant losses if they are on the wrong side of a trade.     


This is obviously very different than investing where the intention is to be invested in companies that have strong business models and expect to generate profits in the future.  With that in mind, this is why we have the different buckets for the clients we manage money for.  The next 10 years of cash needs are either cash or non-stock investments to provide stable income.  This allows us to take the long-term approach and be investors for our clients in-lieu of traders.  This is a fundamental principle in our firm and will continue to be as we believe it leads to the best long term outcomes for our clients. 


I anticipate many more headlines of individual stocks rapidly climbing and falling over the remainder of this year as this type of trading is garnering a lot of media attention.  I believe another big reason for this is because of the shutdown.  People have a lot of free time on their hands to explore new ideas, especially ones that you can do in the comfort of your home.  I read a recent statistic that stated that close to half of the traders in the Gamestop stock were brand new to investing.  That could help explain why some of the fundamentals have been thrown out the window and no price is too high for the stock as the wave will continue. To top it off, many people who have the ability to work from home have also received extra stimulus over the last year.  In my mind I am wondering if they view this gambling money and since the casinos are not as available, why not throw it in to some penny stocks!