Investing Or Trading. Which Approach Is Better

Posted on Posted in Weekly Featured Articles


By John Yii

Investing traditionally refers to buying a stock or other financial instrument for a longer period of time, typically over 6 months to one year or longer. Good investment opportunities often makes use of fundamental analysis, such as price –earnings ratio, return of equity etc.

Fundamental Analysis is the study of economic, industry and company based information. It is used to picking the stocks that are the best performing in their industry or economic sector. Banks, brokers and fund managers have many full time specialists studying fundamentals. It has its limitations. It requires extensive industry knowledge and a mass of information. It is subjective and very much a matter of judgement because part of the analysis has to base on some assumptions which may be risky. Sound fundamental business of the company is the key drivers of the share price and therefore using solid fundamental analysis can help greatly in investing.

 Trading typically refers to buying and selling stocks or other financial instruments for shorter periods of time, typically range from a day to 3 months. Assessing good trading opportunities normally makes use of trading systems or technical analysis. Technical analysis is the study of price history to identify common patterns or changes in trend to forecast future price movements.

One of the great advantages of trading is that you can "do it yourself". Technical analysis for trading is now a very accessible and convenient. You do not need a broker because you can do online and trade at home and it suits majority you have independence.

The main advantage of trading over investing is that it provides the ability to make money regardless of the overall direction of the market or the price of an individual stock. Trading with technical analysis do not need vast amount of information and its beauty lies in the fact that it does not presume to predict the future. It is purely based on price and volume that display on the chart.  But it involves lot of mental toughness and discipline. Before you have a breakthrough in trading, you will need a time-consuming education and lots of hurdles. Frustration and despair is very common among traders.

NO DIFFERENCE BETWEEN LONG TERM INVESTING AND SHORT TERM TRADING. But trading approach is better than investing in times of volatility and uncertainty

It may sound hilarious when I say that there is no difference between investing and trading nowadays if you consider the big risks in long term investing. That is a hard truth in the current investing and trading environment. Both approach have the same goal to make profit . The only obvious difference is the time required to put the money at works.

The Intelligent Investor by Benjamin Graham, first published in 1949, is a widely acclaimed book on value investing, an investment approach Graham began teaching at Columbia Business School in 1928 and subsequently refined with David Dodd. Famous investor Warren Buffett described it as "by far the best book on investing ever written",a sentiment echoed by other Graham disciples such as Irving Kahn and Walter Schloss. Source : Wikipedia .

In The Intelligent Investor , he clearly draw a line between investing and trading . He quoted "We do not hesitate to declare that this approach is as fallacious as it is popular."

The financial system in his time has undergone a lot of big changes to the present system which is designed to benefit the big players in the wall street . In fact , the financial system has been so corrupted and thus investing environment become very hostile and uncertain .

Think about what happens to the following market crash events after his book was written in 1949 and also think about your superannuation return in the last 10 years . If you take your own calculated inflation figures ( not government cooked number) , your yearly return probably is settled around 3% per annum which is far below the normal acceptable return of 8% per annum.

If you think carefully about this two hard facts , you may start to understand better and agree with me trading ( for short term ) is better than long term investing .

Major crash events – not good for your long term investing

1973–1974 stock market crash (U.K.) 1 year Dramatic rise in oil prices, the miners' strike and the downfall of the Heath government.
Silver Thursday March 27, 1980 Silver price crash
Souk Al-Manakh stock market crash
Black Monday October 19, 1987
Friday the 13th mini-crash October 13, 1989 Failed leveraged buyout of United Airlines causes crash
Japanese asset price bubble 13 years Share and property price bubble bursts and turns into a long deflationary recession.
Black Wednesday September 16, 1992 The Conservative government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism (ERM) after they were unable to keep sterling above its agreed lower limit.
1997 Asian financial crisis July 2, 1997 Investors deserted emerging Asian shares, including an overheated Hong Kong stock market. Crashes occur in Thailand,Indonesia, South Korea, Philippines, and elsewhere, reaching a climax in the October 27, 1997 mini-crash.
1997 mini-crash October 27, 1997 Global stock market crash that was caused by an economic crisis in Asia. The points loss that the Dow Jones Industrial Average suffered on this day still ranks as the seventh biggest point loss in its 114-year existence.
1998 Russian financial crisis August 17, 1998 The Russian government devalues the ruble, defaults on domestic debt, and declares amoratorium on payment to foreign creditors.
dot-com bubble March 10, 2000 3 years Collapse of a technology bubble, world economic effects arising from the September 11 attacks and the stock market downturn of 2002.
September 11 September 11, 2001 The September 11 attacks caused global stock markets to drop sharply. The attacks themselves caused approximately $40 billion in insurance losses, making it one of the largest insured events ever.
Stock market downturn of 2002 October 9, 2002 Downturn in stock prices during 2002 in stock exchanges across the United States, Canada, Asia, and Europe. After recovering from lows reached following the September 11 attacks, indices slid steadily starting in March 2002, with dramatic declines in July and September leading to lows last reached in 1997 and 1998.
Chinese correction February 27, 2007 The SSE Composite Index of the Shanghai Stock Exchange tumbles 9% from unexpected selloffs, the largest drop in 10 years, triggering major drops in worldwide stock markets. (Forbes) (BBC) (Xinhua). (February 27, 2007)
United States bear market of 2007–2009 October 11, 2007 – June 2009 2 years The Dow Jones Industrial Average, Nasdaq Composite and S&P 500 all experienced declines of greater than 20% from their peaks in late 2007. [1]
Financial crisis (2007-present) September 16, 2008 On September 16, 2008, failures of large financial institutions in the United States, due primarily to exposure of securities of packaged subprime loans and credit default swaps issued to insure these loans and their issuers, rapidly devolved into a global crisis resulting in a number of bank failures in Europe and sharp reductions in the value of equities (stock) and commodities worldwide. The failure of banks in Iceland resulted in a devaluation of the Icelandic krona and threatened the government with bankruptcy. Iceland was able to secure an emergency loan from the IMF in November. Later on, U.S. President George W. Bush signs the Emergency Economic Stabilization Act into law, creating a Troubled Asset Relief Program (TARP) to purchase failing bank assets. [2] [3]
Dubai debt standstill November 27, 2009 Dubai requests a debt deferment following its massive renovation and development projects, as well as the late 2000s economic crisis. The announcement causes global stock markets to drop. [4]
European sovereign debt crisis April 27, 2010 Standard & Poor's downgrades Greece's sovereign credit rating to junk four days after the activation of a 45-billion EUIMF bailout, triggering the decline of stock markets worldwide and of the Euro's value, and furthering a European sovereign debt crisis. [5][5][6]
May 6, 2010 flash crash May 6, 2010 The Dow Jones Industrial Average suffers its worst intra-day point loss, dropping nearly 1,000 points before partially recovering. [7]

The late-2000s financial crisis (often called the Credit Crunch or Global Financial Crisis) is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s.[1] It was triggered by reduced interest rates (due to the perceived deflation risk), followed by easy credit, sub-prime lending, increased debt burden, incorrect pricing of risk, and finally a liquidity shortfall in the United States banking system.[2] This resulted in the collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. In many areas, the housing market has also suffered, resulting in numerous evictions, foreclosures and prolonged vacancies. It contributed to the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, and a significant decline in economic activity, leading to a severe global economic recession in 2008.[3]

The collapse of the U.S. housing bubble, which peaked in 2007, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally.[4] Questions regarding bank solvency, declines in credit availability and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined.[5] Critics argued that credit rating agencies and investors failed to accurately price the risk involved with mortgage-related financial products, and that governments did not adjust their regulatory practices to address 21st-century financial markets.[6] Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion and institutional bailouts.

The repeal of the Glass–Steagall Act of 1933 effectively removed the separation that previously existed between Wall Street investment banks and depository banks. There is some debate as to what role the repeal of Glass–Steagall had on the late 2000s financial crisis.[7]

Although there have been aftershocks, the financial crisis itself ended sometime between late 2008 and mid-2009.[8][9][10] While many causes for the financial crisis have been suggested, with varying weight assigned by experts,[11] the United States Senate issuing the Levin–Coburn Report found “that the crisis was not a natural disaster, but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.”[12][13]

Both market-based and regulatory solutions have been implemented or are under consideration.[14] Source : Wikipedia

All the above events are man-made .It reflects conspiracy, manipulation or greed practice or whatever you call – simply this is evil.  Human being is a highly intelligent created being but could not foresee or regulate the systems. And government could not do anything about them before they implode. Don’t you think this is hilarious!

You may argue that Warren Buffet is still doing well in investing for the last 20 years. Do you know the hard facts about?

1. He finds it tough to get the same usual return since the last 10 years

2. There is only one Warren Buffet (billionaire value investor) in the entire world population of 6.77 billion people with a special talent in long term investing

3. In 2007 AGM of Berkshire Hathaway , he told the investor if he were to start all over again in investing with a small sum of money , he would put his money in small stocks that wall street would not cares about . What he means is that he would put his money in a small company with high risk of growth. This is a speculation game, carries more risks than short term trading and long term investing.

4. Warren has had one of the longest and most successful stock market trading careers of all time. While he's considered the "world's greatest value investor," there's another side to Warren that is not very well known by most people. Although he has gained recognition for his value investing approach to the markets, the fact is that nobody -- over the past fifty years -- has traded and invested with a more diverse group of stock market trading strategies than Warren.


Three great advantages of Short term trading:

1. You can minimise the risks of big loss in any financial crisis by trading in and out. What you need is: winning trading system, laser-focus strategy.

2. You can leverage your capitals and profits in and out by trading variety of stocks in a short time frame without jeopardising your hard earned dollars in market crash

3. You tend to make more money by recycling your capital and profits and thus creating bigger compounding effect.

Thomas H. Keep Jr., is President and CEO of Stock Traders Daily and author of 'Buy and hold is dead-How to make money and control risk in any markets? In the book he, pointed out that over the past 10 years, all major averages are negative. Buy and hold have all lost money and given the current and future environment which is very uncertain; this pattern is likely to continue for many coming years. It is a warning here – do not rely on fund managers or brokers to tell you to stay invested at all times for the long run.

Conclusion: I believe that in long term investment, you need to consider timing cycle entry. This is simply because you can maximise your return if you are able to buy in during the cycle bottom. For example, for those who buy in during the peak time in 2007-2008 (before GFC), it takes them 4 years to breakeven till today. For those who buy during the cycle bottom in March 2009, the next 4 years return are really great.

In time of uncertainty, the best is to invest in shorter time frame. However, trading is risky and may not suit most of the people.

Share This :

Leave a Reply

Your email address will not be published. Required fields are marked *