The Case For: Why Investing Is Better Than Trading

Have you ever been accused of being anti-trading? That is like saying you're against major league baseball pitching. Unless they are pitching against the Orioles, most folks are against people trying to pitch in the major leagues that don't have the athletic ability, specialized knowledge and physical capability to take the bump on any given night.

Haters Gonna Hate

I have among my friends and acquaintances several wildly successful traders. I am talking big mansion, jet setting, and multiple vacation home successful. I have a few others that earn a more than decent living as traders. They trade a bunch of stuff among them including S&P Futures, binds, grains risk-arbitrage, options and stocks. All these folks share a few things in common:

• They are really, really good at math
• They have deeply specialized knowledge about the markets they trade
• They have enormous computing power and deep databases of the knowledge and information needed to understand their markets
• They work at it full time and then some
• They are in front of the screen all day and then spend many more hours testing and acquiring deeper knowledge about what they trade
• They are incredibly disciplined and have the financial and emotional ability to sustain enormous losses
• They are the Major Leaguers of the market

In contrast the army of wanna-be part-time traders armed with chart books, a protractor and a dream are even qualified to pitch a few relief innings in the local softball league. Novices cannot do what the experts do any more than they pitch for the Orioles against the Red Sox this season.

How 'They' Win On Your Dime

All your attempts at going to work every day, living life, enjoying family or enjoying vices given certain preferences in life, and then successfully day or swing trading the markets are merely making the Major Leaguers richer. No matter how much you might want to be an instantly successful trader, the simple truth is you cannot. I am not against trading, I am against people without the temperament, skill set and specialized knowledge attempting to trade the financial markets.

Don't Get Discouraged

That's doesn't meant you cannot make money in the markets. My own research as well as that of folks far smarter than I clearly demonstrate that there are ways for the individual investor to make money – lots of money - in the stock market. I can't speak much about the momentum approach to beating the market as it is way outside my knowledge and skill set, but I can talk about some of the others. Investors who focus on buying stocks below liquidation value and those that trade below net current asset value should do pretty well most of the time. Add in community bank stocks with strong loan portfolios and balance sheets that trade below 90% of book value and things get even better. Now add in a habit of stockpiling cash until there's a substantial price decline and using it to buy high quality companies at huge discounts. Using this approach will make you a big buyer near market bottoms. As markets top, investors will be selling lots of positions as stocks become overvalued and there will be nothing to buy, so cash balances will increase adding to an already large stockpile. While it may be frustrating to sit with cash as the market enters the final stage of a bull market when the inevitable happens and everyone is running from the market as hedge funds and levered traders puke out margin class all over the Street, the value investor will be in a unique position to be the buyer of last resort.

Be Forewarned

There won't be buying and selling every day. Most of the time, these investors will own illiquid smaller stocks that no one has ever heard of and will be holding these stocks for a long time. When talk at the cocktail party and backyard BBQ turns to short-term market movements and super exciting fad stocks you will be the most boring guy in the room. In short you will don't the exact opposite of what the research shows us makes individual investors perform so poorly. The broker will not be your friend. He or she will NOT be giving you tickets to the big game as a 'thank you' for all the business. In fact, the broker will most likely suggest that you take your business elsewhere since turnover is so minimal. But history and experience tells us that the odds very much favor building a very nice net worth with this type of patient disciplined focus to investing in the stock market. As a bonus, value investors will have more time to do the things you love to do and give the protractor to some poor kid struggling with first year geometry.