The Advantages of Investing vs. Trading

Trading seems fun, exciting, exhilarating, etc. so it has a lot of draw to it. And many people won't dig deeper than the euphoric emotion that they feel. However, trading is MUCH harder than investing. And much of the industry is bent towards getting you to trade rather than invest.

After all, if you'll trade often (whether you win or lose), the stock brokerage firm makes far more in commissions. So they win either way. And the market maker in the stock (that sets the bid/sell and ask/buy prices) make far more in spreads (the difference between the buy and sell quote), whether you win on the trade or lose.

So market makers in the stocks and those that broker those trades do very well if you'll simply have a lot of buying and selling going on in your account.

But there are many reasons why trading is not so advantageous for you.

Costs: For instance, let's say a trader and investor want to make $1,000 profit. The trader places 10 trades to try to make $100 each time and the investor buys once until the appreciation is great enough to reap the $1,000. It seems like six in one hand and half a dozen in the other doesn't it? But let's say that the commissions are $7 per trade. The trader has a buy and a sell commission associated with each profit of $100. So it costs them $14 per round turn or $140 in commission costs (not counting all of the additional market-making spread costs that they had as well). Meanwhile, the investor only had commission costs of $14 to get to the $1,000 profit.

Said another way, you could say the trader has to gain $1,140 to end up with $1,000 in profits while the investor has to gain $1,014 to reap the $1,000 profit. So you can see where the trader has a decisive cost disadvantage over the investor to get to the same profit in the end.

Time: The reason why stocks gain over time and sustain those gains are because companies earn more, which commands higher stock prices. And it takes "time" to be able to sell more products or deliver more services. Yet "time" is what the trader doesn't give a stock.

Additionally, the trader has to be right fairly quickly or they'll get stopped out or they'll sell out of the shares at a loss when not right in a very short amount of time. Meanwhile, the true investor DOES have time on their side. The more time they have, the greater chances they'll come out profitable over time and with less commission costs and market making spread costs than the trader.

Competition: Imagine you're in a race. However, they're in a Lamborghini and you're in a VW bug! That's what your laptop, internet connection and brokerage firm's order fill speeds are like relative to what pro traders use. So they're running circles around you. It's like fighting with one arm tied behind your back. And they're laughing at the commercials that infer that "it's a level playing field".

Information: Institutions will always get information quicker than you. Why? They pay dearly for it. For instance...for just one Bloomberg terminal, it costs them $24,000 per year. Bloomberg terminals are known for getting information very quickly when news is released, etc. Why do they pay $24,000? Because they make FAR MORE than what it costs them because they're able to outrun you to the information. Once again, you're at a disadvantage.

Emotions: Believe it or not, many professional traders are right about a third of the time. You may be thinking, "How can they be right a third of the time and make a living that way?" And the answer would be...because they make a ton of money as they "let their winners run" while they cut their losses on the remaining attempts at a profit.

Now...can you imagine a regular trader sticking with a system that was only right one third of the time? They'd think the system was broken. Additionally, if they were wrong twice as many times as they were right, they'd get depressed and quit trading. Yet the pro knows that this very well may be the case for them. And they're not emotional about it.

So imagine, costs being against you...time being against you...competition being stiff...your information lagging, your emotions running rampant and yet you're going to take profits from the pros that do this for a living? And you're Joe plumber by day and novice part-time trader in between jobs and on your lunch break?

Can you see why trading is not advantageous for you (even though it is for your broker and market maker) and how investing is really where the odds tip in your favor?

With investing, you have lower costs than the trader and that's an edge. You have time on your side to allow companies to be able to sell more products and deliver more services so they can increase their earnings and thus command a higher stock price over time.

Much of the competition is down at the short end (where they're trading in fractions of a second) and there's not as much competition in true investing.

You don't need super fast access to data and information since you're investing for years and not hours to days. Additionally, you don't even have to look at your portfolio often as an investor, which saves you from hopping on the emotional roller coaster.

Therefore, there are HUGE advantages to being an investor over a day trader (which opens and closes their trades within that one day's trading session) or even a swing trader (who trades over days to a few months).

The edge goes to the investor, hands down!

God bless!

Great article

1

Thank you, Bekka.

Great article Sean

Thank you. I'm so glad you enjoyed it.

Great article Sean. In your years of study, is there something that you have found to INVEST(not speculate) in that has a shorter time frame than 2-3 years? I am currently holding long options as well as stock for your current picks and I certainly do not want to become a trader. I am really enjoying the new format.

No. Believe it or not, what we do is considered "short-term" for true investing. Most brokers will tell you not to invest what you can't leave in the market for at least 5-10 years. So what we're generating in 2-3 years, typically, is fast for true investing. LEAPS (long-term options) can enhance the returns and can capture similar returns in shorter time frames but also carry more risks since they do ultimately have expiration dates and stocks that are not bought on margin don't have a mandated sell date or expire.

Thanks for the kind words. I'm glad you liked the article.

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