Trading vs Investing

[Dennis Ng]

There are alot of courses out there that teach Trading. Forex Trading, Option Trading, Stock Trading....

In general, the Max a trader can risk is NOT more than 10% of his/her capital.

Thus, if you have S$1 million, you max risk S$100k. Even if you make 300% returns, your wealth grows to S$1.3 million.

On the other hand, as an investor, I can invest 100% of my money. Thus, if I have S$1 million, I can invest the entire million, I mitigate my risks by spreading my investments, and not put all my eggs in one basket.

Let's say I just make 100% return, I would have reached S$2 million.

Round 2:
Trader trades S$130,000, and made 300% returns again, his wealth grows to S$1.69 million.

I, as an investor invest S$2 million and made 100% returns again, my wealth grows to S$4 million.

Give it a few more rounds, and the further and further the Trader would be behind the Investor, in terms of accumulated Wealth.

All the "sifus" (Multi-millionaires that I got to know and learned investing from) made their Wealth through Investing. None of them became Multi-millionaire through Trading.

As an investor, it is possible to have a full-time business or job and still able to make good money from investing with very little time spent.

I personally grew S$250k to S$1 million in 6 years through investing, NOT trading, and for the reasons stated above I'm not interested to attend any of these "trading" courses, I've attended courses that teaches on Fundamental and Technical Investing though.

Any comments?

[alvin]

I agree. The problem about trading is that the amount a trader can trade is limited by his psychology. How much can he risk without feeling uncomfortable and jeopardize his trades.

Hence, it is normal non-professional traders cannot trade a big sum of money.

That being said, trading can indeed boost your profits. Using a portion of your wealth to trade, you can accelerate the earnings while keeping the rest of your wealth in other areas for diversification.

It is thus alright to trade with small amount of money but as your capital gets bigger than you can handle. You need to invest your money somewhere else so that you can sleep well at night.

[Dennis Ng]

The problem is when you're trading, you are "competing" against the TOP traders in the whole world, there are many Professional Traders employed by large Financial Institutions trading 24 hours a day (on a shift basis).

What is the chance of an average person having a full time job or business being able to Beat such traders in the long run.

In 1996, I had S$5,000. In year 2008, I have S$1 million. My wealth was built not from trading, but from investing. The problem is when you first started, you might only have say, S$50,000, if you further break the money down for Trading and Investing, then the chance of you making it BIG is really very slim.

If people really be honest with themselves, most people like trading becos it is so-called 'Exciting, it is thrilling, and people like to see Short Term and Quick Results.

Investing is pretty boring. For instance, there are times whereby I did not even buy or sell any stocks in 6 months. And there are times I waited 3 years and the stock I own barely moved. However, most of the times, ultimately a cold stock becomes a Hot Stock, and the price can zooms up over 100% in just a few months, while it can be going nowhere for 2 years.

All the sifus I learned from (Real Multi-millionaires), NONE of them Became Rich through Trading, ALL of them became Rich through Investing. And of course, that is my personal experience as well.

The Shorter the Time Horizon, the Higher the Risk. The Shorter the time, the MORE unpredictable prices are, the longer the time, the more Obvious a Trend is, whether Up or Down.

Thus, by Investing, one essentially make use of Time as a Friend to help one Lower One's Risk and Increase One's Odds of Making Money. Trading is the Reverse, the short time frame increase the chance of an unpredictable outcome.

Give you one real life example which happened recently.

A few weeks ago, it is Public Information that Suntec REIT was trading at S$1.04 and its NAV is about S$2 and its dividends is 11.6 cents or 11% Dividends. An investor can simply buy the shares and sit and wait. The same cannot be said of a Trader trading Suntec REIT, who might need to square off position or cut loss over the short term market movement of Suntec REIT which dropped from S$1.13 to S$1.04.

[alvin]

I would say trading is not about competing the top traders. Sometimes it is about "following" the top traders.

Just like we don need to be the best investors in the world but still earn decent profits, traders do not need to be the best traders in the world to gain profits.

I think the most important thing is that a person must know what he/she is doing in the market. Such that there must be an edge to win in the market.

For trading, it is a probability game. Using methods to stack the odds in favor of you. For investing, a method is also needed - using a selection of valuation tools.

I think it is analogous to medical practice. There are Chinese physisians and western doctors. Both aim to treat patients but they may go about doing it differently for the same illness.

[Dennis Ng]

One major difference between Trading vs Investing is the "importance of timing".

In trading, Time is one's enemy. For instance, most traders have very short time frame, eg. day traders who might closed off their position on a daily basis. eg. they bought earlier at lower price and wanted to sell at higher price. If by close to 5 pm, the price is still lower, they might have to cut loss and to close their position.

Weekly traders (traders who trade slightly longer term of weeks) would have to do the same if close to their "time frame".

On the other hand, investors like myself actually typically 90% of the Time get the "timing" wrong.

For instance, in year 2002, I invested all my Opportunity fund, but the markets went down further and only bottomed in March 2003, so I got the "timing wrong" by 1 year. In year 2008, I started buying BIG in Oct 2008 through to Jan 2009, but the markets only bottomed in March 2009. Despite getting the timing wrong, both times I made money.....I made over 200% from year 2002 to year 2007 and in the "2nd round", my stock portfolio is up 40% in year 2009.

Another recent example is I bought UE at S$2.03 and the price drops further after that becos the market as a whole is in correction.

However, if price of UE drops to say S$1.80, do I panic and sell off? Actually, I might do nothing and I might even buy more shares at lower price. Becos when I buy, I bought becos UE shares is "under priced" in my opinion compared to its Asset Value and also compared to its historical high price of over S$4 in year 2008.

And when I buy stocks, I only buy when I'm prepared to hold 2 to 5 years. Thus, I'm not too concerned over short term price movements as long as the market as a whole has NOT changed its Trend (from Bull to Bear) and the company's fundamentals have not deteriorated.

In the last one week, many traders who long would have cut loss. In the last one week, some investors might actually choose to do nothing even though they saw prices coming down.

All that I observed is that all the Singapore multi-millionaires sifus I have ALL of them made millions from investing into Stocks and Property, NONE of them made their millions from trading, and NONE of them depend on things like Option Trading, Forex Trading etc.

Becos in investing, it is possible to get the Exact Timing wrong, but still made money. While for Trading, if you get it wrong, you probably need to cut loss and run.