Brett Steenbarger talks about how the psychology of traders differs vis-a-vis investors. Investors, he says, have a different way to approach markets – a long term research based strategy rather than pattern analysis of the short term trader. One interesting thing he notes is:
To understand the psychology of investing, it’s helpful to look toward other areas of life in which we invest ourselves, such as relationships and careers. Can you imagine what would happen if we were to take a “trading” perspective on relationships or careers? We would set a close “stop loss” and exit the relationship or career whenever that was hit. No doubt, we’d wind up with an impoverished love and work life as a result. To sustain a romantic relationship or a successful career, we have to be able to ride the ups and the downs and remain rooted in our commitment despite difficult times.
The more I think about it, the more I begin to realize how this differs with the world around me. People have started to “trade” jobs and careers – I routinely scan resumes that have over two jobs for every year worked. People still “seem” to be committed to relationships, yet I’ve seen enough “trading” psychology in that area too. I think the Indian short-term mentality has started to permeate into other things where it shouldn’t, like relationships and careers.
I’ve often heard advice from short-term traders: “Don’t get married to a position.” Investors, however, do enter into a kind of marriage: a marriage with their basic approach to markets. Frequency of exposure drives the rapid pattern recognition of the scalper, but it is depth of conviction that enables investors to stay their course.
Brett refers to short term as typically a day to a month, and investing as pretty much anything longer than that, I presume. To me the concept of trading is interesting, but I’m looking at talking about investing – that is, identifying a strategy and sticking to it with discipline.
You might think this involves staying with stocks despite their worst performances. Not really. I give stocks the chance of going down 20% below my buy price; and I will buy more at lower prices if the fundamentals remain buoyant. Yet, I will do this only one or two times; if the stock slides more this is an immediate feedback that my fundamental analysis may perhaps be wrong. After all, the regulation here is lax and information is not evenly distributed, so some people may know more than the general public.
I think there is one important difference between a trader and an investor: the former expects an income, and the latter, capital appreciation. One works for cash flow, and the other looks to build assets.
Think of it as the difference between taking a job with a high salary versus one with no salary but you share profits at the end of the year (or two years, or even five years).
