10/07/2020
Do you want to be a TRADER OR AN INVESTOR? There are many ways to make money in stocks, and one crucial aspect is understanding one’s personality. Do you look at big stock moves on a daily basis and wish you were able to rapidly move in and out from one stock to another? Then you may have a trader/speculator mentality. Or do you prefer to buy and hold a few positions, not pay attention to market gyrations, and let your holdings compound? Then you may have more of an investor mentality.
Perhaps the archetype of the trader is Steve Cohen, of SAC Capital, now Point72. His firm famously generated ~30% annual returns from 1992–2013, impressive performance that is likely in the top echelon of fund managers. Cohen is widely known as a stock picker who used a deep understanding of trading with a dose of fundamental analysis to regularly increase/decrease long and short positions to drive performance. Some view Cohen as a sort of human quant, though admittedly he evolved his approach. For portraits of Cohen, see Vanity Fair and Bloomberg.
Perhaps the archetype of the investor is Warren Buffett. Put simply, Buffett thinks of buying a stock as buying a piece of a business. And his decisions to buy a stock depend more on an assessment of the quality of the business, its potential to generate cash flow, and his determination of its intrinsic value relative to its price.
As Buffett puts the distinction between traders and investors, for traders:
“…the focus is not on what an asset will produce but rather on what the next fellow will pay for it…” (see here). Depending on your mentality, that could guide you on how you think about making stock buying decisions. Both approaches entail an expectation about market and company dynamics. You may buy TSLA because you read that a lot of retail investors are entering the market and pushing that stock up and think that that momentum will continue. Or perhaps you anticipate that sell-side analysts will continue raising their price targets. That could be a trading approach. You might buy AAPL because the company exhibits numerous positive attributes — barriers to entry, high margins, sticky products and high ROC. That could constitute more of an investment-minded approach.
As Prof. Damodoran of NYU, the so-called “Dean of Valuation,” puts it, traders focus on measures including P/E multiples, which are commonly thought of as valuation measures, but that he instead prefers to categorize as “pricing.” In contrast, investors often focus on “valuation,” which he characterizes as cash flows that come in vs cash flows that go out. Listen about 8 minutes in here.
The lines between traders and investors can sometimes blur — some take longer-term views that are like that of an investor, but tactically modify their positioning in the short-term like a trader.
Both approaches can work.
