Investor type 3: the vigilant, no-nonsense, realistic trader
March 19, 2011
WE HAVE had a look at income investors and value investors. This week we look at another potentially adoptable self-managed super trustee identity, the "trader".
Most of you have already stopped reading this article because the expression ''trader'' conjures an image of someone who spends a ridiculous amount of time in front of an online trading screen kidding themselves that they can cut a living out of short-term price movements. It's gambling, isn't it? And we're smarter than that aren't we? Or are we?
The truth is that traders are almost certainly the better investors, because they have structure, a plan, market knowledge, discipline and vigilance. All the things the average happy-go-unlucky investor doesn't have.
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Trading is one of the few approaches in the market that is honest, in that it does not presume to predict the future. Its mantra is simply to enter trades that have a high probability of succeeding and, when the trade goes wrong, there is no faffing about - no debate, no questioning, no analysis and no blame - just a closed trade.
And trading is realistic. It negates pride and denial because getting it wrong is expected when trading, and getting it right is not a matter of "pride", it is a matter of probability. Trading success is based on the hope that a trend will extend on the understanding that the trend could change at any moment and in the knowledge that if it does change and go against you, you act, you don't wallow in a debate about whether you are still right.
And it may interest you to know that, contrary to popular belief, trading is not necessarily short term. You can establish trading systems for any time frame of investor. Whether you are trading daily or investing for the long term, the methods are the same, it's just the settings that narrow or lengthen. In fact the mindset between a trader and an investor is a lot closer than you might think because both set out to buy a stock that goes up forever. Traders would love nothing more than to buy a "portfolio" of blue-chip stocks that they never had to sell again. The difference is that when they do eventually fall over, the trader sells while the investor ignores it, sticks his head in the sand and, encouraged by most financial advisers, holds and hopes.
Those are some of the good bits, but it's not all roses. There are a few major problems with trading. For instance:
■Before you gain an "edge" you will need a time-consuming education. There are some great educators in Australia and I'm not talking free seminars from product sellers.
■To do it properly is almost a full-time job. This will catch most of you. Most of us don't have the time to trade. You have to make it your hobby and love it. It's not something you want to do out of necessity.
■There are a lot of charlatans selling education as a hook to sell you product. To survive you will have to navigate a minefield of free product pitches (trading seminars) designed to convince you that you can fly (trade). Enough to get you to jump off a cliff, anyway. Trading is harder than farming, but when did you last see a free two-hour seminar on farming?
■And finally, before you can embark on the crusade let me tell you, without time and interest you will not stay the course and more likely you'll have to be put down at the third hurdle.
But the best news is that the techniques of trading are now a well-documented commodity and very accessible, and a $35 book is all you need to invest in to find out whether you are interested. Beyond that, for those of you interested, the rest of the education is relentlessly stimulating, ever evolving and your results are oh so easily measured.
A trading culture should be a goal for any and every type of investor and it is a wonder that anyone that hasn't had the education ever attempts to make money in equity markets at all.
Marcus Padley is a stockbroker with Patersons Securities and author of sharemarket newsletter Marcus Today
. For a free trial, go to marcustoday.com.au. His views do not necessarily reflect the views of Patersons.