An Investor or a Trader?

Consider these global leaders.

Is Jim Cramer a trader or investor?

George Soros?

Bill O’Neil?

Warren Buffet?

Peter Lynch?
David Dreman?

Steven Cohen?

From another realm:  George W. Bush?  Barack Obama?  (I’ll give you my answers in a later post).

Most people who are not professionals lump traders and investors together into one big group. They don’t understand the major differences between them.

The difference is one of perspective. The investor seeks answers to the question: “What should I buy?” The trader: “When should I buy?” The trader and investor also have different expectations. Investors are thinking about the positives, the returns they will gain, the appreciation they expect to receive from their investments. So they look to maximize the upside. They expect to gain on every investment. So they measure their success in terms of the correctness of their investment decisions. How many went up?

Traders are different; they know that they are going to lose money on a significant portion of their trades, for some traders, even most of the time. They understand that the uncertainty that underlies each trade keeps them from being able to win all the time. So for traders, losing is a normal part of the process. They don’t expect each trade to be successful. The best traders know that uncertainty can bite hard at times, so they focus on controlling risk and keeping the downsides of market uncertainty to a minimum. They focus on containing the negative outcomes. Traders are pragmatic realists. Rather than thinking about how much money they are going to make on a particular trade, they think about all of the ways that a trade can go wrong and how to minimize their losses when the unhoped for happens. Traders think defensively because they know that capital preservation is critical.

In fact, even before they buy, all good traders have a price in mind at which point they will exit the losing trade. Since they expect to lose, they suffer minimal emotional pain when their trade hits an exit point and they have to get out of the loser.

Most investors have no such point. Since they are so focused on what to buy, they spend a lot of time analyzing particular companies. Once they have bought, they convince themselves of the correctness of their logic even when the market tells them otherwise when the price goes down. If a stock is a good deal at $40, it must be an even better bargain at $35, right? Or $30? Or $2?

Investors have their ego invested in their decisions.  They are concerned with what happens for each and every decision. For this reason, it is much harder for the typical investor to change course. A loss becomes an admission that their decision was wrong.

Traders have their ego invested in their strategies, not any particular trade. They are concerned with the long run, what happens over the course of many trades. They change course easily on any given trade because that is what enables them to continue trading.

So which are you? A trader? Or an investor?  Which are the names above?

Tagged as: Investor, Trader