Every trader has to make a move to be an investor. Here are 4 reasons why I had to make a move and unlearn some of the trading ideologies and learn the art of investing
Trading makes you feel of being involved in the market action which can be exciting and can pump the adrenal. It gives a sense of achieving success (or failure) whereas investment doesn’t give the same feeling of accomplishment and is often boring with no sense of involvement.
I was a trader for a long time and I learned the process of making money on a consistent basis in the market with active trading with price action. But over time I had to make a move from being an active trader to a passive investor.
Here are few reasons why I had to make a move and unlearn some of the trading ideologies and learn the art of investing.
Trading isn’t Scalable
Trading isn’t scalable will be a general statement but it wasn’t scalable at least for me. In absolute terms, the quantum risk increases considerably as we trade with a large amount.
Let me explain this with an example.
Let us say we have 4L Rs in the trading and each position will be in the range of 1 to 1.5L for me. I normally take up positions 1/3rd to 1/4th of my trading account and underleverage than over levarage. In an open position of 1L and with a stop loss of 4% the amount I am ready to lose in absolute terms is 4k.
The same scenario with 20L Rs in the trading account and the 4% stop loss amount becomes 20k which may not be very high for me and still manageable but with 40L, the stop loss of 40k, though it is still 4% of the total traded value, the amount seems too big to risk.
For some the stop loss amount of 40k may be too big for others it may be either 20k or 80k. In either case, there will be an amount too big to risk.
So you can’t scale up your trading account beyond a point. Which means the positions in the market will have to remain the same size to reduce the stop loss amount in absolute terms. It will result in a reduced ROI and can’t generate incremental returns with an increase in capital.
Not Enough Open Positions
When you cannot take up one big trading position so the other alternative is to take up smaller positions but isn’t very fruitful either.
I couldn’t focus on my open trading positions when they were more than 4 at a single point in time. Even with 4 positions, I was more involved in the market action than I would have liked to. So I preferred to have 1 or 2 open positions because having more open positions meant, my other work lost my focus and concentration.
A full-time trader can have lot more open positions but the point is, there is a limit to the number of open position one can focus on at one single point of time in the market as well.
Mediocre ROI Target
As a trader, you aren’t trying to double or triple your money in a single trade and often the best possible targets are in the range of 20 to 25% with a stop loss being of 4 to 8%.
But as an investor, your viewpoint is to invest for the long-term and double the money. The time to double or triple can vary from investor to investor and from one position to other. Some may not be able to achieve it either but the vision of an investor isn’t to make a profit of 20 to 25% which is the most important aspect.
As an example, I made a profit of 50k in a couple of days which was quite handsome (Details here) but if I had hold-on to my position for one year, my investment would have doubled. How handsome it would be? Lots of ifs and buts but an investment position in my open portfolio where I have doubled my investment in under a year and I am still holding my investment position.
I compared both the positions though they are more than 5 years apart is because the very next day when I took the position, both the stock rallied handsomely. I wasn’t too concerned about booking out of my investment and I wasn’t too eager to keep my trading position open. The only change was my varying viewpoint.
Trading can create income but not wealth
Most passive of traders can have a tough time not to look at the charts of the open positions for weeks. A very active of investor may only need to check once every quarter how the company has performed in the near term and is this something which gives them a level of comfort to hold it till the next quarterly result.
The limitation of trading is, you can create a certain amount of money trading but you can’t create a fortune. I could be completely wrong in making such an assessment but this is what I have made of it being in the market for a decade doing both trading and investing.
As a trader, you are the sole reason for your trading wins and losses. Your money isn’t working for you hard enough though it may seem so. Your money needs your active direction all the time and so it can’t help you achieve financial freedom.
My view is, one can start as a trader when they have a limited amount of money to allocate in the market but can devote some time as well. As the money grows, one has to make a move from being an active trader to a passive investor.
If you are already short on time and cannot allocate enough time to market, you shouldn’t be dealing in stocks and go the mutual fund way.
AforArijit BforBanerjee says
Advising others as a passive investor (more precisely investing in mutual fund) and experiencing yourself a trading experience with a long periods clearly indicate you are not successful as a trader. I know many people who spent 30 years or long in stock market and think themselves they are very good in stock market. But in reality, their portfolios say how bad they are in stock market. Trading requires a lot of devotion, learning, commitment and very good money management. It’s not everyone’s cup of tea. 2 more things I need to point out and therefore close my writing:
1) Your analysis precision will always be great as long as your timeframe is smaller. The longer the timeframe, the more prone you are commit to do mistake. You can easily predict if there will be a rain in next 5 minutes or not. Your prediction will be slightly less accurate if your timeframe is 1 hour or so. But, your prediction will be completely inaccurate if your timeframe for raining is next 6 moths or a year and so on. You may say there will be a rain in next 6 months and if that indeed happen, that doesn’t mean your prediction is accurate, rather it’s just a out of luck. Similarly you can quite accurately say what you are going to do in next 1 hour (maybe you will call someone / attend a meeting / having lunch etc) or how you spent your next day. But can you really tell me what you are doing to after 1 year on the same day on the same time? Or can tell me how you spent today on 2018 and next year?
2) Beside trend analysis, investment (passive or active whatever) requires some kind of fundamental research. And for that, you need to primarily depend on Annual / Quarterly report which itself provide by the company. Company can easily manipulate that report whenever they think to do so. Besides we are not participating day to day core company’s core business. And how can you predict what the company will perform after next 3-5 year based on last 2-3 report? Does it really make sense? A government policy / political change / management decision / M&A /new order can turn a poor performed company to a very good one.
So, trading is always good and remain good in future as long as you have knowledge and idea what you are doing. Again most traders are unsuccessful because it needs a lot…lot of commitment. Most think themselves as a trader, but don’t put such commitment. And on the other hand a fairly large percentage of investors are successful. That is completely out of luck for their buy and hold strategy.
Shabbir Bhimani says
Thats a Long comment AB and being a trader for a long time, I will agree that moving from being a trader to an investor was mainly because I couldn’t scale it up. One can say it is because of my methods aren’t as successful as they should be. There is a different perspective and view point to it and I totally respect that and agree to it to some extent as well.
I have always preferred to be transparent to the extent of sharing my contract notes openly. When I did that with trading, it was like a show off and so I had to stop it and with investment, I still share my contract notes but cannot comment on individual stocks because SEBI doesn’t allow it.
1. Actually your analogy with weather / time isn’t perfect and when you take a bigger picture for trading, it becomes much more easy to predict based on charts because you nullify the noise to a large extent. Like for example you can easily identify a breakout on a daily chart than on hourly chart.
2. Companies that manipulate are best avoided and yes I agree in the short run, policies will make lot of different but in the long run, solid business with good fundamental and ethics will prosper. Its hard to find and that is the challenge that one needs to take to make a move from being a trader to investor.
Trading will always remain and should remain and that is part and parcel of market. There is no harm in being a trader as long as it is working for you. At some point it won’t and possibly I have reached a point where it did not made sense to me.
I don’t agree on the luck factors too much and yes luck can help you get from A to B but it cannot get you from A to B to C and ultimately to Z. So yes buy and hold may work but still being a trader, it is quite tough to execute that. I would say it is impossible.
Milind Shripad says
Very good article which touches all traders and investors.
I am also having duel role as investors and reader for short to medium term.
I lost heavily as a long term investor, when I invested for almost 10 years in reliance, few years in sun pharma, cipla, tata motors, glenmark, hcltech , Dr reddy, even though these were A grade stocks.
I think, a stop loss is necessary in long term also but one would loose heavily as stop loss will be far down.
What is your view about this?
At the age of 61 my view is becoming shorter and I am moving my funds to mutual funds.
Shabbir Bhimani says
Yes one should have a stop loss and often people are confused that being a long term investor is more than enough and it isn’t. What you have mentioned I have shared it here with stats – https://shabbir.in/long-term/
All bluechip stocks and remain invested for the long term in one of the best period of Indian stock history and still the returns are subdued or losses.
So investment is not about being long term, it is about being long term in the right stock and at the right price and for the right time. You have to make sure the 3 dimension of the investment matrix is right else it is tough.
Interesting article… My thoughts .. If stock market is considered for secondary income, then one need not be a trader, can be just an investor and create wealth. If stock market is the primary source of income then one need to be a trader to generate income and at the same time also create wealth with a long term portfolio. For full time stock market guys .. it would be better to have a short term portfolio to generate income (based on the needs) and then a long term portfolio to create wealth ..
Shabbir Bhimani says
Completely agree with your views. I think my view is biased to be an investor because I am a part timer in the market.