I have been reading with some concern about the high stakes speculative trading of late. Since COVID, we’ve noted the growing number of younger people locked up at home, combining spare time with record levels of stock market volatility. Sharing “quick win” stock tips on social media has led to record levels of new investors buying and selling stocks, hoping for a big win. Clickbait titles of investors returning +380% from a single trade has even Warren Buffett sounding the horn of alarm.
Especially as a firm that loves social media, we don’t want to sound stodgy, but is this really sustainable, advisable or necessary? We think not. Actually, we’re big believers in long term investing.
So what is the difference between trading and investing?
It’s easy to think trading and investing are the same thing. They both involve buying or selling and asset, often shares, bonds or options. But in truth the difference between the two come down to three key factors: mindset, risk and time horizon.
Time horizon refers to the length of period the trader/investor looks to own and monitor the asset. Short term speculative investors can often buy and sell the share or option within a few days or less. They’re so sensitive to short term movements in the market that they will be glued to their computer screens, riding on the seat of their small number of big bets. They’re less concerned with the longer term prospects of the asset they own but how the value of it will rise and fall with every change in economic data or tweet by Trump. Nerves of steel are required and the stakes are high, especially for people new to investing who are essentially competing with professionals in the market.
Investing, as we see it, is about the long term. A minimum of 3 to 5 years. The idea is that as investors we own assets that will have their valuations shaped by the value added by that company and its management as well as long term economic forces and trends. The investment analysts of our funds will often forecast the valuation of the shares they invest in for years into the future, and will update those forecasts as economic and corporate expectations change. If you are looking forward over 5 years, does the minute to minute movements of a share price, or a Trump tweet really matter?
You can still participate in the financial markets without gluing your eyes to your phone and while still sleeping at night. Our Active ETFs allow investors to invest in a portfolio of shares or fixed income where professional investors manage the composition of the portfolio to achieve their targeted long term returns.
Two key factors separate the traders from investors when it comes to risk: Diversification and options. Trading options is inherently risky, as they can amplify both gains and losses one experiences with each point movement in share or commodity price. Not for the faint of heart.
Diversification is your friend when reducing risk. It’s the simple “don’t put all your eggs in one basket” approach. Active ETFs are diversified portfolios that you can trade just like a single share
Typically, prudent long term investing will require a detailed analysis of a company’s fundamentals. Theses can be found in in annual/semi annual reports, and are analysed in detail by fund managers, brokers and research houses. In our eInvest Income Generator Fund (EIGA.asx) we tend to look for companies with strong balance sheets, excellent management, diversified earnings base, minimum net interest coverage 3.0X and a strong track record of profitability.
A trader will tend to look at much more short term signals such as tweets, intraday movements, gut feelings, trend lines. These are not fundamental signals, but rather flashes in the pan.
Investing, as we see it, is being a real asset owner. That is, caring about the long term value creation of asset, resulting in corresponding increasing financial valuations. It’s about creating new jobs, new technologies and products. Long term drivers such as sustainability (a core driver of ASX:IMPQ), can only be tapped into through long term engagement with companies.
I worry that new investors being burnt by these high risk speculative trades will leave the financial markets with a bad taste in their mouths. As Buffett says, speculation is most dangerous when it looks easiest.
So this piece is a little reminder: there is another way to participate in the wealth creation that can come from the financial markets. Consider Active ETFs. Get advice. Think long term.
Read more like this:
- ETFs vs LICs & LITs – How are they performing in the global pandemic?
- Why is the Aussie ETF market growing so fast?
Disclaimer: Please note that these are the views of the writer, Jodi Pettersen, Investor Relations at eInvest and is not financial advice.
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