Most of the people who put their money in the market, do not know if they are long term investors in the market or if they are short term traders. There are couple of differences between traders and investors that one should understand before putting any money into the stock market (via equities or mutual funds).
Traits of Investors
- Investors invest based on company fundamentals and have a deep knowledge about company fundamentals like its business model, its growth potential, quality of the business and the management etc.
- Investors are usually contrary by nature- they buy value when others are selling in panic. They don’t believe in timing the market.
- Most of the good investors run concentrated portfolios and don’t have more than 20-30 stocks in their portfolios. This allows them to do deep research into few names rather than buy the complete market.
- Most of the investors hold the stock for a long period of time-usually more than 2-3 years. They are willing to suffer massive drawdowns (upto 50% of their capital) during bear market phases. As a matter of fact, they might add to their positions during downturns.
- Their market edge lies in picking good stocks and holding them for really long term. So imagine holding an infosys for 15-20 years and taking all those 2008 type corrections in your stride!
- The risk with fundamental investing is holding on to “wrong stocks” for long period of time. In the current scenario imagine the difference between holding PSU banks for last 5-7 years and holding private sector banks like Yes Bank/IndusInd Bank for 5-7 years
Traits of Traders
- A stock trader usually trades based on price action and rides the market trends. His holding time can be few hours to few months.
- A Trader is essentually a market timer and tries to time the market in various time frames. He usually uses technical analysis tools/charts as well as macro factors to take his trades. Many successful traders employ mathematical algorithms to make buy and sell decisions.
- A trader is not akin to using levearge to enhance his/her returns during trending markets.He main objective is to ride the upside/downside momentum in stocks.
- A trader practices strong risk managment and is quick to get put of losing positions. He is a master student of probability and is alsways listeing to the market sentiment.
- A trader is always looking for risk adjusted returns and is always looking to limit his drawdown during bear markets. Some traders might even go short during bear phases to profit from the same!
- His biggest strength is his ability to cut his losses which gives him an edge over the investing crowd!
So are you a trader or an investor? Many times we enetr a market for short term gains but when we see a loss we turn into an investor and then end up owning dead stocks for long periods of time.On the other times- we say we are a long term investors but don’t have the patience to keep our good stocks for really long periods of time.
So it is important to undersatnd your goals and objectives before you put any money into the market. And remember- no strategy will work all the time in the market.