Know Thyself – Are You a Trader or an Investor?

I heard about a study that found people were more likely to vote if you ask them, “are you a voter?” as opposed to, “do you plan on voting?” The way you view yourself matters. If you identify as a voter, then you are more likely to go to the polls or send in your ballot at election time. It’s the same with fitness – if you identify as a runner, you are more likely to run consistently, because it’s not just something you do, it’s who you are.

So who are you – a trader, or an investor?

A trader, as defined by Investopedia, “is an individual who engages in the buying and selling of financial assets in any financial market, either for himself or on behalf of another person or institution.” OK … we do that at Parsec. However, it goes on to say, “The main difference between a trader and an investor is the duration for which the person holds the asset. Investors tend to have a longer-term time horizon, while traders tend to hold assets for shorter periods of time to capitalize on short-term trends.”

Ah, there it is. By definition, then, we at Parsec are investors, not traders. If you’re familiar with our investment philosophy, the first of the three pillars is long-term investing. The third is no market timing. (The second is diversification – important, yes, but not germane to this discussion so we’ll put a pin in that one for now.) Long-term + no market timing = investor. Short-term + market timing = trader.

This distinction is important for several reasons, the primary of which being that it answers many of the questions we get from clients about the latest fad, whether it be SPACs, bitcoin, or GameStop. Rather than listing the many reasons we do not recommend these “trades” to our clients, it is perhaps more instructive to remember why we do choose to buy a given stock or fund. We are interested in building wealth over time by investing in the long-term growth of a company or sector of the market, and we identify such opportunities by considering factors such as earnings, cash flow, and balance sheet quality as well as the capacity for the first two to grow over time. Of course, we place trades to buy or sell these securities from time to time, either to initiate a position, trim it back, or exit the position, but those trades are largely based on our long-term outlook for the security, not on short-term, market-driven sentiment.

Think of it this way – traders are very transactional in nature, and their decisions may not be based on the underlying health of the business at all. As the definition above states, they are looking to capitalize on short-term trends. There’s nothing wrong with that – you can definitely make money on a good trade (you can also lose it on a bad one, but that’s true of anything you do in the market). Investors, on the other hand, are looking to create wealth from participating in the long-term growth of a company or sector.

As an investor, you’re opting in; you’re supporting a business or industry you think will succeed. It’s still exciting, but in a different way – trading provides a short-term thrill whereas investing is a slower burn, but it’s often more rewarding. At Parsec, we are investors, not traders. You won’t see us hopping on the latest bandwagon trade or buying stock in companies valued at 50 times sales with no history of earnings. We take our investment philosophy and our responsibility to clients very seriously – it’s just who we are.

Sarah DerGarabedianSarah DerGarabedian, CFA
Director of Investment Management

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