Trading vs Investing

/The article is intended for novice traders. More training materials can be found here: https://www.varchev.com/trading-uni.htm. /

Everyone knows that great wealth in the stock market is built with proper selection of stocks held for the long term and good risk management. The compound effect of dividends will do the hard work if you hold the right name.

Warren Buffett is the classic example. He bought stocks like Coca-Cola, American Express and Apple at an early stage and they made him one of the richest people in the world. About 90% of his money is invested in just five stocks, and Apple alone is nearly 50% of his current holdings.

It’s a deceptively simple approach. It’s easy to explain in theory, but the actual implementation is extremely difficult. The reason so many people think it’s easy is because they’re doing it in hindsight.  ;It’s very easy to look back and determine what stocks would make you rich if you held them for the long term. Everyone knows that if they bought and held Microsoft for 30 years they would be extremely rich, but this is not was so obvious in 1990

Identifying the next Apple early on is the hardest thing about investing.  Buffett says we may only have 20 exceptional investment opportunities in our lifetime.

The Buffett Way

“Great opportunities in life must be seized. We don’t do many things, but when we get the chance to do something that is right and great, we have to do it. And doing it even on a small scale is just as big a mistake as not doing it at all. Since we’re not going to get 500 great opportunities, it would be better if we gave these 20 opportunities more thought. You will become very rich because you will consider every single decision very carefully since you do not have many options. “

All Buffett is saying here is to be extremely selective and when we find one of these great opportunities, act boldly.

This is great advice, but it still doesn’t answer the question of how to find those super stocks. Obviously a lot of analysis needs to be done, but no matter how long we analyze, mistakes are part of the process.  If we make the mistake of thinking that this is one of those 20 possibilities, then that mistake can be extremely costly.

Trader Approach

The trader approach is the opposite of the highly selective investor approach, but we have to be much quicker in admitting mistakes. . The 2 methods are distinguished by a simple definition. Buffett’s approach is an investor’s, with a very long-term view and no stops, and the alternative approach is a trader’s, where stops are mandatory. The trader’s approach is also quite short-term compared to the investor’s.

Ultimately, we can try many stocks with measured risk, and if a stock is actually performing well, we simply let it run, move the stop or add on a correction while watching the fundamentals and price action unfold. Ultimately, such a position can turn from a trader’s to an investor’s.

On the other hand, losing trades should be “cut off” quickly and without much hesitation.

As another multi-billionaire says: “It’s not whether you’re right or wrong, it’s how much money you make when you’re right and how much you lose when you’re wrong.”

This is the best tip to use when looking for the next super stock. It is critical to cut our losses quickly when we are wrong and be extremely aggressive when we are right.

People like Buffett and Soros are against over-diversification. They want to be heavily invested in the names that are doing very well. They want to use their money when they think it is right, not dilute by holding less productive investments.

Soros is essentially taking Buffett’s advice to remain selective and recognize that there are only a small number of great opportunities in life, but he’s changing it by taking a more proactive approach. We will never be 100% certain about every investment, but we can manage risk by recognizing mistakes very quickly and keeping losses small.

/The article is intended for novice traders. More training materials can be found here: https://www.varchev.com/trading-uni.htm. /