| | | Re: Trading vs Investing
I am not sure how much of the discussion between Lee and I you followed but I summarize it as I see it.
Lee believes that companies he likes are investments and everything else is trash. He further believes that he can tell who will be around 5 years from now and who won't be and that those he thinks won't be around are trash.
This debate is not unlike bond trade before junk bonds were a thing. That is where the word "junk" in junk bond comes from. The modern and more accurate word is "high yield bonds." Prior to the '80s only investment grade companies could offer bonds. Then Michael Milken (and later Howard Marks) decided this is wrong. Anyone should be able to offer bonds to the public, if they are willing to pay a large enough interest.
Which brings us to my perspective. Investments are not to be decided by some arbitrary aristocratic metric like the pre-80s bonds. Investment is what you can assess based on risk adjusted rewards. FRGE, something I have in my portfolio and brought forth as an example, is in its worst possible business condition. As a result, its stock fell from the IPO of 46.50 to $1.26. At that price it was trading below cash. The company has no debt and has low operating costs. All they have to do is to survive till the next bull market and then the price will likely go above 10 or 20. From where I stand this was a great investment. If I see the price going much higher and the trend bending, then it will not have the same risk/rewards and I will sell it until I assess better risk/rewards.
I don't judge based on anything other than risk adjusted rewards. It is that simple. And I can come up with a long list of blue chip companies that flirted with bankruptcy and/or accounting fiascos. GE, GM, C to name a few. I am not even getting into things like Enron. So this idea of only buying "quality" companies is investment and everything else is a trash trade smacks of snobbery to me. I have no snobbery in me.
Finally, I've never found anyone able to properly define trading vs investing. The best I can see is some arbitrary measure that investing is supposed to be measured in years and trading is measured in days. But I have to ask - look at the performance of any stock you want over the last 18 months. The vast majority have had bigger swings within a year than they have had over a year. NFLX, by no means a small weak company, went from 700 to 160 to 360. Why in the world would anyone hold on to a losing position as it falls from 700 to 160? Why would you not follow its trend as it more than doubles and climbs from 160 to 360?
The long term investment myth is based on two things: (1) Wall Street having a steady supply of clients they can sell stocks and mutual funds to. (2) If a person is unfamiliar with the capital markets and reading the tape, then since the general trend over *very* long term is upward, then they should stick with it. The latter is a special case of a general statement that I have always emphasized: Your choice of timeframe is the most important decision you make and should match your ability. So if a person is totally unfamiliar with the markets and/or does not have the time to put in it, then they should become "long term investor" because over very long time period the trend is up and that is the timeframe that matches zero effort. Everyone else should adjust their time frame accordingly.
This brings us full circle back to there is no difference between trading and investing - there is only following the trend that matches your abilities. Even Warren Buffett agrees with this perspective. The question of timeframe and trading came up during the last BK annual meeting. Buffett said that he does not trade because he is not good at it. But he acknowledged that there are those who can and that is great for them. And he was not being sarcastic. He actually named a day trading quant as an example of a successful fund manager. |
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