By: Phil Kernen
Three different roles. You may see yourself as one or all three. The answer will determine how you view capital markets and investing, the decisions you make, and the conviction you bring to your conclusions.
Traders look for the quick win, taking advantage of rising and falling markets to open and close positions over a short time frame, sometimes as little as a single day. The idea is to take smaller and hopefully more frequent profits. Short-term trading became more practicable in the 1970s after the deregulation of trading commissions in the U.S. The advent of electronic trading platforms and the dot-com bubble in the 1990s created even greater ease of trading.
Trading can look different and depends on a variety of factors. Individual traders with fewer resources may take advantage of momentum, such as catching a wave created by others in the latest tech or meme stock. Or it may look like targeting a volatile stock that trades wildly from hour to hour because of a positive or negative news cycle. For institutional traders with more resources, it may look like arbitrage or correcting an asset price differential and gaining profits in the process. For example, the stock of company A may be trading on the New York Stock Exchange for $10.00 and trading in Paris for $10.05. The trader would buy shares in the U.S. and sell them in Paris until that difference is $0, making a small profit in the process.
Investors look past the trend lines conveyed on a trade screen and focus more on the worth of a company. Investors research a company’s fundamentals to determine its value and compare it to the stock price. If the stock sells for less than that value, investors buy and hold it until the stock price moves up. The time required for a stock price to converge with value is unknown at the outset, so investors need the confidence of their convictions.
It doesn’t always turn out as hoped. It may be that the higher value moves towards the lower price due to poor management decisions. It may be that value is consistently created, but the industry is seen through a negative lens for various reasons, placing a cloud of doubt over prospects. Investors are willing to hold the stock until the market judgment on their analysis becomes clear.
Owners buy a company because they see a positive and productive future. They prioritize the company’s cash flows, understanding how to increase them. Owners, or their hired management teams, have the skill sets to improve cash flows and bring more value to shareholders. Owners see more than the difference between price and value. Owners are concerned with the purchase price, but it is secondary to their view that the company value can increase, and the price will follow. Owners have a longer time frame than investors.
The distinction between investor and owner is not always clear. Financially, there is no difference between owning a coffee shop worth $1 million and owning $1 million in Starbucks stock. Any differences arise from how you view your role. You are an investor if you plan to sell at a predetermined price target for each. However, you are an owner if you are willing to wait for management to increase the company’s cash flows, raising the value of the company and your share of the earnings.
Traders and investors play their role in capital markets. Beyond that, viewing oneself as an owner is the more effective way to build wealth, encourage long-term thinking, and sharpen the ability to look past the emotional volatility of stock ownership.
Disclosure: This is for informational purposes only and any reference to a specific company does not constitute a recommendation to buy or sell that company. The reader should not assume that an investment in the securities identified or described, was or will, be profitable. For a complete list of disclosures, please click https://mitchcap.com/disclosure/