What is the difference between a long-term investor and a trader?

It is like asking whether are you a hiker or a mountaineer? The terrain might be the same, but the risks and skills needed differ vastly in more ways than one. Many dream of climbing Mount Everest but only a few have and will ever succeed at it. Some even paid the price with their lives to be able to attempt it.

Firstly. When you invest for the long term you might want to look at your portfolio once a week; you will look at weekly graphs and you will look at 10, 20 or 40 week moving averages; you will phase yourself into a position or you will use stop losses to protect capital. As a trader you must look at your positions daily to take profit or adjust stop losses; your time frame on graphs will also be daily or maybe hourly graphs.

But then you get 80-year-olds that have a long-term view of 3 months when they invest in shares. In theory, long term means longer than 6 months, but for some, can mean longer than 3 years, and for others how quickly they can make money and move on.

Long term investors usually buy and sell the actual share where short term traders use derivatives like CFD’s and futures for short term trading.  

We live in a time where your new hiking boots with all the pads and cushions will, next month, be out of fashion and a softer more flexible, stronger boot will be available. So, I feel 6 months might be long-term enough in this market. Think about it. In early 2020 we hit a bear market and within 4 weeks we were back in a bull market with the whole world still in lockdown. Historically the average bear market has lasted between 18 months and 3 years. Not anymore! Talk about moving fast.

Secondly. Your position size is calculated differently when you trade CFD’s or derivatives, as opposed to when you invest in shares or equity. When you are an investor you buy the actual share, also known as equity, and you become a shareholder in the company. When you trade the CFD (the underlying is the actual share) you only rent the share for the time being. You pay a deposit to rent it, which is called a margin. The suggestion is that when you trade CFD’s you should not keep the position for longer than 3 months otherwise the interest on the long side might start to hurt you.

When you trade CFD’s you have long and short positions. In our hiking analogy this has nothing to do with the type of boot you wear or even the height of the mountain you are facing, but the planned route you want to take traversing said Everest (despite the wrong boots!). In other words, whether you want the instrument to rise or whether you want it to decline because you can benefit from them both depending on whether you are long or short. If you want to learn more about CFD trading then watch this video here: https://frans-de-klerk-independent-technical-analysts.ck.page/a4416e79f8 and consider subscribing to our Candle of the Day.

In the Chris-tell subscription we focus on shares and ETF’s for long term investors.

The final big difference between a trader and an investor is the amount of emotional skill needed to trade successfully (I’m not trying to be funny here, really, but you need soles of leather and bunions of steel!). Only 3% of the people who attempt trading are successful because you need patience, perseverance, and military discipline. You cannot be a rooky and think you are going to be a successful trader. By successful I mean for at least one year, where you had more wins than losses.

Countless trading accounts have been avalanched because traders don’t stick to the rules. They get greedy and trade bigger. They trade thinking the market must do what they think the market should do, and before they know it, they are in a margin call and on the phone to their broker using the trading platform as a lame excuse why they are not profitable.

The weather on Mount Everest changes constantly and within minutes the wind or snow can have a detrimental impact on the plan of the team for that day. The market is no different. There is always a new news cycle, new politics, a new management decision somewhere in the world that pulls and pushes at the market forces and if you are on the wrong side of the precipice, and you don’t have a safety harness (stop loss) in place, you can get wiped off the face of the market.

When you are an investor you buy and sell shares (equities), ETF’s (exchange traded funds), ETN’s (exchange traded notes) or unit trusts. If you are a trader you trade CFD’s (the underlying is shares) or futures (derivatives) of commodities like gold, silver and oil, indices like the ALSI and S&P500 or forex like the USDZAR currency pair. The tradeable instruments are far and wide.

My suggestion is always start with shares. Buy and sell some… get a feel for the market. See how quickly you can win or lose your money and then consider trading. But you need to be honest with yourself. Regardless of the boot, where are your feet most comfortable, stable and surefooted?

I love honesty so let me save you a lot of time, heart ache and money by being honest with you today. If you do not have self-discipline and perseverance, then please don’t waste your time. Stick to hiking the equity trails and leave the mountaineering of Everest for those who train hard and are prepared to put the work in.