Let me share a very simplified description of the players in the US Stock Market. As I see it, there are basically two types; Investors and Traders. To keep it simple, an investor seeks to make money by owning a piece of a publicly traded company and profiting by its growth. An investor looks at a company like Apple computer or Nike shoes or Costco*, whichever he chooses and says, “I think that is a good company with a desirable product and a large potential market. I would like to own it and watch my value in the company grow as the company Value grows.” So, an investor buys stock and literally becomes a joint owner of the company, much like buying a business, except that he doesn’t have to do anything other than put up the money. The investor is also not limited to buying businesses he is an expert in, or that are close to home. He can buy in any industry and in any amount he is capable and willing to own.
A Trader on Wall Street however, is one who seeks to profit from the Movement in the prices of stocks, and is especially interested when the movement is significant and quick. Unlike the investor who prefers a long steady climb in value, the trader focuses more on shorter term price movements, and the bigger the movements the more the potential profit. To make money the movement doesn’t even necessarily need to be up. Traders can be greatly benefitted by stock movements in either direction that are large, sudden and frequent. The investor seeks companies whose value will increase. The trader seeks stocks whose prices will move dramatically, regardless of the value of the underlying company. That is a key difference we must remember, especially at times when markets are volatile. A trader cares more about price movement and an investor cares more about company value.
So how do these two groups co-exist on Wall Street? Sadly, it is often to the detriment of the investors. The reason is because traders who benefit from price movement, often enjoy the days when others are afraid. News that drives markets down rapidly is feeding ground for the traders. They know the history of the stock market that shows it has recovered from every crash*. But investors often fear these drops to the point that they panic and start selling while prices are down. My son Devan, in a recent article about the springtime market drop wrote that if you are selling your favorite stocks into a crash you are “giving your shares to rich people at a discount, only to likely want to buy them back once they recover.” Then he ended his article saying, “Think like a rich person.” I thought that was very inciteful information about what happens in a rapidly falling market. Or as others have said, market drops are times when wealth is transferred from the fearful to the informed.
Traders know that the market has an amazing long-term record and so when investors get panicked and sell out at a discount, traders are all too happy to gobble up those shares, though they may not hold them for very long. When the next cycle of market greed kicks in, which may only be days later, they will be more than happy to sell them back at a higher price to the once fearful investors who suddenly don’t want to miss out on the rising market. This cycle repeats over and over as wealth is transferred from those who are either fearful or greedy, to those who better understand the long-term view.
If you are a normal individual looking to build a good retirement nest egg for your future, don’t let the sometimes-volatile markets frighten you into selling your valuable assets in a time of fear. Nor should you allow yourself to buy more than is reasonable during rapidly rising markets. Establish instead a system of periodic investing over the course of your life and stick to it. In doing so you will not only increase your chances of long-term success, but you will also find more peace in the wonderful opportunity that private stock ownership can offer. This is your chance to own the great businesses and future businesses of the world and to use their success to fuel yours. Don’t let a moment of fear cause you to trade away, at a discount, that which you will likely one day be sorry you sold. “Think like a rich person,” which for most of us usually means to be an investor, not a trader.
Dan Wyson, CFP® is a long running national financial columnist, author of several books and CEO/Founder of Wyson Financial/Wealth Management 375 E. Riverside Dr. St. George, UT 84790 – 435-986-9525 Securities and Advisory services offered through Commonwealth Financial Network™, member FINRA/SIPC, a registered investment advisor. *Stock names used are for illustration only. There is no guarantee stock markets will go up in the long term. Past performance does not guarantee future results. Investors should use many tools to help secure their financial future.