Posted October 18, 2021
By Zach Scheidt
Settling My Argument With Alan Knuckman
"A trader is a more informed investor. An investor doesn't have a plan... An investor wants to make money. A trader has a plan..."
That's how my colleague Alan Knuckman kicked off his presentation for last week's Six Predictions Summit.
Was Alan taunting us here at Rich Retirement Letter?
It's quite possible. Alan and I have always enjoyed some good-natured bantering about our different styles and approaches to the market.
Deep down I think we both have a lot of respect for each other. I know I value Alan's trading insight.
But if you've ever sat in the same room with either of us, you know our personalities are very different.
(And hopefully you will be able to sit in the same room with us soon... More on that later).
Today I wanted to respond to Alan's barb about investors not having a plan.
I take offense to that statement and I want to make sure that we're very clear about our plan for growing and protecting your hard-earned retirement savings.
The Difference Between Investors and Traders
"I'll trade anything as long as there's a market for it."
It's a statement I've heard Alan make plenty of times. And I think it gets to the heart of our differences.
Traders are focused on the price action of whatever they buy and sell.
It doesn't matter whether they're trading stocks, options, oil, corn, bitcoin or even Beanie Babies...
Traders don't really care what's behind the trade. They're simply buying and selling based on which way the price is moving.
Sure, there are nuances. Traders can have sophisticated indicators and they can look at how markets are correlated.
Quite frankly it takes a lot of hard work to be a good trader. That's why I respect Alan and his work so much.
So there's nothing wrong with being a trader. In fact, I consider myself to be a trader in certain areas of the market.
Now, let's look at how an investor operates.
When you invest in a stock (or a home, or a business, or even something conceptual like a relationship), you're taking ownership of it.
You already know that when you buy shares of a stock, you become a part-owner in the company.
I don't know about you, but when I own something I want to understand what it is that I've got!
So before I recommend investing in a stock, I do a lot of homework. I look at how the business is run, how much profit they're generating, what the industry looks like and more.
I also carefully compare what I'm paying to what I'm getting. That means looking at earnings per share, dividends per share, and making sure that we're investing in a company that will give us value over time.
Price is still something we investors keep track of. But our research process covers a lot more ground.
Have a Plan — And Stick to It!
The point that Alan made about having a plan is an important one. And both traders and investors should always have a plan before jumping into the market.
The plan may look different depending on whether you're buying a stock for a trade or buying it as an investment.
But either way, you should know why you're buying a stock. And if that reason changes, you should get out of your trade or investment.
Incidentally, I wrote about this very idea a couple of weeks ago when I told you about my rookie hedge fund mistake.
As a trader, when you buy a stock, option or commodity and the price moves against you, the smart thing to do is close your position.
When we're investing in a stock (and we want to own a piece of the company) we still watch where the stock is trading.
But we also look at the company's profits, their competitors, the safety of the dividend and all the other reasons we bought the stock in the first place.
If those factors change, we get out as well!
And if the company is still healthy, profits are growing, the dividend is increasing and the management team is making great decisions...
Well in this case, a pullback gives us a chance to buy more of a great stock at a discount price (as long as that's part of our original plan of course).
Trading Versus Investing... It's Up to You!
Here's the question... Is one method better than the other?
My answer is absolutely not!
Both trading and investing have their advantages and their disadvantages. Frankly, if you want to manage your wealth in good times and bad, it's important for you to have skill in both of these areas.
Personality is also an important factor.
If you like sitting in front of a screen, looking at charts, finding that great setup and pulling the trigger on a new trade, that's great! (I know the feeling well and I'm right there with you.)
However, if you're more of a person who can take a newspaper and a few research reports to the nearest park... spend the afternoon reading about different companies... and then buy a handful of stocks that you know deeply and believe in...
I like that approach too!
Since both trading and investing can help you build and protect your wealth, you don't have to choose one or the other.
But like Alan said, you absolutely must have a plan so you know when to stick with your investment (or trade) and when to exit and find better opportunities.
Here's to living a Rich Retirement!
Editor, Rich Retirement Letter