In Shakespeare’s play Macbeth, three witches appeared before Lord Macbeth with the prophecy that he will eventually become King. The foretelling troubled him greatly, for although he has secretly harboured thoughts of ascending to the throne, he was ‘too full of the milk of human kindness’ to carry out the deed of disposing of the current King. It just is not him to do such evil. Some time later when the King of Scots decided to visit his castle at Inverness, he gave in to Lady Macbeth’s taunts and murdered the King in cold blood. He was made King, and to protect against the precarious situation he found himself in, he immediately ordered for his closest friend’s assassination to cover his tracks. One bloodbath led to another and Lord Macbeth was eventually killed in battle.
When I first started my forays into the Singapore stock market many many years ago, the game was simple. Buy Low. Sell High. I didn’t know a stop order from a limit order; I couldn’t tell support from resistance. All I knew was to buy, and hope to sell higher. Within T+3. If the price at settlement didn’t allow me to make a tidy sum, I would simply hold on until the spoils reach an acceptable level. What started out as a trade, has now become an investment.
And as I stumbled along, I read and learned. At one time, I remembered reading that the ability and discipline to cut loss is the single most precious skill set to possess. It is the hallmark of all successful traders. Cut the losers and let the winners run, they all say, because markets can remain irrational longer than you can remain solvent.
All the resources you'll ever need as an investor
We've gone ahead and done the work. Compiled here are all the resources you'll need as an investor.
Yet on other occasions, analysts and market gurus and financial advisors would declare in no uncertain terms that buy and hold is the only way to prosper, and that dollar cost averaging allows us to extract the most value from the markets over the long run. If price drops, buy more, because then you end up getting more for less.
At no point in time was I puzzled that there are two diametrically opposing schools of thought. The world has always been made this way. Adam and Eve, Yin and Yang, Man United and Liverpool. I thought they were meant to co-exist in the same space, and that one could choose between cutting loss and averaging down, in the same situation.
How wrong was I to be. One cannot cut loss and average down at the same time. One cannot hope to combine short term analysis with long term execution. And it is really frustrating because throughout these years, no one, not a single mother-father-son bothered to explain to me that when Trading, one should cut loss to preserve capital and while Investing, one should average down, provided that the original premises of the analysis remains unchanged. Or perhaps I was just plain dumb not to see it earlier.
Both Trading and Investing involves buying and selling. Both of them involve money. Both activities bring about rewards (if done right) or pain (more often than not). But the similarities end here.
The truth is: Trading and Investing cannot be more different creatures! (Sam Goh has written an excellent post here on the differences. )
During the question and answer with Jim Rogers at the Shares Investment Seminar a couple of weeks ago, an elderly gentleman took to the mike. He shared with the audience that he has been a fan for many years and took all of Jim’s advice seriously. So seriously that when Jim mentioned that he was very bullish on China in 2007, the gentleman rushed out to load up on China plays. In begrudging tones, he told everyone present that after he bought in, the market tanked and even up till now, the Shanghai Composite is barely half of it’s 2007 peak. In the very same breath, he asked Jim what should he do with his holdings, whether he should take the painful step of cutting his losses or to sit through the whole situation and hope for a quick recovery. If the situation was not so tragic it would have been extremely funny.
Jim Rogers is a legendary Investor. He is forever proclaiming that he has only bought Chinese stocks 4 times in his life (and not in 2007), that they are for his kids and strictly not for sale. He does not care if the market crashes tomorrow (If it does he would probably buy more), but rather, whether he will be right in 30 years time.
Our uncle friend was keen to trade in China shares. Like Macbeth, he is seduced by the prophecies, and hope to trade in China shares, realise some profit and take money off the table in as short a time as possible. Like Macbeth, he does not have the patience, nor the fortitude to stay in the market for years on end. Like Macbeth, he knows not the difference between a Trader and Investor, and more critically, he ended up pairing a Trading mindset with Investment advice. Like Macbeth, he knows not himself at all. And like Macbeth, it is a tragedy in the making.
He who does not know who he is, is likely to be swayed with the slightest of breeze.
If there is one question you have to ask yourself this week/month/year, it is this – Do I want to be a Trader or an Investor? Because only after understanding yourself, will you be able to understand the markets.