The biggest mistake newcomers make in investing is trading instead of investing. Let’s examine the differences between these two approaches and why beginners face the threat of trading.
It’s a common starting point because it looks very attractive. It’s easy to attract with a quick (supposedly) and clear definition of income. Bought cheaper and sold at a higher price, the difference in your pocket. The chart is always moving, the price changes, so there is always a difference. It seems to be easy: you can earn by buying, and you can sell, and it does not matter where the price goes up.
Of course, nobody says that the price is very difficult to predict and it may go the wrong way, and trading on small intervals of time without expensive instruments has more in common with a lottery than with investing.
But year after year, month after month thousands of people, seeing easy money, think that, well, they will succeed. They sit down to calculate, find the right technique or the best approach. Sometimes beginners think: “A man who drives an expensive car, works on the beach with a laptop can not make mistakes, because he has earned money in trading, so I can do it too”. And who said that in trading?
No one at the start understands what they are up against when they enter the path of short-term trading. Yes, yes, when you enter the path of trading, you’re in a struggle.
But about that later, first I will tell you what is fundamental in trading to make money on it:
- Speed. The offer is limited and the sooner you make the trade you want, the better. If you’re late, someone else bought at that price.
- Large capital. They will tell you that you can start trading with small amounts, but they will forget to tell you about commissions for each transaction, eating up your deposit, and nullifying the income from positive trades. No, trading is about big capital. At least it’s tens of thousands of dollars that you don’t feel sorry for because the risk is very high.
- As strange as it may sound, it’s other people’s money. Yes, most traders manage other people’s money and are protected by an army of lawyers from customer lawsuits.
So who are the competitors of the rookie traders on their way to make money in trading? Large funds, large investment companies.
Those who have the resources:
- Speed: There is competition for fractions of a millisecond. Companies try to put their trading terminals as close to the exchange as possible, to make the communication channel as fast as possible so that while a beginner is thinking about which asset to buy, millions of trades per second are made. Yes, you read correctly, that is exactly the number of trades per second we are talking about. No sooner have you clicked to buy an asset, than millions of transactions at a certain price will have reversed and wiped out the difference you wanted to make.
- Capitals: Large funds turn around a couple of three billion dollars a day, they can safely add more if they want to. As you understand, they can easily influence the price of assets without much effort. Guessing where the price will go in the short term is like guessing which set of numbers will win the lottery next time. Those, who manage the price and have big stocks, are the lucky ones.
- Managing other people’s money, which means a minimum of nerves. Not compared to a beginner, especially someone who is trying to make money on trading by investing their last money. As I’ve said many times before, the vast majority of traders are professionals and manage other people’s money.
And a few more arguments not in favor of trading:
- The vast majority of people who come into trading are engaged in it no more than a year. The maximum is three years. After that begins burnout because of nervous overstrain, absence of money management (absence of competent management of own deposit for trading), and resources in the form of constant money influx from other sources to finance this expensive hobby – trading.
- In the long term, trading loses a lot to usual medium-term and long-term investments. This has been proven more than once. I will give you an example below.
Warren Buffet, the world’s largest investor, entered into an argument with traders – that conventional investment over the long term will always be more profitable than trading. And, for 10 years, from 2007 to 2017, Buffett quietly invested in the S&P500 index, while hedge funds with their resources and professional traders worked as usual – engaged in trading.
For all of 10 years, the traders tried their best, but in the end, they lost. A portfolio of 5 hedge funds for 10 years gave a gain of 22% (not annual but for all 10 years), and Buffett’s investment in the S&P500 gave about 85%. It turned out to be more profitable to invest, without stress, in an ordinary index available to absolutely all private investors, than to invest gigantic sums of money, waste nerves, and end up losing.