To Trade, Invest or Gamble?

I have at least two hats - one as a full-time investor, another as a part-time trader. I’m not really a commentator although I like to offer the occasional opinion on these articles and also occasionally provoke with a few of my own suggestions.

So what are you - an investor, a trader or just a plain old-fashioned gambler?

Trading is a different activity to investing and they shouldn’t be lumped together as one interchangeable activity. The terms ‘trading’ and ‘investing’ are frequently used interchangeably as if they were the same thing. But no, far from it - they are completely different activities, and just because someone picks some stocks on an app doesn’t make them a trader.

How you invest depends on many factors. It’s not just about picking the right assets and diversifying. If you are not a Warren Buffet genius at picking winners (and who is?) a lot depends on your current level of wealth, what you need in the immediate future and what debts you have that need paying off.

To gamble is, in my humble opinion, the privilege of the extremely wealthy or those of an extreme constitution. Either way it is not something that should be undertaken lightly or without your own clearly defined set of rules.

The problem here in 2021 is that those that thought they were doing well as amateur investors or traders - or reasonably well at either - which was, let’s be honest, relatively easy in 2020 since March, are now finding themselves in for a very bumpy ride this year.

Why? Because there are mini corrections happening all the time, that’s why; it’s not a comfortable smooth time at all. It’s time heavy. The only way to trade sensibly is to pound cost average by stashing away a set amount in set investments irrespective of what the market is doing and to never time the market. Plus you do need a healthy stash of cash for strong corrections and crashes.

Many newbies have unrealistic expectations of making enough to retire in the short term. Warning signal: if you hate your job that much you dream of retiring at 40, perhaps you should find another career, not stick the lot of Dogecoin.

So what of the newbie starting now? Many are driven by the current stock price bubble for tech/new economy stocks. If you are very academically able and knowledgeable, there is some gain from analysis, but only if you understand the need for a consistent tendency to evaluate the quality of the business in isolation from correctly assessing what is a reasonable price to pay for shares in the business. In many I see an approach almost symptomatic of a market phase when price movements within some sectors have become detached from a fair or reasonable price for the business.

Accruing good dividends linked to a common sense assessment as to the future prospects and the general financial strength of the business can be a good starting point, but you need to be more thorough.

Assess the tangible shareholder surplus rather than just the dividend. That is, the forward dividend added to the average annual growth in net tangible shareholder funds over the past 4 years. The sum is then expressed as a percentage of market caps. Around 10% tangible shareholder surplus relative to market cap and you may well have found a bargain.

When the tangible shareholder surplus is around 10% of the current market cap for a financially solid predictable and dependable business, it is not just a 10% annual return that you should expect, you should do much better than that as the share price will be well below a fair value.

Above all, I recommend reading up on the plentiful free open-source material written by or about some of the long term respected traders or investors as is your chosen path. Not only do they give valuable tips to take on board, they also offer numerous insights to pitfalls they have either fallen into or circumnavigated. It’s always good to have had someone else to already have done the dirty work for you!