The Difference Between Investing and Trading

I get people telling me all the time “I want to invest x amount so I can start making x amount of money every month to pay for this or that.”

So today I want to explain something to everyone who would love to invest, that I think will help you better understand what investing is and what it isn’t.

Investing is not an attempt to get rich quick. Done well, you will get rich, over time. But investing is really about sacrificing your money today to acquire productive assets that will increase your cash flow and purchasing power in the future. The best analogy I have for it is planting trees. You spend money to buy seeds you don’t plan to eat, plant them, water them, trim them and for years they don’t really give you much. But once they mature, and start yielding fruit, they will do that without much further effort and you can sit back and enjoy the fruit and sit in the shade and get much more fruit from it than the seed you planted. And after you’re gone, the tree stays there yielding fruit for your children and family and community.

I have a few shares. They’re not making me rich in any real sense today but they’ve been growing and the expectation is that in the future they’ll be producing enough dividends, earnings, capital growth etc that I don’t have to work to earn an income. And I can leave them for my children and family and use the money to fund charities or organizations. My investment holding period ideally is forever but for me to really get there, my current lifestyle and financing needs have to be considered and dealt with.

Contrast this with trading, which most people also call investing even though it is anything but. I mean think of the word “invest”. Think of what it means. It’s about building and growing and sacrificing today for a future result, in any area the investment is. Flipping property, or shares for a profit is not investing. Arbitrage is not investing. You do it as an investor of course but it’s trading. A lot of people expect to put in say $1,000 today and cash out $5,000 in three months. Some of it is just the naivety of outsiders to the game while others get that expectation from what the financial media, movies or people have painted investing to be. Can you make returns like that? Absolutely. But that means taking considerable risks that increase your chances of losing money. Most day traders make a lot of money and lose a lot of money and at the end of the day, aren’t getting much results on a net basis. I myself have traded and can do it relatively well but I consider that different from bread and butter investing. The psychology and expectations are different for the two. Investing is simple. Trading absolutely isn’t. 

Investing is when I identified Brown-Forman (makers of Jack Daniels) as a great business, learned about them, did a valuation then waited almost three years for the stock to trade at a good price before buying. Trading was when I jumped into LinkedIn on a Friday and got out Monday for a 100% return, then lost half of the profit from that on trying to short Qualcomm in the same day. (Insert “get you a man that can do both” meme.)

To cut the long story short, if you want to invest? Save up money that you don’t need immediately, create a plan of action and know what you want to keep adding to your investments, slowly grow your money making portfolio over time.

If you want to trade, take out money that will not hurt you if you lose it all, learn what You need to know about the asset you want to trade and go for it with the understanding that you can either win big or lose everything.

But please, don’t do one while thinking you’re doing the other. 

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