Monday, February 27, 2006

Can an investor learn from Traders?

Can I learn from a trader?

Is the trader's mindset any different than an investor's mindset?

For me, good rational thinking is simply needed, in regardless if one is an investor or one is a trader.

Do not believe?

Let's take one of the classic books, Reminiscenes of A Stock Operator and compare some of the issues mentioned in the book and find if the investor can learn anything.

  • I would rather play commodities than stocks. There is no question about their greater legitimacy, as it were. It partakes more of the nature of a commercial venture than trading in stocks dies. A man can approach it as he might in any mercantile problem. It may be possible to use fictitious arguements for or against a certain trend in a commodity makret; but success will be only temporary, for in the end the facts are bound to prevail, so that a trader gets dividends on study and observation, as he does in a regular business. He can watch and weigh conditions and he knows as much about it as anyone else. He does not guard against inside cliches. Dividends are not unexpectedly passed or increased overnight (to drive the stock prices up) in the cotton market or in wheat market or corn. In the long run commodity prices are governed but one law - the economic law of demand and supply. The business of a trader in commodities is simply to get the facts about demand and supply, present and prospective. He does not indulge in guesses about a dozen things as he does in stocks.
Understand that one law - the economic law of demand supply in a given trade. Guarding against inside cliches, trying to figure out what is happening. In short, stocks are easily manipulated. JL talked about how stocks announced dividends overnight just to drive up the stock price.

Any change then and now? Nope! Crooked owners are still crooked owners. And crooked owners of stocks still cheats. They manipulate stock prices!

Is the intelligent investor any different than the trader in this perspective?

Remember Warren Buffett's Goal ?
  • Our goal is to acquire either part or all of businesses that we believe we understand, that have good, sustainable underlying economics, and that are run by managers whom we like, admire and trust.
See how important Buffett stressed that the good business MUST be run by managers whom we like, admire and TRUST.

Or the issue of Management Integrity mentioned by the late Philip Fisher?
  • It's not only the dislike for dealing with unscrupulous people but Fisher believes that companies managed by people of dubious integrity will definitely meet with failure.
The trader guards against inside chiches. The investor? They too need to avoid investing in stocks whose owners/management cannot be trusted.

One of my personal favorite saying in the book Reminiscenes of A Stock Operator is, "I have never thought it is good business to play any game in any place where it was necessary to keep an eye on the dealer because he was likely to cheat if unwatched."

Lesson here? The issue of trust is so very important.
  • What does a man do when sets out to make the stock market pay for a sudden need? Why, he merely hopes. He gambles. He therefore runs much greater risks than he would if he were speculating intelligently, in accordance with opinions or beliefs logically arroved at after a dispassionate study of underlying conditions. To begin with, he is after an immediate profit. He cannot afford to wait. The market must be nice to him at once if at all. He flatters himself that he is not asking more then to place an even-money bet. Because he is prepared to run quick he hugs the fallacy that he is merely taking a fifty-fifty chance. Why, I've known men to lose thousands of dollars on such trades....
Take the issue of the investor investing in a stock because of the market.

Commonsense tells the invesotr that it makes no sense because the investor is basing the reason to invest base on the market price and the prevailing market sentiments.

In a bullish market sentiment, the believe is simply that the market could go higher. This is it. The big, big bull that we have been waiting so long is finally here. This is it. What are we waiting for? Whack them stocks! (Chiak the bugger!) However, do remember that it has simply been proven so many countless times that if an investor buys anything that is overvalued, and given time, such investment will most likely end in a loss.

Conversely, in the case of a falling stock, if one uses the price as the main factor to invest in the stock, the investor will most likely to end up losing lots of money if that stock price decline is caused by falling earnings which turns into a permanent deterioration of the business fundamentals. Be more realistic, companies in this region, they do not have such a strong durable advantage as the Cokes. Here it is possible to have so-called good companies turning into a bad company. And the biggest danger is that it could remain bad for a long time. And sometimes these companies could even can go bust!

And this is one reason why we hear so many folks saying that investing does NOT work. They argued that they had tried and experienced investing before and that they bought this so-called good fundamental counter at such a low PE but somehow despite buying and holding that stock for a long term, that investment never did worked out. So why didn't it not work out? Was the reasoning to buy the stock flawed? Was the stock selection simply wrong? Was the reasoning to invest influenced mainly by the market price? One of Buffett's famous saying to remmber here is, ' Buying a poor quality stock at a cheap price would most likely yield a poor set of investment results.'

(to be continued.... )


hhc1977 said...


Today i m quite free so i kick yr blog for a while since yr forum is closed.

"However, do remember that it has simply been proven so many countless times that if an investor buys anything that is overvalued, and given time, such investment will most likely end in a loss."

Just my 2 sen,

For those investment which inevitably leads to losing money, it's all about money management. There is always a chance that our investment turns sour no matter how good our criteria are. So, having a good money management is far more important than buying or selling criteria.

Knowing how to pull out from losing position or taking profit where there is profit on the table are the most fundamental skill in sharing investing or speculation.

Again, this is my 2 sen

Moolah said...


Yes, money management is very important no doubt in preserving our capital ... but... from a business perspective, too much focus on money managment will see the investor placing too much emphasis on the stock price instead of the business economic of the stock.

hhc1977 said...


There is a stark difference between trade and investor. But even as an investor, using reasonable money management will save u a lot of gut wrinching experience when Mr market is not agreable with yr valuation.

Unless u swing a big line, then proper money management will prevent you from taking too much risk without knowing it. Diversification is also part of money management.

Moolah said...


Very subjective... and of course i do understand and i do accept ur point of view.