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Macro Economics
Trading vs. Investing

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By washcomp
July 17, 2009

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I borrowed the below from another post of mine as I think it's important to keep perspective on things (and then couldn't resist embellishing it):

I don't think our current rally is infinitely sustainable. Just remember, while the only two days which really matter are the day you buy and the day you sell (the rest is just watching a horse race), you don't make a profit until the money is in your hands. While quality is always in style, so is making a profit :-)

The price you pay for a share of stock is simply what another party is willing to part with it for. You can only sell it for as much as another party is willing to pay for it. Apparently, in times like this, the underlying value of what that share of stock represents is less important than the above observation.

If you are indeed a LTBAH investor (yes, there is significant rational to this behavior - if you had bought your portfolio in November 1987, you should have still have been sitting pretty on March 6 2009), treat your purchases the way you would any other long term investment (US Savings bond, corporate bond, CD) and choose conservatively. Then ignore it and let the dividends do their work. A reasonable list to choose from (with the exception of the four letter names of minor miners) would be the portfolio I posted a little while ago. I had a portfolio similar to this which I dumped in mid 2007 (in expectation of the crash I expected in October 2007 - got the month right at least) dating from previous crashes and its vestiges have stood the test of time through even this year's mess. Timing is everything in investing and while we may not be at the lowest that stocks will get in the future (I think there is a possibility that Oct '09 and Feb/March '10 might be problems), I would imagine quality issues accumulated at these prices will be looking fine when you unwrap them in 10 years.

If the above doesn't appeal to you, but you still want to buy stocks, don't confuse what you are doing with investing. That's not to say you can't make money trading - just don't confuse the two.

Properly done (emphasis here), over the long term, investing is far less risky than trading and will give decent average returns. Over periods of time when business environments are such that returns are small, like now, trading is a way, by adopting far more risk (import point here), to increase your potential returns from the zilch offered by cash.

I know that some may think that I'm stating the obvious above (or some might take issue with it), but I think it's important for each of us to keep his/her eye on the ball (whatever game we happen to be playing).

Just some idle thoughts,
Jeff