By MoneyMorning.com.au
I’ve said it before, and I’ll say it again.
The markets are broken.
It’s not that they’re not functioning on a daily basis, pricing risk and assets and performing their price discovery duties. They are doing that – or at least trying to.
Those are the little, daily things that markets do, and there are things there that are broken. (I’ll get to those things another time.) Think of those little things as the “hows” or the “mechanics” of buying and selling.
Think of the big things as the “whys” or the “psychology of investing.” Those are the things that are broken. Until they are fixed, or “things” change, drastically, we are in for some really wild swings in the months, quarters, and years ahead.
First, there are two types of players in markets, stock traders and investors.
It used to be that investors dwarfed stock traders – by a huge margin.
Investors were the meat and potatoes and the vegetables, and stock traders were the gravy that made sure investors’ plates were liquid enough so that they didn’t choke when swallowing their meals.
But that’s all changed.
There aren’t that many truly long-term investors any more. It’s too dangerous to be an investor in the traditional sense. That’s why most investors, at least those that call themselves investors, are really all traders now.
I don’t mean traders in the high frequency sense, or even in the day trading sense. I mean they are stock traders because they invest for the future but can’t see beyond a few quarters, if that, so they have to get out of positions.
These traditional investors almost always have stop-loss orders down, or at least have stop-loss levels in mind as part of their investment “plans.” A lot of them now use profit targets, too. That hardly ever happened traditionally. Investors invested. They were buy-and-hold believers in a brighter future where, over time, assets appreciated, and they stuck with them.
Not anymore.
You can’t do that unless you have nerves of steel, tons of capital, and a generational approach to holding your positions. Even then, I say, good luck with that.
So, from the perspective of psychology, if it’s not safe to be an investor, but being in the markets is still a tremendous wealth-generating endeavour, stock trading will remain the tail wagging the old dog.
For me, that’s all well and good. I’m a stock market trader. I always have been. Sure, I used to have a bunch of long-term investments that I expected to always weather short-term trading and fluctuating economic cycles.
But those all ended up being a 50/50 proposition. Meaning I lost on about half of those investments and made money on the other half. I’m talking about maybe eight positions that I’d keep on the books for years.
Not anymore.
Why? Now I use that capital to trade bigger positions, because holding a diversified (I’m not including the few mutual funds that I used to own, that I jettisoned a long time ago) portfolio, even a well-constructed, concentrated one, didn’t work out.
My point is, think about how you look at the stock markets. Ask yourself if you are an investor or a stock trader. Ask yourself how much time you have, how much capital you have, and what kind of constitution you have… and do the math yourself.
Shah Gilani is a veteran US hedge fund trader and contributing editor to Money Morning (USA).
Publisher’s Note: This is an edited version of an article originally published in the US edition of Money Morning (www.moneymorning.com)
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The Brave New (Broken) World for Stock Traders and Investors
