Once a supposed “expert” in the Philippine stock market wrote an article describing the importance of self-discipline when investing or trading in the market. I then asked him personal examples of self-disciple and how he has benefited from practicing self-discipline or how he has lost a lot of money by not practicing self-discipline. I never got an answer.
Well, I posed the question on myself then. My immediate response- when playing in the market, you have to decide whether you are an investor or a trader, and have the self-discipline to stick and act to what you are.
Investors differ from traders as follows:
- Investors buy and hold, traders enter a position to make money.
- Investors enter long positions. Traders enter long and/or short positions.
- Investors hold for a long period. Traders hold for a short period.
- Investors focus on fundamental analysis, traders use technical analysis and charts.
- Investors are not concerned with short term losses, traders cut loses.
- Investors let profits run (accumulate). Traders take profits quickly.
Investors assume that overtime the investment will increase in value and be profitable. If the investment losses value, the investor rationalizes it is only temporary. The investment will bounce back and become a winner.
Traders have a defined plan on when to enter and exit the position. They never let losses run (become large).
As a trader, I usually enter a position with a stop loss order to limit my loss to 5% of the original investment. As the price goes down and approaches my stop loss price, there have been times when I take out the stop loss order declaring that I am now an investor. As investor, I am unwilling to sell the position, rationalizing that the down move is only temporary and the investment will bounce back later.
By what I have done, I lacked self-discipline. More often than not, it has led me to much larger loss- as much as 40% of my original investment, instead of the 5% limit. And then of course I panic and decide to again be a trader and take out my losing position. Honestly, is this not a familiar story? Avoid making the same mistake!
It is okay to be either one. You can be successful by being either one. Warren Buffett is a well-known very successful investor. So is Jesse Livermore and Bernard Baruch legendary stock traders. Do not be one and the same at the same trade.