As the world’s stock markets continue to capture our attention with their extreme fluctuations, we think it’s important to present our view that most of this volatility is actually being created by traders, as opposed to long-term investors. (Note: this is our third memo in the last several days addressing current stock price declines.)
What’s the difference between trading and investing? Traders look to profit from price changes that occur in the short term, typically measured in days, frequently even shorter. The wider the price range, the more opportunity for gains or losses. Trading is a form of gambling, in that the result of the trade is known quickly and is often unrelated to any underlying, long-term economic rationale.
In contrast, investing presumes a lengthy time period, a set of goals to be achieved over that time period, and a view that there’s likely to be sustainable economic growth in the world’s economies over that time period. The investor’s relevant time period is measured in years, not days. We believe investors should not transform into traders when the markets experience periods of extreme market volatility.
A thoughtful article in The New York Times (August 22, 2015, pg B2, written by Ron Lieber), headlined “Take Some Deep Breaths, and Don’t Do a Thing,” makes the same point. Mr. Lieber observes, “Stocks are most useful for long-term goals. So unless these goals have changed in the last few days, it probably doesn’t make much sense to overhaul an investment strategy based on a blip of market activity.”
At Park Piedmont Advisors, we have long advocated that the U.S. stock market not be used as a basis for trading activity because trading can give rise to unsettling price changes from time to time. These changes can lead investors to take ill-advised actions that could undermine their long-term goals. Simply put, the financial well-being of long-term investors is threatened when trading activity turns the stock market into a casino.