In the everyday reporting about the ups and downs of markets, there is a frequent ambiguity that’s highly important, though easy to overlook.
Take this lead story from the front page of this past weekend’s Wall Street Journal.
“U.S. stocks slid Friday after a relatively strong jobs report, capping a roller-coaster week in which investors built up hopes for easier monetary policy—only to then give them up again …
“Stocks soared Monday and Tuesday, with the S&P 500 and Dow Jones Industrial Average logging their best two-day stretch since 2020 [but] weak data on the manufacturing sector and job openings led investors to bet that the Fed might slow its pace of interest-rate increases in the coming months.” (Emphasis added.)
The article uses the term “investors” several times, though the described behavior – making day-to-day, or even minute-to-minute, gambles on market movement – is that of traders. This is an important distinction.
What are the primary differences?
Investors make investments. Traders make trades. While the same securities markets are used for both of these activities, that doesn’t mean they’re interchangeable.
The crucial difference is the time period over which an outcome is achieved. Successful investing is a long-term process, measured over periods of years. In those timeframes, investors will experience significant up and down periods. By contrast, trading outcomes are known in a matter of moments, or minutes (think the role of the dice, or a horse race, or whether somebody makes a putt).
Long-term investors are interested in participating in the long-term economic growth of the world’s economies. This growth does not come in even amounts and may not come at all for some period of time.
However, to the extent investors have a positive view on the prospects for long-term economic growth, they can be willing to allocate at least some of their investment portfolios to risky asset classes, particularly stocks. At Park Piedmont Advisors (PPA), we manage investment portfolios only for clients who seek to achieve some long-term investment objectives.
We are investors, not traders.
The investment industry is populated by vast numbers of people and institutions who seek short-term profits from trading the very same marketable securities that investors own as investments. What characterizes this activity is that the long-term prospects for a company, or market sector, or the general economy, plays virtually no role in the trader’s decision-making, which instead is focused on whether the trade can be completed at a gain, before it turns into a loss.
In recent market movement – both intraday and day-to-day – we have seen significant volatility. This is largely the product of traders. From the perspective of investors, trading turns financial markets into a casino. Trading disregards any notion of underlying value represented by market prices. As a result, it can undermine the confidence of investors in the financial markets themselves.
So when you read, hear, or see reports in the media about the ups and downs of markets, ask yourself: is this the work of investors, or traders?