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  2. INVESTING vs TRADING (Long Term Investing vs Short Term Trading)
  • By Henrikh
  • 21 Sep 2021
  • 3 min read

INVESTING vs TRADING (Long Term Investing vs Short Term Trading)

We'll talk about four main advantages of long-term investing over short-term trading.

 

Hey everybody, it’s Henrikh here, and today I will explain why growing your wealth is easier with long term investing rather than short term trading.

 

Ok, let's start.

I don't want to separate day trading, swing trading, or whatever trading. Yes, they are different, but I will call all of them as short term trading because all short term trading methods have the same type of fundamental elements that differ from the long term investing psychology. That's why I mostly want to talk about the differences between trading and investing regardless if it's day trading, week trading, or minute trading.

 

You can do both short-term trading and long-term investing at the same time. One doesn't block the other, and you are not forced to choose only one. I know many successful investors that do both short term trading and long term investing. As you know, I'm mostly interested in long term investing, but I do some short term trading as well. But when it comes to short term trading, I mostly use options, and I mainly sell rather than buy, which is usually a big part of my long term investing strategy. So this way, I become successful in both short term trading and long term investing. But there is a big difference between my short term trading style and what most people do. In this article I will talk about why I mostly love long term investing, and what I don't like in short term trading the way most people do.

 

Before we start, please be sure I’m not against short term trading; many people make fortunes with short term trading. My short term trading is thriving as well, but anyway, I will tell you what I don't like in short term trading and what I love in long term investing. I will cover four main points on this.

 

  1. First of all, for me, long-term investing surely makes the most money in the market. Go through Forbes's list of wealthiest people. Who are those people, who own businesses and investments, or who trade the market? There should be a reason for that. And some of the reasons are that in the long term investing you pay fewer commissions, fees, taxes and you don't miss the most important days that make the most significant impact on the stock price. 80-90% of the price move comes in under 10%-20% of the time. With the buy and hold strategy, you don't miss those days, and not missing those few days can make you really wealthy. And when it comes to commissions if investing in the stock market is almost a zero-sum game, then trading, in general, is a negative-sum game because of the frequent commission, fees, and taxes. There is always some money that leaves the table. So you fight for the rest of the money which is on the table. So for me, there is no doubt that long term investing makes real wealth rather than short term trading. 

 

  1. The second thing I want to mention is inflation or hyperinflation's impact on trading or investing. Does inflation harm your success in short term trading? It surely does. And oppositely it mostly doesn't in long term investing. I don't say that each and every stock will gain from inflation, but mostly the stock market is positively correlated with inflation. Not in all cases, but mostly inflation makes the stock prices go higher. Usually, business earnings don't get bitten by inflation, because whenever the prices of goods go higher, business income goes higher as well. So the stock prices also go higher not only because of business performance but also as people have more money to invest in stocks. This is a great advantage over short term trading as when you buy and hold with a long term investing strategy, then inflation works for your portfolio.
    On the other hand, when you do short term trading, your asset is the “cash” and not businesses, as you are not an investor but a trader and you jump in and out all the time. And the main asset still remains the cash in your portfolio. In long-term investing, the approach to your portfolio is to own businesses, not cash. So when there is hyperinflation or inflation, which will always be with us, most probably, your stocks will price into that even automatically. Although your real wealth won't grow, your wealth measured in dollars will grow. And oppositely in short term trading, most probably you will lose those gains. It's really tough to understand the very nuances, but when you do it, that's when the “Aha” moment occurs. Let me bring an extreme example that can show what I refer to. Both in trading and in investing if you expect a 10% gain on a deal and there is a sudden inflation increase by 5%, then you will end up gaining 15% if you hold the stock for a long term, but instead, you will most probably end up gaining your expected 10% if you are just trading it with going in and out. 

 

  1. The 3rd thing I want to go over is that there are more emotions involved in short trading than in long term investing, and that's why more than 95% of people don't succeed when it comes to short-term trading. For many people, it's like addictive gambling, which can lead to terrible losses. It's really way harder to be successful in trading than in investing. Also, you will need a lot more time, software, tools, and connections to be successful in trading. And your eyes should always be open to the news in the world. In short trading, you need more awareness of what's happening in the world, than in long term investing. Because when you invest long term, you select your preferred company, and you stick to it for a very long time without following the short term news or the short term economic events itself, which is not true when you do short-term trading in the market.

 

  1. The 4th thing I want to discuss is my most favorite topic. But before we move on to the 4th topic, let's shortly sum up the first three topics. If we want to be successful in short-term trading, we must consider that we will be bitten by fees, commissions, taxes, and inflation. In the long term investments, we also have some of those problems, but they are much less than in short-term trading. 2-5% inflation and 1% commission on each trade or short-term capital gain taxes with compounding can really disturb your growth easily over a long period.

    Ok, let's finally move on to the 4th and the most important topic I want to cover on trading and investing. And it is, in my opinion, that short term trading doesn't create much value in the world. Of course, I can be wrong, that's only my personal opinion as a regular guy, but I think trading doesn't add value to the world. It has some value, but it's way less than investing in a company that tries to make the world a better place. I'm a big believer that the more problems you solve in the world and the more people you help and the more value you add to the world, the more successful you become. And in trading, I don't see as much value as I see in investing. It doesn't make the world a better place in the way that investing does.

We'll talk about four main advantages of long-term investing over short-term trading.

 

Hey everybody, it’s Henrikh here, and today I will explain why growing your wealth is easier with long term investing rather than short term trading.

 

Ok, let's start.

I don't want to separate day trading, swing trading, or whatever trading. Yes, they are different, but I will call all of them as short term trading because all short term trading methods have the same type of fundamental elements that differ from the long term investing psychology. That's why I mostly want to talk about the differences between trading and investing regardless if it's day trading, week trading, or minute trading.

 

You can do both short-term trading and long-term investing at the same time. One doesn't block the other, and you are not forced to choose only one. I know many successful investors that do both short term trading and long term investing. As you know, I'm mostly interested in long term investing, but I do some short term trading as well. But when it comes to short term trading, I mostly use options, and I mainly sell rather than buy, which is usually a big part of my long term investing strategy. So this way, I become successful in both short term trading and long term investing. But there is a big difference between my short term trading style and what most people do. In this article I will talk about why I mostly love long term investing, and what I don't like in short term trading the way most people do.

 

Before we start, please be sure I’m not against short term trading; many people make fortunes with short term trading. My short term trading is thriving as well, but anyway, I will tell you what I don't like in short term trading and what I love in long term investing. I will cover four main points on this.

 

  1. First of all, for me, long-term investing surely makes the most money in the market. Go through Forbes's list of wealthiest people. Who are those people, who own businesses and investments, or who trade the market? There should be a reason for that. And some of the reasons are that in the long term investing you pay fewer commissions, fees, taxes and you don't miss the most important days that make the most significant impact on the stock price. 80-90% of the price move comes in under 10%-20% of the time. With the buy and hold strategy, you don't miss those days, and not missing those few days can make you really wealthy. And when it comes to commissions if investing in the stock market is almost a zero-sum game, then trading, in general, is a negative-sum game because of the frequent commission, fees, and taxes. There is always some money that leaves the table. So you fight for the rest of the money which is on the table. So for me, there is no doubt that long term investing makes real wealth rather than short term trading. 

 

  1. The second thing I want to mention is inflation or hyperinflation's impact on trading or investing. Does inflation harm your success in short term trading? It surely does. And oppositely it mostly doesn't in long term investing. I don't say that each and every stock will gain from inflation, but mostly the stock market is positively correlated with inflation. Not in all cases, but mostly inflation makes the stock prices go higher. Usually, business earnings don't get bitten by inflation, because whenever the prices of goods go higher, business income goes higher as well. So the stock prices also go higher not only because of business performance but also as people have more money to invest in stocks. This is a great advantage over short term trading as when you buy and hold with a long term investing strategy, then inflation works for your portfolio.
    On the other hand, when you do short term trading, your asset is the “cash” and not businesses, as you are not an investor but a trader and you jump in and out all the time. And the main asset still remains the cash in your portfolio. In long-term investing, the approach to your portfolio is to own businesses, not cash. So when there is hyperinflation or inflation, which will always be with us, most probably, your stocks will price into that even automatically. Although your real wealth won't grow, your wealth measured in dollars will grow. And oppositely in short term trading, most probably you will lose those gains. It's really tough to understand the very nuances, but when you do it, that's when the “Aha” moment occurs. Let me bring an extreme example that can show what I refer to. Both in trading and in investing if you expect a 10% gain on a deal and there is a sudden inflation increase by 5%, then you will end up gaining 15% if you hold the stock for a long term, but instead, you will most probably end up gaining your expected 10% if you are just trading it with going in and out. 

 

  1. The 3rd thing I want to go over is that there are more emotions involved in short trading than in long term investing, and that's why more than 95% of people don't succeed when it comes to short-term trading. For many people, it's like addictive gambling, which can lead to terrible losses. It's really way harder to be successful in trading than in investing. Also, you will need a lot more time, software, tools, and connections to be successful in trading. And your eyes should always be open to the news in the world. In short trading, you need more awareness of what's happening in the world, than in long term investing. Because when you invest long term, you select your preferred company, and you stick to it for a very long time without following the short term news or the short term economic events itself, which is not true when you do short-term trading in the market.

 

  1. The 4th thing I want to discuss is my most favorite topic. But before we move on to the 4th topic, let's shortly sum up the first three topics. If we want to be successful in short-term trading, we must consider that we will be bitten by fees, commissions, taxes, and inflation. In the long term investments, we also have some of those problems, but they are much less than in short-term trading. 2-5% inflation and 1% commission on each trade or short-term capital gain taxes with compounding can really disturb your growth easily over a long period.

    Ok, let's finally move on to the 4th and the most important topic I want to cover on trading and investing. And it is, in my opinion, that short term trading doesn't create much value in the world. Of course, I can be wrong, that's only my personal opinion as a regular guy, but I think trading doesn't add value to the world. It has some value, but it's way less than investing in a company that tries to make the world a better place. I'm a big believer that the more problems you solve in the world and the more people you help and the more value you add to the world, the more successful you become. And in trading, I don't see as much value as I see in investing. It doesn't make the world a better place in the way that investing does.