This weekend, Chez Melvin hosted several spirited discussions about the markets and investors' behavior. The focus was the age old debate about trading vs. investing. I declared that unless you had the time and attention to trade full time, along with a definable tradable edge, you would likely fail as a trader. The great, and even good, traders I know do it full-time. The live, breather and sleep markets and are studying and testing ideas constantly. The do not have a fixed set of rules or chart patterns they follow slavishly, but are always looking for what is creating an edge right now. It is not just their hobby or interest; it is their vocation and their passion. There are not that many of them.
Part-time market traders rarely succeed because too much can happen between the time you put on trades and that first coffee break later in the morning. A quick check of prices between clients is simply not enough to have and maintain an edge. You will not be able to develop the skills and knowledge needed to trade successfully between work, family and other commitments.
Individual investors should emulate those participants who have made the most money over the years in the markets. They are the business creators and business owners. You best asset is your ability to run a business, or your ability to engage in a trade. Your first tool in the path to market success is your ability to create wealth. That should be your first focus. When it comes time to invest the profits of your endeavors, you should focus on being an owner. Buying assets and earnings when they are cheap and holding them until they recover and prosper is the path I think most individuals should follow. It doesn't matter if you are a deep value guy or a growth gal: Buying companies when the market creates attractive pricing is the path that will lead to success for most individual investors.
Take a look at the Forbes 400. Most of the names on there are either creators or owners of businesses. There are some traders, including Steve Cohen and James Simons, but they not only have very unique and specialized knowledge, but the real source of their wealth comes from fees earned by running the business -- not from the money they took out of the markets. Business owners and investors are on the list. People such as Warren Buffett, Sam Zell, Carl Icahn and others who have invested at the point of maximum pessimism in markets and sectors and then held on for years -- and even decades -- dominate the list. Individuals should study and learn from the owners about how when to buy and sell stocks. The traders may be flashier and more exciting, but it is the owners who always seem to end up with the money.
Buying and selling shares of market leaders such as Apple (AAPL) or Lululemon (LULU) based on certain patterns may seem to make sense, but for most individuals it is probably a bad idea. It is almost certain that you will miss a trade while reviewing the job site or arguing your client's case. Your stop-loss orders will get picked off by the full-time traders and you will get whipsawed on a regular basis. However, buying Hess Energy (HES) when it trades well below book value and holding until the business cycle turns upward leaves you free to run your daily life while the managers of Hess run the oil business for you. Trying to figure out if the latest chart is a head-and-shoulders pattern or not while trying to close a million unit deal with a client is not going to be as productive for you as buying EXCO Resources (XCO) when natural gas trades below $2 for the next five years.
If you are earning your living outside the markets, raising a family and living your life without an intense, complete focus on markets, then you should be an owner, not a trader. In the long run, you will make a lot more money and enjoy your life more.