Why We Are Investors and Not Traders
In a world where seemingly everything is available at our fingertips and the universe of instant gratification is ever expanding, there has been a boom in retail stock market traders reminiscent of the rise and subsequent crash of the late 1990’s Tech Boom.
I say trader and not investor as many of these individuals have no interest or desire to hold these assets and businesses for the long term. The rise of meme stocks such as Gamespot, AMC in the US and Brainchip or this weeks pump (and almost certainly to be dumped) Kukino.
While there are certainly some brilliant individual traders out there, in my professional opinion for every genius outlier like a Jim Simons or Paul Tudor Jones, there is a plethora of unsuccessful traders. While I personally do not recommend the use of popular trading instruments such as Contract For Difference (commonly called CFD’s or Spread Betting), the research shows that on average over 75% of retail accounts in these markets end up losing money.
The trader is focused on realising capital growth by buying and selling shares over a short time frame. This ranges from individuals who aim to enter and close out positions by the end of the day (day traders), through to those who focus on longer time frames such as days or weeks. Often the research focus for these traders are based on technical factors such as Moving Averages, Fibonacci Retracements and Chart Patterns.
The investors research process entails understanding the fundamentals behind the business, including the strength of the balance sheet, cash conversion, free cash generation capabilities, dividend growth, quality of the management team etc. As you can imagine, this research is being done with the intention of holding the business for long periods of time. The best known example of this is the Oracle of Omaha Warren Buffett himself, who famously has held stakes in outstanding businesses such as Coca Cola, GEICO and AMEX for decades. In fact, some of these holdings were in his portfolio 20 years before I was born!
Our focus is to invest for the long term and our rationale is as follows:
Timing the market is incredibly difficult and swings can be brutal. A 2019 study by JP Morgan showed that in the 20 year period from 1999 to 2019, an investor who was not in the market for the 10 best days had returns of half that of someone fully invested the whole time. Scarily, an investor who missed the top 20 days actually showed a negative return over that period.
We believe that over time exceptional businesses will produce returns that are better than inflation.
Understanding your investments and how they will be bigger, better and more profitable businesses in the future will enable investors to avoid making mistakes during periods of market turbulence and uncertainty.
We want to own assets that are capable of spinning off mountains of cash to our investors. This means that when markets have fallen and prices become compelling we have plenty of firepower available to take advantage of the fear within the market.
Particularly for our older clients, reliable and consistent income is of immense importance. Traders will typically not receive dividends and in the case of many of our favourite Australian Shares the associated franking credits.
The tax inefficiency of trading from a CGT point of view. Long term investors who hold assets for longer than 12 months are eligible for a Capital Gains Tax discount (our preference is to pay the tax man as little as we are legally required to hence why we love holding assets within the superannuation environment). Traders unfortunately are required to pay full Capital Gains Tax on any gains.
We believe that trading carries an additional level of risk in comparison to long term focused investing. Often stocks will move with no news or reason to explain the short term movement. It can be as simple as an investment firm really wants to own the stock and is buying it or they need to sell for liquidity and are happy to sell at almost any price. We believe that understanding your holdings provides less risk than trying to accurately time the market day in day out.
Lastly, research shows that it is near impossible to consistently call correctly market movements over a short time period. The longer your time frame, the more certainty you can add that your total return is likely to be positive. For example the ASX 200 has never had a period off negative returns after 8 years once dividends are included. As the famous quote goes “In the short term markets are a voting machine, but in the long term they are weighing machine”
Keep an eye out for end of reporting season wrap up and as always feel free to contact us