You would think a carpenter ought to start a business in woodwork. Or a chef in the lines of catering and whatnot.
But you’d be surprised to know how technical expertise doesn’t guarantee success.
At least this was my experience and why one of my advocacies is to convince non-complex investors to stop trading stocks.
Business valuation specialist
I used to work in the M&A space and was an Associate Director for the Advisory Group of one of the largest accounting networks in the world.
Part of my role was to estimate the value of large corporations for sale, for reporting purposes, or other related reasons.
Trading then was something I thought I should be doing. I had the technical know-how, the right equipment, and was always tuned in to the news anyway.
But trading is a lot harder than what other “experts” claim it to be.
In fact, I say trying to make money trading stocks is an unproductive use of your time.
It’s not that you can’t make money trading stocks. But rather there are better ways to make money than trading stocks.
And remember, an investment that makes you money, but at the expense of another investment that would’ve made more money, is, therefore, a poor choice. (See opportunity cost.)
Trading is exciting. Investing is boring
But I admit, trading is a lot of fun! I mean, who wouldn’t want to earn daily just by trading on market movements.
An understanding of technical analysis is vital to trading profitably. And it’s not just about the hard-and-fast aspects of technical analysis either.
Everyone has the same information, and your advantage (or disadvantage) lies in how you interpret the data and the charts.
Speculating is the utmost example of exciting trading. There’s a real chance of earning over 1000%! It’s a slim chance, but real nonetheless.
On the other hand, investing long-term is dull.
Once you pick a stock, you essentially wait, for the most part. An even less exciting strategy is investing in index funds where you don’t pick stocks altogether.
In my years of experience though, I’ve actually found “boring” to be a desirable attribute.
Boring is profitable
An invest-and-forget strategy has several benefits. For one, you don’t stress about the inevitable daily movements.
Stock markets are bound to fluctuate because of human emotions.
I probably don’t need to tell you how traders are a fickle lot.
People interpret the same news differently, we use different assumptions in our valuations, and our sentiment can change for no apparent reason.
Another benefit of investing in an index fund is you essentially fill a basket of stocks that’s inherently diversified.
Your exposure is to the overall economy, which historically has been on an upward trend over the long run.
(And if it weren’t on an upward trend, the likelihood that your selected stock, or stocks, does well is slim anyway.)
Advice from Warren Buffett
Yes, you also lose the upside potential of a profitable stock choice.
But the ups and downs of your stock selections eventually balance out and have frequently been seen to do worse than an index.
That’s not even mentioning the costs of transactions for every trade you make.
Warren Buffett, the greatest investor of our generation, thinks low-cost index funds are best for investors such as ourselves.
In 2007, he made a bet for $1 million that an index fund would do better than an actively managed fund.
A hedge fund took and lost Warren Buffett’s bet. This, to me, is the kicker.
If a hedge fund, a group of professionals with advanced degrees and expensive software, is unable to beat an index fund, then there’s no reason for me to waste time selecting stocks.
How I invest today
I like to think I’ve learned from my lessons. I no longer actively trade in stocks, and I use the freed-up time to do things that are actually productive.
I network with people, read books, and just focus on my businesses.
Investing is still very much part of me, but I’ve toned it down to quarterly updates. I use the Buffett Indicator, which I’ve tailored to fit the Philippines.
Using this method, a hypothetical portfolio would’ve earned 19% p.a. based on a backtest I did over 20 years of PSE data.
To me, that beats a portfolio that has a slim chance of earning huge amounts at the risk of losing possibly more.
Conclusion
Should you stop trading and start investing? I hope you would, but I wouldn’t want to make you do it either. It’s still a matter of preference.
These are my findings and you are free to choose your direction.
I don’t doubt that others have made a fortune trading stocks. Although I do doubt most influencers out there.
Continue trading stocks if you think it’s enjoyable and profitable.
But let’s call it what it is and not confuse one for the other. Trading is costly, risky, and potentially more profitable.
For me though, I’d rather invest in an index fund and use my time on things that grow wealth in more fruitful ways. Whatever your choice, I wish you luck!
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