Traders versus Investors — Who Does Better?
Kurt Brouwer October 23rd, 2007
A great deal of Wall Street’s brainpower is devoted to gaining an edge in short-term trading. If you read brokerage house research reports, they are frequently focused on what stocks are picking up momentum and thus should be good buys — over the short-term. On the other hand, there are those investors who buy and hold for the long haul.
In this post from his blog, Kudlow’s Money Politic$, Larry Kudlow talks about traders versus investors.
‘…Last night I asked Jeremy Siegel, Wharton Finance professor and author of “Stocks for the Long Run,” the following question: Who does better, long-term investors or traders? That’s really the key question. Siegel said it’s a no-brainer—definitely long term investors. He conceded that there’s a very tiny few who can buck the trend and succeed in the short term game. But on the whole, it’s no contest, you want to be a long-term investor.
I posed the same question to Trend Macro CIO Don Luskin. Here’s what he had to say: “There’s no question about it. The great myth of trading is that it’s the very, very few survivors in the trading game who show their face to the public, who come on CNBC. What you don’t see…are [the] 10,000 who are driving cabs and flipping burgers somewhere.”…’
Don Luskin kind of mangled his comment, but his point is a good one. When we hear about someone who was successful in short-term trading what we do not hear about are the thousands of traders who lost money using similar strategies. One analogy to consider has to do with coin tosses. If one million people paired up and tossed a quarter, then half would call it correctly and half would fail. If we repeated that process, after 20 tosses, we would have one winner who had called the toss correctly 20 times. No doubt this hero would get rich off promoting his or her ‘system’ for calling tosses correctly with advertising that might go like this, “I made a fortune with my patented wrist flip and you can too!”