A trade or an investment?

The majority of my investing is for the long term, in my case a 10 year horizon, but in the current climate, short term trading also makes sense: the large swings in the pricing of good quality stocks and indices can yield strong returns.

I recently heard the founder of CMC Markets commenting, and I paraphrase, that traders call a bad trade an investment. At the heights of the last bull market, when M&A action was all that was sustaining prices, I have to admit that I nearly fell into this trap.

Whilst I feel that I’m confessing a sin: admitting to buying on market rumours, I avoided compounding the error by convincing myself that the stock would still be good value for the long term. It wouldn’t, the price was inflated, the fundamentals I ignored made that clear, and it was very unlikely to ever be worth what I paid for it.

Trading and investing are not the same thing, and require different strategies. Timing is important for a trade, as is close observation and the use of stop losses. An investment must represent reasonable fundamental value to be worth buying, so the precise dynamic of the current market doesn’t matter as much.

In future I’ll decide, in advance, whether I’m trading or investing.