A Bourse Diary

Thoughts on stocks, speculation and ... life

Tuesday, December 13, 2005

To speak a common language

A Russian poetess once asked how would she feel about living in exile and with a foreign language around her, answered: "what does it matter in which language you are not understood". The sooner I explain some terms I often use and which are also often misunderstood, the better. It's not a big deal - for the first here are these three ones:

I consider it important. These are the main characters involved on the bourse:
A trader is the one who tries to exploit the short term, even day-on-day fluctuations of the prices. I also call him a gambler, because the (extreme) short term movements of the chart are a highly hazardous, non-predictable matter. This is my conviction. Anyhow - even if I do not know famous names of traders who managed to achieve some kind of impressive wealth - there should be successful ones. The main point is that the trader acts in a specific way. In the very short term the stock markets are mainly driven by emotions and technical conditions. They also say "a news-driven" market, though the way the public reacts to the news is highly emotional. The same news can produce very different reactions. The public also seldom knows exactly and right away which news is good and which bad. I do not believe in those efficient markets theories. The trader (and even more the so called day-trader) should be very flexible and fast in catching the emotional and technical conditions of the market on every single day. For example: He/she might come to the bourse (or sit down in front of the monitor) with the serious intention to buy, but recognizing the weak opening and the dull sentiment of the day he/she sells short all the shares, which were yesterday considered an excellent buy-opportunity. They also say "to read the ticker" i.e. to feel the immediate reactions of the stock prices. The trader can and should not care about the deep sense and couse for a larger price movement, because he/she trades the small ones in either direction.

The investor is the opposite pole of that. An investor puts his money in stocks for many years, he/she mounts a (someday large) portfolio of shares - bought may be in bad days at low prices and may be also in good periods at high prices. The investor believes in the overall superiority of stocks vs other investment forms in a long term. He does not care about how the market closed today or this week, or even this year. He knows his money good invested and expects in some dozens of years to earn the fruits. If an investor has a good sense of business models, of intrinsic value, maybe a vision about a company or sector, he can get extremely rich, because he does not sell too early. He has the patience to wait and see things evolve. The pioneer investors in companies like IBM, Microsoft or Apple - to mention just very few - who had the patience are surely rich men. The most prominent investor is of course Warren Buffet. As good as I know the average duration of his stock positions is ca. 12 years. But the specific skills of an investor are much more in evaluating a business model and prospectives, to estimate an intrinsic value of a company etc. You need to be much of an accountant, of a businessman, of a financier, not a stock exchange operator. Warren Buffet has once stated, he does not even look at the stock prices on the bourses. There are just a few like him of course, but my point is: investing as described demands skills "from outside the stock exchange", and secondly the investor has one great advantage: the stocks rise in long term - (almost) inevitably, so the very most of the investors win - not excitingly much, but win.

Somewhere in between stands the speculator. His time horizon is not that short sighted (pardon: just short), but not that long like the investor's either. The speculator looks at the cyclical movements on the stock markets, the bigger ones, and does not care about the day-on-day fluctuations. A percentage point or two higher or lower just don't matter. He concentrates on the overall conditions of the market and on the main underlying trend. His considerations are of completely different matter as these of the trader, but also not that business or purely saving-in-stocks related like the investor's. Please make no doubt about it - the job of the speculator is also very dangerous. If he is at a fault, he can severely loose.

As a rule of a thumb I would consider the long term success chances of these three like that:
The investors win in a long term, the traders almost certainly loose, and for the speculators there is no rule of thumb.

I consider myself speculator. And the focus of this blog will be on the issues of relevance for acting in this manner.


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Disclaimer: All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and are in no way intended to serve as personal investing advice and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Readers should not make any investment decision without first conducting their own thorough due diligence. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed.