Why Traders Are NOT Investors

Shawn: Ready to clear up a big misconception in the financial world – are traders and investors the same thing? Spoiler alert, they’re not. From Warren Buffett’s long-term growth strategies to the quick buck culture of trading, today, we’re demystifying these often confused terms. Let’s get some perspective. Welcome to another episode of Christian Financial Perspectives. We’re so glad that you’ve joined us. My name is Shawn Peters. I’m joined as always by my father-in-law and co-host, Bob Barber. Today we have a really exciting episode for you today on why traders are not investors, and if we ruffle some feathers, sorry, not sorry, but we are going to be sharing scriptures and how those apply within this. So we hope you stick around and if we help at least one person from making the mistake of getting caught up in the trading that is effectively gambling, then I think this video will have been absolutely worth producing. Bob: Shawn, what made me want to make this program was I’m kind of tired of reading the financial articles every day where they intermix and mix up the words between an investor and a trader. Shawn: That’s right. So that’s kind of where this came from is I’m sure you’ve seen in the news all the time, oh, what are investors looking at buying today? Or what are investors looking at? Yeah, exactly. So we’re going to be going over that and starting out with, first of all, what is an investor? So we have a couple different definitions, not just ones we came up with, but from arguably credible sources. So the first one, Bob, why don’t you cover that one from Investopedia. Bob: Investopedia says, “An investor is any person or other entity who commits capital.” I like that word, commits. “Commits capital with the expectation of receiving financial returns. Investors rely on different financial instruments to earn a rate of return and accomplish important financial objectives like building retirement savings.” Notice that building, “Funding a college education or merely accumulating additional wealth over time.” Emphasize some words in there. Shawn: So the second definition we have for you is from Webster’s Dictionary, “To commit money in order to earn a financial return to make use for future benefits or advantages.” So what I’m noticing here, Bob, is a little bit of common thread. Bob: I do, too. Shawn: On investors are focused on the long-term, 3 to 10 years or longer for their time horizon. And then just some additional insights for you, Bob, if you want to. Bob: Well, I just see they’re committed. They’re committed. It’s to building wealth. It’s not about what’s happening today, Shawn. It’s the future. Shawn: Exactly. We’re not talking in days, weeks, or for the most part, even months. we’re talking about in years because otherwise you’re not investing, which we’ll get into that next. So an investor uses a diversified portfolio to mitigate risks. They’re not looking for the hot stock pick of the day. That’s not investing, that’s trading. And investors often will look at companies’ fundamentals, the management team, long-term growth potential, and maybe even like we do here, you’re looking at, well, what is it they even do? Even if a company has a lot of really good fundamentals, but the product and the service that they’re offering is maybe kind of going out of style or it’s just not something that’s very dependable and maybe that’s not a good idea for the investment. Bob: And we throw in the mix biblically responsible investing. Shawn: Exactly. Bob: What is the company, what might they be supporting? Shawn: That’s right. Bob: We’ve talked so much about that on our other episodes that we’ve had. Shawn: That’s right, that’s right. So the scripture for this section, we have Proverbs 13:11, “Dishonest money dwindles away, but whoever gathers money little by little makes it grow.” Bob: Yeah. Not all trying to get rich quick, is it? Shawn: Exactly. Bob: Yeah, it’s little by little. Shawn: I love that verse. And it really focuses on the slow and steady wealth accumulation through long-term investments, not get rich quick, which again, I love how many times scripture talks about these kinds of principles. And you hear on social media, I’m not going to mention any specific names, but you will see all the time, oh, there’s this new cryptocurrency or this new investment or there’s this, “If you do this one trick, you’ll make all this money.” Everyone feels like I’m behind and I need to catch up quickly. But that’s not how you build and maintain wealth. And scripture talks about that a lot. Bob: The turtle wins the race. Shawn: That’s right. So the next section we want to cover. Bob: We get to the definition of what we feel an investor is. Okay. Shawn: So now we want to cover the definition of a trader. Bob: That’s right. Shawn: Which as we kind of allude to already is short term. Maybe it’s minutes to days or could maybe be a couple of weeks, but… Bob: Usually it’s not. Shawn: Usually short term. That’s right. Bob: Usually it’s just a day. And that’s why you see so many fluctuations between one hour and the next or sometimes between 15 minutes and the next you can see sometimes right before closing or right after, right at the opening, you’ll see it shoot up real quick, then you’ll see it shoot back down and then you’ll see the same thing happening in the last few minutes of the day. It’s just crazy. It’s crazy. Shawn: What is a trader? Well, according to Investopedia, a trader is “an individual who engages in the buying and selling of assets in any financial market either for themself or on behalf of another person or institution.” Bob: And their time horizon, again, is aimed for just short-term profits based strictly on market trends, news, what’s happening at the moment, not the long-term, but what’s just happening at the moment. Shawn: Some interesting things to consider, but for traders, 95% of day traders lose money, which I think that’s a pretty good highlight on the high risk nature of trading. And they incur or may incur, I guess we have to say, but they may incur higher transaction costs including taxes like the short-term taxes as well as commissions that can eat into the profits. Bob: I think it’s the taxes, that’s the main thing. Shawn: Yeah. Bob: I mean the taxes is all based on income taxes. Shawn: Instead of long-term capital gains. Bob: Capital gains. And I was mentioning to you that we know somebody that got caught up in the day trading and they were really doing good. It was in like 2021 and when the market was doing nothing, you could throw a dart and it was going to go up. But then what happened was they traded this stock over and over and over and they made a lot of money and then they got caught, I’d say with their pants down. Shawn: For lack of a better way to say it. Bob: And then it dropped and dropped and they owed $200,000 or $300,000 in income taxes. And then… Shawn: Because of all the trades that have been going on for years. Bob: And the value of the stock was not there and they couldn’t get the value out to pay the taxes. So guess what they had to do? Go borrow against their home. So it is sad to see this happen. Shawn: Well, long story short here is that it’s not that we don’t see traders make money. Okay? That’s not the case here. Bob: They’ll occasionally make money and you always hear about it when they’re making money, but you never hear about it when they’re losing. Shawn: The issue here is that traders, the very nature of what they’re doing, it’s not going to last. So it’s not a matter of if they lose money, it’s really a matter of when they lose money. I mean, you’ve been doing this over 30 years, Bob, how many day traders have you met that have been doing what they do successfully for 20 years or longer? Have you ever met one? Bob: Shawn, I’ve never met somebody that’s been doing it for three years or longer, but I have seen between three and four years I’ve watched… Shawn: Maybe five, depending on when they were doing it. Bob: We’ve covered this with sudden wealth. I’ve watched Sudden Wealth just slowly dwindle down to nothing over that time as they’re doing the day trading. And you got to look at the motivation. What’s the motivation behind day trading? Is it just to make a quick buck? Well, yeah, it is. It really is. And I think this is where scripture plays into this too. We look at Matthew 6:24 and it says, “No one can serve two masters. Either you’ll hate the one and love the other, or you’ll be devoted to one and despised to other.” You cannot not serve both God and money. So this is really speaking into the quick prophets and just trying to make a quick buck. Shawn: That’s right. You cannot simultaneously aim for quick profits and long-term growth. So, Choose wisely. Bob: Yeah, definitely. Shawn: Alright. So what are the main differences between a trader and investor? Bob: And I think it’s important, this is important right now to see what we say about this, I want to say something in the middle here. The main difference between a trader and investor, when you’re reading anything on the internet, this is where you really got to pay attention right now, because there’s a big difference between a trader and investor. We’ve gone over what an investor is and a trader, but what are the main differences. Shawn: So the first and foremost is the duration for which the person holds the asset or the time period. So, is it being held for a day, a few days? Is it something that’s being held for months or years. That would give you a big indication, the longer term, on whether or not it’s a trader or an investor. Bob: Investors have that longer term time horizon. Shawn: That’s right. Bob: It’s going to be investors going to have a 3, 10, 15, 20 year time horizons. Shawn: That’s right. And traders tend to hold assets for much shorter periods of time to try to capitalize on short-term trends. Bob: They’re looking for those trends. Shawn: That’s right. Bob: And they’re all guessing against each other. And they’re also gambling many times on just one company or two companies. So they’re putting more of their eggs in one basket where an investor’s going to diversify a portfolio. Shawn: Which goes right into our scripture for this one, Bob, which is Ecclesiastes 11:2, “Invest in seven ventures. Yes, in eight, you do not know what disaster may come upon the land.” Diversification is crucial in investments to mitigate risk. Bob: That was the wealthiest guy in the entire globe. Shawn: That’s right. Bob: I don’t know what. We heard some kind of interpretation that he would be worth. – Solomon would be worth 7 or 8 trillion a day or something. It’s some crazy number. Shawn: Some crazy numbers. Bob: Alright. Shawn: The misuse of the terms trader and investor. So here’s the problem, as you alluded to in the beginning. Bob: This is why I made the program today. Shawn: Many financial websites use these two terms trader and investor interchangeably. Apparently, I think due to inexperience and lack of knowledge, I mean I guess no journalistic integrity. Bob: I cannot understand why they mix ’em so much together like that. And so many times I’m saying you mean to say trader here, not investor. Shawn: The implications of this, the misuse confuses the public and it leads to misconceptions about investment and trading strategies. Bob: So when you hear the word investors are doing in this and investors are doing that and you’re thinking, well, I’m an investor, I’m not doing that. Shawn: Or then we get the question too, Bob. So clients will ask us, well, I heard on CNBC or whoever, whatever. I mean it’s a pretty major one. Bob: Yeah, it is. Shawn: But you’ll hear on these financial sites, whether it’s articles or videos about what investors are doing. And then clients are asking us and we go, no, that’s a very short term. That’s a day trader thing. Bob: They should be saying trader investing, that’s not investors. Right. Shawn: So investors, and I think this is an easy way to hopefully remember this. Investors focus on time IN the markets, not TIMING the markets and time in the markets is a proven strategy. Bob: It is, yep. A trader is just concerned about quick profits without regards of the company’s long-term potential or their impact on society. Shawn: That’s right. And so the scripture, this is Luke 14:28, “Suppose one of you wants to build a tower, won’t you first sit down and estimate the cost to see if you have enough money to complete it?” Planning and assessing risk are essential before embarking on any financial journey. Bob: Absolutely. Shawn: Especially when it comes to your investments. Bob: We’re going to hark on a little bit more here. Shawn: I feel like I had to hold you back on this, Bob, because this is the part you wanted to get to. Traders are professional gamblers. Bob: They are, I mean, similar to the gambling, the majority of day traders lose money or do so eventually, if not right away. Shawn: Like we said earlier, you’ve seen some that have three to four years maybe in the right circumstances, maybe five years, but you don’t hear about or meet people that have been day trading consistently and profitably for 10 years. It just doesn’t happen. Bob: And I’ve had clients in the past, they’ve gone through all the courses, they’ve bought all the advertisements since they’ve heard and spend a lot of money on the trading programs. Shawn: And we won’t get too far into that Bob, but we talked about one of our other episodes on the professional doomsayers. And you have these people that are selling you this trading program that’s going to help you be profitable. Here’s my first question. Bob: Yeah. Shawn: Why are they wasting their time on this educational training program that supposedly works? Because if it actually worked half as good as they say it does, they wouldn’t be wasting their time selling it. Bob: They’re doing fine themselves. Shawn: They’re making money on tricking you into buying their nonsense, not on what they’re actually selling you. Bob: Because if they sell it too much and everybody starts using that program, it’ll no longer work because now the strategy is everywhere. Shawn: Yeah, just like gamblers, the traders, they’re not particularly concerned with the underlying value of the assets. They’re more focused on those short-term movements. And we have another scripture, Hebrews 13:5 if you want to read that one. Bob: “Keep your lies free from the love of money and be content with what you have.” Money’s not evil, but the love of it. And this is what day trading can do. And I like your interpretation. I’ll let you share that. Shawn: Yes. Money should not be the end goal. It’s just a means to achieve financial security and contribute back to society. Expanding God’s kingdom, if you’re a Christian, that’s our goal. So we have a case study, if you will. Bob: A case study, right. Shawn: I guess it’s not long enough to be a case study. Bob: No, it’s not. Shawn: Warren Buffett. Bob: Oh, he is definitely. He turned 93 a few weeks ago. So the old guy just keeps on going. Shawn: That’s right. Well, so investors look at what the company makes and its long-term growth potential or dividends. Warren Buffett is arguably the most famous moderate investor. And his long-term strategy focuses on finding excellent companies to invest in and holding them for their long run. Warren Buffett doesn’t day trade, as far as I know. Never has. Bob: I mean, when you listen to him and I listen to ’em a lot, they hate the thought of it. Shawn: And it doesn’t work. Bob: And they talk about how it is so bad for the markets itself as well. Shawn: Again, to use the gambling idea, Bob, the reason why we say day traders or traders, not investors, are gamblers is because just like with gambling, the house always wins. So you might get a lucky streak at blackjack or whatever is your game of choice, but eventually the house wins and you lost it all. And if you’re really lucky, maybe you made enough money to pay for your drinks. Bob: Well, I think I want to learn from the most successful investor I know in modern times, which is like you say, Warren Buffett. He’s very intelligent and also he doesn’t let any motions get involved. You always hear him injecting money in the markets when they’re way down. So he takes the emotional part out of it and he’s looking for things on sale. So the guy is smart. And I guess something’s going on there, too. At 93 years old, he’s still doing it. I think that’s amazing. Shawn: So we hope this clarification of the difference between an investor and a trader has helped you for the next time you see an article about “what traders are looking to invest in today”. Because as I think we’ve made clear what the writers usually mean is what traders are looking to BUY today, not invest today. Bob: That’s correct. Shawn: Using those interchangeably again. And ultimately, financial writers need to exercise caution and correctly differentiate between traders and investors to provide accurate advice. So if we happen to have someone watching or listening that works for one of those financial sites, hopefully this helped. Bob: I hope so. And please, if you are a writer, don’t call an investor a trader. Shawn: Yeah. Bob: Okay. And we’re here to help you invest for the long term and we’re here to help you with a Biblically responsible investment as well. Shawn: That’s right. Thank you. And God bless. [DISCLOSURES] * Investment advisory services offered through Christian Investment Advisors Inc dba Christian Financial Advisors®, a registered investment advisor registered with the SEC. Registration as an investment advisor does not imply a certain level of skill or training. Comments from today’s show are for informational purposes only and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely those of the hosts, Bob Barber and Shawn Peters, and their guests. Bob and Shawn do not provide tax advice and encourage you to seek guidance from a tax professional. While Christian Financial Advisors® believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability.