Why Long Term Investing is Superior to Short Term Trading

What’s a Trader? What’s an Investor? What are you now? And why do I say that you should be an owner of stocks, not a trader?

Investors Beat Traders

First of all, in my world a TRADER is someone who buys and sells something to make a sale on the difference in the transactions. There are people who trade cards, stamps, corn, soybeans, and while we are at it they buy and sell ownership shares in companies. Stock Traders buy and sell stock looking for a quick profit in a short time. Almost all people “investing” in the stock market are really Traders, not Investors.

Meanwhile an INVESTOR buys a business to make a profit on the operation of the business. They are looking to make money off of its dividends and the growth of the business. These people look at investments over years, even decades.

I must admit, I am both an Investor and a Trader since parts of my portfolio show both sides. But when all is said and done, being an INVESTOR is by far the most profitable. There are three reasons for this:

• Transaction Fees – Every time you buy and sell a stock you pay a transaction fee. If you invest in something you pay the fee only once. If you are a Trader you keep paying the transactions fees over and over again and those fees add up, eating away at any profit and compounding the pain of any losses.
• Taxes – Anytime you sell there is a tax bill owed for any profits. Short term transactions (those involving ownership of less than a year) are taxed at a much higher level than investments kept longer than a year. Not only must you pay a higher tax than an Investor, but the Trader must pay that tax many times more often.
• Sort Term Unpredictability - Long Term Predictability – It is a common expectation of most economists and Investors that in the short-term no one knows what the stock market will do. Just listen to the news in the morning before the market opens. The talking heads will be jabbering away about the news of the last 24 hours and wondering how the market will react. That’s right, wondering, because no one knows what news item or unexpected event will change Trader expectations. However it is also a given that in most cases stock price will reflect company value. A company that is well-managed and making profits for its shareholders will bring profits to the shareholders eventually.

Being a long-term Investor will almost always beat a short-term Trader because the Trader has so many disadvantages to overcome.