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Trading is often seen as a speculative way to “timepass” or satisfy “khujli”, while investing is seen as a noble path to financial freedom.
You have been misled.
Trading is more risk and time efficient than investing to earn your first crore on skill parity. Here's why:
Price vs Value
The philosophy of trading vs investing (or TA vs FA) is based on the difference between price vs value. Prof. Damodaran has some fantastic lectures on this, and I am taking the liberty to borrow from his teachings ahead.
Value is typically driven by the cash flows from assets, their growth, and associated risks. Price is determined by the interplay of supply and demand, which is influenced by market moods, momentum, and the narratives surrounding the fundamentals. Both are derived from different forces and have to be estimated using different tools.
In a perfectly rational world, the demand and supply of a stock would be driven purely by its fundamentals. Old-time value investors live by the adage that price can go up and down with no relationship to value, but eventually, it will converge to value. While this may hold true for fixed income markets, in equities, the price may diverge from the value not only in the short term, but also in the long term, without a catalyst causing convergence. As Keynes said, "The market can stay irrational longer than you and I can stay solvent.”
So what motivates investors to put in the effort to understand the fundamentals of a company and hope to be rewarded? It's simply FAITH:
FAITH that they can estimate a company's value
FAITH that market price will adjust to that value
Neither of these propositions can be proven, and they will be tested over time. In the past 25 years, we've had enough bear markets to realize that most market participants who describe themselves as long-term, patient believers in value were actually just traders, and a crisis can bring that to the surface.
I have faith, now should I invest ?
If you are considering investing, first assess your liquidity and patience.
Are you secure in your job or business? Do you have any immediate financial needs ?
Can you see your portfolio in a 50% drawdown and not lose sleep?
Unless you have faith, liquidity, and patience - which most people lack - you have lost very big tools to play the “value” game. You will be much better off playing the “pricing” game.
But what about so many investors who became billionaires ?
Most of the stories involving people losing wealth in the stock market come from trading, whereas most heroes we have in India are investors who went from rags to riches.
Several investing heroes in India began as smart speculators with an information edge, playing with 100x leverage. They eventually became investors because they became so rich during the euphoric run of the 90s that they couldn't trade on size later due to liquidity concerns. Neither do we have such leverages now and neither is the information now so protected.
Moreover, many large and prominent investment deals are not simply valuation games or finding diamonds in the rough. Rather, they are shrewdly structured arrangements that include preferential rights, convertibles, buybacks, off-market discounts, or other exit arrangements, which retail investors cant be a part of.
What about Mutual Funds and SIPs ?
For those uninterested, outsourcing the activity is a viable but highly inefficient way to beat other asset returns. While it is better than nothing, learning to trade is not too difficult either. The effort to benefit ratio (at least to get to your first crore) is a lot more favourable if you play the pricing game via trading rather than the duration game via SIPs.
Ironically, Munger had a great proposition for trading-
All intelligent people should think primarily in terms of opportunity cost.
That’s obviously correct, but it’s very hard to teach business based on opportunity cost. It’s much easier to teach the Capital Assets Pricing Model, or you can just punch in numbers and out come numbers, and therefore people teach what is easy to teach instead of what is correct to teach. It reminds me of Einstein’s famous saying. He says,
‘Everything should be made as simple as possible, but no more simple.’
So what do you do as an investor now ?
You are well ahead of the average retail trader who trades blindly based on TV channels, telegram tips, and technical books. Simply understanding the basics of price action - the "why" rather than the "what" - can greatly improve the timing of buying and selling stocks. You don't need to change your method of stock bias, you just need to align it more closely with market confirmations of supply and demand. The probability of an investor creating wealth by using price action is much higher than a trader using technical analysis in its theoretical form.
Buy Value Sell Momentum > Buy Right Sit Tight
More investors have been buried under the rubble of past A grade stocks like RPower, Yes, and DHFL than traders. By following risk management patterns used by traders, you can better size your positions, stay in sync with market trends, and manage risk more effectively than with just diversification.
My take on @ActusDei’s opinion
I can completely understand Neil's bias against TA, since it has been so poorly spread by content creators masquerading as traders for short-term gains. Even CMT certification may be useful for getting a job, but not for producing consistent trading profits. However, this cannot be used as a benchmark to disregard a craft that encompasses a proven, timeless process to analyse demand and supply.
Stock markets are not about fundamentals, technicals or lunar cycles. Prices move as a collective result of all participants' bullish or bearish sentiment and their decision to act in the market based on that sentiment (buy or sell). The whole objective of FA and TA is to find the WHY to buy or sell the stock and get into improved probability and risk reward scenarios. When you look at a stock, don't see it as P&L, ratios, trendlines, or indicators. Instead, see it as participants operating through a foundation of fear and greed, with all their perceptual limitations and biases that influence their decisions and subsequent actions.
For the layman, it is better to play the pricing game (as a trader) with a small capital, and become more of an investor once the capital has grown. Furthermore, it is easier for laypersons to develop trader skills than it is to develop investor skills.
The only noble pursuit in this business is to find the most efficient way to create wealth by being partially both.
P.S. - Many of my references to "trading" refer to plain vanilla cash trading, not the non-linear Option segment.
https://x.com/ActusDei/status/1678603547385147392https://x.com/ActusDei/status/1678603547385147392