Managing Trades and Investments: What’s the Difference? December 3, 2018

The Psyche of Traders and Investors

In the world of stocks and shares, it is important to recognise that rules for managing trades are different from that of managing investments. The Phillip Youth Stocks Challenge 2018 was a long-only trading competition over a three-week period. This provided opportunity for a suboptimal strategy given that the market has been undergoing a correction this year.

The psyche of a trader is unlike that of an investor. Traders usually hold positions over much shorter time frames, and correspondingly have clearly-defined entries and exits which are likely to differ from investors. In most cases, it does not make sense for investors to follow the calls of “trading gurus”. If you are an investor, ask yourself honestly, do you have a stop loss or exit strategy? Have you ever followed your stop loss policy and exited from a losing position? Knowing this, I offer three perspectives about managing personal investments, after taking part in the Youth Stocks Challenge.

Invest within Your Means

Do not use leverage if you cannot manage risk and refrain from borrowing. Many top-tier funds like Blackrock, Allianz and Manulife are down almost 30% year-to-date. If you started a fund in 2018, a 2x leverage would imply that the equity is 60% in the red, closing in on margin call territory. This stance was reversed for trading in the Challenge, where we were given $1,000,000 Buy and Sell limit daily. Not fully utilising this would be playing to lose.

Knowledge is Key

In this Challenge, you could get by with some awareness of market trading rules. In order to win the trading Challenge, I only traded stocks with the highest margin per tick (minimum unit change in stock price). In these short-term trades, the fundamentals of stocks are negligible as opposed to investing.

Knowledge allows you to make more rational and logical decisions. For example, investing in Temasek Bonds, with a 2.7% interest rate, may not be the appropriate option for all. Consider that interest rates are likely to challenge 5% within 5 years. Similar to how home buyers want to lock in fixed interest rates in a rising interest rate environment, an investor may seek floating rates of return.

Another example is structured products that banks offer to clients. Structured products offer the convenience of managing a position with various accompanying conditions. Some understanding of quantitative finance will allow you to deconstruct these products. You may recognise that by taking on a structured product, you would have lost the spread and margin to the bank. Additionally, the structure is such that the bank is hedged, and risk is passed to the client.

Paying for an investment course does not magically make you a better investor. Such courses typically organise and present factual information to you – information which you may otherwise found on your own by Googling. The question is whether you are willing to take that step to do so!

Treat Investments as Written Down

This may not apply to the short-term high-risk trading nature of the Challenge, but can be helpful for young investors. Invest only what you can afford to lose and treat all investments as sunk costs. You won’t lose sleep over your portfolio, and you will be happily collecting in a down market. If you do not have time to research on individual companies to invest in, try investing in an index. Warren Buffett’s successful bet that the index would outperform a basket of funds selected by an asset manager at Protégé Partners between 2007 and 2017 is testament to this.

You may not hit a home run by banking on a tech name like Apple, but who knows what other gains you may make?