Can investors learn from traders?
The short answer would seem to be no. After all, investing is a long-term discipline. Goals and objectives are measured in years and decades. Trading is short-term, with positions that can last just a few hours, minutes, or even seconds. But both deal with financial instruments and financial risk. Both require you to make decisions with imperfect information. And both play on our emotions—making us euphoric and giddy when we’re up, and frustrated and grumpy when we’re down.
So it makes sense that one can learn from the other. And since trading is a short-term practice, feedback there is more frequent. So what are some trading rules that investors can profit from?
I heard one of my favorites when a senior trader was advising a junior partner. The junior trader was trying to squeeze a few more cents from a winning position, and the senior trader told him, “Leave something for the next guy. If you try to push your luck, you can see a winner turn into a loser.”
The principal here is to avoid being too greedy. If your portfolio becomes overweight in one stock because that company has been on a roll, you should trim your position—even if the prospects seem good. Especially if their prospects seem good. Because nothing rises forever. Concentrated portfolios are riskier. If that stock keeps going up, be happy you still own some. And hey, leave something for the next guy.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!