Why We Trade Instead Of Invest

The TradingMarkets.com view on trading versus investing: can be summarized in a story from the book Hit and Run Trading (1996, M. Gordon Publishing) by cofounder Jeff Cooper, commentator in the stocks section of the Web site and contributor to this book.

Jeff's father was a successful textile businessman who, after retiring at age 42 in the late 1950s, turned to the stock market to keep himself occupied and to make money. He was barraged by phone calls from enthusiastic brokers who encouraged him to take long-term stock market positions and enhance his profit potential by purchasing stocks on margin. The brokers seemed to make sense—after all, they were market professionals—and he went along with the strategy All was well—for awhile. Then, in 1962, on a day when his wife was being operated on for cancer, Mr. Cooper went bankrupt, his brokers liquidating his portfolio to meet margin calls. The family was wiped out and in debt to the brokerage houses. This was Jeff's first exposure to buy-and-hold investing. Jeff's father was the largest IPO player on Wall Street and had made far more money than he had lost in 1962.

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The story doesn't end here, though. When Jeff himself gravitated towards Wall Street in the 1980s, he initially tried to use his father's IPO strategy—but it didn't work. The market had changed; mutual funds were muscling out individuals in the IPO market. In the middle of the decade, Jeff transformed himself into a big-picture, buy-and-hold investor. Like his father, he was besieged by brokers who tried to direct him into stocks they were sure were absolute steals. The 1980s bull run that made geniuses out of so many people carried Jeff along for the ride, too, but in October 1987, he and many other buy-and-holders discovered the error of their ways. While not wiped out, the hit was substantial, and Jeff set about developing a stock market strategy that would free him from the errors he and his father had made.

After almost a decade, he has certainly succeeded. His strategy of trading rather than investing allows him to profit in both bull and bear markets. He uses simple techniques based on short-term price movement that, combined with knowledge of which stocks to use them in and tight risk control, removes the risk of future buy-and-hold disasters.