Value Investment Research | Port Wren Capital | Investor or Trader: Which Strategy is Better?

Investor or Trader: Which Strategy is Better?

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Over the years we have noticed that a number of folks are unaware of the fact that they are not really an investor. When you speak with them they refer to themselves as investors and they think they are indeed investors. But, the fact of the matter is they are not true investors. Many do not appear to know the difference between an ‘investor” and a “trader”. Some even say, well what is the big deal, they are the same thing just a different word. There is a major difference in the two. And the key element is they have very different strategies.

When it comes to investor, strategy is key, which brings a true story to mind. Back in 1976 there was the “Great American Horse Race”. The race was to travel 3,500 miles through 13 states and take over 14 weeks. It would be farther and longer than any organized race in memory. Recall, that 1976 was a very special year for the United States of America. It was our bicentennial since 1776. The concept behind the race was it would give people a chance to see the country in a way it has not been seen in 100 years. The route included parts of the Oregon Trail, the Pony Express Trail and the Donner Party’s doomed journey. There were about 200 well muscled animals ready to start in Frankfort, NY. The majority of them consisted of fast breeds like Arabian stallions, Irish thoroughbreds and Appaloosas. The strategy was to use the finest and fastest horse to win the race and claim victory and the end. Again, notice the strategy to use the fastest horses.

But, in addition to these high quality breeds was one that was a kind of outlier. His name was Lord Faunteroy, or “Leroy” for short. Leroy was not a horse. In fact, Leroy was a mule. His owner was Virl Norton a 54 years old from San Jose, CA. Who knew horses as he had spent years in Wyoming breaking wild horses. He figured that these fine horses could easy beat a mule over one, ten or even a hundred miles. But, this particular race was long in distance and very grueling through rough terrain and changing elevations, with mountains and deserts. This in his mind would give a Mule a great edge over the horses. Again, notice the Virl was using a very different strategy. Speed was not going to win the race, but endurance. In this case, Virl was being a contrarian to popular belief.

Many of the fine horse suffered from penalties related to injuries which hurt their finishing time greatly. But, Leroy never wavered as he just took it all in trade. Mules are more durable than horse, yet slower in the short rerun. At the end, Leroy’s rider spent some 315.47 total hours in the saddle and came in first place. Leroy won the $25,000 prize. The second place was an Arabian with its rider with 324.6 total hours in the saddle with penalties. He had gone lame during the last leg of the race. So you can clearly see that strategy is very important whether it is a cross country horse race or in investing.

Getting back to being a “trader” or an “Investor” there is quite a difference in the strategy between the two when it comes down to it. Typically traders are referred to as a “day trader” or a “swing trader”. The day trader as the name implies opens and closes a position in the same day. The swing trader opens a position one day and will typically close that same position within a few days, most times within the same week. Naturally they incur more trading fees from their brokerage house due to their high turnover in positions. And more importantly than that, is they actually expose themselves to higher risk due to higher degree of volatility over such a short-term time period.

In contrast, the “investor” tends to take a much more long-term approach. This long-term strategy reduces their risks and lowers their exposure to high volatility. This is because, over a longer time horizon the extreme peaks and bottoms have more time to average out to a normalized price trend. As Seth Klarman, value portfolio manager and author of Margin of Safety book says, "The single greatest edge an investor can have is a long-term orientation."

And of course, with less buy and selling, they have a much lower brokerage fees giving them higher returns. Now if you are a “value investor” as we are at Port Wren Capital, LLC, then you buy only when the market price is lower than its intrinsic value and then you wait patiently until Mr. Market corrects its error and properly prices the stock to its just intrinsic value. This typically provides a much higher rate of return than what is achieved by “traders”. Why would you needless expose yourself to the negative aspects associated with being a trader? Make the right move and maybe you could win the race and a $25,000 prize like Virl.

At Port Wren Capital, LLC, we specialize in picking specific undervalued U.S. stocks using fundamental analysis developed by Benjamin Graham using a five step process. We have beaten the S&P500, DJIA and NASDAQ benchmarks since we started 5 years ago on our own investments. Discover the difference for yourself. To learn more contact us today.

Published: 8/1/18

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