Opinion
Buy low, sell high? What Hollywood gets wrong about investing
Paridhi Jain
Money contributorSomeone recently asked me: “Do you need to be a good day trader to be successful at investing?”
It’s not the first time I’ve been asked that. I get it, that’s what you see in popular culture like The Wolf of Wall Street, Billions or The Big Short.
Day trading is to investing as race car driving is to driving; they are completely separate activities.Credit: Simon Letch
They’re sitting in front of big computer screens, eyes glued to the market. They’re trying to time the market – is the price going to drop lower? Should I sell now or wait for the price to go up more? They’re trying to make a quick buck by buying low and selling high. There’s panic. There’s drama. It all seems so stressful and complicated.
The truth is none of that is really investing. Day trading and investing are not the same thing.
It’s like someone asking you: “Do you need to be good at race car driving to be successful at driving your car to work?” The answer is no.
If an alien came to Earth and had no idea what cars were, sure you could see why it might be confusing. Both people are driving a car. But you know they’re not the same thing.
If you want to be a successful investor, you’re better off avoiding day-trading altogether.
The skills you need to drive your car to work, the kind of vehicle you need, the training needed, the risk involved – everything is different. They’re completely separate activities that happen to both involve driving a car.
Day trading is the race car-driving version of investing. They are completely separate activities that happen to both involve buying assets. Let’s break those differences down a little further.
What is the core objective?
Day traders want to make a quick profit by buying a stock at a low price and then selling it at a higher price in a short timeframe. There’s no intention to hold on to that stock.
Day traders don’t care about how it’s going to perform in a year or 10 years. They only care about how the share price is moving in the short term. Can they buy low and sell high? This is the complete opposite to the criteria and objectives of a long-term investor.
Long-term investors care about how the asset will perform in coming years. They don’t care about how the share price is going to move in the next few days, because short-term share price movements are not a good indication of the long-term value of the asset.
Since their objectives and reasons for buying an asset are different, the kinds of assets a day trader will buy will be totally different to the kinds of assets an investor will buy.
Just as a race car driver isn’t looking to drive a Toyota Corolla on the tracks, your average mum or dad isn’t looking to drive a sports car to school drop-offs.
Ups and downs: Monitoring stock at a brokerage house in Beijing.Credit: AP
What does the process involve?
When you see movies or TV shows about trading, you’ll notice that traders are glued to their screens, constantly watching market movements.
When you consider their objectives, this makes sense. If you’ve bought a stock intending to sell it as soon as the price goes up, you have to get the timing right. This means you have to get good at understanding what impacts share price movements. You have to understand market movements enough to gauge when to get in and get out.
Day trading is not a set-and-forget endeavour. You have to keep an eye on the ball. There is a lot more ongoing work involved. It’s a constant process of buying and selling.
On the other hand, when you invest a lot of the work is done upfront when selecting your investments and designing your portfolio.
Since you intend to hold on to investments for a longer period of time, you are selecting investments that you believe will perform well regardless of short-term market movements.
Of course, you may still want to stay on top of market trends in case something changes your assessment of whether this asset will make a good long-term investment, but on the whole you don’t need to be as glued to the short-term market movements as a day trader.
A race car driver doesn’t use the same sports car for their entire career, but when picking your family car, you expect to use that car for several years.
In short, you don’t have to be a good day trader to be a good investor.
You don’t need to watch the market all day. You don’t need to take huge risks. You don’t need to stomach huge losses. Good investing requires none of those things.
In fact, if you want to be a successful investor, you’re better off avoiding day trading altogether.
Paridhi Jain is the founder of SkilledSmart, which helps adults learn to manage, save and invest their money through financial education courses and classes.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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