Day Traders vs. Investors — Which Are You?

October 1, 20267 min read

InvestingDay TradingPortfolio ManagementRisk Management

Reactionary Trading vs. Business Ownership

Day trading is a description of a type of retail investor who isn’t really concerned too much about the financials or business strategy of a company. For them, it’s more about momentum and thematic trading. If you consider that under the timescale of earnings reporting, which is quarterly, and strategy fulfillment, which could be years, trading a stock day-to-day is really avoiding the common factors which would move a company’s stock price and its valuation.

Now, the definition of a day trader by experts means they close out all positions at end of day to avoid overnight risks. I’ll lower the threshold of it and leave it to just mean, “reactionary trading.”

What Really Moves a Stock?

A Thought Experiment

Take some company XYZ whose price today is an imaginary $50 per share. Assume no news is reported anywhere about that company, and yet its price falls to $47.50 by the end of the day. Ask yourself: what moved the stock?

It certainly couldn’t have been anything material, since nothing was reported in data or news services or released by the company. It would move only because investors, in their collective, aggregated wisdom, changed their opinion of the stock. Now, is that sentimental behavior predictable? That is, can any typical investor have insight into which direction the investing public’s aggregated view is going to turn?

Different People, Different Speeds

In truth, people assimilate information at different rates. You and I could have heard company XYZ is buying company ABC last Tuesday, but you wanted to model the expected cash flows before you take any action — which took 3 days — while I was on the phone with my advisor the moment the news hit the media, and the two of us decided a plan that minute. Hence, we could have traded the stock on different days upon hearing identical news the same day.

It’s not really immediate news that triggers all investors to action. Some news takes longer to assimilate and delays actions due to the strength of mental “acid” to digest the news for differing people. In addition, bad news tends to travel more slowly than good news.

The result: Compared to day traders, investors experience lower trading frequencies, lower costs, greater understanding of economic and business fundamentals, and lower portfolio volatility — in addition to greater compounding of returns.

Renter vs. Owner

The time commitment for day traders to attempt successful implementation is higher and involves more risk-taking. It’s a renter’s attitude based on short-term-ism and often involves margin and leverage. Conversely, an investor’s perspective is longer term, and he acts like a business owner waiting for business strategies to be realized.

This is more directly related to what the asset actually is, while a day trader separates the actions of the stock price from the business. Day trading makes a derivative of the business, since the stock’s price in a day’s time can hardly be a result of business strategy fulfillment. If that’s not enough, the taxes on short-term gains can be higher than long-term capital gains — again, usually, depending on the trader’s tax bracket.

The Day Trader

Momentum and thematic trading
Avoids the factors that drive valuation
Higher time commitment and risk-taking
A renter’s short-term-ist attitude
Often involves margin and leverage
Separates price action from the business
Short-term capital gains taxation

The Investor

Longer-term academic discipline
Acts like a business owner
Waits for strategy to mature
Lower trading frequency and costs
Greater understanding of fundamentals
Lower portfolio volatility
Greater compounding of returns over time

Where BlueFire Stands

We at BlueFire firmly fit into the investor’s category. The selection of securities we buy is based on long-term academic discipline relating historical performance of stocks to the common financial factors which move them over a year or more.

After selecting the candidate list of stocks, we measure their longer-term associations between each other.

We build a well-diversified portfolio where the weight of each stock is directly proportional to its risk.

Every stock is held at a weight that makes their risks equal across the portfolio.

Then, we hold them — keeping drawdowns, volatility, and costs low while compounding releases economic value over time.

In this way, each of the businesses we own part of has time for its strategy to mature, while we manage the risks of the overall portfolio for the principal protection of our investors.

Ours is a strategy ripe for investors who aren’t trying to make a “quick buck” — but who want long-term growth with an element of safety of principal, a more cautious strategy.

Steven P. Greiner, Ph.D.

CIO & Founder, BlueFire Strategies LLC

Steven is Chief Investment Officer with over 30 years in asset management and equity research. He previously led the Schwab Equity Ratings team at Charles Schwab and holds a Ph.D. in Physical Chemistry from the University of Rochester.

Read Steven’s full bio →

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DISCLAIMER: This is not a solicitation for investing, nor is past performance any forecast of future performance. This is for education and information only. Investments by their very nature are risky, and all investors should consult with professional advisors or counsel before making investments. All charts and numbers in this communication are estimated variables, not constant, and the author has taken their published numbers as they are from outside sources with no further research as to their authenticity. Nothing has been audited. Read and interpret at your own risk. Interested investors must be at least accredited and need to read documents provided by the Fund administrator based on invitation from BlueFire Strategies LLC.

Investments involve risk and, unless otherwise stated, are not guaranteed. Information provided is for educational purposes only. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.