What We Talk About When We Talk About Investing

Today I want to talk about investing – specifically, what are we even talking about when we use that term and why it matters.

There’s a phrase that pops up in different places – I’ve seen it attributed to both Morgan Housel and Kwame Appiah – that goes something like, “you need to make sure that the game you’re playing is one you actually want to play.” In other words, if you assume we’re playing checkers and I show up ready to play chess, one or both of us is going to be very disappointed with the outcome.

And this idea of choosing the right game you want to participate in very much applies to what we’ll talk about today, because, depending on how you look at investing, you could end up playing a game that is really hard to win and almost no one is good at OR you could play a game that is easy to win and anyone can be good at. Spoiler alert: I am a big proponent of the second way of thinking about investing.

So, before we dive into the version that I like and recommend, let’s start with the other version.

There’s an idea that to be good at investing, you need to be plugged into the public markets all day, every day, making decisions and then recalibrating as new data comes in. What you buy & sell depends on where you think the market is going, regardless of the underlying value of those assets. If gold is going up, then, by god, you’d better buy some gold. If the S&P 500 is going down, then you should sell it to get ahead of the curve. And so on and so on.

There is a name for that kind of activity, but, in my book, it isn’t investing. That kind of activity is called trading. And, to be perfectly candid with you, it’s really fucking hard to be good at trading.

You can have all the latest, best information, you can understand the relevant details as well as anyone else on the planet, but making money on a trade still really boils down to a gut decision about what you think will happen. Is Apple stock going to go up or down this quarter? You can talk to two equally talented analysts who have the exact same information who nevertheless recommend totally different things. Analyst A thinks Apple is in a great position to beat quarterly expectations and recommends that you buy and Analyst B thinks they’ve lost their innovative spark and recommends that you sell.

Both of those sound like reasonable positions to take. But the thing is, when it comes to trading, only one of them can actually be correct. If Apple stock goes up this quarter, that means the people who did what Analyst A recommended will make money and the people who believed Analyst B will lose money; but if Apple stock goes down, the situation is reversed. Which is to say, being good at trading involves a huge amount of luck, which I don’t consider an awesome strategy. 

I want to double down on a point I mentioned a moment ago: when we’re talking about trading, what makes a trade good or bad is less about whether the underlying thing is inherently valuable or not, and instead it’s all about whether we can buy it at one price and sell it for a profit. Those analysts making predictions about what will happen to Apple stock this quarter aren’t necessarily talking about whether Apple is a good company or if it will do well over the next 5-10 years. They’re making predictions about short-term trades that will (hopefully) generate a profit. In other words, the goal of trading is to consistently turn a profit through buying & selling, rather than to accumulate a lot of valuable assets.

And because of that, the upside of each trade is limited. If you buy at one price and sell at another, you’re locking in your gain (or loss) right then. If you sold Apple stock and made a profit but then Apple continues to go up in price, you don’t get to participate in that continued growth. That means you have to find the next good trade, and the next one, and the next one. Even the very best traders have to do a lot of it to make it work. 

To summarize, trading takes a lot of effort, the upside is limited, and it requires a lot of luck. If you’re playing that game, it’s very, very hard to win.

Now let’s contrast that with investing.

According to Merriam-Webster, investing is committing money in order to earn a financial return. Two things pop out to me about that definition: first, the use of the word commit. There is no real commitment when it comes to trading: it’s all about whether an investment will go up or down, and not whether an investment is fundamentally worth owning. That seems pretty far from making a commitment. And secondly, the words “buy” and “sell” don’t appear anywhere in that definition. In other words, the success of an investment can be entirely distinct from when – or even if – you ever sell it.

Here’s an easy example: let’s say you buy a house so that you can live in it for the rest of your life. Assuming you live to a ripe old age, at some point you’ll pay off the mortgage and your cost of living will drop off a cliff – which means whatever kind of nest egg you’ve built up to that point will take you a lot further. And, if you pass that property on to another generation when you die, you’ve created generational prosperity for your family. I’d say those are very real financial returns, even if you never sell the house.

So, even though it’s not in the definition, I think we can recognize that investing should inherently be viewed as a longer-term activity compared to trading. Maybe you don’t intend to own every investment for the rest of your life (though that is a pretty good rule of thumb for evaluating investment options), but investing involves a longer time commitment than trading.

Now let’s look at the workload involved when it comes to investing. To be perfectly blunt, it is just much, much easier to be a great investor than it is to be even a halfway decent trader. Trading requires you to be plugged in all the time, every day. Investing requires you to learn some basic skills and knowledge, pay attention to what tends to happen over long periods of time, and then make decisions accordingly. You don’t have to be right this quarter or this year to be right over the next 10 or 20 or 50 years. And that’s great news, because, even though the stock market tends to be very choppy and unpredictable in the short-term, it actually becomes fairly reliable over longer periods of time. 

That means that you don’t have to keep up on all the new hotshot tech companies with crazy growth numbers. You can buy a handful of very high conviction stocks or bonds or funds and then just own them for a really long time. Since the stock market tends to be really reliable over longer periods of time, we can invest in boring things like stock market index funds and still do really well. A decent investor with fairly average returns can achieve truly world-class results simply by sticking with things that work and letting them compound for really long periods of time. 

Speaking of which, another advantage that investing has over trading is that there is an asymmetric upside to risk when it comes to investing. In other words, the balance between what you could lose versus what you could gain is heavily tilted in your favor. The most you can lose on any investment is 100% of what you put in. I’ll be honest, that doesn’t happen often, but when it does it sucks. But, because of the exponential growth you get from compounding, patient investors can see gains of 200%, 500%, or 1,000% just by holding onto investments that do reasonably well for long periods of time. 

So investing takes some work upfront, then becomes easier the longer you stick with it. The upside is theoretically unlimited and, if you’re a patient investor, it’s a game that is very, very easy to win. I don’t know about you, but that seems like an amazing game to play. That’s the one I want to participate in, and that’s why I recommend that kind of long-term mindset to all of my clients.

I want to make one more point before I wrap up today: the news and financial media almost exclusively report on trading activity. If the S&P 500 went up or down today, that’s because of trading activity – and not necessarily whether all of the companies that make up the S&P are good, bad, or in-between. If you’re making your investment decisions based on news about trading, then you’re playing the wrong game. To be a good investor, you need to pay attention to what tends to do well over long periods of time and then do that. In my opinion, that means choosing investments you can own for at least 5-10 years, and potentially for the rest of your life.

If you’d like to talk about how working with an investment manager can help you make better decisions now so you have more and better options later, I’m happy to have that conversation. You can shoot me an email or click the “See If We’re A Fit” button at the top of iselerfinancial.com.

Thanks,

Timothy Iseler, CFP®

Founder & Lead Advisor

Iseler Financial, LLC | Durham NC | (919) 666-7604

Iseler Financial helps creative professionals remove stress while taking control of their financial lives. We'll help identify current your strengths and weaknesses, clarify and refine your long-term goals, and prioritize decisions to improve your financial well-being now and later. Reach out today to take the first step.