The Investor Diary Entry #5: January 17, 2023
In concept anything that we do not know is difficult. In concept anything can be difficult. So is investment difficult?
To be able to answer this question, we first need to differentiate between certain terms in the world of investing. By doing this differentiation we will also be explaining investing methodologies that might appeal to someone who is still exploring this world.
The first thing that we need to differentiate is the difference between an investor and a trader. After this distinction we will be able to move to differentiate between a passive investor and an active investor.
Before moving on, a reader might be wondering how come this is a diary while the diary writer is writing informative articles? The answer is very simple. When I write, I think, and when I think I analyze.
I bring up these topics so that I can think of them myself and I learn from my own thinking. Furthermore, my thinking drives me to read more into a concept that I am not totally sure of, accordingly, I learn more.,
One of the very important aspects of writing a progress diary is to better oneself, and one of the best ways to learn something is by trying to explain it.
Investors And Traders
To me investors and traders are two distinctive groups with different sets of skills and methodologies. Traders are creating an income for themselves through active and frequent buying and selling of financial securities using technical analysis and some economic fundamentals depending on their trading techniques and the time frames that they trade in.
Investors on the other hand, intend to increase their wealth by buying into financial securities for extended periods of time and they use company fundamentals to look for their investing opportunities and depending on the techniques and methodologies some economic indicators.
You can read more on this in our previous article with the same title.
Passive Investor vs Active Investor
A passive investor by definition is someone who is putting money into the financial market but without actively looking for opportunities or monitoring the portfolio. This is done by using two main strategies; the first strategy would be by letting some sort of financial adviser, financial expert, financial institution to handle their investments.
This strategy entails that the passive investor put either a lump sum of money with either of the above mentioned options, or gradually feeding their account, and the financial expert manages their portfolio. In this case the investor carries the risk as well as paying commissions and fees to the financial expert.
The second strategy is by buying into financial indices such as the S&P500; or buying into widespread or niche Equity Trading Fund (ETF) such as SPY. In this case the investor is buying into the total market and not individual stocks. This is based on the long history of the market and the assumption that the total market always grows, this is especially true when you are investing in indices with well-established economies such as the US economy.
The Active investor on the other hand is someone who is evaluating single opportunities and individual companies to invest in. In this way the investor is saying that I can beat and outsmart the total market by choosing selected companies that this investor expects to perform better than the average market.
More On being Active Trader or Investor
This is where the answer to the question posed by this article comes.
If you are thinking of trading while calling it investing, then yes you need to teach yourself the ins and outs of trading, by becoming specialized in a certain financial security type and within that security type you will also need to know how to look for opportunities which will lead you to segment certain companies within this security type.
The advice to myself before giving it to anybody else; is never to try trading with real money before exactly knowing what you are doing. I have tried this the hard way and I will not repeat this mistake again. I tried to play, yes play, in the currency market (FOREX) and lost several accounts while doing this trying to learn with my own money, and not having the patience to train myself with dummy accounts which are offered by almost every broker.
If you are excited about the world of investment and want to evaluate individual companies and choose the ones that you want to invest in on your own, then you will also need to know how to evaluate companies, and the evaluation methodology that suits your personality. The investment strategy that you will choose is based on how you educate yourself about the different evaluation techniques and how to consider an opportunity, then you need to build your own strategy that best suits your style.
My Plan
Currently I am an active investor who now uses value investment theories to evaluate and choose my companies. I am an active investor not by choice but by ignorance, because when I first started investing I didn’t know that I had a choice of investing in ETFs and ride the market.
Now that I am here, I am enjoying this investment style, but I am also looking into the passive investment from a diversification perspective. Meaning, if I am choosing my own companies, then I run the risk of under performing the average market by making the wrong choices of companies to invest in. Therefore, I am thinking to put a portion of my investment into the total market to ride the average market on the side.
My future plan is to learn trading, learn not play, to be able to create an income that will allow me to grow the amount that I can invest.
Conclusion
Not only in the world of investing, but if you want to turn anything that seems difficult into easy, then you need to educate yourself.
I am not sure if it was Warren Buffett or his partner Charlie Munger who answered a question about the best investment by saying that the best investment that you can make is by investing in yourself, this is an investment that you cannot lose.
Today I make sure that my daily routine involves reading investing books, mindset books, business and finance news, and when evaluating companies I also read articles and news written about those companies as part of my evaluation.
The Investor
Tuesday 17 January 2023
About The Author
I started looking into individual stocks in January 2022. I created this diary initially for myself to track my investing progress, and second as a place that I can share my ideas publicly hoping that others will share their ideas and learn from each other, and lastly as an online business where some links that I share are affiliate links, and if anybody bought anything by clicking those links I will get a commission based on that successful sale, which of course will not affect the price that you are buying the product or service at.
For a more detailed information on my affiliate disclosure please refer to the Full Affiliate Disclosure page, and if you are interested in building your own online business you can check this post here.
Furthermore, this site is in no way or form is giving any financial or investing advice, nor it is encouraging or discouraging people to buy or sell any financial instrument. This is a personal diary in which I track my own progress and share for informational, educational and entertainment purposes.
I really enjoyed your article! Yes I think that investment is not that difficult but you need to know some stuff like what kind of ratios you must analyze, especially if you use fundamental analysis. For me, I never used trading but I intend to learn how to trade in the future because it can be very interesting and you can earn lots of money. The only thing to know is to trade in the right timing.
Yes absolutely, is simple words, know what you are shopping for, and pick the factors that are important for your company valuations.
Wow, I already started a course in trading and I intend to start writing about it in the diary. In my point of view, trading should be exciting, but investing needs to be boring. In both cases, there should be a system to follow.
I found myself nodding in agreement with the sentiments expressed here. Investment can indeed appear daunting at first glance, with its complex jargon and fluctuating markets. However, I can personally attest to the transformative power of education and persistence in overcoming these initial challenges. When I embarked on my investment journey, I faced a steep learning curve, but by immersing myself in research, seeking guidance from experienced investors, and staying committed to continuous learning, I gradually gained confidence and started making informed investment decisions.
I would like to thank you very much for sharing your experience with us. Knowing how we started, and the development that we need to go through is very important, and it can show us that we are not alone in this journey.
You’re absolutely right, understanding the different ratios and using fundamental analysis is important when it comes to investment. Ratios such as price-to-earnings ratio, debt-to-equity ratio, and return on equity can provide valuable insights into a company’s financial health and performance.
Fundamental analysis helps investors make informed decisions by analyzing a company’s financial statements, industry trends, and competitive position. By understanding these ratios and utilizing fundamental analysis, investors can evaluate the potential risks and rewards of an investment and make more informed decisions
I think it was Warren Buffett who said ( I might be wrong ) if you don’t know how to calculate a value of a company don’t waste your time investing in individual stocks. Meaning, in this case, it is better to invest in ETFs or indices.
Thank you very much for sharing your thoughts.