In this video we’re going to look at investing versus trading. Now many people regard investing and trading as two fundamentally separate things and a lot of people have a very similar definition for each one. What we’re going to look at today is how we view both of these ideas because they’re often interchanged in a way that we find isn’t very helpful for understanding how investments should actually be managed. So what do we mean by investing? So fundamentally we would regarding investing as deploying capital or exchanging capital for an expectation of future income. So essentially we buy something or we buy a share of something into something with a view that we will receive an income stream from that property, that company, that particular investment over time. And it’s really that income and that growth in income over time that we’re interested in as an investor. That’s where our return is going to come. Now obviously if that income grows over time, the value of that particular investment would also we’d expect to grow over time. But that’s not really our aim, we’re not really interested in that because if we would ever sell that investment, the income that investment provides us stops. And so we’re simply going to have to redeploy that capital somewhere else for something else to provide us income. Now that’s not to say that an investor wouldn’t ever sell an investment. An that particular investment isn’t relative to the price someone’s willing to pay them for it. So if the income we’re receiving doesn’t justify the price that someone’s willing to pay, they’re willing to give us a lot more than it’s really worth, provided we could also then buy an alternative investment which would produce a more justified level of income for its price, then we get an opportunity to create a small arbitrage. That however tends to be relatively rare, so investors tend not to buy and sell investments very often because most of the time the market tends to price these things reasonably well and as a result we tend to always get about fair price for our investments give or take a small margin. Now trading on the other hand we would regard as the activity where we buy something with a view to sell it at a future time for a price greater than what we paid for it. So again many people would regard buying shares that are going to go up in value as a strategy to then later sell and ultimately profit from that difference in the price they paid versus the price they get paid in the future. Now the difference between that particular activity and investing is it’s that growth in the price or the surplus from the price paid that is essentially the return that we’re trying to utilise. So every time we sell we’re going to need to take a little bit off and we’re going to use that to fund our lifestyle and then we’re going to redeploy some of that capital with a view to try and create another gain in the future and continue to rotate if you like. This is very similar to what a retailer does if we go into David Jones or Meijer they’re essentially buying things – t-shirts, socks, underpants, whatever they are, for a price and they’re hoping to sell them to consumers for a price greater than what they paid for. The fact that the garments have no utility for David Jones means that they’re no use to them, they want to sell them, move them on as quickly as possible. So from time to time if they have items that they don’t think are going to be valued by consumers at a particular point in time, they will put those items on sale and try to get rid of them so they can redeploy that capital into things they can buy and then sell for a profit and that’s why retailers will have sales. Similarly, share markets can do the same thing. Share markets will be basically driven at the margin by those who are buying shares and trying to sell them at a higher price and if at a particular point in time those traders don’t feel that they’re going to be able to sell their shares for a higher price, then they’re going to discount them, they’re going to throw them out the door to try and get their money back so they can put it into something that they can do that for. And because you’ve got these traders operating in a market that you’ve also got investors operating in, you get a very fundamental difference in terms of market activity from time to time, because you’ve got these two very, very different participants in the market. And so I think it’s important to understand when we look at share market activity to understand exactly what’s going on because these two participants are behaving in very different ways. Now we can argue about which one’s right and wrong, it’s you know it’s appropriate for traders to operate the way they do, just as it is for investors. But it’s very, very important to understand which type of participant we are, because we don’t want to be investing in the stock market like a trader, and we certainly don’t want to be trading in the market like an investor, because neither of those will end very well. So we need to understand what it is we’re trying to get, ’cause that’s gonna drive the type of return and the type of profile and activity that we need to undertake within the market. As I said, we fundamentally look to invest. We’re looking for that long-term cash flow and that growth in cash flow. And therefore, we really don’t fundamentally care what’s happening from a day-to-day, hour-to-hour, minute-to-minute, news-based cycle like a trader is, who’s really trying to buy and sell based on will the next bit of news be better or worse than the current market expectation. The great thing about traders is they provide liquidity in the market. So when we do wanna sell a share, we do have an opportunity to buy and sell that share much more so than if the traders weren’t there creating that extra volume in the first place. So they do serve a purpose for investors, but it’s important to understand that difference between that activity. So hopefully that’s an interesting bit of information for you. As always, if you’ve got any questions, give us a call, drop us an email. We’d love to answer any of your questions specifically. (gentle music)