This post serves as a personal reminder.
There are a litany of articles talking about the difference between trading and investing. But recently I’ve grown to accept the fact that reading something and thinking it through in my head is insufficient to ensure I’m heeding those lessons. I’ve noticed that writing things down helps, so here goes my take.
Let’s start with investing.
If we stick to the narrowest scope of definition, investing is an endeavor to acquire an asset with the sole intention of receiving hopefully consistent cash flow in the future. By this definition, buying a bond to hold until maturity would be investing, so is buying land or real estate with the purpose of renting it out for income. It could also be a business investment in the form of heavy equipment that brings improved productivity and therefore profit.
However, this brings about the question of the final value at asset disposal. For something like heavy equipment or a production line, it can be reasonable to assume a negligible final disposal value, which is also quite common I believe in accounting as well (don’t quote me on this as what little knowledge on accounting practices I have came solely from coursework 10 years ago).
For something like a bond or real estate, the final value is usually not zero. In fact, in the case of a zero coupon bond, the only cash flow you receive is the final face value of the bond, and the interest you get paid is from the discounted bond price upfront.
And what about stocks?
Back in some decades ago, stocks usually pay dividends to their bearers, much like bonds. But then companies say “hmm I can reinvest the dividends better than you can so why don’t we hold onto those sweet profits and invest them in growing our business for you?” Now a good majority of stocks don’t ever pay dividends. It would seem absurd to say that there is no investing in the stock market.
To fix this, a key is to notice the intent in the activity. Are you buying an asset, whether that be bonds or real estate or stocks, for the purpose of profiting from some sort of business activity, even if the associated profit is deferred?
Buying bonds essentially is lending money to others (governments and companies mostly). Buying real estate if renting out is obviously some kind of business. Buying stocks can be viewed as investing, if you expect the business to stay afloat and be able to bring in more profits than now in the near future.
Even if your profit seemingly comes from the appreciation of the asset and not from any interim cash flows, as long as your intent is that you believe the business will stay afloat and will be around almost indefinitely (or for the duration of your life), it is reasonable to me to call your acquiring the asset investing.
The more profits in the future aspect is almost guaranteed, at least nominally, as long as the business stays alive, because of the need for a healthy inflation to exist for the fiat system to function, so really the requirement is that you believe the business will still be around for decades to come.
Now with this you may ask “is buying CSCO in March of 2000 at the price of $80 investing?” I will say, yes, if your only intent is to profit from future business activities of the company and not at all thinking about selling to the next moron because it rallied a shit ton recently. Not all investments are good investments that’s all.
Therefore, we can amend the definition to say that investing is the behavior intending to profit from some kind of business activity. This almost demands that the timeframe is long, at least in terms of a few days for short term zero coupon bills, to years and decades if talking about long bonds or real estate or stocks in the form of Buffett.
Trading is anything that is not investing. Or I’d like to call speculating.
Essentially, if your intent is to buy or sell ahead of others in expectation that price will rise or fall due to the majority going in your direction, you are speculating and not investing.
Sometimes people like to call themselves investors because they hold stocks long term. But ask yourself, is your intent to profit from the business? Are you buying because you like the business prospect or because its stock price has done so and so in the recent past? If you really have no idea what the business does and are buying because you think its price will go higher from here, then there’s no shame in calling yourself a speculator. Speculators are great, helping with price discovery- the market can’t function without them.
The reason it is quite important to know if you really are investing or trading (speculating), is that the approach is very different.
With investing, like I said, what you would want to do is to understand the business and its prospects, and then evaluate if the company is able to stay around in the face of competition and if the current price is justified by the future earnings potential. All of this is super hard because it’s quite impossible to reasonably estimate future earnings prospects and being able to then analyze if the current price is reasonable to make the investment decision. Especially in the face of (geo)political and technological uncertainty.
It would then follow that for most individual investors, the everyday folks not in the professional business of deciding the allocation of portfolio worth millions or billions of dollars, the most reasonable approach would be to simply buy the index, dollar cost average even better. The economy is likely to stay alive indefinitely (you better hope so), and so as long as you are exposed to winners inflation will lift all boats.
In fact, if you are not in a professional capacity (not getting paid to do so) in stocks or god-forbid financial derivatives, you are almost certainly better off just buying the index or maybe a few stocks that you truly understand or have faith in.
Trading is fun, and sometimes you get a sense that you are in control, that you can design something that can print money, that there’s a feedback loop and you are getting better. Well, most of the times it’s just luck.
Trading is zero-sum (negative sum considering fees), every dollar you make you are taking it from someone else’s account. So that requires you to have an edge. You can be faster than others. You can be smarter than others. Or you can outright cheat (not necessarily breaking the rule). But you have to have something to win.
With investing it’s positive sum, because the pie can get bigger, at least nominally.
The Ephemeral Tourist
November 22nd. 2025 @ 12:27am CST
The Ephemeral Tourist 