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PRACTICE MANAGEMENT

Investing vs. trading: Taking advantage of fundamentals and discipline

Male financial professional using interactive screen to present data

Key points

Short term versus long term

Large market volatility events highlight the importance of using long-term investing tactics.

Maintaining focus

Investment strategies that focus on quality fundamentals and discipline tend to prevail.


Over the past three decades, the economy and financial markets experienced three seminal events which amplified behaviors of individuals reacting to basic emotions of fear in the investment markets.

These events were the dot-com era bust of 2000, the mortgage-backed housing boom that preceded the great financial crisis of 2008 and the rapid bust-and-boom of the 2020 COVID-19 pandemic.

All three events led to huge infusions of liquidity into the markets from the U.S. Federal Reserve (Fed), as well as significant changes in government policy, regulation and the structure of capital markets themselves.

They also helped to usher in new types of investment assets, strategies or vehicles that can be characterized as having significant speculative dimensions.

In the aftermath of all three events, the value of solid fundamental investing practices again became manifest, and long-term, disciplined investors continued to enjoy the magic of compounding returns in building wealth.

Investing in the current environment

The confluence of social media, higher interest rates holding steady, rapidly developing technology like artificial intelligence and extremely low-cost brokerage platforms has helped to create an environment in which some market participants are focusing on the pursuit of speculative, short-term trading profits rather than a methodical long-term approach to building wealth.

New asset types and investment vehicles such as cryptocurrencies, leveraged ETFs and special purpose acquisition vehicles (SPACs), to name a few, were created in response to this speculative dynamic in the markets. The dramatic growth in video gaming and online gambling has also contributed to this increasingly edgy, restless and, at times, volatile environment.

Rapid-fire equity sector rotation, high frequency trading, meme stock trading, cryptocurrency trading and arcane equity derivative strategies are just a few examples of the behaviors that react and respond almost entirely to the price action of an asset rather than to any assessment of its fundamental value. At its worst, this behavior is simply FOMO (fear of missing out). The common theme of this environment is the focus on trading, not investing.

Trading does provide a valuable contribution to healthy financial markets, if pursued by individuals and organizations in a knowledge-based, disciplined and ethical manner. Trading provides benefits to financial markets in the form of aiding in price discovery and providing liquidity for both investors and other traders. However, when trading is being pursued without real knowledge and research, it becomes a basic form of gambling. And as the saying goes, in gambling, “The house always wins!”

Knowledge-based, disciplined and ethical investing has the potential of providing success for most investors. It is the process of carefully assessing a rising tide of information—with the use of data analytics—to determine opportunities and risks for various industries and companies.

Real investing has a much longer-term orientation than trading. It leverages time as an opportunity, not a clock that needs to be beat. Consequently, this longer-term dimension provides the powerful advantage of time for an investment to benefit from either organic growth or from positive changes occurring in specific industries, or from positive management changes that a company makes to improve its performance.

By contrast, many trading approaches are based on short valuation behaviors, price momentum or short-term arbitrage opportunities.

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Focus on the main event—not the sideshow

Speculative activity that revolves around trading is the sideshow of investment markets. The main event of investing should focus on the following key, long-term elements:

  • Long-term investing in the equity of quality companies, regardless of capitalization size or growth/value dimension, remains the best approach to wealth building. The composition of industries and companies may change over time, and business models and asset composition may change, but investment value is still constructed from the dynamic interplay of growth, profitability and return on capital.
  • Although it is widely understood that knowledge is power, given modern communication technologies, knowledge is widely available across the markets. However, it is knowledge combined with process, patience and perseverance that may lead to powerful investment success.
  • Ignore the growing noise in the world and the markets, but always be open to incorporating new information and analyses. The explosion of new data and the ability to rapidly process and analyze it in potentially new ways can yield significant benefits.

Speculative activity is part of the natural cycle of financial markets, and short-term profits may be derived from them for those who follow a disciplined approach. However, systematic long-term investing should always be at the core of any serious, committed long-term investor’s approach.

Be entertained by the sideshow, but don’t neglect the main event of long-term wealth building, where the cornerstone is investing in growing economies, industries and well-managed, ethically oriented companies. Use time and patience as your leverage, not financial leverage.

Finally, if the sideshows do end badly and negatively impact the broader markets, history has shown that an investment strategy that focuses on quality fundamentals and discipline may prevail in the long run.

 

 

All information and representations herein are as of 05/10/2024, unless otherwise noted.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance.

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