The Investor, the Trader and the Speculator

The Investor, the Trader and the Speculator

December 12, 2022

In my opinion the markets are affected by three very different investment strategies which I have titled the Investor, the Trader and the Speculator.  It is my desire to define the three different strategies, along with the details of how each, in very different ways, interpret and react to news, events, and market movements.



The equity, stock market investor is in the market for the long haul and is often referred to as the Long Term Investor.  They understand that over a long period of time the economy and the market will experience ups and downs, including recessions and bear markets (20% decline in a market). The belief that each up market will reach a level higher than the previous up market will be the catalyst for a generally growing equity portfolio over time. The odds of success for the Investor are high (over a long period of time) as this has been the case throughout history.  Even after the worst economic conditions and worst bear markets since the Great Depression, the markets have always recovered and found a new all-time high.  This does not guarantee it will happen in the future, but history is pretty clear the markets go up, down and then up again.


The Investor often diversifies their wealth into portfolios of stocks, bonds, cash, real estate and other assets.  This diversity seeks to allow their wealth to produce smoother returns over time. Their strategy is often based on the long term historical track record of the market.  The Investor spends little to no time making investments seeking to benefit from short term market declines. The Investor avoids the need to react or over react to the ups and downs of the market or any negative headline. The diversity provides flexibility and, when accompanied with an annual rebalancing strategy, allows the Investor to make minor moves from one asset class to another, often following the old adage of buying low and selling high.



There are two different types of traders in the global markets: those that trade their own wealth and those that trade other people’s wealth.  Major firms around the world have built trading desks, often referred to as a Wall Street Trading desk, that execute trades on behalf of others or in some cases for the firm’s own wealth. The time frame for these trades can be seconds, minutes or hours.  Opposite from the Trading Desks would be the Day Trader.  The Day Trader is buying and selling using their own wealth. They most often are a fund or, in some cases, could simply be an individual. The Day Trader holding period is likely to be longer than the Trading Desk but still much shorter than the long term investor. 


Traders seek to benefit from short-term changes in the markets, global economies, individual sectors or individual companies in the hope of generating short-term profits. They are buying and selling, betting on the investment going up or down.  They will enter and leave the market rapidly.  Basically they are gambling, making bets on red or black. 



Taking on high risks, Speculators seek high returns. The Speculator often seeks to concentrate their investments or bets in one sector or company, often completely abandoning any kind of diversification. They have an all-or-nothing mentality. They may also choose to be fully invested and then borrow funds in order to buy more, adding what is called leverage to enhance return and risk.



Market activity will be dramatically different for these three. 


The Investors are fully aware that markets pullbacks (defined by declines of -5 to -9%), market corrections (defined by declines of -10 to -19%) or bear markets (defined by declines of -20% or more) will happen over their long term journey. The Investor never likes to see the down moves of the market, but since their wealth is diversified, they are hoping to have the ability to ride out the downturn.  However, for the Trader and Speculator, a downturn is VERY different, due to the major impact the downturn move can have on their bet. 


For The Trader, when the markets start to move against the current bet, the trader often employs a ‘preserve capital’ approach, meaning they are very often selling their positions, often taking a small loss rather than having their bet end up being a big loss.  This way they are often not holding their positions for any long period of time. Most of the trades the Trader is making are within a trend, which could be either an uptrend of downtrend. If that trend changes direction, the Trader, often regardless of price, sells quickly and then re-enters the positions whenever the trend reverses.


The Trader often affects the short-term focus, and the tendency of Traders to get out of the market quickly can accelerate the downside for the markets over the short term.


The Speculator, much like the Trader, will seek to protect their positions from any negative changes.  Even normal market movements can trigger Speculators to react to selling, especially if they are using leverage. Additionally, if prices fall too far, the Speculator using leverage could be required to sell positions in order to pay back the borrowed amount and stay within the agreed debt-to-equity terms of their loan.



In today’s Global Markets, the Traders and Speculators control massive amounts of wealth, so their short-term strategies can have huge impacts on the markets in the short term. The problem for the long term Investor comes when they let the actions of the short term traders and speculators negatively influence their long term decisions.


Daily news and events, along with all kinds of market guidance in our information age, are being produced for The Traders and The Speculators. This is why the vast majority of news coverage and market guidance found in popular media, financial news agencies, and major financial firms all have a day to day short term focus designed to help influence the Trader and the Speculator.  This often leaves the Investor confused - or worse, cause the Investor to react to the wrong information at the wrong time, and potentially produce the wrong result.


I need to make a very clear statement of fact: no one can predict the future.  No one can see tomorrow. No one can know what the morning will bring. Yes, people can make guesses, and sometimes be correct, but no one can do it day in and day out.  So, if no one can consistently predict the future, why do we try to predict the markets, the future economy and the future returns of investments?  The answer is for the gambling activities of the Trader and the Speculator.


At FORM Wealth, our clients are planning out the rest of their life, which we would define as long term.  Many have desires of determining where their wealth will go after their death, so their time frame becomes multigenerational, which makes the time frame really long term. For the long term Investor, one needs to understand how the Trader and Speculator function and how they affect the global markets. This understanding will help clarify market volatility and drastic moves from time to time.  Understanding this will also influence how you react to current and future events as long term investors.


History has shown that for every dollar made in the market, a dollar must be lost. It is my opinion that Traders and Speculators, over time, offset each other. For every winner, there ends up a loser.  I believe those Investors who allow themselves to stay invested through the short term noise, pull backs, corrections, and even bear markets, while seeking the long term average returns the markets have rewarded in the past, will again be rewarded in the future.


The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation.  Any opinions are those of Tyson Ray and not necessarily those of Raymond James. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment.  Prior to making an investment decision, please consult with your financial advisor about your individual situation.  Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.  Past performance is not a guarantee of future results.  Holding stocks for the long-term does not insure a profitable outcome.  Investing in stocks always involves risk, including the possibility of losing one’s entire investment.  Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.