Outside the Box: Are you a trader, speculator or investor? Ray Dalio and Jim Cramer weigh in on stocks

A young relative recently asked me if I thought it was a good idea to buy a certain stock, an airline. Its share price had fallen because of the pandemic.

“Well,” I told her, “Let me ask you a question first. Do you consider yourself an investor or a trader?”

I’m not sure of the difference, she replied. I said, “Well, a trader buys a stock with the idea of selling it for a profit, usually in a few weeks or months, at most a few years. An investor buys a company in order to own it for much, much longer, maybe forever.”

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Most people say they are investors. But they tend to act like traders. There’s a huge difference.

I see this same conflict playing out across the actions of many young people. They know they must own stocks for their future security. The crisis seems to have created an opportunity to buy.

Some young investors do their buying through a smartphone app called Robinhood which allows for small purchases of stock with little effort. No knock on their business model; I’m all for getting people invested.

The app’s makers recently released the top trades on their platform for March, so it’s a neat data slice on how young investors are thinking at the moment.

Among those trades were a biotech that is working on a vaccine for the COVID-19, blue chips such as Ford Motor F, -5.22%, Disney DIS, -1.56%, Boeing BA, -2.92% and GE GE, -3.33%, the cruise line Carnival CCL, -7.14% and a cannabis stock.

It’s a “fantastic list,” commented CNBC personality Jim Cramer. “Not perfect, but very good for speculation.”

Cramer is absolutely right. What most people do on Robinhood is not investing. It’s not even trading. It’s speculation — buying on the short-term bet you can get out quickly with a win.

Is it wrong to buy shares that are beaten down? Of course not. But don’t confuse that with investing.

Ray Dalio, the investment guru who runs Bridgewater Associates, recently took to YouTube to try to shake some sense into investors tempted by what appear to be sudden stock bargains.

You’re outclassed from the start and don’t even realize it, Dalio warned.

“An investor must understand that they probably won’t be able to play the game well. You will not be able to decide how to move in and out of things,” Dalio said. “In order to be successful in the market, it’s more difficult than getting a gold medal in the Olympics.”

Normal people wouldn’t dream of getting up on a starting block alongside swimmers such as Michael Phelps or Katie Ledecky. Even world-class athletes would shudder at the thought. (Have you seen Ledecky lead her competitors by more than a pool length?)

“You wouldn’t think about competing in the Olympics, but everybody thinks they can compete in the markets,” Dalio said.

The problem is that there’s much more money competing in those trades than you realize. Hundreds of millions of dollars coming and going from these same stocks, Dalio points out.

He would know. His fund is among the biggest movers of such money. “The worst thing you can do is think you can time all these movements. I guarantee it’s a tough game to time,” he said.

In fact, he says, it’s likely that even experienced investors will get confused and do the opposite of what they should — and that quickly gets dangerous.

“The greatest mistake of all investors is to think that what has done well lately is a better investment rather than more expensive. And what has done worse lately is the worst investment — get me out of it! — rather than it’s cheap.”

“Unless you know how to deal with the differences of those, which most people don’t, they’re going to be in trouble,” Dalio says.

So what should investors do? First, Dalio says, diversify. “Diversify by company, by country, by currency.”

Second, yes, you should invest. Waiting is a real risk. “Cash is seductive, no volatility, but it taxes you about 2% a year” because of inflation, Dalio notes.

Burt Malkiel, the Princeton professor who wrote the investment classic “A Random Walk Down Wall Street,” had this advice in a recent opinion column for The Wall Street Journal. Malkiel serves on the investment committee of my firm.

Yes, buy stocks, but do it the smartest possible way: In careful steps. In addition to diversification using index funds, Malkiel says, buy into the market over time.

“There is no need to complete any reallocation all at once,” Malkiel writes. “By moving money into equities slowly over time, you will ‘dollar-cost average’ your reallocations and avoid the feeling of regret you could experience by reallocating equities at prices that could be well above the ultimate market bottom.”

Put another way, invest without trading and definitely steer clear of speculating. Where the market goes in 10 or 20 years is what matters, not what stock you choose today with an eye toward dumping tomorrow.

That direction, ultimately, is up. Instead of worrying about what to buy, focus instead on what you pay to do your investing. It’s almost certainly too much, and that cost often determines your performance over the years.