Is Your Advisor a Trader or Investor?

Recently, I went to lunch with a colleague and friend who is also a hedge fund manager and well known in the hedge fund community. He was noticeably more irritable than when I last saw him, coincidentally when the Dow appeared to be approaching 11,500 around the start of summer.

I asked him why the long face. Apparently, he was still kicking himself for not getting into the market prior to the recent rally to 12,600. In fact, he was stressed in general about a rising market and felt he couldn’t sleep until it changed course.

It was a pretty striking comment to make–in particular since as an investor, I’m always rooting for the market to rise. He is as well. However, there’s undoubtedly a disconnect between having a rising market and a struggling job market today.

Therefore, a market that is heading downward today just feels more explainable than a market that is heading upward today. And as a trader and hedge fund manager, my colleague is better able to place a large bet where there is certainty.

Herein lies the difference between traders and investors. I’m an investor. I place my money into companies that I feel will grow over the long term. There are times when I’ll invest based on short term opportunities, but generally only if the fundamentals make sense.

My friend is a trader, as is the average hedge fund manager. Technicals and short to mid-term opportunities are key, at times even if the fundamentals aren’t ideal. As a result, a company could be selling ice cubes to Eskimos — if there’s certainty in its stock’s direction up or down, a trader will attempt to profit from that certainty.

So while I’m the horse breeder, my colleague is the cowboy riding the stallion (or donkey). And in a market where indicators such as a weak job market and burgeoning debt make a rising Dow seem nonsensical, traders like my friend are waiting with their ropes twirling on the sideline to jump on the Dow should a bubble pop again so that they can ride it like their rent is due tomorrow. Nevertheless, if the Dow and other key indicators break upside resistance marks, they’ll ride it upward too.

Neither technique is wrong nor more profitable–just different. Which is why at the exact same point in time in the market, one investment manager could be optimistic while another pessimistic. And keep in mind that the typical investor too has tools to create profits in a downward market.

Therefore, depending on your preference, it’s important to understand the investment style behind the manager’s smile (or lack thereof).

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