Trading vs Investing
Why Patience Wins and Panic Loses
📌 The Quick Hit
Trading is sprinting. Investing is like a marathon. Most sprinters burn out. Most marathoners - steady, disciplined, tax- and fee-aware - finish with a respectable time and less drama.
⚖️ The Core Difference (Short and Sharp)
Trading seeks to profit from short-term price moves. Speed, timing, and quick reactions dominate.
Investing buys exposure to businesses (or productive assets) and lets compounding, cash flow, and long-term growth do the heavy lifting.
Trading rewards accuracy and timing every day; investing rewards good choices plus time. That’s not small semantics - it’s different temperaments, incentives, and outcomes.
📊 Data That Speaks for Itself
A landmark study of 66,465 households at a discount broker found that the most-active traders earned ~11.4% annual return while the broad market returned ~17.9% during the same period - active turnover cost investors a meaningful share of returns.
Research on day traders shows that while a tiny sliver can be consistently profitable, fewer than 1% of day traders earn reliably positive abnormal returns after costs - the rest tend to lose money once fees, slippage, and taxes are counted.
Looking at professionals, S&P’s SPIVA scorecards repeatedly show a majority of active managers underperforming their benchmarks over multi-year periods - in 2024, a large share of active large-cap managers failed to beat the S&P benchmark. Fees, constraints, and crowding are major culprits.
Those three facts - retail traders underperform, almost no day traders win persistently, and active funds mostly lose to indexes over time - form the empirical backbone of the “long term > frantic short term” case.
[Sources: Barber & Odean, Trading Is Hazardous to Your Wealth, Barber, Lee, Liu & Odean (various papers), S&P Global.]
🫨 Why a Trading Mindset Breeds Desperation
Trading encourages a psychological loop of urgency:
Instant feedback. Wins and losses arrive immediately, training the brain to chase excitement.
Overconfidence & churn. Frequent wins (or escaping losses) create overconfidence; people trade more and pay costs. Studies show the most active traders perform worst.
Loss aversion escalates risk. Chasing losses or trying to “make up” for a bad week pushes position sizes and risk to unsafe levels.
Transaction costs, slippage & taxes. The micro friction of trading compounds into macro underperformance. Even competent strategies must overcome these headwinds.
That cocktail of issues turns rational judgment into reactive desperation. Investing, by contrast, redesigns incentives:
You get paid for time, not for reflexes.
🧭 Long-Term Thinking: The Compass That Actually Compounds
If you want to tilt the odds in your favor, here are actionable principles that align with evidence and behavioral economics:
Anchor to an investment plan. Define horizon, risk tolerance, and purpose (retirement, house, legacy). A written plan kills impulse trades.
Prefer low-cost, diversified exposure. Broad index funds reduce single-stock risk and fee leakage. SPIVA shows many active funds can’t overcome fees.
Limit turnover. Fewer trades = lower costs + fewer behavioral mistakes. Studies show heavy traders underperform light traders.
Use systematic rebalancing. Rebalancing enforces “buy low, sell high” mechanically - a sanity-preserving habit.
Tax-aware moves. Harvest losses wisely; place tax-inefficient assets in tax-advantaged accounts. Short-term gains often get hit by higher tax rates.
Keep a margin-of-safety. Cash buffer for emergencies prevents forced sales at market bottoms.
If you trade, treat it like a side hustle. Put a capped, predefined percentage of your investable assets into higher-frequency strategies; let the rest compound in low-cost core holdings.
Track net-of-cost performance. Always judge by returns after fees, slippage, and taxes - gross returns are a mirage for most retail traders.
👌🏽When Trading Can Make Sense
Trading isn’t inherently immoral or useless - but it’s niche:
Professional trading firms with sophisticated tech, low latency, and deeply capitalized balance sheets can exploit micro edges.
A tiny subset of highly-skilled retail traders do well, but they’re the exception, not the rule. Studies show persistent outperformance is rare (<1%).
Hedging, rebalancing, and tactical tilts - done sparingly and rationally - can be useful within a broader investment plan.
But if you find yourself with a “trading” mindset - the constant need to jump in and out of the market - then, pause and conduct a reality check. Compound interest is boring - but boring gets you wealthy.
✨ Final Takeaways (what to do tomorrow)
Re-read your goals. If you don’t have written goals and a horizon, stop trading and write them.
If you haven’t designed a “model portfolio” learn how and get started.
Move your core savings into diversified, low-cost funds that match your risk profile.
If you enjoy trading, treat it like entertainment or a capped experiment - money you can afford to lose (and learn from), not the family nest egg.
Measure everything net of fees and taxes. If your net-of-costs performance doesn’t beat a simple low-cost index over time, change the approach.
If you’ve got an urge to trade, you can always send a DM and I am happy to talk it through with you!
🚀 Up Next:
Thursday - Retirement Series #2: How to “Pre-tire”
Sunday - Desperation Capitalism
This publication is for brains, not bets. The Other Side of Obvious shares ideas, stories, and general financial information - not personalized investment, tax, or legal advice. Investing comes with risk (including losing money). Talk to a pro before you act. Please take time to read these important disclosures before you get started.