The investment and the trade

The distinction is sometimes made between investing and trading, and the dividing line seems usually to settle on the holding period… the longer term denoting an investment and the shorter term a trade.

I don’t think this is adequate. It oversimplifies a highly nuanced undertaking that is more than academic.

There are key qualitative differences between investment and trade, on both sides of the transaction – preparations, expectations, style, analysis, structure, size, and often but not always, duration. That last item is as frequently a cause as it is an effect of all the others.

As an alternative approach to the distinction, consider the idea of control… envisioned along a continuum of varying degrees in speculation and self-determination

At one extreme, the purely speculative, there is no fundamental play at all, not even a desire… the underlying asset is as though invisible and its price is just a number. The action, often, in this case is high-frequency. But not always.

At the opposite end, the speculative risk is substantially reduced (though never entirely eliminated) by self-determination. Although there is market risk, there is control over the asset. This requires in-depth preparation and continuous follow-through. It’s a responsibility. This is the world of buyouts, M&A.

And then, most commonly, there is the large gray area between the two extremes… transactions that contain elements of both, a range of greater or lesser speculation, of lesser or greater self-determination, depending on proximity to either of the ends along the line.

Active, passive, venture, growth, all forms of debt and hybrid instruments, some different asset classes, are in this in-between space of not fully speculative or fully self-determined.

The blend and composition, the distinction between categories, the questions raised and described exercise to answer, are important. The difference between a trade and an investment, between trader and investor, should be a key consideration on both sides of the ledger… introspectively as well as analytically of the other.

To know what you are, and who you’re dealing with, and what you’re both prepared to be can be a knowledge as important as cash flow.