On 14 October, Samir Arora, founder of Helios Capital, posed the following question on his twitter account:
It was a nice way of highlighting the apparent contradiction that a lot of market commentators fall into when categorising investors as short term and long term. In our view, there are simply investors on the one hand and traders/ speculators on the other with the basic difference between the two being how they approach their investment decisions. Investors focus their attention on the fundamentals of the company and take action based on the gap between price and their estimate of value. Traders, on the other hand, are more concerned with momentum and look to other market participants to guide their actions. Investors are not constrained by time horizon – depending on the situation they may buy for the short term or hold a stock for a really long time. Traders on the other hand, usually have a shorter time horizon.
Given the above, the question then becomes whether there can be situations where a particular stock is good for an investor and not a trader? We believe that this is possible since both of them look at very different criteria when making their investment decisions (as discussed above). A trader may want to sit on the sidelines while a stock is in a downward spiral because he/ she believes that others are also likely to sell thereby waiting for further correction before making his/ her play. Whereas, an investor who looks to the price-value gap may want to enter the same stock because he/ she believes that the price is well below his/ her estimate of value, knowing full well that the stock may fall further.