Investing vs Trading vs Hybrid (part III)

In a previous article (Read more here), we talked about investing vs trading from expected return perspective.  Now, we shall look into the third type – Hybrid type.

Most of the investors or traders skid into Hybrid type when their investing or trading has turned sour after a certain period of time.

Example,

An investor may have started his investment using the “buy and hold” principle.  After he bought the stock, the stock price went down another 50% in 3 months.  A true hardcore FA (fundamental analysis) supporter will buy more stock at a bargain but not many people could withstand the stress when the portfolio has depreciated by 50%.   At that moment, the investor may probably ask the million-dollar question – Is the analysis correct?  Frankly, nobody knows the answer.  This is purely a psychological affair.

If the answer is a weak yes, the investor might upgrade the “buy and hold” principle to “buy and forget” belief.  If the answer is no, then the investor might execute cut loss procedure, switching to trading mode, which transforms the overall strategy to Hybrid type.

Another example,

A trader identified a trading opportunity that could generate 20% return.  The cut loss level is -10%.  After the investor bought the stock, the price appreciated 17%, then took a deep dive and settled at -11%.  A true trader will execute the cut loss procedure sternly but not many people could pull the trigger, especially when the stock was at positive 17% return at the beginning.   The trader might switch the strategy from trading to “buy and hold”, changing the strategy to Hybrid type.

Both the above examples show the process of switching from either investing or trading method to hybrid type.  Whether the investor or trader would benefit from the hybrid strategy is hard to quantify using common logic.  But from the observation that we had, the chances of generating positive return from Hybrid type is extremely rare.

Does this mean investing and trading cannot co-exist?  The answer is no.  You can do it by keeping separate accounts for investing and trading.  We shall talk about that in another article.