Hello and welcome. You are listening to Patrick Boyle on Finance, a podcast exploring ideas from quantitative finance, examining events occurring in markets right now and financial history to see what lessons can be taken away, including interviews with some of the most interesting people in the world of finance. To learn more about the podcast, visit onfinance.org.

Over the weekend, I was browsing through Twitter and someone had posted a Warren Buffett quote,

where he says that calling someone who trades actively in the market an investor is like calling

someone who repeatedly engages in one night stands a romantic.

This got me thinking about why people differentiate so much between trading and investing.

After all, the people involved are just trying with varying degrees of success to earn the

best return they can on their capital.

If you reach for the dictionary, you'll see investing defined as buying something in the hope of making a profit or a return.

That's exactly what a trader does.

And outside of the stock market, it's what most retailers and manufacturers of goods do. You'll notice that no one

is encouraging Walmart to hold onto their inventory for longer than necessary. So what is the

difference between trading and investing? Is one better than the other? And does it make sense

to discourage short-term trading? Well, the online consensus appears to be that investors

are people who build diversified portfolios of assets and stay in them through the ups and downs

of the market, seeking a larger return over an extended period of time. They do this through

buying and holding. Traders, on the other other hand take advantage of both rising and falling markets, entering and exiting

positions over a shorter timeframe, hoping to earn quick returns based on short-term market moves.

These are clearly quite different approaches, but why is it argued that one approach is better than the other?

The Buffett quote even implies that there is possibly something less wholesome about short-term profits.

Most governments seem to agree with that point of view, and they discourage short-term trading by setting a higher tax rate on short-term capital gains versus long-term gains.

One of the first arguments I found comparing the two approaches put forth that investors do more analysis than traders do.

Long-term investors generally build DCF models and attempt to calculate the intrinsic value

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