Dear DTA,
I’m just starting out and feeling a bit overwhelmed. Is trading better than investing? Or is investing the better way to go? How am I supposed to know? Is it possible to trade your way to riches? How do I do that? Thanks.
-Adam B.
Hi, Adam.
Thanks for writing in to us. It’s always great to hear from readers. We appreciate you taking the time to get in touch.
You have an interesting question.
It’s actually a great question.
Not a lot of people try to delineate trading and investing. They might assume they’re one and the same.
Well, they’re not.
They’re structurally different concepts.
Trading stocks involves holding them for short (sometimes very short) periods of time.
You aim for maximum price gains in the shortest possible period of time on a stock.
Then you cash out and move on to the next target.
Traders look at trends and charts, using a variety of software to actively and frequently trade in and out of names in the hopes that they’ll turn a profit.
Trading risks capital. Trading also risks time. There’s a lot of concentrated effort and time that can be spent on trading. And there’s no guarantee that it’ll yield results.
Investing, on the other hand, involves buying stocks and typically holding for long (sometimes very long) periods of time. You aim for significant wealth and income creation over the long haul. Then you rely on compounding instead of activity.
Investors look at business fundamentals, competitive advantages, industry risks, and valuation. There is often minimal ongoing input once the initial analysis is performed and the investment is made.
Investing risks capital. But it risks relatively little time. There’s not a lot of concentrated effort and time that is usually spent on investing. Not in such a recurring way. There’s also no guarantee that it’ll yield results.
Now, Adam, I cannot sit here and tell you which method is better for you.
Only you can determine that for yourself.
But I will tell you a little bit about my experience, which I think will offer you some perspective and guidance.
I’ve been a diehard investor since early 2010.
We’re talking almost 10 years now.
And it’s radically changed my life.
How radically?
I started out investing when I was in the hole and worth less than $0. I wasn’t just broke. My net worth was negative.
Yet I found myself financially independent and retired just six years later.
You can read exactly how I did this in my Early Retirement Blueprint.
There are many ways to go about both trading and investing. I’d guess there are thousands of strategies out there.
I can tell you that I personally used dividend growth investing to build my wealth and passive income.
I’m not the richest guy around, Adam.
Not even close.
But I grew up extremely poor. I don’t have a college degree. And I had a very middle-class job.
So to be retired in my early 30s, starting with that kind of lot in life, is pretty special.
By following dividend growth investing, I built my FIRE Fund.
That’s my real-money portfolio.
And it generates enough five-figure passive dividend income for me to live off of.
What is dividend growth investing?
Fellow contributor Dave Van Knapp has you covered here.
His Dividend Growth Investing Lessons teach you just about everything you’d possibly want to know about this strategy.
Again, I’m not the wealthiest investor around.
But I can tell you who is.
That would be Warren Buffett.
He used investing to build a fortune that’s valued at over $80 billion – and that’s after giving away billions of dollars to philanthropic causes.
Guess what?
He invests in a number of high-quality dividend growth stocks.
The common stock portfolio he runs for Berkshire Hathaway Inc. (BRK.B) shows this.
This strategy scales up and down.
Now, I’m sure there are traders out there making money.
But it’s funny.
I don’t actually know of any.
I can name you dozens of very wealthy investors and businessmen who have invested in quality companies for the long term, earning massive fortunes in the process.
But I cannot think of a single trader who has traded his way to millions or billions of dollars.
Plus, trading is so much work!
The companies I’m invested in are working hard so I don’t have to. They’re sending me my dividend payments no matter what I do.
I’m free to wake up when I want and do whatever I like. Every single day.
In fact, I’m sipping on a delicious iced caramel macchiato at a comfy coffee shop in Thailand as I write this response to you, Adam.
I’m definitely not hunched over my computer, running all kinds of software, freaking out about candlestick charts, and wondering if my next trade is gonna go boom or bust.
The stock market doesn’t run my schedule. Stock prices don’t dictate my actions, nor do they dictate my ability to be financially independent.
I live off of growing dividend income, not fluctuating stock prices.
Growing dividend income from world-class enterprises tends to be reliable.
To see what I mean, just take a look at the Dividend Champions, Contenders, and Challengers list.
It contains information on more than 800 US-listed stocks that have raised dividends each year for at least the last five consecutive years.
Many companies on that list have reliably raised dividends for decades.
Meantime, stock prices wildly fluctuate every single day.
Dividends are fairly predictable. They’re largely within the control of a company.
Stock prices are neither predictable nor largely within the control of a company.
Look, I don’t need the stress in my life that trading entails.
And you should think carefully about whether you need it or not.
But I can tell you one thing.
If you decide to take up dividend growth investing, you’ll never be short on potential ideas.
I helm the Undervalued Dividend Growth Stock of the Week series, whereby I take the time every Sunday to highlight a high-quality dividend growth stock that appears to be undervalued.
Filtered from the CCC list, they must pass a number of quality and valuation hurdles before they are put forth for the community.
You have a big choice to make, Adam.
I hope I’ve provided some valuable insight.
No matter what you choose, make sure to get started.
I wish you luck and success.
Jason Fieber
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Disclaimer: Jason Fieber is not a licensed financial advisor, tax professional, or stock broker. Please consult with a licensed investment professional before investing any of your money. If your money is not FDIC insured, it may decline in value. To protect the privacy of our readers, any names published in this article are under aliases. In addition, text may be edited, omitted or paraphrased for grammar or length.