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Figure out WHY You Are Trading and Investing

Earlier this week, on the HX Podcast, we had the chance to catch up with an old friend—technology investor Ram Parameswaran. You can check it out here.

The conversation went deep into the psychology of investing and how your background can influence what kind of investing style is right for YOU.

We will explore this more in an upcoming issue of HX Daily. Still, we wanted to talk today about another topic we discussed on the podcast…

WHY are you trading or investing?

As I've said many times, there are two approaches: investing and trading. However, the reality is that these approaches have a broad range of motivations that can combine the elements of both.

Most people think the goal of investing is to always make money. This is what we do at HX Trader, but the reality is more nuanced.

Many investors – especially those who trade – enjoy the activity.

This isn't surprising. We have often called the stock market the most fascinating intellectual competition in human history. Take a step back and think about it—millions of participants trade a combined trillion dollars each day and compete for returns.

In fact, the best, most successful "athletes" in this intellectual competition make 100 times more than the most successful professional sports athletes.

Investing can be intellectually engaging and fun... and there is nothing wrong with that.

We often use analogies to gambling; this is another case where one applies.

For those who do enjoy gambling, ask yourself – why do you gamble?

Again, the obvious answer would be to make money. But we know the reality is far different.

And this is where the analogy gets interesting...

When gamblers lose money, they're considered to have a problem. When investors lose money, they are often jokingly considered "value" investors.

There's a critical difference between the two. With gambling, the house always wins – eventually. With stocks, investors always win – as long as they are investing for the long term!

Regardless, we have often emphasized how some of the basic rules that apply to successful professional gamblers also apply to trading and investing. These are concepts like managing your bankroll, betting more on high-probability bets, and knowing when to leave the table.

This is where thinking about why you're investing and comparing it to why you gamble becomes an interesting exercise.

As regular HX Research readers know, I have played my fair share of blackjack. Usually, I have the following three goals when playing the game:

  • Establish a set bankroll that I would be ok if I lost all of it.

  • I set a goal for the profit I would like to make. If (when!) I hit that goal, I will cash in 90% of it and play with the remaining cash.

  • I set a goal for the amount of time I would like to play. If I lose all my money before this time, I walk away from the table. If I make my profit goal before this time, I play with the remaining 10%.

The same strategy can apply to your investment portfolios. And that means asking questions like:

  • Do you want both a trading and an investing portfolio?

  • If so, how big should each be?

  • What is the goal of each portfolio?

  • Is it the maximum return?

  • How much do you care about volatility and drawdowns?

  • How much time are you willing to devote to your portfolios?

Why do you think YOU are trading or investing? Tell us more in the comments section below.

You can answer these questions in different ways, and each individual's answers will differ. But the most important thing is that you're asking these questions.

While it's important to consider your plan regarding these questions, it's more important to actually have a plan.

The vast majority of investors never really even ask the questions.

Figuring out why you are investing and your plan will be crucial to your investment success!

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