Monday, December 21, 2009

Trading, the buying and selling of inventory

Some time back Ira (I’m embarrassed to say that I have forgotten his last name) was active on a list I read; he then got inspired to launch a web site: I saved one of his posts, from which I have lifted a passage that may help other traders. (Call it the holiday spirit of sharing, except in this case I’m sharing someone else’s thoughts. That seems somewhat Scrooge-like, doesn’t it?)

“Trading and investing are two different animals. Investing is a plan that involves the allocation of assets in various areas that are supposed to increase in value over a period of time. During this time the individual is earning a living in his/her chosen field of endeavor. Trading is the generation of cash flow. In the stock, futures and options markets a trader has the ability to make substantially more money than an investor. Trading is like any other retail business. You are doing nothing more than buying and selling inventory. If you are a buyer you are hoping to buy at one price and sell at a higher price. Isn’t that exactly what every retail and wholesale business is doing? If a store cannot sell an item at the price listed it goes on sale. The same should happen in trading. If the stock, option or future doesn’t do what it is supposed to do, sell it and buy something else that will produce a profit. Safeway and Tiffany have different methods of operation. One is a high volume low margin business with a rapid inventory turnover and the other generates a higher margin with a lower turnover rate. At this time they are both profitable. The one thing you don’t see in these businesses is a stagnant inventory. They are not investors; they are in business to buy and sell inventory. If you go into a Chevy agency you won’t find one 1957 Corvette convertible or other vintage car. The Corvette sold new for $3500 and in good condition it could bring between $65,000 and $125,000 at auction in today’s market. The purpose of the agency is to buy and sell cars not invest in them. Businesses buy and sell inventory. Investors are collectors of assets. If you are an investor you own the building and if you are in business you rent that building and generate cash flow by buying and selling inventory. Both should make money.”

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