Trades vs Investments

Rule:

Never change a trade into an investment and never change an investment into a trade.

A trade is short term where you are looking for a specific catalyst. A trade should be where you are betting on a buyout, a new product that you think the market will like but you also think it is just a flash in the pan idea (Crocs), or maybe you are betting on an activist investor, like Carl Icahn, to unlock some needed value and lay waist to sloppy management.  A trade is short term, usually less than six months, and when the trade is done, it is time to sell. Don’t make excuses to keep it. Remember, when the money is made, it is time to go.

Example of a trade: YELP: We are waiting for GOOG, MSFT, FB or YHOO to snap them up, YELP owns the yellow pages, they can’t stay independent for too long.

An investment is usually greater than six months. Sure, you may still be still waiting for a catalyst, but this stock has some mojo; maybe a good CEO, a first to the market product or no competition (we like a monopoly). When you make some money, you must let your winner run, just like in horse racing. Obviously, if there is a change to the fundamentals, it is time to sell, but you are in it for the long haul and if you keep reading the quarterlies and the news, you won’t be surprised to the downside.

Example of an investment: SBUX: They are run by a top CEO, no competition (no, Dunkin is NOT competition, they are being dragged by the ice cream biz.) and they are the masters of mobile payment that is going to double SBUX over time when they license the tech.

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