I am often told I am a trader, speculator or a gambler. I have outlined above what makes a good investor. Below I outline the characteristics of traders, speculators and gambler.

Traders make money by using large balance sheets to provide liquidity to the market-place through frequent dealing and can set the price of liquidity through setting the bid / offer spread. Most investors should not trade. Leave it to those with the biggest balance sheets and the lowest dealing costs and be thankful they are providing you with liquidity. Most investors will not be able to set a price inside a trader’s bid / offer spread and can never gain enough volume to make trading a profitable activity. Unless you can consistently set the bid / offer spread, trading will be a loss making activity.

Speculators take an investment decision without concern about the fundamental factors determining an asset’s prospective return. Investors should not invest in an asset in the expectation they can reverse the position in the short-term just because they are confident the market will take the other-side of their exiting trade. Speculators buy tulip bulbs knowing they are over-priced but not caring. Investors sell land to the tulip growers.

Gamblers have the odds staked against them (especially in US casinos), having a less than 50% probability of achieving a positive return above a risk-free rate, are taken out of their investment position every time they deal and have no insight into the fundamental factors determining their prospective return. The best they can hope to achieve over the long-run is a return slightly below the risk-free rate of return, provided they have infinite liquidity. If a gambler achieves a return in excess of the risk-free rate, it is down to luck and the gambler should never gamble again.