That brings us to the basic question; what generates higher returns? The answer is that you must take more risk for higher returns. Since trading is a higher risk game compared to investing, it should logically imply that trading should generate higher returns compared to investing. Is that assumption correct? No, that assumption is wrong. You need to understand causality here. Higher returns entail higher risk, but then assuming higher risk does not automatically guarantee higher returns. You may be taking a higher risk by trading but that does not guarantee higher returns.
There are successful traders and there are successful investors. There are extremely successful traders like George Soros, Paul Tudor Jones and John Paulson who have made billions of dollars timing their trades to perfection. Tudor James’s decision to buy stocks on Black Monday (October 1987), George Soros’ decision to short-sell the UK£ in 1992 and John Paulson’s decision to short sub-prime futures in 2007 were all cases of extremely successful trades.
Similarly, there are also extremely successful investors like Warren Buffett, Carl Icahn and Peter Lynch who have been successful as long-term stock pickers. It is possible to be extremely successful as a trader or an investor if you play by the rules of the game. But for most small investors, trading will be a very difficult and nerve-racking game.