The philosophical difference between investors and traders is that traders value humility. The name of the book The Intelligent Investor implies other approaches are unintelligent. The allegory of Mr. Market as a manic basket case teaches investors to regard it with contempt. 1/
Investors value intelligence, conviction, and pain tolerance. A success story is Michael Burry in The Big Short. He was years early, held to his conviction, took the pain, and was rewarded for it in the end. The formula works if you're right, but is catastrophic if you're wrong.
But we've seen once great investors unwilling to let go of a stock, sector, theme, strategy, or style, endure years of pain, and it sinks them. Fear of missing the turn and misplaced conviction. Brilliant investors especially fall to this trap - they aren't used to being wrong.
Sometimes I joke with my friend that "in the end, momentum is my one true god." The market rudely reminds of this from time to time. In an argument between price and fundamentals, price always has the last word.
Even if you're 100% right on fundamentals, if price moves against you enough, you'll have to give up. Better to accept this fact and plan for it. The higher the conviction, the larger the position, the larger the loss, and the more difficult but necessary it is to take that loss.
In interviews with great traders, at first it struck me as strange how much they talked about taking losses and risk management, and how little they talked about actually having a profitable trading strategy.
Eventually it clicked for me. Over the long run, due to the geometric nature of compound returns, big losses are all that mattered. Reducing the size of losses is the lowest hanging fruit. There are myriad viable strategies, but risk management is essential for all.
It's human nature to want to be right. Admitting you're wrong and taking losses is hard. That's why the first lesson that traders learn is to cut losses and let winners run. It's a very simple concept, but counterintuitive, difficult, and profound.
I think good traders internalize this concept, and great traders embrace it and exploit the failure to do so by others. I'm not there yet but I'm working on it.
