Warrant Trading vs. Warrant Investing, Why Not Do Both

I received an email recently asking why my book focuses on warrant trading and not warrant investing. Wall Street has created very deep and emotional connotations that most individuals have internalized around the terms “trading” and “investing.” Generally, investing is “good” and “trading” is bad.

Why would Wall Street spend money (advertising, white papers, academic studies) to give investing a good name and trading a bad name. Because the longer your “invested” money has a home with a Wall Street firm the more fees they make off of it.

Wall Street would much rather you invest, because this makes their job, which is asset gathering, not achieving good returns on your money, which most people think is the job of their broker.

I don’t want to go too far down that rabbit hole, as that is a subject for a book, but I do want to make it clear that I’m very aware of the arguments for and against investing and trading.

Having said that, why does my book focus on warrant trading and not warrant investing? Especially when trading is more difficult for most individuals to do, as opposed to investing.

Here is a slightly edited version of the email I sent Marco (thanks Marco) in response to those questions.

Thank you very much for spending your hard earned money on my thoughts around warrant trading. I very much appreciate your purchase.

I know exactly what you’re talking about when you talk about the “sorrow” in trading. I actually started another website, www.100tradingmistakes.com that begins to tell some of my story around trading. (I started the site a while ago, and have not really done anything with it.)

Trading is a VERY difficult business and you’ll find that you yourself are your own worst enemy. I believe I’ve made every mistake possible in trading.

Having said that, I’ve found that I often make mistakes in “investing” as well. I buy something I think is a bargain and it only becomes more of a bargain! That is one of the reasons I like the world of arbitrage so much.

With arbitrage I can be wrong a lot and still manage to make money. The percentage hedge strategy I describe in my book is a great way to make money with warrants with very low risk, and you can make money whether the stock goes up or down.

In answer to your question about why I don’t suggest long term investing in warrants, it is simply because I find it easier to take small profits over and over with very small risk, than to have to be “right” about my stock picks. That is definitely not to say that you cannot make money by investing longer term in warrants. If you are good at picking value stocks then warrants or LEAPs are a great way to leverage your funds.

It’s really a personal decision for each trader / investor. I am extremely risk averse, but still need to make more money than I can get at the bank, haha.

So, I prefer a long / short strategy that tends to make money in small amounts as the stock / warrant move up and down. I then take these small gains multiple times throughout the year. And I know if the stock moves down substantially I will likely make money.

This style may or may not fit your trading style / personality. I know many, many traders and investors, each with their own system and style who do well in the market. I find that whether or not I like the way they trade or invest I can usually take something from their system that helps my own.

For example, let’s say you are invested in a warrant and the stock moves up substantially (causing the warrant to move up as well). After the move you are unsure whether the stock will continue to move up or go back down.

You could short some percentage of the stock in relation to your warrant holding and lock in your gain, but also give yourself an opportunity to make more money if the stock either comes back down in price or if it continues upward. You could do this even if you don’t generally hold a long / short position in the warrant / stock.

So, just because I focus on trading warrants does not mean that investing in warrants is a bad idea. Take something from every system you look at to improve your own trading system. Make it something that fits your personality, trading / investing style, and money goals.