All too often people believe they are investing while they are actually speculating. Being an investor or speculator is different and everyone should know what he is or wants to be. His strategy and success depends on it.
Being an investor or speculator is more important than people may believe. And to know what you are is even more important, because your success depends on it. To believe that you are an investor, even though you are really a speculator could cost you a lot of money, maybe everything you have. You’re strategy depends on knowing what you are and what you are depends on your goals and your own characteristics.
I’m calling myself an investor and I’m sure I am one now. But for a long time, I only thought I would be an investor but rather was more of a speculator. And for some time I knew I was both, because I invested and also speculated. During this time I knew about my different strategies and goals and I separated them very accurately.
Why I did both?
I’m a curious person, always hungry for knowledge. Mostly not the knowledge you get from any university written down in studies. Although I read one and the other study, I prefer the knowledge the life teaches me. I like it when life proves studies wrong. So, sometimes I just try things out to make my own experience, to prove for myself what others are claiming and to decide about what I want to do in the end.
In the beginning of my investing career, I was a speculator thinking I would be an investor. That was due to two things: First, I was young and second, had too little knowledge and experience. Later I became an investor, because it’s more successful over the long run, but also tried out speculating. I stopped the latter, because it was too stressful.
“Confusing speculation with investment is always a mistake.” (Benjamin Graham)
“The stock market is filled with individuals who know the price of everything, but the value of nothing.” (Philip Fisher)
Benjamin Graham stated that “an investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting this requirements are speculative.” Well, many would be of the opinion that they analyze an investment before buying. And this is quite right. So the difference has to be in the nature of the analysis as well as in the promise of the safety of principal. An adequate return can be achieved with an investment as well as with a speculation.
The speculator is more like a gambler and the stock exchange is his casino. He isn’t interested in the company he’s buying. He is only interested in the stock. For the speculator a share is just a piece of paper, which he buys today and sells tomorrow. Nothing more, nothing less. The speculator isn’t interested in the value of an asset. He is only interested in the question, whether the share price will go up and someone will buy the share for a higher price than he did. Then the speculator will sell his shares getting his return. The speculator “base(s his) standards of value upon the market price.”(Benjamin Graham) He tries to figure out, where the market price would go. He uses computers and charts to identify a pattern and predict the future of the share price upon it.
A bet on Emotions
Because these patterns are a result of the behavior of the market participants, the speculator bets on the reaction of those participants. Or as I like to say, on the psychology of the participants. The speculator wants to figure out what the emotions of the people in the market would be. The emotions make the participants buy or sell. A speculator can participate in both actions. He can make profit by increasing and decreasing markets. But his profit isn’t based on the value of any company, but only on the bet regarding the emotions.
A speculator can make a lot of money by leveraging, but he can also lose a lot, i.e. lose all his money. The risk of a speculation is very high, especially when leveraging. I’m very skeptical if speculating is the right for the average people.
In contrast to the speculator, the investor is interested in the asset he buys. For an investor, a share isn’t just a piece of paper, but, as the name says, a share of a company. The investor buys a company in form of a share. That’s why he is always interested in the company behind that share and in the success of its business. The investor judges “the market price by established standards of value” as Benjamin Graham stated. In comparing the market price with the intrinsic value of the company, the investor decides if this company is worth buying. His intention is to get more value for the price he pays, or with the words of Peter Cundill: the investor tries to buy a dollar for 40 cents.
To find such a bargain (or even a company at a fair price) the investor researches the company well. He is less or not interested in charts, because charts only reflect what the market is willing to pay. They don’t reflect the value of the company. To get to know the value and health of a company, the investor looks at the financial statement and its numbers. He tries to figure out, if the business will last for a long time yet, if it has a competitive advantage, if it could stand an economical storm and so on. The investor is not interested in the daily ups and downs of the market price and if the price will be higher tomorrow or not. The price is only important in relation to value. And the investor wants to know or anticipate the future value of the company.
Asset vs. Emotions
While the speculator bets on the emotions of market participants, the investor decides based on the assets of a company. Because predicting the emotions of people is more difficult than anticipating the success of a business based on its previous performance, speculating is more risky than investing. Especially regarding the time horizon. When you make a mistake, it can be disastrous in the short term. But time, however, compensates many mistakes over the long term.
What are you or what do you want to be?
I think, for the average Joe Bloggs, investing is more reasonable and less risky. But maybe not everybody is made to be an investor. To ignore the ups and downs of the market and to control your emotions is really not easy. If you buy a share and the price goes down the next day, week or month, it demands a lot of patience, not to sell in panic and secure what’s left behind. If patience is not one of your virtues and controlling your emotions is exhausting than you’re maybe not made for being an investor.
Many people have to be active all of the time and buy and sell shares. They like to take an opportunity even if it’s not the best. They need the experience of selling a share with a good return, because this success let them feel alive and they can tell everybody about it.
Being an investor demands from you to ignore what the other market participants do. It demands not to look at the market price every day as well as it demands to do your homework and research a company well. As an investor, you have to make your own decision based on the facts and strategy you have. You have to go against the tide which could be really hard. James Chanos says that “in investing you can be really right, but temporarily wrong.” Not everyone can stand it! Can you? It is important to find out, because your strategy has to be based on what you are.
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