“It won’t be the economy that will do in investors; it will be investors themselves.” Warren Buffet
I read an article earlier this year in a financial industry publication that was discussing how people were less willing to “invest” in an uncertain economy and market. First of all, have the markets or the economy ever been certain or even followed logic? (As I write today, our government is “shut down,” but the stock market is currently up… go figure.) I’ll paraphrase a bit, but an individual is quoted as saying the past years had made him a much more “conservative trader” (oxymoron?) no longer having the “intestinal fortitude to gamble and trade like a cowboy.” It is clear this “investor” was making one of the most egregious of investor behavioral mistakes… believing he was “investing,” when in fact he was “speculating.”
Investopedia defines speculation as “the act of trading in an asset or conducting a financial transaction that has significant risk of losing most or all of the initial outlay.” Speculation is usually a “zero sum game”… in other words…for there to be a winner, there has to be a loser……no new “wealth” is created. Short sales, leverage, derivatives, options and futures could all be considered examples speculative tools in the “investment” world. Trading stocks on their price movements or movements in the market would fall into this category as well and is the most common way the average investor will attempt to speculate. Speculation does have its place in finance as the willingness of someone to assume the other side of a trade helps to provide some liquidity in the market place. It affords the opportunity to take a calculated risk….as does betting on a horse.
Investing on the other hand is defined as the “purchase of an asset with the hope that it will generate income or appreciate in the future – the purchase of goods today – not consumed today – but used in the future to create wealth.” A good investment can be sold in the future for a gain, to someone else who also sees it’s value and may experience gain over time as well. An “investor” will hold a quality portfolio through good markets and bad. A “speculator” will try to time the market – jumping in or out—making “bets” on which direction a stock or the market will move in the future.
We’re bombarded with advertising telling us how we can trade faster and cheaper and how we can take advantage of market conditions instantaneously. There are not too many commercials about the long term benefits of investing in a portfolio of quality investments. It’s just not as interesting as a “talking baby” convincing us we can “trade” our way to a successful retirement using an app on our phone….even though it is humorous.
You can be a speculator, an investor, or both. Just understand the difference…. And don’t let indifference or emotions result in confusion of the two.
Kimber L. Barton, CFP®, AIF®