Investing Vs Speculating Vs Safekeeping
Speculation entails the same Key element.
Safekeeping means, safely “marching in place”
That commonality leads many people to confuse investing with speculation. However, the fact is, they are very different. So, if you are to become a successful investor, you must separate them in your mind, mood and mode.
Below are are some of the things that distinguish Investing from Speculation, as follows:
Successful investors research their targets, whether they be companies, bond issues, currencies or commodities. They understand the supply and demand dynamics that drive markets, they understand the forces and cost factors that will determine the ability to profit from the growth.
Speculators do not look in depth at the underlying vehicle, they put their money up aka Bet, on the belief that it will go up or down.
2. A detailed outlook
Understanding current conditions is good, but a further step means being able to make calculations about how those conditions will develop in the months and years ahead. This can take the form of data like a multi-year earnings projection for a stock, or quantifying the interest rate sensitivity of a bond, government or corporate.
One needs to have thought through both what is expected to happen and how the investment will react right. Without specifying how one will succeed, one is speculating that things will work out.
3. Consider valuation
Taking into account valuation is a Key component of investing. This means comparing the price now with likely future value of the investment based on its underlying fundamentals. This is Key, because markets anticipate the future. If you pay for an investment and the pricing reflects an assumption of its future success, there will be little Northside for even if things go well.
Speculators, on the other hand, hope that if things go well, the price will rise.
4. A flexible frame
Investments can take some time to succeed, as economic fundamentals usually evolve gradually, and sometimes it takes markets a while to recognize the value. Having the flexibility to wait for all of this to happen increases the investors chance of success. But, narrowing the frame in which it can happen takes one down a road towards losses.
5. An awareness of a differing perspective
Understanding how one’s view of an investment differs from the market consensus is important, because if you do not see things differently, there is less potential for gains. This is why buying into very-popular investments takes on the element of speculation. When you like what everybody else likes, the risk is higher than not. Note the Ferrari (NYSE:RACE) story.
A fully researched and different perspective can involve any or all of the things discussed above. Information, outlook, valuation, and the frame over which you are willing to hold onto the investment is Key.
6. Recognition of the Southside aka Risk
Speculators are mostly focused on winning. But a true investor for value understands the probability and Southside potential of being wrong.
7. Reliance on others
The “Greater Fool Theory” means that one does not care if he/she overpays for an investment, because if it keeps going up a Greater Fool will come along and pay more for it. Depending on the irrationality of others rather than on investment fundamentals is very close to Speculation.
Real investing should be less risky than Speculation
It is important to understand the difference between Investing and Safekeeping.
Again, Investing involves being conscious of the risk of loss, and trying to manage it in proportion with the potential Northside.
Safekeeping involves eliminating the risk of loss, at the expense of any significant Northside.
Savings accounts and other insured deposits should be fully protected against loss, but they offer little in the way of appreciation aka Northside, especially when interest rates are low as they have been for the past 8 years.
If Safekeeping, or slow growth, is what you want, it is important to recognize that as a priority and ensure that your money is placed accordingly.
This means making sure you stay within FDIC insurance limits, and not mistaking safe vehicles for somewhat low-risk investments, like government bonds, which carry some risk of loss.
The distinction between Investing and Safekeeping is in the trade-off between potential Northside and potential Southside.
Again, the difference between Investing and Speculation is essentially the difference between making a reasoned business decision and placing a Bet.
Buddha said, “It is to the one who endures that the final victory comes.”
Have a terrific weekend
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