Are you an Investor or a Speculator?
If you read our curated ten investment commandments, you will get the flavor what in our view makes a good investment and hence a good investor. The corresponding definition of an investor would probably be as follows:
“An investor is an individual or an institution who is interested in generating attractive long-term real returns by following a disciplined, continuous and cost-efficient strategy of buying shares and/or bonds issued by attractive companies at time-averaged prices, ideally holding those assets forever.”
What on the other hand is a “speculator”, so commonly and widely blamed for all unwelcome market distortions?
Let’s first look at some third-party definitions before presenting our own:
“If a man walks in the woods for love of them half of each day, he is in danger of being regarded as a loafer. But if he spends his days as a speculator, shearing off those woods and making the earth bald before her time, he is deemed an industrious and enterprising citizen.”
Henry David Thoreau
The following quote by Benjamin Graham gives a flavor of the mindset of a speculator:
“The reader can test his own psychology by asking himself whether he would consider, in retrospect, the selling at 156 in 1925 and buying back at 109 in 1931 was a satisfactory operation. Some may think that an intelligent investor should have been able to sell out much closer to the high of 381 and to buy back nearer the low of 41. If that is your own view you are probably a speculator at heart and will have trouble keeping to true investment precepts while the market rushes up and down.”
We actually see speculation far more prosaic: there will be situations where market imbalances are so enormous and mispricing so outrageous, that, once the market realizes that mistake, prices will flip back in a major, frequently sudden move into the other direction. Identifying these distortions and benefitting from the swing back, should be the basis for successful speculation.
If such a situation is identified by the speculator, he or she should build a position with maximum leverage, i.e. eventually generating returns in multitudes of the capital at risk. This usually requires the intelligent use of derivatives, which by their very nature strongly multiply the move of the underlying.
As such we adopt as our own the following quote by the famous investor Bernard Baruch …
“A speculator is a man who observes the future, and acts before it occurs.”
… and would add: “Acting means using the appropriate tools to benefit from the actual occurrence of the anticipated future event in the best possible way.”
Why are we presenting this? Investing is our core mission and we hope it is going to become yours. Occasionally though, you may be convinced that a major market move is going to occur. In that case feel free to consult with us – we help you implement the appropriate instruments to make a fortune in case you are proven right.
One of our favorite books by one of our favorite authors on one of the most successful speculative trade in recent history you’ll find here.
Last but not least let’s not forget a healthy dose of self-irony:
"What's an investor? An investor is a trader that is underwater." Wall Street adag
Better be an Investor, but talk to us for implementing major speculative trades