Investing and Speculation

Whenever we invest in something, whether it be securities, real estate, a business venture, or anything else, what we are doing is essentially speculating on it, where we presumably expect to see the value of our investments increase at a certain point in the future.

The goal then becomes to sell the investment later, hopefully at a profit, although no speculation is without at least some uncertainty, risk in other words. This can mean that we lose money on the investment in the end or it may mean that we end up making less than desired or less than we would have achieved with competing investments.

This brings up an important point, and one that most investors don’t really appreciate, and that’s the fact that with any speculation, we should be looking to not just get a positive return on our speculation, we should be seeking the best return. This goal does need to be tempered by considerations of risk, and we do want to make sure that we are seeking both goals, to maximize return in a way that is also acceptably safe.

We don’t really want to put our life savings on a single number on a roulette wheel for instance, even though the prospects of multiplying our bet by 36 can be pretty exciting when we have all of our money on the line and can become quite a bit wealthier if we get lucky. This is a clear case of the risk being unacceptable to anyone but fools, and we most certainly do not want to be foolish, especially with our life savings.

We don’t just necessarily want to keep all our money under the mattress either, as the risk might be acceptable but the return, in this case zero, should not be. While these are extreme examples, these principles apply to all investments and we need to seek out the proper balance between risk and return whenever we speculate.

Investing is Indeed a Form of Wagering

Many investors can get caught up in the whole idea that they are investing in companies and are buying a piece of the company’s profits over the period that they hold their shares, and may think that this is more like a business venture than a pure speculation, but this is quite mistaken.

While the performance of a particular business can influence its share price, and the value of our investments in return, we can’t even know all that much about where the business will be years down the road, and companies who at one time were very highly regarded as blue-chip investments sometimes fall upon harder times years later and may not even remain in business.

When we evaluate our investments based upon results like this, we at least have our ear to the ground, and that is a big step up from what most investors do, which is to invest and then not pay any attention to anything other than perhaps their returns. If we do not make the right choices here, the poor returns that follow aren’t the problem in itself, they are the end result of the problem, at least if we could have done something differently and did not.

Watching business performance only tells part of the story and isn’t even the major factor that drives changes in prices of investments like this, and if that’s all we’re paying attention to, we will miss much of what is going on and may end up with stocks that still look good fundamentally but have been nonetheless beat up.

When we do invest in any securities, we are really placing a bet that the price will move in our direction, up for instance if we are betting that way. A lot of people think that if we are betting this somehow degrades what we are doing, perhaps thinking of other forms of betting that people make with the odds always against us, such as casino games. There are other forms of betting that are based upon skill though and one can achieve favorable odds should one have the right skills, and this is the form of betting that investing involves.

The insight that we need to achieve here is that if we are betting on the price going up, or going down, as the case may be, then how our bets are doing, how well they are moving our way, is going to matter and matter a great deal. We should therefore be paying attention to this instead of ignoring such things and just hoping our luck will change when things don’t turn out as well as we had hoped.

The Basis of Investment Speculation

When we invest, once again we’re doing so with a positive expectancy, regardless of whether this expectancy is reasonable or not. We really don’t invest in something expecting to lose, and while this can happen, we actually need to seek to manage this risk, not seek it intentionally.

A lot of people think that when they make mistakes when investing they are choosing the wrong investments, and they certainly may, but the real damage is done by our being in investments at the wrong time, not being in the wrong ones.

We can make money from just about any investment if we use our power to go with its direction, and even ones which people see as performing terribly can perform very well for us and even extraordinarily well if we are on the right side of the move. This is something that does not even occur to most investors since they are so entrenched in the idea that we should only be investing on the long side.

It is commonly thought that being on the short side is riskier and much more so than the long side, but this is only true if we allow ignorance to drive our investing. Sure, if you short something and just hang on to it and let it go wherever it may over decades, we’re going to be risking a lot indeed, and this whole idea is absolutely crazy actually.

If we instead manage our positions appropriately, the short side is no riskier than the long side and actually is a little less risky, because the long side is the one that tends to get nastier surprises and also tend to be more difficult to manage at times, especially when things go south.

When we speculate, we should do so with not only a clear plan but a sound basis. We need some good indication that, over the next while at least, it is more likely that we will make money than lose it, otherwise it’s simply the wrong time to invest in this.

This is true even though our investment horizon may be decades away and even though we may have a preference to hold positions for a long time. If we see that something will probably go down for a year or two but has better long-term potential, we may wish to take advantage of this potential, but the time is not now.

If we are in an investment already and things don’t look so good for the near term but look better longer-term, it doesn’t make sense to be in it now as well. Why would we want to take a loss for a while even though we may make it back later and more? It’s just not sensible to want to do that as opposed to getting out when the going is tougher and looking to enter if and only if things turn around well enough to make the prospects of success clearer.

If we want to invest in something and think that if we hold it for several decades the probability of getting a good return is high enough for our liking, this never means that we should just jump on and just keep our eyes on the prize and ignore everything else. As crazy as this sounds, that’s exactly the approach that most individual investors take.

Proper Speculation Involves Assessing Our Investments

We might think that determining these things are well beyond our knowledge and abilities and we should just ride the decisions of the professionals and go with mutual funds or even hedge funds if we qualify.

Mutual funds are not equipped to assess their positions properly because they are duty bound to stay the course. This doesn’t mean we are duty bound though although they do their best to convince us that we are or at least should be.

Timing investments really isn’t all that difficult of a task, at least timing them to gain some sort of a meaningful advantage, and many people could even use their gut feelings here, with no training or skill, and still probably beat the market handily. When the market is up, just about everyone knows it, and when it’s down, the same is true.

There are some periods where things are running more sideways, but we need to realize that we generally need good evidence that our speculations have deteriorated enough to liquidate them, which means that we need more than just something not moving very much.

If we are skilled enough, we can add all sorts of twists to this game and may indeed wish to be out of investments who are producing neutral to mediocre results. This doesn’t mean that any of this is really that required though, and we can just focus on the big stuff and leave the smaller stuff up to the professional traders who have the right skills to manage this better.

Trading and investing aren’t really that different by the way, at least when we’re talking about trading properly and investing properly. There are a lot of both poor traders and poor investors. but when we do this right, we’re all just speculating over a given period of time, with investors looking at longer timeframes and traders speculating over shorter to much shorter ones.

Just having the goal of not being a poor or ignorant investor would be a big step up for most of us, and our ignorance as investors is at the pre-cognitive stage so we’re not even aware of what we don’t know and what we are missing out on because of it.

How we do doesn’t necessarily mean how good we are, and in a bull market for instance, most investors feel pretty good about themselves because they have the good fortune to see moves run their way. When the reverse happens, this is what really separates the good investors from the lesser ones.

We need to realize that we are speculating here and we are doing so not over a long time but are continually involved in these speculations whether we care to pay attention to this involvement or not. When our investments run poorly, we usually blame luck or the market, but we instead shoulder at least most of the blame here, because we chose to hang around anyway when things went against us enough to spot the trend and render this fate more probable than not.

Hanging on to the investments and patting ourselves on the back for this if things do turn around favorably enough later is not anything to be that proud of, because when we do this, we bear both the shorter-term losses that could have been avoided and the additional risk that trying to swim against the tide added.

There is a lot of potential for us to become better investors, but this can only start once we’ve taken responsibility for our own investments, and understand that the quality of our speculations, both prior to and while in the investments, can matter a great deal and allow us to really help ourselves should we have enough courage to step up and take charge.