Shiba. Tech. Seed Investing. Gamestop. Robotics. This Stock. That Stock.
Since I began to invest my own money, I’ve found that the “thrill” with financial markets derived from the possibility of making money from an investment that no one could see would appreciate. A hidden gem, tucked into the haystack that seemingly only my own eyes could see.
Early in my career this made me “the guru” amongst my fellow colleagues who wouldn’t dare analyze stocks in the way that I did, who weren’t inquisitive enough to have their own ideas, and investment policies other than those given to them by the institutions that we served, and that largely aligned with hefty expense ratios that filled the pockets of the banks with every dollar invested.
The hunt for the next meteoric stock was a taxing one. It required hours of research which included listening to earning calls, looking at charts of historical stock prices and moving averages, and gauging the general sentiment of individual stocks – one that is oftentimes just a guess. If I was right, the hunt for the next gem was prioritized and the cycle of my obsession with equities churned time and time again. If I was wrong, the memory was filed in the back of mind never to be visited again. I was a young, impatient investor with lots to learn about capital markets and how they functioned.
To invest by definition means to expend money with the expectation of achieving a profit or material result by putting it into financial plans, shares or property or by using it to develop a commercial venture. On the contrary, a speculator is defined as a person who forms a theory or conjecture without firm evidence.
Today, with information – true and false – being exchanged more quickly than ever before, more and more investors are moving away from the true meaning of investing and leaning into the actions and ideologies of a speculator.
Below I’ve listed 5 telltale signs that you may be speculating and not investing:
The age of information can make anyone an active investor. Whether it’s via your favorite media personality on television or a colleague at work, ideas are a dime a dozen. If you find yourself listening to ideas and then investing your dollars in them, you may be a speculator.
Herd thinking suggests that an investor makes emotional decisions influenced by their peers over data and researched-backed, rational decisions. Herd decisions disregard the facts, and follow the feeling. In the stock market, it prioritizes trends and quick dollars over patience and wealth accumulation. And let me be clear, those who follow the herd can make money – and lots of it – in their practices. Yet, sustaining those returns becomes harder the longer a speculator tries to replicate them.
Herd thinking brings herd results, but the fundamental practices of investing can increase the likelihood of sustainable returns over a longer period of time.
The most common sign of speculators is the extremely impatience with their investment holdings. You can not be a true investor without understanding the power of time in your portfolio.
Consider two investors who both invest $1,000. The first investor makes her investment today and lets it grow for 40 years. The second investor starts 20 years later and lets it grow for the next 20 years. If we ignore taxes and inflation, and assume a 7% rate of return, the first investor would have $14,975 while the second investor would have a total of $3,870. Each investor set aside $1,000 but had the results differ by over $11,000.
There are two fundamental things at play in this example: an early start and patience. Speculators are usually dollar driven so the quickest path to the most dollars is the place where they’d prefer to assume investment risks. The best investors are investing dollars early and often, and are patient enough to watch their seeds grow into trees.
As mentioned in my article, 3 Must Have Qualities of Great Investors, the best investors have a plan for their dollars. They are able to connect every dollar investment with a plan in their financial ecosystem.
Whether it’s retirement, buying their second home or leaving a bequest, determining financial goals will assist in formulating an investment policy that can encourage discipline through choppy markets and the avoidance of greed through periods of growth. Your plan will be the backbone of your investment decisions and should not be worth jeopardizing on speculation.
Nathan Rothschild is famous for his quote, “the time to buy is when there is blood in the streets.” When I ponder on Rothschild’s ideology, I think of how difficult it is for even the best investors to think counterintuitively during the markets' most debilitating cycles.
When there is blood in the streets suggests that the ticker symbols that you track and follow are red on your television screen or finance app. It means that your investment statements likely reflect the losses taken in the markets, and any economic slowdowns globally or domestically. It reflects crises that are occurring for the consumer, who may be feeling pressure as costs increase for staples needed to power their everyday lives. Yet, for Rothschild, and many others, this is the time to purchase investments that align with your financial goals.
Down markets, though dreadful and uncomfortable, are the periods for the investor where wealth is accelerated. In these periods where quality investments are underpriced, investors find themselves gifted with rare opportunities to capture premium returns.
The speculator hates these cycles because it is likely he may have already suffered deep losses from speculation during bull markets. It reminds him that investing is not a game, but it could be a gamble without proper due diligence, patience and quality investment selection. Down markets are not a threat but a gleaming opportunity for the disciplined investor.
There is an opportunity cost of waiting for the speculator. As listed in my point on patience, waiting can be the difference between goal-securing returns on investment and not achieving the desired goals at all. An investor should have an advisor, accountant and potentially a lawyer as a part of their financial power team. By having these members, the investor will have more greater detail in growing and preserving capital as they work towards their goals.
Speculation isn’t a lifetime sentence. Most investors, including myself, started out as speculators. If you’re looking to change the course of your habits, schedule a call with a Yarnway Wealth advisor today.
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