There are two times in man’s life when he should not speculate: when he can’t afford it and when he can. – Mark Twain
People, often adopt many different approaches that may offer little or no real prospect of long-term investing and considerably chances of substantial economic loss. Many have had no coherent investment portfolio at all and made as investment which is resemble speculation or outright gambling. They are frequently lured by the prospect of quick and easy gain and fall victim to the many fads of stock market. My goals in writing this post are twofold. First, to create understanding the difference between investment and speculation which is also first step in achieving investment success. For the remainder of this post, I tried to identify many of the pitfalls that face investors.
Silver line between Investors and Speculators
In financial market, participants can be divided into two groups which can, often be characterized as either investors or speculators. This distinction is made not clear to the most people. Both investor and speculator buy and sell securities and appear to generate investment returns. But here is one critical silver line between those; investors throw off cash flow for the benefit owners whereas speculators do not. Today many financial-market participants, knowingly or unknowingly, have become speculators. They may not even realize that they are playing a “greater-fool game”. While buying overvalued stocks and expecting-hoping-to find someone, a greater fool, to buy from them at a still higher price, if he may not be able to do so, in which case he himself is become the greater fool. On the flip side, investment is a serious business, neither entertainment nor playing any game. If you want participate in the financial markets at all, it is crucial to become as an investor, not as speculator, that’s why you must make to understand the difference.
Real Definition of Speculators
By contrast, speculators buy and sell securities based on whether they believe those securities will next rise or fall in price. Their judgment regarding future price movements is based, not on fundamentals, but on a prediction of the behavior of others. They regard securities as pieces of paper to be swapped back and forth and are generally ignorant of or indifferent to investment fundamentals. They buy securities because they “act” well and sell when they don’t. Indeed, even if it were certain that the world would end tomorrow, it is likely that some speculators would continue to trade securities based on what they thought the market would do today.
They are obsessed with predicting-guessing-the direction of stock prices. Every morning, they watch business news channels, every afternoon on the stock market report, every week in dozens of market newsletters, and whenever businesspeople get together, there is rampant conjecture on where the market is heading. On the other side, many speculators attempt to predict the market direction by using technical analysis past stock price fluctuations-as a guide. Technical analysis is based on the presumption that past share price meanderings, rather than underlying business value, holds the key to future stock prices. In reality, no one knows what the market will do; trying to predict it is a waste of time, and investing based upon that prediction is a speculative undertaking. Since, they do not wear badges to get identify them as investor or speculators, it is sometimes difficult to define the two apart without studying their behavior at length.
Indeed today, many “investment professionals” actually perform as speculators much of the time because of the way they define their mission, pursuing short term trading profits from predictions of market fluctuations rather than long-term investment profits based on business fundamentals. As we shall see, investors have a reasonable chance of achieving long-term investment success; speculators, by contrast, are likely to lose money over time.
Becoming Successful Investors
To investors, their holding of stocks represents fractional ownership of underlying businesses and bonds are loans to those businesses. Investors make buy and sell decisions on the basis of the current prices of securities compared with the perceived values of those securities. They transact when they think they know something that others don’t know, don’t care about, or prefer to ignore. They buy securities that appear to offer attractive return for the risk incurred and sell when the return no longer justifies the risk. Investors believe that over the long run security prices tend to reflect fundamental developments involving the underlying businesses.
Successful investors tend to be unemotional, allowing the greed and fear of others to play into their hands. By having confidence in their own analysis and judgment, they respond to market forces not with blind emotion but with calculated reason. Successful investors, for example, demonstrate caution in frothy markets and steadfast conviction in panicky ones. Indeed, the very way an investor views the market and its price fluctuations is a key factor in his or her ultimate investment success or failure. Investment success requires an appropriate mind-set. Needless to say, investors are able to distinguish Pepsico from Picasso and understand the difference between an investment and a collectible. When your hard-earned savings and future financial security are at stake, the cost of not distinguishing is unacceptably high.
Latest posts by Suresh Kumar Narula (see all)
- Why we should shun investing in Mutual Fund NFO? - April 29, 2019
- Not to worry current losses in equity investing! - March 2, 2019
- The Secret of Goal-based SIPs? - October 26, 2018
- Do not invest based on returns, rather than goals! - May 18, 2018
- Gold is not bold anymore - April 17, 2018