Learn How to Avoid the Perils of Speculation And Be a Successful Investor

A Man Sitting With A Financial Advisor In An Office + Investing vs Speculating


First, let’s discuss the difference between investing and speculating..

In general, when we buy assets such as stocks, bonds, mutual funds, or ETFs, our holding period can be either short- or long term. Those that hold long-term are often referred to as long-term investors while those that own for short periods are considered short-term investors. However, these characterizations don’t seem appropriate. In fact, one could argue that those who hold for the short term are traders or speculators – not investors. If we carry this definition a little further, we can eliminate the reference to time-frame, leaving us with investors and traders (speculators). In short, placing the word long-term in front of the word investor is redundant. By our definition, only investors hold for the long term. If you frequently move in and out of stocks based on short-term needs and events, you are speculating, or trading stocks, and not investing.

Words of Wisdom from Warren Buffett

It seems likely Warren Buffett would agree with our view, as he has said, “Calling someone who trades actively in the market an investor is like calling someone who frequently engages in one-night stands a romantic.”

Investors seek to purchase shares of viable, well-run companies that they can hold for a long time. In Buffett’s terms, “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.” The longer we hold these companies, the better we get to know their business. We should check on them periodically (typically after earnings are released each quarter) just to make sure there have not been any material changes to the business (whether good or bad) and to make sure that our thesis for owning the stock still applies.

Benefits of Investing; Keeping Costs Down

If we are fortunate enough to choose our stocks wisely, we can also keep our costs down. We will pay less in commissions, and if the stocks are held in taxable accounts, we will also pay capital gains taxes less frequently. Perhaps more importantly, we will also reduce the number of decisions we make.  Further, we will have less cause to agonize about when to buy and sell the way traders do, as we will not frequently be buying and selling and buying and selling specific equities or stocks.

An Example

If you were fortunate enough to purchase shares of Google 10 years ago, investors could have simply held the stock over the entire period. This includes the bear market that took place in 2008-2009 as well as a few other rough spots the shares experienced during this period.

There is some risk of becoming a “fan” of a stock, or company, as it could leave us too willing to overlook a material change in its business outlook. For example, Kodak was once a highly regarded company. Today it is left in the footnotes of history. Management essentially missed the seismic shift that took place as most photographers transitioned from conventional to digital cameras. While we can see this clearly with the benefit of hindsight, checking in on performance regularly would hopefully have allowed us to see that margins were deteriorating and the company was becoming weaker financially.

The Sports Connection

Investors can follow stocks much like they follow their favorite sports teams. If we are honest with our analysis, we know when our favorite team has little chance of winning, when it is time for a rebuild, or when it is poised for a run of impressive performance. When it is time for a rebuild, we can still follow our favorite team or stock. However, when fundamentals deteriorate, it could be time to allocate our money elsewhere.

In today’s stock market, there are more traders than investors. Average holding periods are now less than one year. In the late 1950’s the average peaked at roughly eight years.

At Apprise, we take the same long-term approach to investing that we do to following our favorite sports teams. We do not switch stocks because of a bad quarter, and we do not change our rooting interest because of a bad year or a devastating injury. There are stocks that we have held for 15-20 years or more. Similarly, while I have moved from New Jersey where I was born and raised, my fandom remains the same. In fact, this tradition extends back to my grandparents and continues with my children. The history of which sports teams we follow goes back to the days when fellows named Ruth and Gehrig were hitting third and fourth in the Yankees’ lineup.

The one difference is that while I have jettisoned stocks from my portfolio that have been held for 10 years or more, my rooting interests have never changed. During my lifetime, there have been years that the Yankees were far from competitive, particularly in the late 80s and early 90s, but that didn’t cause any change in allegiance. Those teams were highly dysfunctional and failed to deliver strong results on the field.

Closing Thoughts

If the idea of taking an approach to investing that helps to eliminate the stress and costs that come with trading appeals to you, please fill out our contact form, and we will be in touch. We do not believe in trading or market timing, and we can also work with you to create a financial plan that we believe will help you achieve your long-term goals.

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