02 Oct 2020


Investment and speculation

For centuries there have been speculators hoping to find the path of least resistance to wealth and riches. Stock markets as an asset class have proven potential to create immense wealth, but are an open arena for both the speculator and investor.

Over smaller stretches of time speculators can generate large returns, but the sustainability of these returns over the long term is highly unlikely. We would argue strongly in favour of choosing the path of investment over speculation as a means to build wealth.

Investing and speculation as approaches to the stock market are wholly-irreconcilable. The investor will do diligence on their investments, basing decisions on data and sound analysis. The speculator, on the other hand, dispenses of these requirements and launches carelessly into the stock du jour. The investor recognises that price and value often diverge, and uses this fact to their advantage, selling when prices become overly-sanguine, and buying when others are misguided by fear. The speculator makes no such distinction between price and value, preferring to instead follow what’s working at the time, with the hope of selling out before everyone else does. This is akin to a large party where everyone wants to continue dancing until the music stops, at which point hundreds of people will try to exit through the same door.

Notably, speculation has been alive and well for centuries, and it is in human nature to want to shortcut the journey to wealth creation. The book Facts, Failures and Frauds (1859) by D. Morier Evans notes that “Without any great violence, all the incentives to commercial crime may be brought under the one common rubric – the desire to make money easily and in a hurry…but still actuated by the same desire, is the reckless speculator, who would risk everything in the hope of a sudden gain, rather than toil safely and laboriously for a distant reward.” It is in this sense that the stock market can hold a certain allure – it’s an accessible venue where stories of overnight riches abound.

There are clearly success stories of those who have speculated in the stock market. However, these outcomes have been driven by luck rather than skill. It is this lack of repeatability of the process that created those investment gains which dooms the fortunes of the speculator in the long run. While it might seem far less exciting, we are proponents of an investment approach that strives for repeatability of process in picking quality, undervalued stocks that have a high chance of creating wealth over a period of decades.


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