As we look back, 2022 provided an important reminder that financial markets are largely unpredictable and staying disciplined under stressful market conditions is what makes us successful investors over the long term. I am currently about 3/4 of the way through reading the Intelligent Investor by Benjamin Graham again. This is the book that has largely defined my investing strategy and it provides many timely reminders after a difficult year. In this post I want to focus on the important differences between investing and speculating, and how understanding these differences drives the advice we provide our clients.
2022 – Lessons to Remember
This is what Ben Graham has to say on the topics of speculating and investing, “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting this criteria are considered speculative.”
Speculating is more akin to gambling; “it involves betting on the price movement of an asset, rather than assessing the underlying fundamentals of the asset.“
The problem is the financial media often uses the two words interchangeably creating confusion among the general public. We saw this play out in 2021 and 2022 with the massive speculation in crypto and unprofitable growth stocks. It was an important reminder that, “much bad advice is given for free.” This was taken a step further in 2021 and 2022, where we saw many celebrities and social media influencers, not only giving free advice, but being paid huge endorsement deals behind the scenes to push the next hot “investment” out to their audiences. Speculative markets are dangerous because they draw in bad actors to markets that are not heavily regulated or well understood (think crypto).
The role of an Adivsor
This brings us back to how we view our role as advisers and planners. Our primary aim is to be careful, conservative and competent. It is our job to educate our clients and steer them away from making big mistakes. We believe the best way to do this is by creating the financial plan first and then developing the investing strategy required to execute the plan. And yes, adjustments will need to be made along the way as life changes, but the financial plan gives us the foundation and helps us to remain calm and committed to our investment strategy through turbulent markets. It is important to understand the investment risk up front, because if you’re lying awake at night worrying about your portfolio, it probably means you are taking more risk than you’re comfortable with.
I want to point out that we are not totally against speculating. Speculating serves the overall purpose in that the allure of a big gain helps drive capital to areas of the market that create innovation for our economy. However, speculation becomes dangerous when:
- We confuse it with investing
- We speculate seriously without proper knowledge or skill for it
- We risk more money in speculation than we can afford to lose
Our view is that speculative money should not be commingled with our investment accounts that are driving our long term financial plan. If once the plan is created, there are discretionary funds left over, then speculating can be a fun endeavor. It can help to keep us engaged and aware of what is going on around us in the financial markets. If we lose some or even all of this money, which is likely to happen when speculating, it won’t derail our long term financial plan.
So, if we can sum this up in one thought; let investing drive your long term financial plan and contain speculating to its proper place as a leisure activity.
Happy New Year!