Difference Between Investing & Speculating Part 1

{Part 1: Speculating}

I’ve been giving this topic a lot of thought over the past year or so.  Been trying to articulate the actual difference between investing and speculating. You’ll see, to the untrained eye they both look pretty similar.  As a matter of fact, to the outsider, they even feel like the same thing.  I hope what you’ll see below is although the difference may be nuanced, it is quite drastic.

Speculating

My brother keeps touting his Bitcoin prowess when he bought it back at $3,000 a coin.  I’m very happy for him and now the newest chatter is NFT or SPAC’s, which I have written about recently.  Less “sexy” is when I get a call from a client or friend talking about this great new stock they are really excited about, as they heard a podcast or got a random article sent to them. 

Conversely, when someone calls me to buy oil (although I can’t really do it) because oil futures are literally negative.  Or, when a change of political agenda happens in the White House and the opposite party calls me wanting to totally change course due to a perceived outcome. 

You see, all of this “speculation” in a sense, is all investing, one would say.  The difference is, all investing is not speculation.  Let me explain why speculating is starkly different than investing.  When we speculate, we are generally guessing an outcome based on little facts.  Now that isn’t an indictment to anyone who called me with one of the items above.  The issue is there are only a few facts out there, to be honest.  For instance, my brother’s brilliant move to buy some Bitcoin at $3,000 turned out to be very lucrative.  However, what info could he have actually based this decision on?  Sure, there were plenty of articles “speculating” where Bitcoin and crypto would go, however, we are talking mere months of data at the time.  The market was new, unproven, and simply a gut play based on perceived supply and demand.

The Long Term

The best, and most well-known, investors focus on the long term. They buy quality businesses, trading at a discount, to their belief of intrinsic value. Speculation gets driven by gut feelings, emotional momentum, or some perception of what is going to happen. All investing requires some sort of assumptions of the future, but speculation takes variable assumptions to the next level. In the late 90s, people speculated what the internet would do while people in 2005/2006 speculated on the trajectory of real estate and interest rates. Today the focus turns to cryptocurrency. The case for cryptocurrency is rooted in the idea of debasement of fiat currency. The question becomes, how do you value that? There are no cash flows and our estimation of value needs to be driven by a belief in some sort of future supply and demand function. I’m not saying crypto doesn’t have a place in the world or won’t end up being wildly successful, but we need to keep all of this in the context of what our portfolio objectives are.

There generally aren’t a ton of fundamentals when it comes to speculating or even any real analysis.  Do you think my brother spent months on research analyzing every angle of Bitcoin?  No, he didn’t.  Is my baby brother an idiot?  Well, despite what I told him his entire childhood, no he isn’t, as he happens to be extremely intelligent (man I hope he isn’t reading this). 

Is speculating wrong?

You may be asking, “Andrew, what is wrong with speculating – look at how much money your brother and others made?”

The short answer is – nothing is wrong with speculating.  Also, nothing is wrong with going to Atlantic City and betting on black because the wheel showed 8 blacks in a row.  One can make a lot of money speculating, and many people do.  Speculating is actually, well, quite fun!  Do you think my brother doesn’t love going to cocktail parties (man you can tell I’m 40 now) and talking about his Bitcoin brilliance?  Of course, he does!  Actually, I get an email from him every time it hits a new high, as I was/am not a big believer. 

Here is the thing with spec investing. You know what you never hear about from these investors?  All the losers they bought.  Honestly, when was the last time you went to a cocktail party (there I go again, and who has been to any party in the past year anyway) and heard someone touting their losses?  I can see it now.  Bunch of guys huddled up giggling about, “man, I lost a ton of this or that stock,” pumping their chests out.  Folks, it doesn’t happen!  So, the short answer though is speculating isn’t necessarily wrong.

What’s the problem with speculating then?

I thought you would never ask!  The problem with speculating is that you can’t plan around it.  Look I’ll admit once in a while when the lotto hits big numbers I will buy a ticket or two.  The fun of it really is contagious.  I think of all the crazy things I would do and then the reality hits when I don’t get one number right, yet again! 

The problem, as I stated above, is there is no way to reasonably plan around speculating.  One can’t plan for a vacation home, or a comfortable retirement with speculating.  A person can’t systematically put money away for a kid’s college or some future goal with speculating.  Now one can, and will, argue that someone who made a lot of money on, let’s say, Bitcoin, can afford these things.  And likely they would be right.  But one, these stories aren’t the norm, and two, they are unpredictable. 

You see there is no strategy or predictable outcome when it comes to this type of “investing”.  Which to me is the essence of investing in the first place.  It is a gut feeling, hunch, or concern not backed by very much else.  As planners and investors, we can’t and shouldn’t allow speculation to be the core building block of our investing strategy.  It can have a small piece of someone’s true portfolio that they want to “play” around with or are willing to lose.  However, when it comes to planning for goals, dreams, wants, desires, and happiness – leave spec out of the dialogue. 

When I started writing this, I didn’t intend for it to be a two-part series, but I think it is best to let part one sink in.  Next week I will focus on what true long-term investing looks like.  My hope is when done and juxtaposed you’ll see the stark difference. 

In the meantime, as I always say, stay wealthy, stay healthy, and stay happy!