Investing and Speculating

Published On: February 23, 2022

Written by: Ben Atwater and Matt Malick

Financial markets have kicked off 2022 in dismal fashion. Given the extreme volatility thus far, we thought it a suitable time to reflect on investing versus speculating.

Investing is about long-term benefits, while speculation is about short-term gain.

We invest based on fundamentals, whereas speculators wager based on recent fluctuations or predictions about an unknowable future.

Think of a company that has fundamentals. One that has a multi-decade history of increasing their profits, paying a dividend, reducing their outstanding shares and broadly adapting to a changing world.

Contrast this with a company that has a great idea or a great concept but is yet unproven and relies on some technology society has yet to validate or a change in thinking yet to occur. Of course, these kinds of companies may present opportunity, but it is an opportunity for private equity and venture investors, not for public capital market investors.

The kind of speculation that takes place in public capital markets is gambling. Whether it is the “meme” stocks or the “innovation” stocks, the bubble will inevitably burst (and likely is bursting).

It is no surprise that speculation heading into 2022 was running rampant. With liquidity at unprecedented levels due to government largesse, the gargantuan Federal Reserve balance sheet and more than a decade of near zero interest rates, bubbles will build.

Not to mention the cultural aspect of speculating. With the proliferation of legal and online gambling, many gambling companies now advertise during sporting events and pre/post-game analysis focuses increasingly on Vegas odds and gambling analysis. This trend shows the thrill of gambling and speculation is certainly well ingrained in us.

Investing, on the other hand, can be excruciatingly boring and requires extreme patience. Instead of bracing yourself for something big to happen, you are well served to simply ignore what is happening and allow your well-considered and fundamentally driven investments to experience the long-term miracle of compounding. Watching grass grow is an appropriate analogy.

This relative boredom makes investing hard. Even the most glamourous profession is a grind. Think of a Formula One driver who experiences the ultimate excitement on race day, but must physically train endlessly, eat perfectly, travel constantly, endure constant media scrutiny, lose all privacy and be under intense pressure to perform. The grind of fruitful labor is always fierce.

Whereas speculating is more like bungee jumping. It is really exciting for an instant and the only effort required is showing up. Speculation is easy. You do not need the endurance and motivation to forever grind, instead you have the opportunity for brief excitement with little effort. It is easy to do fun things; and far harder to do boring things. Boring, though, pays the bills.

No doubt, however, even the drudgery of investing can nonetheless be painful, like right now. This is because investing and speculating are in the same family. The actions of the sinister sibling influence the fate of the more stable sibling. Even legitimate, fundamental investments get caught up in a speculative fever. And when the bubble bursts even solid investments lose value, but only temporarily, whereas speculators often face a permanent loss of capital.