Are you an investor or a speculator?

Are you an investor or a speculator?

If Buffett is the father of value investing then Benjamin Graham was the Godfather but what is the composite of a true investor? Graham wrote Security Analysis, the old testament of value investing along with Intelligent Investor.

Find out how the Godfather fared in the stock market crash of 1929, here.

According to Graham there are two types of investors and spotting your principles early will save you a lot of money in the long run.

Investing vs speculating

The two types of people Graham noticed in the market were investors and speculators. What’s the difference between the two? An investor sees the stock for what it is: ownership of a business which they believe will give them a return in the future. An investor will decide to invest only after performing a fundamental analysis of the intrinsic value of the business. The speculator looks at the price of a stock and decides to invest based on the assumption that someone will be crazy enough to pay more in the future.

How to spot if you are a speculator

Here are some of the traits of a speculator:

  • Speculators only invest in hot new issues or business trends. Snapchat and Tesla spring to mind.
  • A Speculator doesn’t analyse the businesses at all.
  • They do not consider risk or loss of their principle and instead focus on their potential return.
  • And they don’t look at financial reports. If they do, they don’t look at the financial sections in the annual reports and they’ll sell if it sounds like bad news.
  • All speculators focus on the next day, week or month.
  • Most speculators are nervous about their decision and they look to the market for validation. “My stock has gone down 10%, I was wrong, I need to sell ASAP.”
  • They buy and sell based on no new information.
  • Some Speculators try to time the market and are obsessed with what the finance media says.
  • Most speculators have massive FOMO (fear of missing out) and jump in at the wrong time.

There are many people who make a career out of the above but they are usually very skilled traders with a unique set of abilities. The intelligent speculators usually profit from the stupid money though.

How to spot if you are an investor

  • Investors have no problem with being a contrarian and will happily invest in unloved businesses/ industries.
  • True investors can’t analyse a business enough, furthermore they are looking for hidden assets and liabilities and evaluating the fair value.
  • They are seeking opportunities to buy high quality shares with strong historical earnings growth and good future potential at undervalued prices relative to long-term fundamentals.
  • Most investors put quarterly and annual report dates into their calendar and enjoy reading them – regardless of the content.
  • You won’t sell based on one, two or even four bad quarters but you will reassess the fair value of the stock and only act after thought, analysis and careful consideration.
  • They look to hold a stock for more than 5 years.
  • Investors are calm about their decisions because they are based on sound fundamental analysis. They are willing to be patient and wait for the price to reflect the businesses intrinsic value.
  • Investors avoid investments that do not offer an acceptable risk-adjusted return and may risk the principle.
  • They continue to buy when their stock choice has fallen by 10%, 20% or even 50%.
  • Investors consider market gyrations and are ready to poise if the market is out of kilter and speculators are panic selling. They will consider the market and economy but it will have little effect on their investing decisions.
  • Investors observe financial ratios such as price/earnings, price/book, ROE, EV and dividend yields.

Price is what you pay - investor warren Buffet

Next time we will look at whether you are an active investor or a passive investor. If you scored highly on the speculator front then this blog will certainly aim to guide you away from such behaviour. It’s so important to take advantage of this advice now whilst time and compounding is on your side.

Speculating £1,000 today and losing it all is costing you £117,000 if you had placed it into a low-cost index fund which tracked the market at 10% with reinvested dividends for 50 years…

Not a difficult decision when you look at it like that.

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