November 30, 2009
Investing vs. Speculation
There was a time when investing meant buying a company in your backyard (or hometown) and holding on to it for you children and your children’s children. What happened to the “good old days?”
Well the investing public as a whole have been filled with advertising and “propaganda” for that matter for “diversifying” or “online trading” and unfortunately most people think the market is just a big casino. Take for example Mark Cuban; he is looking to start a hedge fund that does nothing but invest or gamble on sporting events. The truth is folks; there is a HUGE difference between Investing and Speculating!
Investing (according to Benjamin Graham, the father of security analysis) is done, upon thorough analysis promises safety of principal and an adequate return.
Now let’s go a step further. When you are buying a mutual fund you are buying 100’s if not 1000’s of companies within one fund. How many of those companies do you think you’ll ever really know? Maybe a dozen at most, if you’re lucky!
Statistically, whether you own 50 or 500 companies, you assume the same amount of risk. Wide diversification is really only necessary if you are not getting to know the businesses you’re buying. And that’s what you should be thinking about. What does this business do and why am I buying it. Then just let the long term prospects work in YOUR favor.
Speculation in my opinion is when you are buying stocks without thorough analysis of the underlying business or you relegate to a small holding period - say 1 day to less than 1 year…
Whether that means looking at past price history or following the herd. If you are buying stocks just for short term profits, you are speculating and taking on excessive risk by simply rolling the dice. Again, the house always wins that game. Unfortunately, the individual investor cannot be blamed for thinking short term because of the media and the coverage by the financial media has done nothing but talk about investing in these ways.
Point is, there is A LOT of money to be made buying GOOD businesses and holding them and if you are going to place your “real” money into the market, please do so with the long term in mind!
About the Author
Read More @ www.jonathanpoland.com