A lot of people have the notion that putting down a sum of money in a 3-4 letter ticker is an investment. They straighten their back, pull their shoulders back, chin up and proudly announce that they are “investors”. Funny how these people only go as far as to say “the market is crazy isn’t it?”, and are usually the ones that buy and sell the most. They consider long term to be 1 or at most 3 months.
All of the symptoms above is what I define kindly as a speculator. Someone who is actively engaged in the market. Looking to get in and out of positions, thinking they can time it perfectly like a Swiss watch. The biggest problem is that it all derives from Wall Street. Speculators buy and sell off the tiniest of noise generated in the news, overreact and start dumping stock at a time. All the while, the average speculator or trader is caught up in the emotion and starts to follow, thinking someone knows something that they don’t.
Let’s hear what Buffett thinks about this behavior.
In his book, The Dhandho Investor: The Low–Risk Value Method to High Returns, Mohnish Pabrai coined an investment approach known as "Heads I win; Tails I don't lose much." Q3 2021 hedge fund letters, conferences and more The principle behind this approach was relatively simple. Pabrai explained that he was only looking for securities with Read More
“We believe that according the name ‘investors’ to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic’.”
Investors on the other hand are the people people love to hate. Investors love investors. Speculators hate investors. Investors in the market are pictured as geeky, hunched over the desk with papers sprawled everywhere, know it all wannabe. Speculators hate investors because they are always spoiling the party by announcing that their Darling on Wall Street is overpriced, always warning and telling people to consider how much they’re paying. In return they always receive generous amounts of curses and F’s.
Pre-Disclaimer: I love controversy.
Speculator Vs Investor
So which side do you stand on? The place where all the action is? or where you watch the grass grow?
Speculators are constantly wired to the market via tv, radio, SMS, email, RSS feeds.
Investors aren’t worried about the day to day fluctuations of the market. They know price follows value.
Speculators assume they have that 6th sense of knowing a certain stock will go up. They only know it will go up, but never mention anything about the possibility of it going down.
Investors admit they are blind,deaf and dumb to the market. They know they dont have the power to control the mood of Mr Market.
Speculators dabble their money here and there many times a week in hope of a few quick bucks.
Investors have the conviction to act on their objective valuation and put down a large amount of capital on just a few opportunities. Charlie Munger tells us that “he didn’t become a billionaire by chasing after mediocre opportunities”.
Speculators believe that Mr Market knows everything (Efficient Market Theory) and believe him.
Investors know that Mr Market is a transvestic freak with suicidal tendencies. But we also know that he will change his ways in the long run.
Speculators believe that PE’s and FPE’s can tell the future.
Investors know that’s a load of crap.
Speculators get high when the market is soaring.
Investors are cowering and hoarding their cash for the crash.
Speculators believe in the Greater Fool Theory – it does not matter what price I buy it at, since there will always be somebody willing to buy it off me for a higher price.
Investors understand they are the biggest fools and so, strives extra hard not to fool themselves.
Speculators don’t learn from their past mistakes.
Investors wet their pants in fear when thinking about their past mistakes.
Terminator: The Rise of the Speculators
The internet made buying stocks so easy. Good and bad. With discount brokers such as Zecco offering $0 trades, people feel free to trade without any regard. So now we have a scenario where people are tadpole speculators to begin with but soon they become toad-like traders.
The key concept regarding brokers is that, the more you trade, the more your broker earns. The less you trade, the less your broker will earn. Buffett makes it clear that
“brokers are paid for activity. Investors are paid for inactivity.”
Long Term Lucy Meets Trader Tim
This is an example from Five Rules for Successful Stock Investing. A fantastic book which is highly recommended.
We have Lucy who invests $10,000 in 5 stocks for 5 years with a modest 9% rate of return. She sells her entire portfolio after 5 years and pays 15% tax in long term capital gains. Tim also invests the same amount of money at the same 9% rate of return but trades the entire portfolio twice per year but must pay 35% tax for his short term capital gains.
After 5 years Lucy ends up with $95,994 and Tim ends up with $54,362 after 5 years.
Tim’s portfolio turnover is twice a year which means he only makes 10 trades per year. 10 trades isn’t much you might think, but the difference is clearly in the numbers. Still not convinced?
What Does Buffett Say?
“The Stock Market is designed to transfer money from the Active to the Patient.”
Remember, when someone loses money, someone is gaining money.
“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
“One is only allowed one punch card, with twenty investment punches. Therefore, an investor will be more selective to invest only in his/her top investment choices. Only twenty wonderful investment ideas are needed in an investor’s lifetime.”
Think long and hard before you make your next investment. Actually, sleep on it and then think again.