Not a favored strategy for value investors!
Stock speculation is not a strategy that value investors follow.
This is no doubt due to the fact that speculating in stocks creates a speculative risk based on reliance on price signals unrelated to the fundamentals or intrinsic value of the company involved.
Investing Versus Speculating
How does investing differ from speculating? There are a few characteristics that can immediately distinguish speculative strategies from investing strategies. I list them below ...
- Stock speculation usually have a short time frame. This can be as short as minutes through to days. The best investment strategies normally operate over a much longer time frame - usually more than five years.
- Speculative strategies tend to rely on short-term capital gain and require hourly or daily attention so are often used to provide an alternative to other employment. The best investment strategies rely more on dividends as well as longer-term capital gain so can be managed as a supplement to other income.
- Speculative strategies normally focus on the share price. The best investment strategies are more focused (or exclusively focused) on the company's characteristics and intrinsic value, rather than its current price.
- Speculative strategies such as speculative buying tend to be more aligned to the sentiment in the market. Investment strategies tend to pay much less attention to the market and focus on the company itself.
I favor investment strategies that lead to longer-term certainty rather than shorter-term uncertain gains.
Are You Really Investing?
As you make investment decisions, consider the differences between the two strategies listed above. This may help you determine your own approach.
Sometimes people think they are investing, whereas in reality they are speculating, because they cannot always clearly distinguish between the two.
This confusion commonly occurs when there is a lot of exuberance in the stock market. It is very easy to be transformed into a speculator by the allure of rising prices.
Probably the easiest way I keep myself on the investing straight and narrow is to ask myself, when I am about to make a buying decision ... "Is it very likely that I will still want to own this stock in five years time?".
If the answer is no, then I think about whether I am truly investing or really speculating.
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