General ThoughtsInvestment Quotes

Investing vs Speculating

“Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook.”

Ben Graham, Intelligent Investor

I wrote this post on why I bought MSFT and AAPL last week and I reposted it over at Seeking Alpha where I received around 60 comments with various opinions, mostly having to do with AAPL. I’ve noticed that Apple is one of those stocks that really ignites emotion from people. This chart can cause a lot of frustration for short term oriented shareholders:

AAPL 1 year chart

One person commented the following:

“You need to invest on the side of the trend. If you had shorted AAPL instead of going long against the trend, you’d be in the green right now instead of the red.”

Speculating is much different (and much more difficult) than Investing

Of course, the comment is accurate. But the danger lies in assuming that you’re investing when you’re really speculating. If you are simply choosing to buy a stock because it’s going up, you’re speculating. As Graham said, it’s not immoral or illegal. But it’s a difficult game to be playing, requiring a much different, and much more focused skill set than what we need as value investors. Here is how I replied to the above comment:

“To each his own”. Trend following can work, but you’re playing a different game than the game that I am playing, along with many others who’ve commented on this post. Value investing is much different than trend following. The end goal is the same (profits), but the process couldn’t be more different.

I’ve studied both strategies. If you are buying a stock simply because it’s going up, you are engaging in speculation. There is nothing wrong with speculating, but you have to realize that you are speculating. I personally have found that trend following or speculating that another buyer will pay more than me simply because a stock is going up is a very difficult game to play. There is a lot of maintenance involved with that type of a strategy, and it involves a lot of screen time and a lot of procedural memory to perfect. There are guys that have done it, but it’s very difficult, and it is a completely different skill set than value investing, which is much more passive and conducive to my personality.

I look at stocks like I look at apartment buildings or commercial real estate, or small businesses for that matter. Cash flow and assets. If a car wash costs me $100,000 to buy, and produces me $20,000 in cash flow after all expenses, (20% FCF yield in other words), I will likely do very well with that investment, and I won’t be concerned about what my business broker quotes me on the car wash the week or month after I buy it.

So again, there is absolutely nothing wrong with following trends, but your inputs are completely different than my inputs, so the argument you’re making against buying AAPL has nothing to do with why I’m buying AAPL. It’s apples and oranges (couldn’t resist the pun).

A lot of people have made (and lost) a lot of money both speculating and investing. Define what your method is and develop a firm understanding of the philosophy. Learn why it works and how it works, and study those who have practiced that method. Most of all, make sure it matches your personality and temperament.

To finish, let’s review some more words from the master, Ben Graham:

“There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are: (1) speculating when you think you are investing; (2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose.”

Disclosure: John Huber owns AAPL and MSFT for himself and his clients. Nothing here constitutes a recommendation to buy or sell any stock that is mentioned. Please do your own research.

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