A lesson that I’ve learned these last few years and that can be applied to many things, is that there are elements of comprehension I knew innately as they were obvious. But if you take those same elements and present them to a large concentration of people, they would absolutely require you to demonstrate with all of your skills that what you claim is true. And there is a chance that it is not going to being enough.

In regard to investing or speculating, the same rule applies even more accurately and why wouldn’t it be. The nature of investing is deeply tied to feelings of inadequacy and hopes for a better future, therefore it makes sense that sentiments could path their way in the investing process.
It should be of value to remind anyone that needs to hear it that decision-making should never lay entirely on the emotional side of our mind. Even more, I would insist on stating that the less emotional a decision is, the better it is. Nonetheless, it is easier than said and we cannot all be psychopaths, feelings are natural and cannot be avoided but it is important to be better and to focus more on what is factual than what the sentiment is. For some of us, it is a natural gift, for some it is something that should be reinstated as part of your investment mindset, so I advise you to figure out what kind of investor you want to be.

Benjamin Graham attempted a precise definition of investing and speculation in his seminal work Security Analysis (1934): “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

How much you estimate the value of analysis and risk management will dictate the kind of investor you can be, are you longing for certain success that can come in 40 years, or do you want to risk it all to have a very low chance of making it? Most people pick the latter because they do not have the patience and discipline to just aim for a long-term goal, and that is even more true in today’s age since our reward system is completely obliterated. We drudge to pursue goals that are not in hands reach because our dopamine receptors are fried and I only need to remind you that none of your ancestors since the beginning of time has ever felt the amount of dopamine levels that you daily perceive, to convince you.

Another point of view that can be pointed out is the major fact that our generation actually believes that rapid wealth is a possibility because they are polluted by twenty years old crypto-influencers that “made it” or other no-value courses sellers that are currently living in Dubai. No need to expand any longer on why I will not promote this delusional path to wealth, because even if you make it (which is a big if), the path you will have taken to attain that status will have no value that will make you feel good about yourself. If you understand that, you understand that money is not everything and that the path is the reward.

People love to dream, so they love to speculate. To speculate is to lack substantial resources to actually do the job, that is why if you actually believe in the value of work and well-deserved rewards, speculation has no interest for you. Because at your age, you understood that what comes your way can be luck but more often is something that is provoked. I could rant about the value of work and how it has been lost, but this is not the point of this article.

The opposition between investing and speculating is deeply tied to the lens from which you look at the market. Are you in for a short but rattled time, or are you in for a slow and boring win.

This short time can be good or bad, to be able to grasp if returns on speculative trading is profitable you shall ask yourself if it is backed by anything substantial besides technical analysis, news and sentiments. If looking at a triangle pattern or a last-minute news stating that X stock is going to drop because sales are going down in the next quarter, I want to ask you:

Do  you really think that there are not algorithms doing that job better than a human speculator would? The fact is that long term, only a small amount of options trader will perform well, and you are probably not going to be that person, and this is okay.

I like to see the market as Benjamin Graham did: Mr. Market is an allegory to describe that the market is full of irrational and contradictory behaviors. Do you want to try to follow each swing of Mr. Market, hoping to catch the trend, without any factual tools to achieve that goal? Or do you want to ignore Mr. Market, and realize that looking at it from a short term perspective is that the Market follows mostly manic-depressive behaviors, but that from long term perspective it is the actual value of the stock that has the last say. 

As Graham said, the stock market is a voting machine in the short run but a weighing machine in the long run. Therefore, value and truth will always prevail and I like to see things that way.

I personally find that fundamental investing, laying on rationality, has no need to convince me to understand that it just makes sense. It makes sense to analyze, it makes sense to be convinced by the well searched value of a stock to know that this investment does not require from you to spend each minute of your life looking at Bloomberg terminal to see if the share price dropped or not.
I like to live a calm life so I am encouraged to separate myself from irrational entities and so should you.

Individuals such as Guy Spier or Mohnish Pabrai, to only cite them, when first read about value investing , were just automatically convinced that it was for them, and that it was their way to win. And  I totally bear witness to that truth.

The concept that you should look at owning a stock as owning a portion of a business is not something that a speculator would even care about. But for someone looking to be in it for the long game, it is of essence, thanks to Buffett and Munger, that owning stocks of great companies is the solution. You don’t want to own a share of a company in which you don’t believe in, even if you are going to make a buck out of it. If you are in it for the long haul, you should try to hold long term. Would you be confident in being the owner of a dying business, even if you can make sell at a gain? Buying cigars butts (companies that still have one last puff in them) is good, but not great, and you don’t want to look at the whole process as being a vulture, eating on the dead.

You want to be there to build, to increase the value, because the fundamental point of shareholding is that: you lend capital to a company, in exchange for a share. The company is going to use that capital to grow, and going to reward you with the Free Cash Flow that it was able to produce thanks to your interest in the business.  That process is healthy and was the original purpose behind shareholding. I would even go further and say that investing should only go in that directing, reinstating the difference between investing and trading. As an investor, you are exchanging capital to grow something, it can be a business, a venture or even a building. You invest because you want to increase the value and sell at a positive return. In stock trading, you may not have to sell and can possibly own a stock till the day you die. But in comparison, what does the speculator gain from that process, is he there to build? Is he there to produce value? For these reasons, we can only admit that investing will always be a much nourishing and healthier process than speculating.

True value is built over time, and yes you can certainly partake in the stock market in many ways and speculate, short and put options and just have fun. But if you are truly looking to be an investor, you should understand what an investor is and align your thought process with all the elements composing the intrinsic nature of investing.

You can gain a lot from simplifying concepts, in contradiction to details analysis and connections processes. In mathematics and logic, demonstration requires that a collective number of structured steps must be taken to attain the goal of finding proof. That is the type of reasoning I used in this article: starting from a definition of what is the essence of investing and only going from there, and then moving forward into details and micro vision, to finally highlight how coherent and vibrant fundamental investing is, and obviously dismiss the speculative mindset.

To be even simpler, it makes sense to create value in your portfolio (increasing your returns), and therefore in your life (by enjoying the intellectual process), if you just concentrate your attention on the value creation process, in opposition to a speculative strategy that absolutely discard this variable. I used to be a fervent admirer of complicating things but sometimes you just need to admit that by focusing on simple reasoning as a starting point and as a macro vision overview, you reduce your probability of invalid proof.

Value calls value.

12/08/2023

CB