Are You an Investor or a Speculator?
Legendary investor and teacher Benjamin Graham — considered the “father of value investing” — once said, “The individual investor should act consistently as an investor and not as a speculator.”1 This simple quote captures a fundamental concept that could help you establish and maintain a sound financial strategy.
A dictionary of investment terms offers these definitions: “Speculators are typically sophisticated, risk-taking investors with expertise in the market(s) in which they are trading…. Speculators take large risks, especially with respect to anticipating future price movements, in the hopes of making large quick gains.”2
The danger of this approach for individual investors should be obvious. Few people have the expertise, time, and available resources to take large risks for quick gains. And even those who think they have the expertise often fail. As another legendary investor, Bernard Baruch, put it: “Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars.”3
A Long-Term Approach
Investors also take risks, of course, and they certainly pursue gains. But unlike speculators, investors are generally committed to a long-term strategy based on sound investment principles. A smart investor buys assets that appear to be good investments and then builds them into a balanced portfolio that is appropriate for the investor’s goals, time frame, risk tolerance, and resources.
Of course, having a balanced portfolio — using strategies such as asset allocation and diversification — does not guarantee a profit or protect against investment loss. However, this approach is an established method to help manage investment risk. It may enable you to take advantage of market upswings while helping to control losses during downswings.
Cool Your Jets
Along with managing risk, an investor should manage his or her own emotions and expectations. That can be difficult in any market situation. When the market is rising, for example, it may be tempting to rush into the current “hot” investment and buy at a high price. And when the market is declining, it can be tempting to sell near the bottom. Even when the market is flat, you might feel that you have to do “something” just to keep your investments in motion.
If you have a well-constructed portfolio, one action you might take in almost any market situation is to make additional purchases in your investment account(s) — although the market could influence how you allocate your investments. Other than that, the most appropriate strategy may be to do nothing and let your investments pursue growth through long-term market trends.
Paul Samuelson, who won the 1970 Nobel Prize in Economic Sciences, described this approach in humorous terms: “Investing should be more like watching paint dry or watching grass grow.”4 A patient investment strategy, often called “buy and hold,” may not be as exciting as speculating, but it will probably serve you better in the long run.
All investments are subject to market fluctuation, risk, and loss of principal. When sold, investments may be worth more or less than their original cost.