Below is a recent article written by Jeff Wagman highlighting the difference between investing and speculating.
We have all heard this phrase from people we know, “I stopped investing in the market because I have
never made money.” The fact is these people are more accurate than they think. Most people think
they are investing their hard-earned money but in reality, most of the time they are speculating. Taking
on much more risk than they knew, intended or could afford. Please don’t get me wrong here, I am not
saying that speculation is a bad thing. Far from it. Our economy and our capital markets need
speculation. Without speculation there would not be any growth in our economy. Every company out
there has started at zero at some point and without speculation, they would not have turned into the
Royal Banks, Bell Canada’s, Apple or Google’s of this world. However, it is crucial that we are aware of
the differences between speculating and investing.
Most of us get our information from the media (newspaper, business reports, radio, TV, evening market
reports and social media). The mainstream media has but one job to do and this is to get people to
read, watch, hear and listen to what they are saying. The more people they get to do this, the higher
their advertising rates. We also have social media where people from all over the world put themselves
out there as investment gurus and talk about their huge success stories (real or fabricated, usually
fabricated). All of these stories give us something exciting to read about and get our blood going with
the idea of a huge win. The next big gold mine, the next wonder drug, the next great app or software.
This is not investing at all and never has been. This is speculation. We are speculating on an outcome
that may or may not happen.
Speculation gets our blood going, makes us feel good when we tell our friends about our latest, hot “investment.” Investing, on the other hand, is not exciting. It’s just a waiting game to let time do its’ magic. Boredom does not sell a lot of newspapers or get us to tune into the latest market gurus. When we are investing there is no action, no commodity price swings, no currency movements and no wild market volatility (there definitely is some, though. We cannot get away from that other than with a GIC). Over the years I have encouraged myself and my clients to shut out the “noise.” Ignore the screaming headlines and, above all, as my first boss used to say: “Don’t panic!” We want our investments to be boring. Investors want to sleep at night and play golf during the day. Investors look for slow steady growth, minimal market volatility and steady, growing dividends. Guaranteed to put the worst insomniac to sleep. I always think back to the greatest learning experience I ever had professionally. It was Tuesday morning, October 20, 1987. The day after the crash of ’87. The news reports were devastating, headlines screaming to get out while you still can. I had many clients calling me in tears to sell everything as they wept in vain. I had a couple of older women who called me and asked me if Royal Bank or Bell Canada had cut their dividend. I replied, “no they did not.” They simply said thank you and hung up the phone. By the end of the trading day that Tuesday, the U.S. market had its’ greatest single day percentage increase in history. I regularly reflect on that story and Rudyard Kiplings poem, “If you can keep your head when all about you are losing theirs….”
Unfortunately, we, as human beings are wired for failure. We are emotional. Our decision making is hugely influenced by these emotions, mainly fear and greed. Emotion causes us to lose rationality and, quite often, common sense. We suffer from that critical ailment called FOMO (Fear of Missing Out) therefore we tend to invest our money when markets are high and sell when markets are low (following the herd as there is comfort there). It is very difficult to make money that way. In conclusion, what investing in the stock market really is, is assembling a handful of good companies, with consistent, reliable earnings and a long track record of paying dividends in good times and bad. Then we hold on and let time do its work for us. As investors, time is our best friend. As speculators, time is our worst enemy.
Disclaimer: The opinions expressed are those of Jeff Wagman and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax related matters.
Jeff Wagman, B.A., FCSI, CIM
Portfolio Manager | Brook Wagman Private Wealth Management
C: 416.616 8529 | jeff.wagman@raymondjames.ca
80 Richmond Street West |Suite 508 | Toronto | Ontario | M5H 2A4 | Canada