Home Wealth  Money Speculating Is Not Investing

Speculating Is Not Investing

Posted: Aug. 4th, 2010  |  By Forbes

powered by Forbes

RSS Syndicated News Email a Friend Suggest an Article Share Visit Website

"It's a stock-picker's market." That's a common refrain from financial market pundits, especially in times of turmoil--like now. The implication is that broad markets are too topsy-turvy for average investors to succeed on their own. Instead, goes the logical implication, you're better off putting your financial future in the hands of speculators.

Don't believe it. Controlled intelligent investing, by contrast, is a result of education and the recognition of buying opportunities. Benjamin Graham, the value investor and guiding light of Berkshire Hathaway (nyse: BRK - news - people ) boss Warren Buffett, defined the difference between investing and speculation in this famous passage from his book The Intelligent Investor:

The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator's primary interest lies in anticipating and profiting from market fluctuations. The investor's primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels, at which he would be wise to buy, and high price levels, at which he certainly should refrain from buying and probably would be wise to sell.

Stock speculation continues to seduce professional and amateur investors alike into a world of hurt for their portfolios. Many ads promise get-rich-quick schemes that pin investor hopes on timing mechanisms and gimmicky market strategies that eschew long-term commitment and investment discipline.

In Pictures: 10 Ways Investors Sabotage Themselves

Speculation-averse investors should shun such schemes and invest in securities globally, holding them as their value climbs and selling only when a portfolio's target allocation gets out of whack--not as a reaction to short-term predictions, which amount to no more than speculation.

No matter how great the allure--and seemingly sound the logic--strategies for timing (and beating) the stock market are far more likely to leave an investor poorer than richer for having tried. No single investor or firm has a crystal ball predicting the future, and it would be wise to avoid those that say they can.

The good news is that history shows there is a formula for investing successfully: Buy equities, diversify your holdings and rebalance back to your target allocations. Prudent investors should hold globally diversified stock portfolios, rebalance regularly and hold on for the long-term (10 years or more). Following these guidelines will help to maximize the expected return on your investment, and most importantly, not lose your shirt when a "hot" stock or sector suddenly falls through the floor.

Speculation is about making educated guesses about the future value of investments, whether stocks, real estate or gold and other precious metals. Some of those guesses will prove right; many will prove wrong. Throw in the cost of buying and selling, plus the tax burden it generates, and your chances of beating the market from such speculative activity are less than even.

Mark Matson is the founder and CEO of Matson Money, a Cincinnati investment advisory firm.




Share on Facebook Share
See Next Article
Write a Story/Review about this topic

Post a Comment

 
Need to Get Away?
Top 10 Business Hotels
Who says you can’t mix business with pleasure?
Read More
More Articles from Forbes.com

advertisement
Quick Links
Autos
Boating
Real Estate
Luxury Travel
Fashion
Search Real Estate
Find Your Dream Home
Search for homes by
State, Country or Style.
Event Calendar
advertisement
Current News & Features
Breaking Bad & Sherlock Sweep the Emmys, Plus More Surprising Moments!
Grill Up This Double Cut Pork Chop With Malbec Marmalade Recipe
Food Network Star Justin Warner Breaks Down His 6 Favorite Burgers for Labor Day
Lake Tahoe's Wild Wild West-Inspired Buffalo Creek Ranch Is Full of Waterfalls, Ponds & Old Saloons
$19K Electric-Powered Radinn Wakeboard Will Be Your Next Summer Must-Have Water Toy
Tonino Lamborghini Releases $4,000 Scratch Proof Limited Edition Antares Smartphone
From Aaron Paul to Pregnant Zoe Saldana: Here's What You Missed at Audi's Star-Studded Pre-Emmy Party
From Grape to Bottle: Take Part in La Crema Winery's Virtual Vintner Experience
Windfall's Glittering Crystal Chandeliers: Good Enough for Cavalli, Good Enough for Us
Artefacto's Milan-Inspired Warm Metals Furniture Collection Brings Hollywood Glamour & Curves
See the complete list
 
Featured Photo Gallery
See the complete list
THINGS WE LIKE