"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
) 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.
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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.