Broker Check

Speculating - It's Not Investing!

| April 15, 2017
Share |

 Investing, in a financial sense, is an outlay of money in hopes of achieving future returns; speculating is an outlay of money in hopes of achieving immediate or short-term returns. The odds are not on the side of the investor with speculating because it's a zero-sum game, meaning the amount of somebody’s gain will equal somebody else’s loss. Success with this strategy depends on the 50/50% chance of being on the right side of the transaction and overcoming the additional costs and possible taxes of each transaction.

"Every transaction has a buyer and a seller, who both believe they’re doing the right thing."

Generally, the motivation behind buying a stock is the expectation it will increase in price - not in a year from now, not even a month from now, but like, tomorrow. On the other hand, I highly doubt the seller of a stock is expecting a short-term price increase; otherwise, they wouldn’t be selling. In 2015, there were approximately ninety-eight and a half million transactions executed every day in the world equity markets - every day! Somebody somewhere who believes buying a particular security is a good idea is matched with somebody somewhere else who believes selling the same security is a good idea.

Chasing Yesterday's News

 When a stock that is owned by someone is falling in price, it’s natural for that person to want to get rid of it. And when a stock is rising in price and you don't own it, it's logical to then want to own it. However, when it comes to the capital markets, this type of thinking doesn’t serve the best interests of investors very well. Instead of moving forward toward achieving objectives by letting the markets work for them, many investors look backward and base their investment strategies on yesterday’s news and performance. What tragically happens is they continue to repeat this cycle of buying when the price has already risen, or selling when the price has already fallen – buying high and selling low -not the ideal recipe for a positive investment experience. And this is in addition to the costs, fees, and possible taxes.

Nobody Knows What The Markets Will Do!

 If it were possible to know which security values will rise or fall, or where the markets were headed, we could simply time our investment decisions appropriately, sit back, and amass great fortunes. But the truth is there is no evidence of anybody having, or ever having, the ability to consistently predict short-term price changes; the markets are simply too large and too efficient. The good news for investors, though, is that they don’t have to know which stocks are going up or down, or if a bull or bear market is headed our direction. We don’t need a crystal ball; the most critical thing an investor needs requires no special education, knowledge, or training - but it’s the most difficult thing to maintain. I’m talking about discipline! But for the transaction-oriented Wall Street firms and the financial press, discipline is a dirty word because the more discipline an investor has, the less trading they will be doing.

Carr Wealth Management considers successful investing to be dependent on the investor's ability to withstand short-term volatility. It's a form of disciplined investing but disciplined to your goals instead of holding onto an investment come rain or shine. A client’s investment strategies will be a function of their objectives, so unless factors impacting their objectives change, we try and remain disciplined, rebalance when necessary, and let the markets work for us instead of against us. Please contact us and take advantage of our no-charge initial consultation, and learn more about how well-diversified and low-cost investment vehicles can help you reach your investment goals.

1 Source: Word Federation of Exchanges. Global electronic order book figures gathered from the 60 WFE member exchanges

 * Past Performance is no guarantee of future results.

Share |