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Do Not Confuse Investing With Speculating!

Do Not Confuse Investing With Speculating!

September 15, 2023

When the financial press speaks of people participating in everyday securities trading, they refer to them as "investors.” For example, you may hear or read, "The stock market surged today as investors took advantage of strong economic data..." or "The markets were down today as investors felt jitters from the latest inflation data and higher bond yields." The danger of interpreting activity from these "professionals" as "what is right for them must be right for me" is delving into speculation, not investing. 

 Why should it matter? It matters because most viewers and readers of financial information are not Wall Street moguls and should not be speculating with their retirement or savings accounts. Below is some information to consider when deciding whether to invest in the capital markets.

Speculating Is A  Zero-Sum Game


Speculating is a zero-sum game, meaning the amount of somebody’s gain will equal somebody else’s loss. Speculative investing creates a winner and a loser, but long-term investing allows all investors to benefit by taking advantage of the market's process of rewarding investors' risk with commensurate returns. Generally, the motivation behind buying a stock is the expectation that it will increase in price - not a year from now, not even a month from now, but tomorrow. On the other hand, I highly doubt the stock seller is expecting a short-term price increase; otherwise, they wouldn’t be selling. 


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

  Chasing Yesterday's News

 When the price of someone's stock is falling, it's natural for them to want to get rid of it, and when a stock not owned by someone is rising in price, it's logical to 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 by achieving objectives and 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!

The Markets Are Efficient

Efficient market advocates believe that current prices reflect all available knowledge and expectations. Between 200 and 300 billion dollars of securities are estimated to be traded daily in global markets. The participants are highly educated and skilled and do this all day long! The intense competition ensures a competitive and liquid market. These global analysts process all available information in seconds, and stock prices adjust instantly. In other words, if somebody tells you that a particular stock is “over” or “under” valued, either they have information that the entire global market is missing or the entire market has gotten it wrong – both scenarios are improbable. Although it’s possible that mispriced securities can occur, there is no evidence that anybody can consistently predict price changes.

A 50/50 Proposition

Success in speculating or “short-term” trading depends on the 50/50 chance of being on the right side of the transaction. The probability of profit-making is even less because of the transaction costs and possible taxes from any gain. 

Below is a chart of various rolling periods with their corresponding percentages of achieving positive returns. For example, the number of 20-year rolling periods between 1926 and 2022 is 74 (the first from 1926 to 1945, the next from 1927 to 1946, and so on). All 74 rolling periods of 20 years produced positive returns.

* S&P data 2023 S&P Dow Junes Indices LLCk a division of S&P Global.

The above data supports a very important investment principle - the longer the investment time horizon, the greater the chances of earning positive returns. Note the short-term probability of achieving a positive return (not including costs and taxes)  of 50% to a 93.6% chance with a 5-year outlook. 

If We Only Knew

 If we knew which security values would rise or fall or where the markets were headed, we could 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 predict short-term price changes consistently -  the markets are too large and efficient! The good news for investors is that they don’t have to know which stocks are going up or down or if a bull or bear market is headed in 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 challenging thing to maintain - discipline! But discipline is a dirty word for the transaction-oriented Wall Street firms and the financial press because the more discipline an investor has, the less trading they will do.

Carr Wealth Management considers successful investing 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 get in touch with us 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.


Investing in securities involves the risk of loss that clients should be prepared to bear.  No investment process is risk-free; no strategy or risk management technique can guarantee returns or eliminate risk in any market environment.  There is no guarantee that our investment processes will be profitable.  Past performance is not a guide to future performance.  The value of investments and any investment income is not guaranteed and can fluctuate based on market conditions.