When does investing become speculating? And is that a bad thing?

Speculating is very different from investing. But many an investor has sunk his own boat by behaving like a speculator.

Speculation is focused on price movements in the markets. The price of oil, gold, corn, a share of Apple stock – speculators speculate on most anything. And, depending on the speculator, it doesn’t much matter whether the price is going up or down. There are ways speculators can profit from movements either way – up or down.

Therefore, speculation is very short term in its focus. And it’s risky. Often, very, very risky.

Guess what – most of us don’t ever need to engage in speculation as I have just described it. It’s far too risky and it demands a huge amount of skill. And even then…

So then - what is investing (as opposed to speculation)?

Investing is focused on fundamental value. It is perhaps oversimplified, but a share of stock represents a proportional fraction of all the money that the company will make in the future. So, fundamentally, sound investing should seek to participate in the ownership of well-run companies that are very likely to make money over a long period of time.

So, here are four factors that most impact the movements of markets in the short and the long-term. These are factors that smart, long-term investors have to take into consideration.

Earnings. Corporations (hopefully!) make money. Investors try to buy into companies that stand a good chance of earning money every year, and to have those earnings figure to go up a little bit every year.

Environment. The price of oil goes down. A hurricane hits the east coast. A novel coronavirus spreads around the globe. These (and a million more) circumstances affect the earnings of companies. Most of the time, these impacts are short term in nature, but they can spook the markets.

Emotions. Markets are made up of people, and people are emotional creatures. Sometimes they are feeling optimistic, sometimes they’re feeling pessimistic, and sometimes in-between… The public’s collective emotional mood often drives the direction of markets – at least for a while.

Emotions often result in extrapolation, which is the fourth thing to keep your eye on. And that can go either way. Markets enjoy a steady upward climb for weeks and months and maybe even years, and it becomes easy to extrapolate and say, “It’s all different this time. The economic gods have figured out a way to avoid bear markets once and for all. And at the rate my portfolio has been going up since Thanksgiving, I’ll be a gazillionaire by Labor Day!”

And, of course, extrapolation can go the other way. Someone says, “My $100,000 is down $5,000 in just two months. Gosh, at this rate, I’m going to be down to zero in three years!”

Being scared is OK. I hate it when my own accounts go down.

But I’ve learned that figuring out the short-term movements of the markets is a fool’s errand (I’m going to leave that to the speculators). I try to keep the faith that the earning capacity of the world’s best-run companies will continue to go up (over the long-term) and I’ll be rewarded for my patience.

Now, you know this, there are no guarantees. But I really think the probabilities are in my favor.

 Offering you Wisdom on Wealth, I’m Byron Moore.

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