A Prescription for Investors Who Speculate

Roulette WheelMany people have had the experience of winning and losing money at a casino. Most people lose money, as evidenced by the fact that casinos are in business. The majority gamble for the fun of it – the adrenaline rush that comes from that next roll, card or spin – and those near misses (if only it had been a 7 instead of an 8…I was so close). And certainly some people gamble for the the chance to win big. At the same time, responsible gamblers know gambling is entertainment and they are prepared to lose a specific amount of money. The expected return on gambling is the entertainment; not to make money. In describing their activities on the casino floor, gamblers may use words such as “bet”, “speculate” and “play”. No one in their right mind (being serious) would say they “invested” in a Blackjack game or the spin of a Roulette wheel.

On the other hand, investors are looking to invest their money in an asset that provides a reasonable probability of receiving back their initial investment plus some gain. Investments are commonly used as a way to reach a specific goal or objective (kids college, retirement, legacy). Rather than engaging in a game of luck in which the profit/loss is random and immediate, the investor takes a thoughtful and analytical approach in selecting an investment plan that will be the best strategy to achieve their goals. Goal achievement for investors is usually accomplished over decades. That is the essence of investing, but investors are often influenced to act more like speculators.


The Media Has Some Blame
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Just this week I read an article in the Wall Street Journal that drove my blood pressure up. It was another news story that said something to the fact that “investors bet that…”

Click on the graphic on the right. How many times do you see the words ‘investors’ and ‘bet’ together?

Since when do investors engage in a speculative activity as someone would do on a casino floor? Unfortunately the answer is ‘all the time’. A bet is a hope for a quick outcome that is driven primarily by luck and randomness. That is not the goal of an investor. No investor in their right mind would want their ability to retire to be based on luck or chance.

Because our thoughts are influenced by what we hear, see and read, it is not surprising that many well meaning investors end up engaging in speculative activities. Every day the media (you pick the source) is discussing how investors are “betting” on this, or the best way to “play” that. Of all people, journalists should know that words matter! Subconsciously, these words are influencing investor actions, often to their peril.


The Correct Rx

When we go to the doctor we have a goal in mind – to get better. If I break my foot, my doctor is not going to prescribe Albuterol. If I have asthma, she is not going to order a cast for my foot. This is obvious. The purpose of the prescription is to help us achieve our goal. We should do the same thing when it comes to investing. Let’s look at two examples:

      Hedge Funds/Mutual Funds: As entities they do not pay a mortgage, do not retire nor put kids through college. Their end goals are to attract new money, retain current assets, and the fund managers need to keep their jobs. The prescription to help them achieve those goals is to have good short-term performance, since they are often evaluated at least annually. This may cause them to bet on short-term outcomes or change their investment strategy in order to achieve greater quarterly and annual performance, and thus achieve their goals.

      The investor: The most common investor end goal is to retire comfortably. The prescription for that is to have a well thought, deliberate investment plan. Investors will not achieve that goal in a quarter or a year, in fact for most investors the goal is achieved over decades. Yet, many investors end up taking the same prescription as hedge funds. They focus on short-term outcomes, change their strategy based on the news/fear of the day and sometimes make bets on random outcomes to try to juice their returns. Just as with a medical issue, if you take the wrong prescription it will not help you achieve the end goal. Many investors are taking the wrong prescription.


By Their Fruits Ye Shall Know Them

Many people call themselves investors, but act like speculators. Actions define who we really are, not what we claim to be. So, are you an investor or have you been acting more like a speculator? Be honest. I have been a speculator at times and I am trying to act more like an investor. It is not always easy, especially with media influences and the volatility of the markets. But if we want to reach our end goals, we need to take the correct prescription. And the correct prescription for the investor is to have an investment plan that takes into account the volatility and cyclicality of the market and stick to it, regardless of what others are doing.


Your Advantage

Investors don’t realize this, but they have a significant advantage over professional money managers. Sure, investors don’t have a million dollar research budget, multiple MBA and PhD’s working for them, nor the many years of experience. But the advantage of the investor is greater than all of that combined. The advantage is time.

Professional money managers won’t last long if their funds don’t perform well. They have to hit short-term targets or they lose their job and funds cease to exist. They have to do better than others to attract more money. You don’t. You don’t have to care about the news of the day. You don’t need to compete with your neighbor. Your retirement goals are not affected by what other investors do; they are only affected by what you do. So let the hedge funds and mutual funds do what they do. Let the media do what it does. And you do what you need to do.


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