Investment Beats SpeculationWealth Principles
Individual investors confuse investment and speculation very often. When actively attempting to gain wealth, speculation has very little place in a long term, sustainable, wealth gaining strategy. Often both are used, but investment has a much stronger track record in the long term over speculation. The difference between investment and speculation can be found in their definitions.
Investment assures the safety of principal, and the return of the investment can always be measured. An investment always has a readily determined value. Although it may not be easy to obtain there are facts/figures that can be used to find this value.
Speculation does not promise either return or the safety of its initial investment. This runs contrary to wealth gaining principles, which require that you reinvest wealth until you have grown rich. Speculation’s definitions can be expanded to include two additional categories. The first is purchasing “investments” that do not have a readily determinable value. This occurs when the “investment” only has market value accessible, and one must estimate whether the price will go up or down based on current events. The second is purchasing investments which have a readily determinable value without actually engaging in analysis, based on hype or market opinion. This second definition applies even if the recommendation comes from “reputable” sources, like brokers, financial advisors, or certified media personnel who haven’t given you an estimation of the investment’s actual real value. If they have, they also need to provide you with the basis for the estimation and how they reached that value.
At its most essential level, speculation is entering an investment without knowing the actual value of the investment being purchased or if the investment guarantees principal and is likely to generate a return. Investment requires identifying an investment instrument’s actual value, ensuring the asset generates return while keeping principal safe. An investor purchases the instrument when the market price is close to, or below, the actual value.
When engaging in speculation, you are engaging in unnecessary risk. This is based on several problems that are eliminated in proper investment, but not in speculation.
No Value Baseline
Speculation has no value baseline. Investment operates in relation to value, speculation ignores value almost completely. The value baseline is necessary since it determines when an investment should be purchased and when an investment should be sold. Speculation relies on guessing whether others will be willing to pay more or less in the future than they do now. By removing this baseline speculation cannot comprehend if an investment should be purchased or sold on a non-arbitrary value.
Little Comprehension of Reasons
Speculation sometimes comprehends the reasons for movements, since it usually must estimate whether or not others will pay more in the future, and that requires asking why. It often assumes but does not truly understand, underlying positive price movements. This often occurs when speculation is based on other’s opinion. Investment analysis indicates when an investment should be entered, which direction the price is moving, why the price is moving, and the price’s level in relation to value. Speculation often does not engage in research that will identify the long-term drivers that are moving the investment.
Betting on Traders, not on the Investment
Speculation attempts to estimate market movements and/or time markets. Often, it identifies a very small amount of factors that may affect short-term market price, then purchase or shorts betting that these factors will cause other investors to buy or sell the investment, raising or lowering market price in the short term. These aren’t based on the value of the investment or key investigation of long-term business problems, but the reactions of others. Speculators earn money, and often lose money, betting against each other’s estimated reactions. Investors earn money from successful long-term business practice that drives the investments they engage in.
Speculation focuses on short term time frames
Speculative actions are concerned with how the market price of investment instruments will change in the short term. It does not focus on or react to long-term pictures of economics or business integrity. Speculation focuses on entering and exiting positions that can last as long as hours, days, or months and rarely ever lasts years. It does not hold positions long enough for substantial value to be generated by the company, or companies, driving the investment instrument. Investments earn profit from underlying value increases created by successful business practices. These are usually generated over the long term and provide deeper gains than market speculation.
Speculation captures price (Not value) change
When speculation results in profit, it captures profit of a short-term change in market price, not an actual long term change in value. Investment captures long term changes from value improvements over time and maximizes returns from profitable business practice. Speculation earns profit from short-term price swings. Price swings are tied to the market and not to the actual company, and do not affect the internal ability of the company to generate business on a daily basis: they do not affect the sales, costs, marketing, internal reinvestment, or any other driver of the company. Market Price only recognizes the market’s short-term opinion of a company’s performance ability, which may not be relevant to the company’s actual performance. Speculation measures change in market opinion more so than actual performance and derive its earnings from these changes. As an investor, you will measure actual performance based on the company’s internal metrics. You will purchase investments only when they are below their actual value and have indicators of future value increases. You will hold investment instruments long enough to exploit increases in both price and value and sell investments when the market price is well above actual value. You should invest to capture value changes. Avoid attempts at superficial price grabs, which often result in losses.
Speculation is far more volatile than Investment
Speculation tries measures constantly changing market views on investment instruments, and attempts to estimate price changes based on short-term supply and demand. This means a speculator has a far wider possibility of error, due to the fact that they must correctly and continuously estimate the market’s reaction which could have an effect on their investment instrument’s demand. The chances of consistently estimating correctly get increasingly slimmer over the long term. Analysis based investing focuses on internal benchmarks and the business climate to identify an investment with a solid long-term outlook and decipher its current value. You purchase investments and businesses when they have a market price that is below the value of the company. This narrows the field of selection. Badly ran companies are ruled out as investment instruments if they don’t meet analytical metrics. Good companies close to or below their value are highlighted. The long-term strategies that will allow firms to generate value increase over the long term are revealed. The firm’s placement in the marketplace is deciphered by you, the investor. This reduces the chance you will suffer losses since investment instruments are purchased at or below their value. The chances of your investments crashing are possible, but it is greatly reduced since you are avoiding purchasing badly ran firms at prices higher than their worth. You are also avoiding firms which are in “bubbles” that are likely to pop and deliver massive losses.
Speculation Overplays its Hand
The lack of value baselines in speculation results in two eventual situations, depending on current market confidence. In bull markets, speculation drives market prices further upward by over-purchasing investment instruments that are above their actual value out of greed. In bear markets, speculation drives prices below their actual value by overselling investments out of fear. As a result, several effects occur. Speculators lose value in the long term by buying investment instruments above actual worth, which shortens the range of profit they can earn before an investment moves towards its true value. By purchasing investment instruments close to the peak of their price range, speculators position themselves for larger losses if the market falls. As markets fall speculators remove themselves from potential value in the long term by clearing out of markets as they crash, due to fear they will buy in only to have the market continue falling. Ironically, many investment instruments are well below their value when a market crashes. This makes purchasing investment instruments for the long term a wise idea if the business connected to the investment instrument has strong finances and a steady consumer base.
You should operate conversely to speculators. Investors don’t purchase assets when the market prices are above their actual value unless the asset can deliver substantial returns. This lowers the possibility they will purchase stocks in bull markets only to have them suddenly crash on them. They may begin selling if the market prices on their investments appear extremely inflated relative to calculated values. In Bear markets, you should begin hunting for investments that have market prices deeply below their actual worth. The investments are held for long periods of time, while returns are gained from increases in market price alongside dividends and calculated value. At a reasonable profit, investments may be sold. This sale often occurs years later, at a market price that is higher than the new actual value, and in turn higher than both the old value and purchased market price. Speculators often forget a simple truth. Markets correct themselves in the direction of actual values, and not unrealistic expectations of market prices. You should operate only in relation to investment potential and worth. You should purchase investment instruments priced below value and hold these assets to extract income from dividends. Sell investment instruments with market prices above their true worth to gain from changes in market price.
Speculation incurs more cost than investing
Due to the short-term movement involved in speculation, speculation rapidly accrues costs from fees and commissions. Investment holds assets for much longer terms of time in order to extract value from the investment, and the lowered amount of trading results in fewer fees and commissions in comparison. When combined with the volatility of speculative market activities, speculators’ long term profit is greatly eroded in comparison to investors focused on value over long periods of time. Since speculation requires operating in quick reactions often over the short term, you will rack up fees and commission costs quickly, which will eat up your returns. Avoid this fate and invest wisely.
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