Today’s financial headlines are dominated by meme stocks, nonfungible tokens (NFTs) and cryptocurrencies.
These headlines revel in how a small army of “investors” has made millions of dollars ignoring convention and betting on assets that did not even exist a few years ago.
At times like this, it’s worth reminding ourselves of the difference between an investor and a speculator.
Let’s start with the term “investor.”
Much like stodgy old Warren Buffett, you are an investor if you calculate the value of an asset before you invest in it.
You analyze the company’s financial statements. You look at sales, earnings and expected growth rates. You also examine the health of the underlying businesses and assess the company’s competitive position.
Benjamin Graham and David Dodd developed these tools in their book, Security Analysis, published back in 1934. And it’s the mainstream approach taught in business schools across the globe.
The speculator’s approach is very different.
If you buy a stock, commodity or cryptocurrency simply because you have a hunch… or you heard about it on TV… or you see it’s gone up a lot, you are a speculator.
If you buy meme stocks like GameStop (NYSE: GME) or AMC Entertainment (NYSE: AMC), you are a speculator.
If you buy cryptocurrency that you can’t value, you are a speculator.
Ultimately, if you bet on an asset because you believe that there is a greater fool out there who will one day pay more for it than you did, you are a speculator.
Speculators believe they will have the discipline and foresight to get a seat before the game of musical chairs stops.
But much like gambling, speculation can become addictive. More often than not, speculators blow up from throwing good money after bad.
The Art of Smart Speculation
This traditional dichotomy of speculation versus investing misses an important distinction, however.
It assumes that all speculators are haphazard and undisciplined in making their bets. It ignores the existence of “smart speculation.”
Like traditional speculation, smart speculation makes a bet on the expectation of short-term gains.
But smart speculators make their bets using a highly disciplined approach to decision making.
As a smart speculator, you have a laser-like focus on the risks you are taking. You have your stops in place. And you calculate your bet sizes accordingly.
Oxford Swing Trader is an example of smart speculation.
This fast-paced trading research service focuses on generating short-term gains by betting on stocks and exchange-traded funds. Ideally, it holds these positions between two and 30 days.
Crucially, Oxford Swing Trader‘s recommendations aren’t based on random guesses.
Instead, they are the product of rigorously back-tested quantitative algorithms. These algorithms identify oversold stocks that are due for a rebound back to their primary upward trend.
(For more on swing trading, watch this video.)
The quantitative strategy does not mean that all of my Oxford Swing Trader recommendations will pay off.
But unlike trading with your gut, the Oxford Swing Trader algorithms help nudge the odds of a successful trade in our favor.
And that slight edge can add up to a big difference over time.
A Snapshot of Speculative Fervor
Today’s financial markets are rife with speculation.
That makes it even more crucial that beginning investors understand whether they are investors or speculators.
After all, the party atmosphere of speculative fervor can reach absurd heights.
Consider the case of a former adult film star, Lana Rhoades, which was recently covered by Jason Zweig at The Wall Street Journal.
In a recent Instagram photo, the lovely and talented Rhoades poses in a bikini while casually reading Graham’s book The Intelligent Investor. (It should be noted that she is doing so with her eyes closed.)
Her post, which was “liked” by nearly 1.8 million people, announced that she is promoting a cryptocurrency called PAWGcoin.
This altcoin is meant for “those who pay homage to developed posteriors.” (The ancient Greeks had a word for such women: callipygian.)
PAWGcoin is up roughly 900% since Rhoades began promoting it in early June, according to The Wall Street Journal.
So here’s a quick quiz: Is PAWGcoin a speculation or an investment?
Cryptobulls, please chime in with comments below.
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