Let me ask you a question… What would you consider yourself to be?
Actually, it’s better to be a speculator and to know that you are. The biggest problems arise when people think they are one thing, when in fact they are the other, or they don’t know there is a difference between them, or worse still think it doesn’t matter.
In fact dear reader, I have developed a strong view on what an investor and speculator is and isn’t. As I’ve gotten older it has served me better and better the more I have understood it. If you want to have a long successful career in the stock, bond or property markets knowing what you are and what you do could be one of the most important issues you face.
Many people call themselves investors, when they are really speculators. TV property shows are the worst for this type of misnaming. When a presenter on “Homes Under The Hammer” is interviewing a recent purchaser of a property the presenter often says “great investment” even before they know if they intend to live there, rent it out or sell it on. Another show is “Location Location Location”, where the presenters are nearly exclusively helping potential buyers purchase a house to live in, yet Kirsty and Phil still announce “I think this is a great investment” when they know for certain that their clients aren’t buying a buy-to-let. An everyday entrepreneur can be forgiven, but when major TV stations don’t know the difference it is frightening, no wonder so many people get their fingers burnt dabbling in the markets when so called professionals are totally oblivious to these distinct differences. It comes down to a lack of knowledge and ignorance.
Speculators are rife in stock markets too. Don’t you just hate hearing the boasts about the killings made piling into an unloved stock or the fortune amassed shorting an index. They always seem to come out smelling of roses, when in reality most are often plain lucky. Sooner or later they get their comeuppance. Even George Soros lost $1bn betting against the US stock markets after Donald Trumps surprise election victory. Speculators believe their success is down to skill, intelligence or some sort of magical ability, when so often luck, chance and ignorance play the biggest roles.
Investing is keeping an asset and getting an income from it, where as flipping any asset for a profit is pure speculation. Speculating is far more dangerous, but even more dangerous is not knowing the difference between the two. Regardless of the asset class, knowing what type of person you are is more important than which one you are. When investing you are more concerned with the income from the asset, buying when prices are undervalued for example and holding them when they become overvalued isn’t likely to put you in a difficult situation, as you still have the income regardless. However, buying an asset to flip once there is equity in it can be highly profitable while prices are climbing but disastrous if you’re caught holding an asset you wish to sell when the tide has turned against you.
Now, if you want to be a speculator and you understand the definition, which means you don’t call yourself an investor by the way, then you need to take economic cycles into account. In short, you buy low sell high. Economic cycles in most developed countries tend to follow an 18 year cycle. That is 14 years up and 4 years down, with the 14 years up often split into two 7 year periods with a recession in-between, followed by a major correction lasting for around 4 years. If you timed property and stock market purchases to this cycle you would broadly be on the correct side of the cycle. This cycle is not only useful to speculators, it is recommended for investors too, although it would likely enhance your strategy rather than keep you economically alive. Using the cycle as an investor would allow one to invest during bull markets, holding when prices are getting frothy and wait for the next phase of the cycle to begin before they resume purchasing.
According to Robert Kiyosaki the definition of wealth is the number of days you can survive without physically working (or anyone in your household physically working) and still maintain your standard of living. Moreover, wealth is measured in time, not money. I happen to agree with this perspective. However, it does tend to highlight why so many people would choose to be speculators rather than investors. Knowing that wealth is measured in time rather than money, many people would find it more appealing and perhaps easier initially to maintain a standard of living by selling assets on for a profit rather than keeping the asset and collecting the income. Easier in the short term, yes. Riskier in the long term, also yes.
Neither investor or speculator is really wrong… Not knowing what or who you are is though and that is where the real danger lays.
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