I have heard a number of advise saying that we should “Invest” and Not “Speculate”. What is the difference really?
One such saying argues that Fundamental Analysis is Investing while Technical Analysis is Speculating. Is that true? Personally, I started out in the stock market using Technical Analysis and then I learnt Fundamental Analysis. So allow my humble opinion on Investing, Speculating, Fundamental Analysis, Technical Analysis…
Let me be dogmatic about the terms Invest and Speculate by referring to the Investopedia, a website dedicated to understanding investment terms:
The Definition of Investing:
“The act of committing money or capital to an endeavor (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit.”
The Definition of Speculation:
“The act of trading in an asset, or conducting a financial transaction, that has a significant risk of losing most or all of the initial outlay, in expectation of a substantial gain.”
Hmm… let’s ponder on this for a moment…. What is the difference anyway?
Is it the term “significant risk of losing most or all of initial outlay’?
Why, I know and read of Fundamental Investors who lost most or even all of their initial outlay…. I also know of Technical traders losing huge amount of money.
Is it the term “in expectation of a substantial gain.”
What is “substantial” anyway? 10%, 20%, 200%? Then what can we say of Peter Lynch who aims for his next Ten Bagger?
I heard someone saying that the difference between investor and speculator is that investors do more homework before pulling the trigger while speculators only try to hear say and guess…
And how do we define “more” homework? Is it more time spent? Is it more indicators or criterion?
To be really honest, when I used Technical Analysis in the past, I spent more time and look at more charts and indicators, in different time frames, avoid major news, adding the knowledge of candle sticks, pivot points etc etc….
Now that I use Fundamental Analysis, I also do my homework such as reading annual reports, looking at financial statements, but overall, the time spent is much much lesser…. So have i turned from an Investor (doing more homework) to a speculator (doing less homework)?
Well… actually I just want to say that I feel that the terms are not important. What is important is what works for you.
For me, I prefer having passive income, looking at stocks as businesses, creating a portfolio and enjoying dividends etc. I also like the idea that when I invest in a good business, everyone wins – from the customers, to the business to me, the shareholder. I personally, with all due respect, cannot understand how short-term trading creates value. As an investor, what I provide is funds to a business that wants to expand to reach more customers. And if it is a good business, providing good value, I can to help more people. (I encourage to think the same. So think twice abut what you are supporting when you invest in Tobacco, Gambling, Pornography industry). Because of your funding, your children or grandchildren may become a customer (i understand it is a bit far fetched but do have principles and make a stand).
So besides alignment of values, why I really stop using Technical Analysis is really because I am a lousy trader… When I compare my results, Fundamental investing is so much easier to understand, so much less stressful and bring in so much more returns every year.
Just a thought from your fellow fundamental, value investor,
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Mind Kinesis Research Team