Today's tip focuses on the concept of investing vs speculation.
Before I get into the details, I am not bashing day trading, speculation, cryptocurrencies, options, or any of the other financial instruments out there. They serve a purpose in their own right. I just want to differentiate between investing in a company and "betting" on whether the price will go up or down.
50 years ago when someone invested in the stock market, they were generally taking money and buying an interest in the future profits/value of the company. You were investing in the future earnings of the company and a general belief the company would grow its earnings through the efficient deployment of capital. As those earnings grew, the value of the company would grow along with the associated share price of the company.
For the market as a whole, the net change in corporate earnings would drive the net change in market value. Thus, the net gain/loss by all market participants was directly linked to the net change in earnings, over the long term.
Today, long-term investors are dwarfed by speculative transactions. When speculative market participants enter the stock market, their "investment" horizon (time table) is often a matter of minutes/hours/days. I would define any duration less than the timing of the investment entity's next earnings report, as a speculative transaction as opposed to an investment.
Generally speaking, speculative transactions are less focused on the long-term (>90 days) financial results of an entity and are more focused on the short-term price volatility/change resulting from any number of variables (political, global, financial, wind direction).
In almost every transaction, what one party makes, another party loses over time. Thus, the net gain for all of the speculative transactions, day trading, options, is zero. So, when you add up all of the transactions over the long run, the net return is the same return earned by the market as a whole.... minus all the fees and expenses paid to make all those trades/transactions.
In summary, I encourage you to be clear about when you are investing and when you are speculating. Each can prove fruitful or fail miserably.
Caveat Emptor
Before I get into the details, I am not bashing day trading, speculation, cryptocurrencies, options, or any of the other financial instruments out there. They serve a purpose in their own right. I just want to differentiate between investing in a company and "betting" on whether the price will go up or down.
50 years ago when someone invested in the stock market, they were generally taking money and buying an interest in the future profits/value of the company. You were investing in the future earnings of the company and a general belief the company would grow its earnings through the efficient deployment of capital. As those earnings grew, the value of the company would grow along with the associated share price of the company.
For the market as a whole, the net change in corporate earnings would drive the net change in market value. Thus, the net gain/loss by all market participants was directly linked to the net change in earnings, over the long term.
Today, long-term investors are dwarfed by speculative transactions. When speculative market participants enter the stock market, their "investment" horizon (time table) is often a matter of minutes/hours/days. I would define any duration less than the timing of the investment entity's next earnings report, as a speculative transaction as opposed to an investment.
Generally speaking, speculative transactions are less focused on the long-term (>90 days) financial results of an entity and are more focused on the short-term price volatility/change resulting from any number of variables (political, global, financial, wind direction).
In almost every transaction, what one party makes, another party loses over time. Thus, the net gain for all of the speculative transactions, day trading, options, is zero. So, when you add up all of the transactions over the long run, the net return is the same return earned by the market as a whole.... minus all the fees and expenses paid to make all those trades/transactions.
In summary, I encourage you to be clear about when you are investing and when you are speculating. Each can prove fruitful or fail miserably.
Caveat Emptor
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