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Investing vs Speculating

Monday, June 7th, 2010

The difference between Investing and Speculating is much larger than Wall Street would have you believe. In fact, they could not be too more different activities. Speculating is gambling. Investing is intelligent decision-making.

Below are some excellent definitions of a Speculator and an Investor taken from Ben Graham and John Maynard Keynes.

Speculator

“If you are a speculator, your decision to buy or sell is based on what you believe about the near-term direction of price.” – Ben Graham

“…speculation is the activity of forecasting the psychology of the market.” – John Maynard Keynes

Investor

“If you are an investor, your decision to buy and sell is based on the underlying economics of the stock you own.” – Ben Graham

“Investing is an activity of forecasting the yield on assets over the life of the asset…” – John Maynard Keynes

Now – think about what kind of activity you are encouraged to engage in when you watch CNBC (especially the commercials) or read most research reports. Even worse, think about what an E*Trade advertisement suggests ~ “in your spare time, you are able to outperform professional investors, most of whom spend million of dollars and work 60 hours a week on nothing but analyzing stocks.”

Of course, they want you to speculate…because they make money whether you buy or sell. They want volume and are happy if you buy today and sell tomorrow – again and again. Volume generates commissions. Commissions cost you and lower investment returns. Ergo, your broker’s interests are often not aligned with your best interests.

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3 Comments

  1. varadha says:

    Terrific, yet simple analysis. I’ve always been a fan of ROIC as a measure of capital efficiency and believe that no size/growth outperformance can replace the quest for efficiency.

    Sort of like a big gas guzzling v8 that needs ever increasing gallons of fuel to keep its engine running

  2. David says:

    But Angie’s $90 per user acquisition cost is going to go away. That’s what their approach probably is. How would their outlook be if that $90 cost dropped down to a total cost of $3 per user?

  3. David:

    That would be great, but cost per user acquisition is not something that’s very easy for a company to fix. ANGI can slash their marketing budget to the bone, but then they would stop acquiring new members. They would probably lose members in fact, as their membership renewal rate is at ~75% and declining. If they cut marketing expense by ~95% as you seem to be suggesting, ANGI might be able to eke out 1 year of slight profits, but they would start shedding members and losing money very quickly. ANGI’s only hope is to keep its marketing budget high and hope it can reach the scale and brand awareness to be able to sustain its business while scaling back marketing costs enough to turn a profit. The fact that ANGI’s revenue growth is slowing down even as its marketing costs keep increasing makes it very unlikely it will achieve that goal.

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