Smart Investor: the difference between investment and speculation

Ok so successful speculators such as Richard Dennis, Paul Tudor Jones, David Harding etc etc etc don't exist then?

Take a recent example. Nokia looked like a great "value" play. You would look at their accounts, see huge sales and good margins and new phones being made and think "yeah, they are a great company...I'm going to invest in them". Then Apple comes out and produces a world beating phone and they are literally bu**ered overnight. Value investing can work but only a very few people are good at it (Walter Scott being another recent example) but to do it properly you have to do huge amounts of research on every company you buy and for the average investor that's just not possible. For some reason, the world "speculation" is considered a dirty word. Without speculators, we probably wouldn't have as much oil today. Without speculators the futures markets (invaluable for manufacturers, producers = hedgers) would be far less liquid, far more volatile and as a result, the underlying price of the commodity would be far less stable. Speculators are absolutely necessary

Oh would it not be great to have a sucessfull fund manager you could trust to outperform the market at a reasonable cost so long term investment was possible and one could lie back and watch the cricket! Its just too exciting doing the lottery!

Long term investing pattern has changed because of the lesson learned from the demise of Big Institution such as GEC. If a company with billions of cash mountain can disappear due to bad judgement by one individual then how can one hold on to investement for long term. What has happened to Wellcome,Cable & Wireless, Reuters? I am looking at few of my long term PEP/ISA holding like BP, Lloyds, Shell, HSBC etc. which are still showing net loss even after ten years of re-investing all the dividends. That is why investors are weary of long term investing in any share and in stead bank their profit from time to time.

The concept of investing for the long term is a dying facet of investment I feel. With an onslaught of available information and analysis we can make "investment decsions" based on speculation that was not readily available only ten years ago.

Therefore investment over the longer period will always reduce, to much information to tempt the eye and raise the blood pressure.

Ignorance was once bliss!

Surely if the stock market provides opportunities for income and capital gain then the investor must have different strategies for either option. The volatility of the market attracts capital gain investments whereas the intrinsic long-term value and profitability of each company affects decisions on income investmemnts. This isn't mentioned in this article but seems to me like the overriding factor that determines behavior.

rubbish. Ive invested long term with big so called reliable companies eg lloyd banking group, persimmon, taylor woodrow, aviva, BP, to mention a few. All big losers and I feel Im stuck with them even longer term hoping for a turnround as opposed to crystalising losses.

Why is it then that Buffett has recently suffered large losses in speculative investments such as his wrong call on the USD and a large loss on a derivatives position? Because he realises that markets have moved on and value investing just doesn't work as well as it used to

Long ago I gave up trying to buy shares ofr the long term, having got burned by a few large "bellweather" blue chips like GEC, M&S etc... I now only invest with a select few fund managers, some of which inevitably have lean periods. But I am ahead doing this and I invest every month whether the market is up or down as the averaging over time does work in your favour longer term. But there is no magic bullet to investing, for sure.

Surely buying BP or Lloyds right now covers both bases - short term it's a speculative but longer term should prove a decent investment.

Also, 'Long term' is surely relative - eight years in 1966 may be the equivalent to 4 years now?

No sorry - Patience and caution don't pay. I and my friends have lost half the capital we invested several years ago in New Star UK Strategic Income - the stock market is totally manipulated and the only way for the private investor to make any money is to grab profits when they are there and then wait for the inevitible collapse before re-investing.

Since the majority of dealing is done by institutional investors, it seems unlikely that the small private investor is directly responsible for the change in length of holding. More likely it's the pressure on the fund managers to 'perform'.

IMO. The graph is illustrative of and directly proportional to the adoption of advanced technolgy used in stockmarket trading.

Back in 1966 a private investor would have to place an order with his bank or stockbroker. Who in turn would place the order with a market maker (stock jobber) who would then interact with traders doing deals in open outcry pits. That process could often take days, especially for smaller orders and/or less liquid stocks.

The situation which exists today is vastly different. The whole process has been computerised. Electronic number crunching of mind boggling dimensions. There are no stockbrokers as such, just account administrators, no stock jobbers, and everyones a trader doing deals from a PC in their own home or office.

The range of financial instruments which a private investor can use has expanded to during this time frame. With tools available such as: Stop loss, lock in profits, fill orders at a determined price, buy long, sell short, etc, it's no surprise that the average period a stock is held has dramatically fallen.

I have read a report recently (unsubstantiated) by a stockmarket analyst in New York; that the average length of time that 50% of stocks traded on the NYSE is 11 seconds! Yes you heard me right eleven seconds.

What a lot of so called investors do not realise, is the exent of "machine trading" Smart computers, programmed by maths wizzards, can crunch numbers and make buy/sell decisions in nano-seconds.

The rest of us have to stumble and stagger like a bunch of dunderheads.

After 15 or so years, I am firmly and truly in the "Speculator" camp, after seeing investment gains evaporate in times of falling markets. I used to believe the investment experts who say "grit your teeth and ride the storm, as the markets will soon recover". Yes they recover, and you start again from a much lower and disadvantaged starting point. I am convinced it is vital to do regular and close monitoring, with stop-loss procedures in place, and abandon ship and cash-in when the storm breaks. Yes, I'm a speculator, and happier and more in control as a result.

My best advice received about 20 years ago was to invest only in income funds and reinvest the income. The discipline of having to produce regular income streams puts continued pressure on the fund managers to keep their eye on the ball and not buy high growth stocks.

On this basis the basic strategy is to invest in big boring companies and to spread it around to reduce the changes of buying too much of Lloyds, GEC, BP etc. Trying to find the next technology (eg biotec) star performer is a nightmare.

I dont see that there's much difference. Investment is simply long term speculation and vice versa for the individual punter who is simply trying to get a reasonable return (better than bank interest) and not get fleeced with transaction charges. Hooray for online trading.

Various studies have shown that by jumping in and out of the market means you miss many of the neaningful upward swings, not to mention incurring more dealing costs. Unless a stock is a real laggard, the main reason to sell in my case is to crystallise gains or losses in a particular tax year but my best successes have been long term favourites, usually consistent dividend payers.

The downside of online trading (and I do some) is the dealing costs for the relatively small volumes of shares that personal investors typically play with which can easily whittle away your profits. In addition, unless you buy a premium service you are always behind the market in terms of pricing information.

What is the point of buying into the market except to make money? So if your 'investment' rides up why not grab the profit when it's there? For you the journey ends at that point and someone else is now to carry the can (take on or continue with the risk) . For me getting in and out lets me sleep well at night and I don't mind the other guys getting in or holding on for more.

The only time I'd consider buying for the longer term would be in 'safe' times where a steady or rising divi wouldn't be bad against benign business conditions with little downside risk. Those days seem long gone.

I started investing in January 2006, and I can trace back my original portfolio. If I had kept all the shares till today I would have an increase of 23%. In fact I have an increase of 36%. So my amateur fumbling (and some of it was very amateur!) has given me 13%.

"Buy-and-hold" wouldn't have worked for me.

The two problems with "value investing", as a number of people have pointed out above, is that the markets don't act logically and that circumstances can change overnight. There is also the fact that a share which looks horrendously risky (e.g. Scottish Oriental Smaller Companies) can perform far better, and more reliably, than (say) Vodafone or Tesco.

Those who decry momentum investing are those who want to sit back and do nothing. Momentum investing takes a lot of time and effort. Yer pays yer money and yer takes yer choice . . . .

I have a portfolio of ISAs with Hargreaves Lansdown and they have just put out a note about the Newton Higher Income Fund. It makes interesting reading and also points out how little the average investor knows about what goes on behind the scenes (how did HL find this out?). I know for a fact that much more complex deals than this are often done. So what chance has the average punter got?

http://www.h-l.co.uk/funds/fund-news--and--investment-ideas/fund-news--and--alerts/newton-higher-income--removal-from-wealth-150

Some interesting points. However, much of the comments relate to short-terms of less than 5 years and this is one of the key differences between investing and speculation.

An investor makes decisions based on historic evidence of how capital markets reward invesors over the longer term. Speculators make decisions based on what might happen in the short-term future.

Investors recognise that time in the market is more effective than trying to time the market movements.

Investors recognise thet dfiversification reduces risk adjusted returns.

There will always be examples of investors and managers who have consistently outperformed the market. There are also investors and managers who will have consistently underperformed the market. This is the normal distribution of probabilities.

Dennis makes the point that the professionals are more sophistocated with their techniques etc. This is true but as a private investor one is not obsessed (as they have to be to stay in work) with constantly matching peers or indecees, also management expenses disappear.One can stick to ones conviction that value will come out despite unfavourable short term trends.

If I sell my portfolio... what do I do with the proceeds..?

invest for around 3%? futile..

Re Ruth Karp

Its a question of forming an opinion on the valuation and future direction of the market in general and individual stocks in particular.

From January 08 to present date the FTSE 100 has been on a roller coaster ride.The index is now roughly back to where it was at the start of this period. So if you had sold your stocks at the beginning of the period and put the money in a fixed interest deposit account @3% pa I reckon you would be ahead of game by now.

With regards to individual stocks, that's a different story. When the credit crunch took hold Standard Chartered plunged along with all the other banks, despite the fact that it had negligible exposure to the subprime debacle. If you had bought at its low point ( approx March 09) your shares would have appreciated by 300%

However that was then, this is now, and tomorrow will be the future. Personally I think the market in general is overbought (stocks will fall) but not until the new year. The Federal Reserve, Bank of England, and The European Central Bank are all poised to implement a second round of quantitative easing. In theory the resultant inflationary pressure and increased money supply should drive investors out of cash and into stocks, but it will also create an adverse headwind to consumer spending. (the pound in your pocket will buy less) The only real gain will be in commodities from which everything is made.

Of course none of this will go unnoticed by the rapid traders who are in charge of the markets these days. Therefore my strategy has changed. I no longer try compete on their terms. I am researching stocks in the smaller companies sections and listed on the aim market.

I mentioned before that my speculation is doing better than my investment, and since then it's been more of the same. Assuming I'm right about insurer Catlin being a value investment, it should come good eventually, but I'm currently nursing a loss on it and wish I'd speculated on more risky small-caps instead.

Just as Warren Buffet came up with the 'moat' concept due to a lack of traditional value-investment opportunities, other value investors have expanded the concept and found their own niches where there isn't too much competition. I'm starting to think that investment is like an ecosystem, with a place for a variety of investment styles.

Ruth, if you can acheive your personal goals and objectives with a monetary gross return of 3% p.a. then why would you want to take any additional risk?

how wise you are Steven Hotham... I will begin to

sell the shares.

Capitol gains system changed from a 10year sliding scale to a one year grab,by the man who wanted you to save more,long term.Thank goodness he's gone