Why Speculate When You Can Value Invest

What many individuals don’t see is that everyone grows up in the presence of investing, and we continue to be surrounded by it. Sometimes people confuse these investments for simple purchases, or even, if no obvious consideration is exchanged, as a decision. At the risk of sounding overly philosophical, the fact of the matter is that these are all investments. They’re investments of time, money, or even emotions. Sometimes nothing comes out of these investments. But sometimes, if you’re prudent with your decision-making, a return is achieved. This is where I would segregate investors into two groups: value investors and speculators. Let’s talk about this.

Speculation irritates me. I find it impractical and dangerous – but that’s just an opinion. I’m not a professional lexicographer nor do I want to dwell on the subject for too long, but maybe I should at least describe what it means to me. Speculation is an investment into something that is forthcoming but unknown. In the context of the stock market, speculative investing is that of entering into a share transaction and expecting to make a profit in the future based on a piece of information that is not substantiated. This piece of information could be a rumor, or it could be the result of some event that hasn’t come to fruition yet. It could be many things but one thing that it is for sure is circumstantial. This is typically depicted in Hollywood with the cliché insider convincing some poor soul to invest copious amounts of money into a stock (usually a pharmaceutical company) that is a “guaranteed” win. Yuk! Now, to be fair, I do have to hand it to the speculators who are able to make a living investing like this. They trade based on news, weather patterns, and other factors. They are day-traders and they are long-term traders. Some of them are incredibly good at it. But this is just too risky for me. I can’t justify investing in something that should, or will, happen. Instead I’d like to stick to investing in what actually already is. So lets talk about value investing.

Almost any piece that you read about value investing gives the fundamental credits to Benjamin Graham, David Dodd, and, most recently, Warren Buffet. These godfathers have taught the world the basics of value investing. This type of investing has a two-fold meaning to me. Firstly, the core concept is that you would find stocks that are undervalued. These are ones that are currently trading below what they are worth; like a discount bin. A value investor would do some analysis and modeling and find out how much a company is worth. He then would wait until the market prices it below that value and below his margin of safety for some irrational reason and he’d then buy it. He is a contrarian. When everyone else is selling the stock a value investor buys it and waits. He knows that the stock is trading unusually and so he waits until the forces of the market bring its price back up to the intrinsic value. It requires patience, the ability to separate emotions away from investing, and also the skills to be able to accurately estimate the intrinsic value. Secondly, to me value investing has a more literal meaning: the investment in “valuable” firms… but we’ll talk about this a different time.

Value investing requires a mindset that fits a particular paradigm. I’ve learned that you must to have patience and ignore the need for immediate gratification. This may seem counter intuitive but it’s the best way I’ve found to be successful at investing. It’s the safest way and, subject to inevitable scrutiny, I believe is the only way.