Investing vs. Speculating: How Value Investing Can Help You Avoid Gambling in the Stock Market

Like so many people I talk to, my first notions of the stock market were not good. I believed that it was about as safe as gambling at the casino. This is actually far from true, as your approach helps dictate how risky it really is. When done properly, value investing can offer a low-risk investment in the stock market.

The reason that this misconception is so popular is because of how media outlets portray the stock market. If you turn on the news the main focus is always on negative news stories because they are more captivating to the audience. This is why you will constantly see crime, devastation, and disaster on the news. Likewise, you will see stock market and stock price disaster stories on most days.

Because of this, when most of you hear about the stock market your thoughts likely turn to the 2008 financial crisis. During these periods, investors “lost” millions of dollars. However, the purpose of this post is to point out that speculators lost the most money, not value investors.

So, you might ask what is the difference between a speculator and an investor? Many people believe that all investing requires some kind of speculation, as the market is impossible to predict. However, this idea is why we emphasize investing in a business, not a ticker symbol.

In the Intelligent Investor, Benjamin Graham dedicates a full chapter to the study of speculation vs. investing. Essentially, a speculator is concerned with making money quickly and getting short term returns. In addition, speculators will try to predict what the stock market will do. Meanwhile, an investor puts their money into a company and has the patience to achieve long-term gains throughout ups and downs.

Obviously, this is easier said than done. Having the patience and discipline to hold off on selling is painful. Watching your portfolio lose 50% of its value is a hard thing to do. Many people panic and sell their positions because they don’t want to lose any more money. This is when it is important to remember that you haven’t lost any money until you sell. This is critical to keep in mind when taking a value investing approach. Additionally, the market almost always comes out of a recession stronger than it had been before it crashed. It’s like breaking a bone; it heals stronger than before.

Don’t Follow the Crowd

Bull and bear markets are very popular terms among investors. Bull and bear markets act as indicators for many investors as to what they should be doing. This is the wrong mentality.

The problem with bull markets is that strong growth in stock prices and high returns will cause speculators to buy more and more stocks. When this happens, stock prices rise even more rapidly as more people get wind of the incredible returns. Eventually, stocks become incredibly overpriced and the real earnings of the underlying company are not able to keep up. When the financials of a company don’t keep up, stock prices will plummet as investors pull their money out. Because the stock market has become so overpriced, the correction to the stock market will be exaggerated as well. Prices will dip well below a stock’s value.

Speculators who are interested in short term gains will often buy into the stock market when prices are rising in a bull market, then pull their money out during the ensuing bear market. Because of this, they lose most of their money and claim that investing in stocks is a ‘gamble’ and swear to never waste their money again.

This is the problem with so many people who want to invest but end up being speculators. Even investing professionals get caught up in the hype of a strong bull market. In the 90s, many professionals claimed that stocks were the best investment a person could make and that they were the safest investment. Obviously, stocks lost a great deal of value over the next few years and experts were suddenly claiming that stocks were dangerous.

An important thing to remember with bull and bear markets is to avoid what the media are saying about the markets. Media often follow the same thought process as speculators. Despite this, it is still important to track bull and bear markets, as they can provide investment opportunities as well as give you an idea of when to sell your positions.

Value Investing and Speculating

If you want to play the dangerous game of speculating, you are more than welcome to. If you do, I would recommend logging out of this website, as we are concerned with value investing.

An investor truly has a long-term mindset. In this sense, only speculators are worried about the day to day fluctuations in prices in the stock market. The stock market is known to be irrational, and bull and bear markets prove this. If the stock market acted completely rationally and companies only ever traded at their value, it would be impossible to make money.

Warren Buffett once said: “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” Keep this in mind when selecting stocks for your portfolio.

Speculators will gamble their money by betting on what a stock market will do. Because of this, they will likely be caught up in the bull market trap that leads to a bear market loss.

On the other hand, value investing involves buying a stock that is undervalued and hold it for the long term. By doing this, they will realize the true gains that the company can provide. This is why it is important to analyze a company and ensure that its financials check out to our standards. A good business will be able to make money for a long time, which is why you will want to hold it in the long-term.

Typically, speculators will focus on a ticker symbol. They will base their purchase of stock shares on the recent returns of a stock. On the other hand, an investor will only purchase shares of a company that has strong financials. Likewise, investors look for companies that can maintain strong financials. Value investing means you will buy companies trading at a price lower than their value.

Make sure you act as an investor so that you don’t gamble your money in a bull market. Sign up to our insider’s list before to get a cheat sheet that will help you sort through undervalued stocks!

Join the Insider's list!

Subscribe now and receive a free "eye-level" cheat sheet tool to help you value stocks at a glance! Whenever I value a stock, I have this cheat sheet handy so I can see if a stock checks off enough boxes to be worthwhile for further analysis!

Powered by ConvertKit

Trackbacks & Pings

Leave a Reply

Your email address will not be published. Required fields are marked *