Building Investment Wealth
by Randall J. Cloud
What is the best way to build investment wealth?
Is there a difference between being an Investor and a Speculator?
Both are seeking higher returns. However, both have distinctly different world views of the financial markets.
Can market prices be trusted?
The speculator sees market prices as something to be predicted, forecasted, and outguessed. Therefore, speculators do not trust market prices.
The investor believes market prices represent the aggregation of the opinions of the millions of investors around the world as to what the future holds for individual companies, industries, and countries. Thus, the investor believe market prices are forward looking and are fair estimates of market values.
Is diversification necessary in a portfolio?
The speculator seeks quick payoffs and a casino experience. The mindset is to find markets where he can place a small number of bets on hunches and intuition that are expected to pay off quickly to create a sustainable business for himself. The speculator is relying on other speculators to either be more fearful or greedier than he.
The investor believes in owning as many companies as possible to cancel out the specific risk anyone company, industry, or country presents. The investor is attempting to increase the likelihood of realizing a positive return and reducing the chance of not realizing any return or worse losing his money.
Where do investment returns come from?
Much like a gambler believes in his superior skill, the speculator believes investment returns comes from his or someone else’s superior ability to consistently predict future prices of individual stocks and markets.
An investor believes investment returns come from the work companies do to manufacture great products and provide great services over months and years. In exchange for the investor providing money to companies to use to produce great products and provide great services, the companies share a portion of their profits with the investor (dividends) over months and years thus increasing the value of ownership in their companies (stock ownership) over months and years.
What role does the speculator and investor believe he has in the investment outcomes?
The Speculator believes he can find the overpriced and underpriced stocks as well as being able to predict the direction and magnitude of market swings. Being able to predict the future will allow him to capture excess profits.
On the other hand, the Investor believes profits will rests on his ability to stay the course over time and resist the temptations to sell out during market downturns and to pursue speculative hot stocks and trends during great markets. By staying invested, profits will come from the great products produced and great services provided by great companies.
What are the likely outcomes of speculating and investing?
For the speculator, he must honestly ask himself “Is it possible to consistently predict, forecast, and outguess the millions of other people in the world?”. If he accepts that he cannot, then he will also ask if there are people who can. He can answer this question with another question which is “if there are people who can, why would they share the information with me or anyone else as they would be giving away their profits?”
For the investor, investing in the greatest companies in the U.S. and Globally will give him the opportunity to capture the positive rates of return generated by capitalism. Thus, an investor will be able to build wealth over time.