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Investing vs Speculating

Most of us come across various investment opportunities in any given year. We wonder if the said opportunity is a good investment or a bad one. Though not an intentional thought process, we are really contemplating is if it’s an investing vs speculating opportunity.

Investing generally refers to an endeavor where you bring value to the table and therefore profit from your addition.

Speculating is a far riskier gambit involving a guess on future economic changes.

When I started writing this post I went into it assuming that speculating is a losing proposition. Researching the topic turned my opinion around – I see the value in speculating, though it’s suited to only few individuals.

Almonds & Marzipan

I came across a great discussion of this a while back and someone likened investing to buying a whole bunch of almonds, making marzipan and selling it for a profit.

Speculating is buying a whole bunch of nuts, storing them, and waiting for the right time to sell the nuts for a profit.

Another less arcane example would be a person who buys a condo and rents it out versus another who buys that same condo, holds onto it, hoping that it will appreciate in the future.

 

Investing vs Speculating

There are many ways for the consumer to grow their wealth these days – it’s a necessary discussion to understand the investing vs speculating dilemma. My stocking picking days in the early 2000’s were mostly speculating ventures, for which I have nothing to show for but an empty etrade account.

From a very broad perspective, those who can afford to speculate, stand to a gain a lot more but they can also lose a much higher sum as well. Speculators can get lucky or, with enough wealth, they can create their own luck.

Venture capitalists are speculators. Even though they like to spin their art as a sexy investment, Shark Tank style. They aren’t gamblers, don’t confuse gambling with speculating. Speculating still requires considerable skill.

My venture capital buddies invest in 7-10 ventures a year and have no problem with all but one of them failing. However, they want that one surviving and prospering venture to more than make up for the losing ones.

 

Investing

I invest in index funds, so what the hell did I bring to the table? What makes me an investor and not a speculator? After all, I’m just holding these dingalings for the long-run, hoping they’ll go up enough in value so I can sell them for a fat profit.

But I’m no almond slinger!

It’s easy to dismiss index fund investing with the argument that since anyone can do it, few will actually profit from it. Of note, the same is said about real estate, restaurants, gas stations, and startups.

Despite index funds returning more than 9% on average in the recent years, the typical investor only enjoys a personal return of around 3%. So if my index fund portfolio has averaged at least that 9%, then I’m bringing something of value to the table.

Index fund investing isn’t just buying a mutual fund ticker from your brokerage company. You need an actual investing plan, a strategy. Without it you will succumb to detrimental investing behaviors which cause you to buy high and sell low.

Even the SEC has a white paper on counterproductive behavioral finance. 

  • When will you buy your index funds?
  • When will you sell them?
  • What asset allocation will you hold?
  • Which direction will your portfolio tilt?
  • Will you invest a lump sum at a time or do dollar cost averaging?
  • How will you deal with market panic?
  • What will you do in a bear market?

I am an investor because I have an answer to each of those questions that matches my risk profile. I came up with these answers (and my risk profile) after sitting down and doing some research and discussing them with my brilliant financial adviser.

 

Speculating

I speculated in 2007 by buying a condo in San Diego while I was living in Los Angeles. I did so because everyone and their momma was getting into real estate and I didn’t want to miss out.

I figured that I would buy the condo and sit on it, as was the popular advice at the time, and when the right time came I would sell it.

I even had the right idea – I was going to do some renovations to increase its value and sell it for a profit.

Flipping real estate can definitely be an investment but it strongly borders on speculating. Naturally, the more experience you have, the better your negotiating skills, the better your cost-estimating skills, then that makes you more of an investor than a speculator.

Buying gold or digital currency and hoping that it will go up really high is a form of speculating. Not that it’s a bad way of investing but in order to be a speculator, it’s important to have a lot of disposable cash to invest with.

 

Nerd’s Eye view of Investing vs Speculating

To get super nerdy on it, the only way speculating can beat out investing is when you have a shitton of money to play with. In this economy, profits are enjoyed through a percentage system.

It’s better to profit 0.01% on $10 billion than 30% on $1 million. And it’s really easy to get a few percentage points above inflation when it comes to investing – and if you have a ton of money then you can make sure you have that as your base.

Then you can take the rest of your funds and speculate with it. Speculating is what earns the big bucks! But don’t get it twisted – it’s not for everyone.

 

Speculators Can Set The Economic Pace

When you have so much money that you can buy a hefty parcel of land and develop it into multiple luxury condos and retails spaces then you can actually draw income to that particular neighborhood.

With that kind of money and influence, you can create your own luck. Yes, you are speculating but shit, with that kind of speculating you’re actually pulling the strings on that economic puppet.

When you buy thousands of acres in the middle of nowhere and negotiate for Walmart and an industrial complex to be built there, you aren’t speculating even though that’s one of the most traditional definitions of a speculator.

 

For The Healthcare Professionals…

As healthcare professionals, let’s invest and let’s speculate but let’s understand why we are doing each and more importantly, let’s focus on our priorities.

Throwing a hail mary with a piece of real estate when you only got $200k in your bank doesn’t make much sense. But taking that $200k and getting an average of 8-10% a year, year after year on it, would make you a very wealthy clinician indeed.

Maybe that’s the way of phrasing it properly, when it comes to investing vs speculating, investing comes first and speculating second.

When will I be ready to be a speculator? In my investing vs speculating spectrum, I am still a newbie when it comes to investing. This is my first bull market. I haven’t yet experienced a real financial loss to know how I’ll behave.

I’m still mastering my investing habits. After making it successfully through a bear market, I hope to invest in my own business and maybe then I’ll get the speculating stage.

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