Is it best to invest or speculate?

When I think of the term speculate I always think of Andre Kostolany, the author of one the first books that I read about financial markets that had a huge impact on me. His books are some of the best about the financial markets you can find anywhere, but they are not very recommendable for the average investor.

Why do I say it?

Because I even tried to apply his ideas myself from the beginning, when I was very young, and it was not good for me, because when I tried to speculate without experience it was a disaster. However, it is always good to know what speculating is about and sometimes we could even apply the idea.

The idea of speculate is different to that of invest, although in the online marketing circles we always see it related to Forex, futures, binary options, options or CFDs. As I always have said in my previous articles, those products are not for investing, but to do trading, something which is completely different, although the differences are not always clear.

Therefore, what is the difference between invest and speculate in the financial markets?

Well, investing is when we try to buy an asset with a long-term project and because we like it, for instance if we buy agriculture land, a garage or any company we intend to put get a good return in the long-run, normally because we want to work on it.

Investing in the markets is when we buy stocks, bonds or any kind of asset because we think it will give us some return in the long-run. That long-run should be of some years, because the same as someone who opens a restaurant it has to have some long-term view.

In other works, I do not open a restaurant with the intention to sell it 6 months later, but we the idea of putting it to work, making a name and being able to have a good business in the future or even sell it. Any kind of business requires a long-term commitment to be able to grow. The same with the markets.

When we buy Apple, Amazon, Santander or Inditex stocks with an investing frame is because we think they are good businesses that will return decent dividends and capital gains in the future.

According to Kostolany´s idea about speculation, the time frame related to it should be from 6 months to 3 years, eventually 5. This idea requires a more short-term frame of negotiating, which is not too far with the dangerous waters of trading, especially day trading.

Here as you can see, we are not talking about doing a long-term investment, as when someone buys a hostel because he wants to exploit it during the rest of his life, but something more similar to “make a killing”.

To “make a killing” requires some sort of ability to buy assets when they are cheap and sell them when they are expensive.

In principle it sounds very good and easy, but in the stock market it is very difficult, because the theory of speculation says that to be able to do it you have to be a contrarian, and doing so it against our human nature. Believe me, it is very difficult to be a contrarian. However, with some innate ability, experience and knowledge we can do something about it. When a stock falls 50% in the middle of a general bear market is a very difficult thing to do, though.

Advantages and disadvantages of speculating over investing:

  • With speculation we will avoid buying in tops and selling in bottoms, due to the contrarian nature of the speculation theory
  • With speculation we will be always trading in a contrarian way, contrary to the masses. And every good gambler knows that betting against the masses is a good idea.
  • Speculation is more “fun” than investing because requires more trades, although that is not necessarily good. When we invest efficiently, we should buy and “forget”.
investing in Santander cycles
buying and selling with speculation

Well, this idea of speculation is based, in part, in the cycle theory, such as Kondratiev, Elliot Waves and all those ideas about the fact that things in this universe work in a cyclical way.

Therefore, the main idea is that we should buy assets when they have a negative scenario and sell them when they have a positive one.

This would be something similar to buying IBEX 35 or some of its main stocks in the negative cycles and selling them in the positive ones.

For instance, as we can see the previous long-term Santander chart, we had a lot of opportunities to implement good speculation trades.

However, I have to emphasize the fact that it is very difficult for the average investor to buy stocks in the middle of a financial crisis. This fact is the most difficult to implement to overcome this strategy.

In a stock similar to Santander, with constant bull and bear markets it is not bad to apply this strategy. Although this does not occur in all the assets since there are some that do not give us these opportunities.

We can see this in cases like Inditex, Apple, Google, Facebook or the German Bond, etcetera. In other words, in the best stocks, which have the “bad habit” of rising seemingly indefinitely. In these cases the best choice is to invest in the long-term. The problem is that we do not know with certainty what assets will be the chosen ones in advance.

What we know or sure is that there will be some assets like that and some assets collapsing and other assets trading in ranges, so to speak.

If we speculate well we should be able to get good profits that are not very different from a buy and hold strategy, although we have to remember that we must diversify.

For instance, if we tried to invest in Santander at 8 euros in 2007, it would have been a problem because 10 years later the asset is trading 30% below, and we could only count on the dividends to be even. If we tried speculation we could well have 100% profits.

investing or speculation

On the other hand if we tried an speculating strategy in stocks such as Amazon, we will find ourselves in a “trap” without any bear market that gives us the “chance” to speculate.

If you are the average investor, the second option, that of speculation is always going to be very complicated to apply efficiently, because we will always be influenced by fear when we are facing bear markets, whereas if we invest we have less difficult decisions to do.

The best thing you can do is to invest in the long-term and leave speculation for others.

The same as I said one day about “trading and investing”, the best thing you can do is the latter, since the other thing is taking too much risks that most people should not take.

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