Future outcome dependence

Investing often gets confused with speculating.

Investing involves buying equity in companies that have strong returns on capital invested, and letting the company grow organically. You are an owner of a share of that company, and are interested in them growing market share, improving profitability and treating there customers well.

There are risks with investing of course, but if we are smart, diligent and stick to our investing and emotional principles, we will get it right more often than we will get it wrong.

 

Speculating is another kettle of fish. Speculating involves buying something with the anticipation that someone will pay you more for it in the near future. Speculating doesn’t involve careful consideration of a companies earning power or management, it involves a hunch.

Here’s a little interactive quiz, that will help you illustrate some common examples of speculating versus investing. Mentally take note of whether the following scenarios are investing, or gambling:

  1. Investing into new & exciting cancer treatment drug, that is awaiting clinical trial approvals in the USA.

  2. Buying shares in a medical marijuana distribution centre that supplies local hospitals

  3. Buying shares in a freight company that is the likely winner of an supply contract tender

  4. Investing into a former market darling who’s share price was $10 for around 5 years, and has recently halved to $5

 

Remember that we need to learn to look at underlying business’s first, then share price later. The share price is the collection of millions of opinions on the same information; does that sound like something you can predict? Sadly, many in the finance industry think they can predict this, and will communicate this supposed skill with unaware consumers.

 If we only look at share prices, we are speculating. Betting on share price rises and falls is essentially the exact same thing as going to the casino and playing roulette. We are betting our hard-earned money on a uncertain outcome.

 

 

Key takeaway

To become a successful investor, you need to become comfortable with uncertainty. This also means you need to play your odds well. Never invest into companies whose revenue will be greatly affected by a future outcome, no matter how certain the probability. We cannot predict the future, and we must always consider this when investing.  

 

Hopefully your answers were as follows

  1. Speculating

  2. Investing

  3. Speculating

  4. Speculating

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