Tuesday, August 19, 2008

Invest vs Speculate

I received an email from reader WN asking the following. "What books do you think/recommend as absolutely essential reading for success in investing." I want to thank WN for reading this blog and for taking time to drop me a note. The question got me to thinking about a few things so here goes. First off, lets turn to the always reliable Webster's dictionary to get some definitions out of the way. Let us start with 2 essential words, those being the highly popular (especially with politicians) words invest and speculate.

in-vest v.t. to put (money) to a use expected to yield a profit or income.

spec-u-late (spekjuleit) pres. part. to undertake commercial transaction involving serious risk for the sake of possible large winnings, esp. to buy and sell in the hope of profiting from fluctuating price, sometimes in an antisocial way.

Is it me or is invest the good word and speculate the big bad word? Now I turn to Websters on a regular basis for enlightenment and enlighten is exactly what Webster does but I can assure you he never traded the capital markets! The use of the phrase antisocial way (short sellers) is not lost on this writer and most assuredly is not on the politico zombies who inhabit the nations capital.


Now, many are familiar with my daily admonishment, that an investor is a speculator who has made a mistake and will not admit it. In my view, an investor is someone who has places a bet, it has gone against him/her. Firmly believing the investment to be of sound basis, continues to hold said investment, and most probably is buying more of it (averaging down) via encouragement and prodding from his quota driven friendly neighbourhood investment advisor, excuse me, investment salesperson.

I firmly believe everything is a speculation, whether it be in the capital markets or in life. I read an interesting article in the Canadian daily, the Globe and Mail recently, in which the boom in the oil patch their was having a detrimental impact on high school graduation rates. Basically, demand for labour has been so high they are dropping out of school to go to work. To me this is a speculation on the opportunity cost of staying in school, going on to college etc, while your buddy drops out in 11th grade and starts working earning a decent income.

Compare this now to the physician who goes undergrad and then medical school and then yet maybe a specialty school. 12 to 14 years of school, all done while that kid who dropped out of high school has been earning money. Maybe we should try some future value calculations to see how long it takes the physician to catch up with the fella who dropped out and went to work. How long does it take the Doc to catch up? Can he catch up. I have done the calculations, it's not pretty.


I would suggest to reader WN to go out and rent the movie "The Sting"with Paul Newman and Robert Redford. Besides, you wife/girlfriend will enjoy the both of them at a young age. A classic movie that is a wonderful training tool for speculation. I would also suggest the movie Boiler Room as this paints the clearest picture available of Wall St.

That being covered I can most assuredly tell you that you can put down and burn 90% of the investment books out there. No offence to the TV and media favourites out there. The must read books on your list should be; Reminiscences of a Stock Operator by Lefavre, One Way Pockets, Panic on Wall Street by Sobel, A History of Crashes by Kindelberger, and Extraordinary Popular Delusions and the Madness of Crowds by Mackay.

You may ask why the doom and gloom books? Well, I remember turning 16 and chomping at the bit to get my drivers licence. First you received your beginners and then graduated up to your full licence. The province(state) made you take the requisite courses, where they taught you to check your blind spot, where they made you watch the gory drunk driving videos etc. Pretty necessary but yet basic stuff. At NO point was I ever schooled in crisis management. What does this mean? I call this real world driving. I have heard the Chinese get their driving lessons on an enclosed private driving course. You tell me how this prepares you for driving in the zoo that is Beijing?

My father was the one who taught me, for example that if a deer runs in front of you, you DO NOT swerve, you keep driving straight ahead. It was my father that taught me that in the ice you pump your break you do not slam it down and hold it there. I could go on but I think you get the picture.

So again, why the doom and gloom books? I have written in this blog numerous times and will continue to do so that, as my grandfather said, you don't appreciate your pilot, skipper, surgeon, etc, until the shit hits the fan. So notwithstanding Websters definitions, I remain unequivocally convinced that
"an investor is a speculator who made a mistake and will not admit it".


Open Positions:
Long 2 units of Powershare Agriculture ticker DBA @ $35.35 stop $32.79
Long 2 units of XTO Energy ticker XTO @ $45.40 stop at $42.28
Long 1 unit Currencyshare SwissFranc ticker FXF @ $92.70 stop at $89.27
Short 1 unit Int'l Bus Machines ticker IBM @ $129.05 stop at $130.54
Short 3 units FedEx ticker FDX @ $87.10 stop at $91.18
Short 2 units of Apple ticker AAPL @ $178.05 stop at $182.76
Short 1 unit Blackrock ticker BLK @ $218.50 stop at $226.18

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