Taking the bet out of investing
THE line between investing and gambling can at times be hard to draw.
In a week when even the most parsimonious of people will often engage in a bet or at least office sweepstake – $143 million was wagered on the Melbourne cup day according to TAB figures - the notion of what defines investing versus gambling may seem crystal clear.
Perhaps it goes to intent and purpose.
When you place a bet on a horse race there is one clear reality – you know you can lose the lot. Those organisations charged with regulating our financial markets would love that level of transparency and clarity about the risks of investing.
So where does investing stop and gambling – or speculating to use a more polite word – begin?
Jack Bogle*, the founder of Vanguard and author of numerous books on investing defines investing as the long-term ownership of businesses. He argues that the rising value of corporate wealth – as measured by dividend yields and earnings growth – is the true measure of successful investing.
Speculation is the antithesis of that. Rather than the long-term holding of a stake in a business speculation is about the short-term trading of financial instruments. Bogle says that speculation focuses on whether or not company prices, as distinct from intrinsic values, will rise and he makes the strong point that if you graph the movement in share prices it is "significantly more jagged and spasmodic than the line showing investment returns".
This is the sort of definition that owners of successful small business owners – who typically have much of their personal wealth tied up in their business - understand very well.
While Bogle is regarded as one of most influential investment thinkers of our time this is not a new idea. Indeed he credits John Maynard Keynes with the best modern definition of investment over speculation.
Keynes defined investment as "forecasting the prospective yield of an asset over its entire life" while he described speculation as the "activity of forecasting the market".
But an industry has built up to encourage people to look for ways to take bets on market moves and this is where speculation is dressed up as investing Be it computer share trading programs, options strategies or products like contracts for difference – there are lots of helpers more than happy to facilitate speculation - for the appropriate fee of course.
So as the spring racing carnival winds down for another year it is perhaps useful to reflect on what you regard as speculation and what is really investing.
Because what you don't want is for your investments to turn into a gamble you never intended to take.