Speculating vs. Investing - A Note by Allan Proske

People very often tend to get caught up in stocks that sound exciting. They come across fast-growing stocks that, on the surface, seem to represent a good company. Then, usually, a public research letter is released, along with an alleged ‘expert’ claiming that it is going to go up by 300% and will be the next greatest thing. The thesis sounds legitimate and you fall in love with this “story stock.”

Sometimes, these stocks do go up – and now, you are reassured that this was a smart move. However, too often, they go down, and people cannot comprehend how that could possibly happen to such a great company. Either way, it was truly a coin toss at best.

There is a place for speculating, and it can be a lot of fun – when it is going your way. You need to put it into perspective and take speculation for what it really is: a gamble.

Every now and then, I run into someone that claims that they “researched the company.” I have great sympathy for those that believe that they have actually researched a company. They quote alleged experts, published stock reports, and even impressive graphs. Unfortunately, any published, public material is already very well known by actual money managers. Almost all such published “reports” are paid propaganda pieces meant to enrich the author and not the investor. To say, “I researched the company,” is like telling a Blackjack dealer: “Don’t worry, I have a system.”

When an investor truly has researched a stock, they have gone beyond reading reports; they have spoken to management, interviewed the executive team, and spent hours inspecting balance sheets, inventories, market volumes, industry metrics, and trends impacting the company. This kind of analysis is an essential part of the process and needs to be repeated weekly. It needs to be combined with a seasoned money manager’s expertise, who uses his or her experience and knowledge to decide when to buy, how frequently to buy, and when to sell.

An interesting fact is that the best and most experienced teams that get paid hundreds of millions of dollars to do exactly this are correct about 58% of the time. Think about it for a moment: a professional money manager that is using countless detailed analyses, interviews, and data processing methods – and adding value through price discovery and strategy – is only correct 58% of the time! Yet, there are still people that believe that they would share this work for free or for a small fee in the form of public research – which makes no sense.

It is okay to speculate, enter the lottery, and gamble – as long as it is outside of maintaining an investment portfolio that needs to be properly constructed using the best analysis, money managers, and a sound risk management approach.

Enjoy the fun of speculating, but please do not confuse it with investing.