In The Long Run

No Pay Out Is Assured, But Some Reflect History
by Ken Goldstein
Fifth in a Series of Ten

One of the hardest yet most pragmatic lessons I have had to learn and re-learn over time is the fundamental difference between speculating and investing. I have found in both finance and career choices, there is a considered role in my life for each. For my own digestion, I have boiled it down to this:

Speculation is a bet, a gamble, a short-term play where intuition plays a key role. If you win, you party; if you lose, you shrug it off. It can be fun and exciting, but it should never be meant to put what you most care about at risk.

Investment is an allocation of resources, capital or otherwise, a long-term play where logic plays the key role. If you win, you most likely got an outcome you wanted; if you lose, you refine and recommit to your strategy, then try again. It is hard work and often gruelingly repetitive, but it is the least emotional consistent path to success and independence.

Casino gambling, lottery tickets, buying individual equities on a friendly (but never insider) tip, quitting your job in a snit because you believe you are better than the job you have and are unquestionably in high demand — these are examples of speculation. You do these things — if at all — when you are in a safety zone, when you can sustain the outcomes without ruining your life or family’s security.

Higher education, buying a fairly priced home to inhabit with a reasonable mortgage, allocating your savings or retirement across a fully diversified set of passively traded asset classes, finding a mentor and sticking with a tough job while charting your career arc — these are examples of investing. You do these things as opportunity allows, ignoring the distractions and noise of the latest media ramblings or get rich quick schemes, to build your net worth and reputation day by day.

Does that mean you should never speculate? Of course not, but only when you can afford to completely lose whatever you have at stake. Risk and reward are not good or bad, they are real functions that warrant each other. If high reward did not accompany high risk, there would be no reason for either. Both when you invest and you speculate, reward is your compensation for the risk you are willing to take. That’s why a CD pays so little interest, because the risk of losing your capital is almost non-existent.  Meanwhile, the latest IPO could see a company double or triple in value in hours, because just as quickly it could be worth half or less of the capital that purchased shares.

There are many individuals, funds, and companies that are well positioned to take extraordinary risk, they might not even consider their choices to be speculation because they allocate resources without ever betting the farm. For most individuals, these risks are simply too extraordinary, but if you do choose to take them, understand what you are doing and why you are doing it.

Likewise in getting an education and building a career path, know what you are doing.  You don’t have to presume the investment path is slow and steady, it can be suddenly meteoric.  But for most of us, those “overnight successes” arrive after many extraordinary hard years of work, focus, and even sacrifice.  I remember David Seidler, the screenwriter of The King’s Speech, saying on the Academy Awards as he received his Oscar at 70 years old this year, “My father always said to me I would be a late bloomer.”  My sense is that award gave him great pride, but what gave him even greater pride was the quality of the work he had created, because of his own life choice to invest his precious time in developing his talent.  That to me screams investment, just like a 401k plan that bounced back if you stayed allocated in the market through the recession.  Others may win the Academy Award on the only screenplay they ever wrote, or quadruple their money on secondary market exchanges; I wish them nothing but well if they do, and hope they have a day job if they don’t.

Work hard, play hard; fully comprehend the difference between long-term and short-term.  We’ll get to the notion of luck in a later post!