Jim's Investing Continuum

Let’s Be Honest: Are You an Investor or a Speculator?

Excerpt:

With the stock market seemingly setting all-time highs every day even as bond prices crumple, this is a crucial time to clarify the difference between investing and speculating.

Unfortunately, that distinction — often credited to the great investment analyst Benjamin Graham — has never been entirely clear.

Every asset is an investment in some people’s hands and a speculation in others’. So it isn’t what you buy, but rather why you buy, that determines whether you are investing or speculating. In his classic 1934 book “Security Analysis” and again in “The Intelligent Investor” (1949), Graham wrote: “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory [or ‘adequate’] return. Operations not meeting these requirements are speculative.”

I used to regard that description as definitive, but I began to see its flaws a few years ago. Can any analysis ever be thorough enough to “promise” safety or a positive return?

The traditional view, dating back at least to the 19th century, is that an investor buys to capture a predictable long-term stream of cash flow, while a speculator buys to harvest a short-term change in price.

Comment: Click on the image above for larger. On the right is Mark Wahlberg from The Gambler . On the left is the Speculator. In the middle is the planter who patiently waits. Several have asked about my own investing strategies. Here goes:

• Basically the speculator is the gambler but the gambler may just not care.
• I try to "treat every nickel like a manhole cover"
• I don't pay an investment advisor so right there I am saving myself 1% (or more). And I figure that I could be an investment advisor and I care more about my assets than another.
• About "my assets" - they really are The Lord's. All came from Him - I must glorify Him. A practical outcome of this is that I do not hoard and I do not invest in companies such as tobacco stocks (although their returns are attractive as in MO or BTI)
• The aforementioned The Intelligent Investor by Benjamin Graham is the definitive read.
• I do not Day Trade. Never have. I doubt I could make $$ doing it. I regard it as gambling
• I rarely trade any stock short term 
• I don't trade Options. I've thought about it and have investigated it but have not and doubt I ever will.
• If I don't understand what I am buying I pass on the investment
• I research the company sufficiently to know something about it. I have many examples but here is just one. We think Cracker Barrel is a great restaurant and we have stock in it. 
• I explain it and "sell" the investment to my wife. She has to agree.
• It has to, there are exceptions such as BRK-B, pay a dividend.
• I have to have some confidence that the equity will continue to pay a dividend.
• Diversification: No one stock dominates. Although we are heavy into several stocks such as ED, JNJ, MMM, and KMB
• I don't need to beat another investor. I'm not in a contest with another
• I hope to have a combination of dividends + some growth. I'm happy with 5%
• I am not looking for spectacular returns - sounds like speculate
• I buy and hold
• I try to live humbly (I have a 10 year old car with just about 100,000 m and a 15 year old truck)

On Market Liquidity, High Volume Trading Periods; and Low Volume Stocks

NYSE Looks to Ease Late-Day Pileup - Exchange plans midday auction for thinly traded shares
Excerpt:

For investors trying to buy and sell shares of smaller companies, a lack of liquidity can mean big money lost. The goal of the auction is to give retail and institutional investors alike an opportunity to trade shares without unduly affecting prices. “The fact that more trading is happening on the open and close today than in the past is a symptom of a larger problem, which is that the market is so fragmented during the day,” Mr. Farley said. He said it is “difficult for investors to find moments of true and deep liquidity.”

Stock-Market Traders Pile In at the Close - End-of-day surge in action boosts costs at other times, increases vulnerability to sharp swings
Excerpt:

More than one in six trades in S&P 500-listed stocks took place between 3:30 and the 4 p.m. closing bell last year, according to an analysis by Ana Avramovic, trading strategist at Credit Suisse. ...... For shares of smaller companies, 19.3% of trades were in the final 30 minutes, up from 14% in 2007. That is important because it can often be difficult for investors to trade smaller-company stocks without pushing the price up or down. Even the closing minutes of trading have become more crowded. The final five minutes accounted for 6% of all volume last year, rising each year since 2010, according to Trade Informatics, a trading-analytics firm. During the day, “people are watching the paint dry,” said Leonid Hmelnitsky, head of equities trading for Mellon Capital Management, a San Francisco money manager with $404 billion under management. “We’ve definitely seen the shift.”

Comment: Things I've never thought about. I tend to trade right out of the chute. I have some money to invest ... I move it to the brokerage account .... and trade by 9 a.m. Central. Maybe I shouldn't?!

May Day for Traders

The Day Wall Street Changed

Excerpt:

On May Day 1975, fixed-rate commissions were abolished by regulators. Until then, a broker who tried to charge customers less than the fixed rate to trade shares ran the risk of being expelled from the stock exchange. With some minor exceptions, for 183 years it had cost the same amount per share to trade 100 shares as it did to trade 1,000 or 100,000—and brokers regularly shaved 2% or more for themselves off the typical trade. May Day blew that cozy world to smithereens. One of its lessons for today’s investors is obvious; another is more subtle. The obvious lesson is that when brokers treat their customers more fairly, the customers prosper. May Day smashed Wall Street’s monopoly, unleashing the discount-brokerage industry, fostering independent research and democratizing the world of investing. The subtle lesson is that when brokers treat their customers more fairly, everyone prospers. May Day, which brokers at the time expected to be the most apocalyptic event in their industry’s long history, turned out to be the best thing that ever happened to them. Trading boomed, investors flocked back to the markets and brokerages minted money for decades. To understand the changes wrought by May Day, consider what it cost to buy 100 shares trading at $25 on the New York Stock Exchange before May 1, 1975. You would have paid a minimum commission of $49 and a bid-ask spread (the difference between the selling price and purchase price) of $13, reckons Charles M. Jones, an economist at Columbia Business School who studies brokerage costs. That totaled 2.5% of the $2,500 transaction.

Comment: Image snap from WSJ article and from Tradeking. On a personal note, we use Wells Trade. Last week we bought a lot of GE for no commission. Trade deals abound