25 July 2022

Speculation or investment

Strange times that we live in! Shares around the globe have fallen quite sharply, driven down by the uncertainty of rising interest rates (how far will they go?), the war in Ukraine (will it spread?) and the pandemic (is it over?). Shares, on average, have fallen about 25 percent.


There’s nothing especially unusual in that; shares have fallen like that often enough in the past.


However, the unusual thing this time is that every other major asset type has fallen as well: shares, bonds, gold, property and cryptocurrency have all taken a correlated plunge. Some bigger, some smaller than shares, but nevertheless, they have all been following the same downwards direction.


Investors like investment types that are negatively correlated – that is, ones that rise when others fall. For example, the economic conditions that drive down the price and performance of shares usually mean that bonds and fixed interest prices climb higher. When bond prices rise, the effects of a share market fall are softened.


Not so at the moment. There is no investment type rising in value to stop a portfolio’s downwards direction, nothing to cushion the blow. Everything is going down.


This time around, for investors, there is no safe haven.


Over the last couple of months, I have spoken at many seminars and found people looking for something to invest in that would actually make some gains. For some, this borders on desperation.

At nearly every seminar, there is a question about whether to buy cryptocurrency or gold. The questioners know that these assets have fallen in value, but they are hoping that now is the time to buy. Crypto could conceivably bottom out relatively soon, and if they buy them, they might make up their losses.


At seminars, I do not get drawn into whether or not to buy or sell cryptocurrency; whether these are likely to go up or down is not something I study or am ever likely to study. And in any event, even if I did spend the rest of my life studying crypto, I doubt I would still have a clear answer.


The important thing, I tell questioners, is to be very certain whether you want to be an investor or a speculator. While some people confuse these two activities, the difference between investment and speculation is, in fact, clear and important.


Both John Maynard Keynes and Benjamin Graham investigated and wrote about this difference: an investor analyses and buys for income first. There may also be some capital gain, but it is profitability (for shares), interest payments (for bonds and fixed interest) and rents (for property) that are the first concern. It is income that gives fundamental value to investments, and if the income grows, that is likely to drive capital growth. Investors welcome that, and will take the capital gain they get along with the income they receive.

Martin Hawes

Martin Hawes

Speculators, on the other hand, buy an asset with the purpose and intent of flicking it on at higher prices. They are not buying for income – cryptocurrency and gold have no income, so you can only speculate on price change. As such, they are simply waiting for (speculating on) someone to come along and pay a higher price.


People who buy and sell cryptocurrencies are clearly speculating. So too are people who buy things like gold, silver, art, jewellery, antiques, commodities and bare land. Because they have no income, they cannot be investments.


In fact, there are only four broad categories of assets that are investments: shares (which have profits or the prospect of profits), property (rent), fixed interest/bonds (interest) and cash (interest). Everything else that might be called an “investment” is, in reality, speculation.


Speculation is riskier – there is no return unless the asset’s value moves in the right direction. On the other hand, investment should give a return regardless of what happens to its price. This income that they earn from their investment allows them to wait. They are, after all, receiving their dividends, rent or interest.


I am very clear that I am an investor – and that cryptocurrency and gold are not things I can “invest” in. I am not, therefore, engaged in these kinds of speculation. I recognise some people have made a lot of money by speculating on cryptocurrency (there are also a lot who have lost), but I am not going to risk joining them.


Although we have markets that offer little comfort in any direction at the moment, I will not stumble off to look at fringe assets that I know little about to speculate on. Better instead to stick to investment and ride out this market slump, keeping funds intact to buy proper investments when the time is right.

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Martin Hawes

Martin Hawes is not a Financial Adviser or a Financial Advice Provider, and the views in this article are not intended to be financial advice. The views and opinions are general in nature, and may not be relevant to an individual’s circumstances. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser. Martin Hawes is a director and shareholder in Lifetime Income.

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