“Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.”- John Mills (1868)
A simple definition of speculation is that it is a process, a form of gambling driven by greed, where something is purchased primarily because that something’s price is expected to rise over time. Speculation is a process that feeds on itself, for a period of time, where buying something in limited supply, drives the price up for a period of time, creating demand for more buying, simply on the premise that the price will continue to rise. The most dangerous forms of speculation is where borrowed money is used in the process. Widespread and increasing use of borrowed money allows prices to rise in the short term at unsustainable rates.
Continued increases in prices require rising demand without a corresponding increase in supply. The greatest misperception is that demand and prices will rise indefinitely because supply is somehow permanently limited.
Some would argue that for “scarce” goods like real estate or oil with finite quantities available for supply, prices can rise at faster rates. This argument fails to consider the creative ability of humankind to create “competitive substitutes” and to become more “efficient”. When the price of something is perceived as “too high” then buyers begin to consider alternatives or become more efficient, and demand for the “scarce” good falls---and the rate of price increase slows. When the price of something becomes sufficiently high, new sources of supply of the “something or it’s substitute” are found and even with rising demand, prices fall.
Hence, successful speculation requires an ability to determine when to sell, before prices fall. Here is where fear enters into the process, because greed tells buyers to “stay in the game” while fear tells them to “get out while the getting is good”.
There are only two long term causes of sustainable increases in demand and aggregate wealth: increased population, and increased productivity of humankind allowing each person to consume more. Increased productivity requires capital, tools and free trade. Increased productivity requires investment, not speculation. In fact, speculation and investment are really in competition with one another.
Speculation does not increase wealth—it only transfers it. Speculation is seldom a productive use of time or any other resource and repeated speculation usually results in losses that offset the gains. Our firm believes the process of investing is the intelligent application of capital for the purpose of increasing humankind’s productivity over time. This increased productivity is in our opinion the most reliable way to increase wealth over time.
There will always be speculation—it is a part of human nature. But during periods when speculation has proven to be unprofitable for the majority of participants, it becomes relatively less popular. Our firm advises clients to seek out well managed companies that use capital wisely for the purpose of increasing the productivity of humankind. These are the investments that more reliably create wealth and value. During periods with “corrections” of past speculation, the price to buy these companies is particularly attractive. When speculation becomes less popular, true investing for long term results becomes even more rewarding.
A simple definition of speculation is that it is a process, a form of gambling driven by greed, where something is purchased primarily because that something’s price is expected to rise over time. Speculation is a process that feeds on itself, for a period of time, where buying something in limited supply, drives the price up for a period of time, creating demand for more buying, simply on the premise that the price will continue to rise. The most dangerous forms of speculation is where borrowed money is used in the process. Widespread and increasing use of borrowed money allows prices to rise in the short term at unsustainable rates.
Continued increases in prices require rising demand without a corresponding increase in supply. The greatest misperception is that demand and prices will rise indefinitely because supply is somehow permanently limited.
Some would argue that for “scarce” goods like real estate or oil with finite quantities available for supply, prices can rise at faster rates. This argument fails to consider the creative ability of humankind to create “competitive substitutes” and to become more “efficient”. When the price of something is perceived as “too high” then buyers begin to consider alternatives or become more efficient, and demand for the “scarce” good falls---and the rate of price increase slows. When the price of something becomes sufficiently high, new sources of supply of the “something or it’s substitute” are found and even with rising demand, prices fall.
Hence, successful speculation requires an ability to determine when to sell, before prices fall. Here is where fear enters into the process, because greed tells buyers to “stay in the game” while fear tells them to “get out while the getting is good”.
There are only two long term causes of sustainable increases in demand and aggregate wealth: increased population, and increased productivity of humankind allowing each person to consume more. Increased productivity requires capital, tools and free trade. Increased productivity requires investment, not speculation. In fact, speculation and investment are really in competition with one another.
Speculation does not increase wealth—it only transfers it. Speculation is seldom a productive use of time or any other resource and repeated speculation usually results in losses that offset the gains. Our firm believes the process of investing is the intelligent application of capital for the purpose of increasing humankind’s productivity over time. This increased productivity is in our opinion the most reliable way to increase wealth over time.
There will always be speculation—it is a part of human nature. But during periods when speculation has proven to be unprofitable for the majority of participants, it becomes relatively less popular. Our firm advises clients to seek out well managed companies that use capital wisely for the purpose of increasing the productivity of humankind. These are the investments that more reliably create wealth and value. During periods with “corrections” of past speculation, the price to buy these companies is particularly attractive. When speculation becomes less popular, true investing for long term results becomes even more rewarding.
This commentary and information is provided for the benefit of clients and should not be considered a sales presentation.
See http://www.waynestrout.com/ for more complete info
Investment advisory services by WS Wealth Managers Inc., a registered investment adviser.
Securities thru Glen Eagle Advisors, LLC, Member of FINRA and SIPC
Investment advisory services by WS Wealth Managers Inc., a registered investment adviser.
Securities thru Glen Eagle Advisors, LLC, Member of FINRA and SIPC
Clearing thru Pershing LLC, Div of Bank of New York Mellon Corp.
WS Wealth Managers Inc., Glen Eagle Advisors LLC, and Pershing LLC are not affiliated.
WS Wealth Managers Inc., Glen Eagle Advisors LLC, and Pershing LLC are not affiliated.
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