Investing vs Speculating
- Ishfaaq Peerally
- Feb 12, 2021
- 3 min read
What is investing and what is speculating? How is it that some people made a fortune on companies such as GameStop $GME while others lost a lot of money?
📕The difference between investing and speculating can be found in the first chapter of The Intelligent Investor of Benjamin Graham itself but we always need to remind ourselves of this difference. Because the 𝙩𝙚𝙢𝙥𝙩𝙖𝙩𝙞𝙤𝙣 𝙩𝙤 𝙨𝙥𝙚𝙘𝙪𝙡𝙖𝙩𝙚 𝙤𝙛𝙩𝙚𝙣 𝙘𝙤𝙢𝙚𝙨.
📚There are different types of investors and traders. What they all have in common is that they dedicate time to 𝙙𝙤𝙞𝙣𝙜 𝙩𝙝𝙚𝙞𝙧 𝙧𝙚𝙨𝙚𝙖𝙧𝙘𝙝. Of course, an enterprising investor will dedicate more time to research than a defensive investor.
🎰Speculators don't do any homework or any analysis at all. They just see a trend happening and they jump on board. In other words, they are 𝙝𝙚𝙧𝙚 𝙤𝙣𝙡𝙮 𝙩𝙤 𝙜𝙖𝙢𝙗𝙡𝙚. For example, I do a lot of arbitrage but it is always based on facts and not rumors. I will not buy shares of a company just because there are rumors that the company will be acquired. Recently, I said no to an arbitrage opportunity with over 20% spread. Aphria $APHA was being acquired by Tilray $TRLY because this sector was outside my circle of competence.
🎮 I invested in GameStop as a pure value play, a cigar butt stock and also with a bonus of an inevitable short squeeze. That's how I was able to make 𝟯𝟯𝟬𝟬% 𝙤𝙣 𝙂𝙖𝙢𝙚𝙎𝙩𝙤𝙥 on average. But there were speculators still buying at $400 hoping it will reach $1000 or even $10000 (making it bigger than Berkshire Hathaway $BRK.B ). What these speculators were actually doing is hoping that someone else will buy at $500 and that this person expects someone to buy at $600. It is a never ending cycle. Unfortunately, nobody has that much money to do that and like any speculative bubble it crashed.
♟️ How did I manage my investment during that speculative phase? I said that the intrinsic value of GameStop was $50 and that I started selling at $58. Why then, did I hold till $420.69? I made sure that I took maximum profits before that. I had 10X of the initial investments in profits secured before GameStop even reached $100. So, 𝙚𝙫𝙚𝙣 𝙞𝙛 𝙞𝙩 𝙬𝙚𝙣𝙩 𝙩𝙤 𝙯𝙚𝙧𝙤, 𝙞𝙩 𝙬𝙤𝙪𝙡𝙙 𝙨𝙩𝙞𝙡𝙡 𝙗𝙚 𝙢𝙮 𝙗𝙚𝙨𝙩 𝙞𝙣𝙫𝙚𝙨𝙩𝙢𝙚𝙣𝙩 𝙚𝙫𝙚𝙧 𝙖𝙣𝙙 𝙬𝙤𝙪𝙡𝙙 𝙣𝙤𝙩 𝙧𝙞𝙨𝙠 𝙖𝙣𝙮 𝙤𝙛 𝙩𝙝𝙚 𝙘𝙖𝙥𝙞𝙩𝙖𝙡 𝙤𝙛 𝙢𝙮 𝙘𝙤𝙥𝙞𝙚𝙧𝙨. I knew that it would keep going up because of the short squeeze. But when trading was limited and the short-sellers bought back their whole position, the whole catalyst of a short squeeze broke, meaning holding it would just be speculating.
📱It is not only with GameStop, at some point I bought Apple $AAPL during the 2016 and 2018 selloffs and it was 22% of my portfolio. I was worried about how the market will react to the earnings. Normally, a long-term fundamental 𝙫𝙖𝙡𝙪𝙚 𝙞𝙣𝙫𝙚𝙨𝙩𝙤𝙧 𝙨𝙝𝙤𝙪𝙡𝙙 𝙣𝙤𝙩 𝙬𝙤𝙧𝙧𝙮 𝙖𝙗𝙤𝙪𝙩 𝙩𝙝𝙖𝙩. That's when I knew that I had to take profits.
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