Value investing has been my staple as the number one source of income. I did the heavy lifting when I was younger and more ambitious. I learned what I could, and I thought I was rather successful. However, recently, I had to assess what happens to someone who has lost all of their invested capital. Some of you who know me know that I spent the last eight years in the cryptocurrency industry as an entrepreneur and invested significant time and money into multiple ventures.
The cash-out on the exit plan didn’t go through so successfully; the government had massive intervention in the process. Had the government stayed on the sidelines, I would have been much better off now. It’s not possible to be a value investor or an investor if you don’t have capital. As fate would have it, innovation is often born from necessity.
What do I do now that my capital, which was speculated on startups and entrepreneurship, is gone? Value investing was my staple, something of a gamble to others. I had a difficult time accepting the truth that others hold. So, obviously, I had to explore what I thought was gambling and that was speculations. However, the participants view it as a profession. This was hard for me to do. I got down to conducting my research. I approached the topic with an open mind and some degree of healthy suspicion, as I had researched value investing by going to the source, which was Benjamin Graham and Warren Buffett.
This time, my goal was to explore the other side of investing or speculation. I wanted to know if there was anyone who was consistent in speculating on the stock exchange. My research led me to a trader in the early 20th century named Jesse Livermore. His story captivated my imagination and made me realize that I’ve been too confined to my limitations. My narrow interpretation of the area in which I specialize is the reason why very few people can invest. You need money to make money.
Most people do not have the capital to start investing in the first place. At that point, after understanding people like Jesse Livermore and Richard Wyncoff, who believe in the tape or the price movement of stocks, it became clear that big money manipulates the market. The only thing that cannot be manipulated or manufactured to a certain degree is the price and the volume. These are facts; everything else is interpretation.
After concluding that there is more to speculating than what I had understood in the past, I asked myself, “Is speculation gambling?” And my answer to myself was that if a person can make money consistently over a long period of time, then that task cannot be gambling. So, if speculation is not gambling, then what is it? If value investing is not what it is, then what is it? We have been conditioned to call value investing a legitimate investing principle. It is legitimate because it provided a platform for consistent results in the field of investing. What sets investing apart from speculation is that, up to now, my thinking is that speculation provides inconsistent results.
Now, if speculation provides consistent results, then what’s the difference between speculation and investing? Take, for example, a capable person who is a practitioner of value investing; this person can and will provide consistent results. Take another example of a person or practitioner of speculation; if this person is capable, it is likely that this person will provide consistent results.
So, the method of separating the consistent returns as being one of investing and not consistent returns as speculation is no longer valid. The argument does not hold true anymore. It only helps to compare capable operators and does not shed any light on whether speculation or value investing are legitimate platforms. I’d like to take all arguments to the next point. Perhaps we can ask, “What is investing? What is not?” I would think that you and I would both agree that gambling will not provide consistent results.
Therefore, the revised definition of investing should be: a person who has gone through the principles in the field, laid out by successful operators in the past, thoroughly understands the trade, devotes adequate time and dedicates ample resources to acquire the knowledge and apply that knowledge for consistent returns. This definition may seem similar to the old method of apprenticeship, where one finds a living master and studies under them until competency is achieved. However, this approach is effective in any profession and can lead to success.
Investing is nothing more than a capable person studying under a capable master and applying the principles set out to achieve consistent results. There’s no more distinction between speculation and investing, and there’s no delusion in thinking that a failed speculation is a long-term investment. As you know, this definition relies heavily on the practitioner. A competent practitioner who engages in an operation that provides consistent returns over a long period of time is the definitive definition of investing.
Therefore, investing is a profession that requires dedication, discipline, and knowledge. It is a way of managing one’s financial resources and growing wealth over time. While there may be debates about the differences between investing and speculation, the important thing is to focus on the principles and practices that lead to consistent returns. By doing so, one can achieve success in the field of investing and secure a better financial future.
There is another side to investing, particularly in value investing, where the participant must know and be able to compute the returns prior to taking on the investment. That means the participant must know to a certain degree that they would make money, but be uncertain of the amount. If they cannot calculate the returns, then it’s not investing. To qualify as investing, the second side of the equation is the ability to calculate a return on the investment.
Does that mean that you have to be precise? No, if you can put in a little effort, plan ahead, and make sure prior to the investment that you have an exit plan and that you know to some degree the amount you would make from that transaction. It should not be open-ended. If the transaction on the trade goes against you, in that case, you need to know how much money you will lose. And I think at this point you are seeing that any operations going into such an extent by taking into account the odds of success or failure. This would consist of putting in ample effort to make sure proper planning and alternative measures are considered.
Let’s take an example. We have two traders who use similar trading strategies, with one exception: Trader A has a stop loss and his exit plan is to exit out of his trades on a weekly basis and then take an account of his balance. He then reassesses his positions before he starts the following week. Trader A also keeps track of his profit and loss, takes notes on his trades, and spends a lot of time researching the market. Trader A has an income goal of earning $500 a day or $2,500 a week because he works between Monday and Friday. His goal is to make $130,000 per year on a capital of $10,000. Well, this might seem overly optimistic, but if the trader can consistently make this kind of return and promptly exit after every successful day, then he is an investor. His approach is sound.
Trader B, on the other hand, doesn’t have any income goals. His attitude is to make as much money as possible from the market. It is possible that Trader B has a conservative capital base of $500,000 and would be delighted to make $50,000. Trader B also conducts extensive research and has a foolproof working ethic. However, it is possible that this trader is not investing but merely gambling his capital in the stock market. He doesn’t have a plan and doesn’t know what to expect when he deploys his capital. This is really putting the money out there and hoping for the best.
As you can see, there are two traders with similar strategies and work ethics. One would be investing his capital to make an income, while the other trader deploys his capital without knowing what he is expecting back in return. Therefore, the approach is important, as well as knowing what you want to get out of it, the exit plan, and the exact returns on the investment.
Investing is the act of using one’s financial resources to acquire knowledge and apply it to achieve consistent returns over time. It requires dedication, discipline, and knowledge to manage one’s financial resources and grow wealth. The distinction between investing and speculation is no longer valid, as both can provide consistent returns if practiced by capable individuals who have studied under a capable master and applied the principles set out. The revised definition of investing should include a person who thoroughly understands the field’s principles and can apply them for consistent returns. To qualify as investing, the participant must be able to calculate a return on the investment, although it does not require precision.