On Wall Street there are investors and there are speculators.
I'd like to spend this blog explaining the difference. Investors usually take the long view, bring risk calculation into the equation, spread their investments around different sectors to avoid getting hammered in one investment, and don't play around with money they can't afford to lose. For example, it's okay, and actually recommended, to invest some money in higher risk sectors like technology or biotech. Just not all of your money.
Not so with Wall Street speculators. These are the guys and gals who chase short-term returns, try to time the market, and have no problem weighing down their portfolio with one or two risky stocks or mutual funds - - you know, the next "sure thing".
Full disclosure: I think you can try to gauge future market movement, both long-term and short-term. Heck, I've done it on this blog several times in the last month alone. But even if I did find the next sure thing, I wouldn't throw all my money into it, and I would go out and find supporting research to back up any claims of future investment growth. That's the investor way.
So, to illuminate my argument that being an investor is better than being a speculator, I've come up with the following list of tips. In it, you'll find a few rules of thumb to distinguish investors from trading speculators:
• Leave the Predictions to Miss Cleo: Nobody on Wall Street has ever gotten rich predicting the future. Instead, as I’ve said, they get rich convincing others they can forecast the future. Stay away from short-term predictions
• Don’t Try to Time the Market: Although some hucksters may tell you different, nobody can move your money in and out of the markets at just the right time, again and again and again. Sure, it can happen once in a while, just as a broken clock is right twice a day. But basing an investment strategy on someone’s ability to figure out short term market trends is akin to trying to time every green traffic light on your commute to work. Too many factors interfere with the process. Study by the Boston-based research firm Dalbar Inc. states that a long-term investment-oriented strategy
beat the average market timing strategy by more than 3 to 1 over that 10-year period. It adds that the average investor tries to be a market timer (speculator) and almost always fails. People who exit the stock market to avoid a decline are odds-on-favorites to miss the next rally. Remember, for a market timing approach to succeed you have to be correct twice – when to leave the stock market and when to jump back in. Why double your chance of failure? Leave the market timing to the speculators.
• Use Your Own Money: Many speculators place bets on the market using money borrowed from their brokerage firms (called “margin” loans after the type of brokerage account the money is placed). But in trying to time the market, margin investors often misplace their bets and have to pay back the margin money they lost in the markets.
• Only Speculate with Money You Can Afford to Lose: As I mentioned above, don’t play around with your financial future. If you must speculate, only use money that you won’t kiss that much if you lose it. Keep the bulk of your money in a long-term investment portfolio.
• Stay Disciplined: All successful investors share a common trait - -they have discipline. They don’t panic, stay away from making emotional decisions, and don’t let their ego get in the way of portfolio decisions. In short, they’re not as concerned about being ‘right’ as they are about making money.
• Stay Flexible – Disciplined investors also know when to change their strategy if presented with solid evidence that there is a better way to run their portfolios. Alluding to his admittedly bearish sentiments during a sell-off in early 1980, financial author Marty Zweig talks about flexibility in his best-selling book Winning on Wall Street:
“I was sitting there looking at conditions and being as bearish as I could possibly be – but the market had reversed. Things began to change as the Fed reduced interest rates and eased credit controls. Even though I had preconceived ideas that we were heading toward some sort of 1929 calamity, I responded to changing market conditions. My problem with most people who play the market is that they are not flexible . . . to succeed in the market you must have discipline, flexibility and patience.
• Build a Bullet Proof Portfolio: Build an investment portfolio that works now and in the future. Build one that controls losses before they get out of hand. By that I mean a portfolio that is bullet proofed.