Gamestop? Bitcoin? What’s going on here? All these crazy price movements you‘re hearing about in the news. Do you feel like you are missing out?
I want to differentiate between investing and speculation. Here is a quote from Benjamin Graham, the Father of modern portfolio management
“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”
That’s a good definition. And the key concept is ‘safety of principal’. People who are speculating in some of these financial instruments have no safety of principal at all. But don’t you have to put your principal at risk to make any money? Frankly I don’t think so.
Consider Walmart. Certainly you have safety of principal. The stock may fluctuate, but it’s not going anywhere near zero. But isn’t that just a boring do nothing stock? Well consider that over the last five years, Walmart has averaged a total annual return of 18%. That’s not too shabby.
Speculations like Gamestop and Bitcoin could indeed go to zero. No safety of principal.
There is by the way no problem at all with speculation. If you understand the risk and are prepared to lose your entire invested amount, then go for it. But don’t confuse investing with speculation.