Ever since Joseph de la Vega wrote Confusion of Confusions in 1688, many of the world's leading investment thinkers have struggled to articulate the difference between "investing" and "speculating." Does a focus on "safety of principal and a satisfactory return" define investing, as Graham and Dodd contended in Security Analysis? Is speculation best understood as an effort to "forecast the psychology of the market," as John Maynard Keynes argued in The General Theory? Or perhaps the distinction comes down to long-term ownership of assets versus short-term trading — or the use of leverage and a focus on price action?
The answer matters: As Legg Mason Investment Counsel's Robert Hagstrom, CFA, pointed out in a recent blog post on the subject, a lack of clarity has created a new class of "investulators," individuals (and institutions, too, for that matter) who "wander aimlessly back and forth between the worlds of investing and speculation," often to their own detriment.
To help empower investors to make better decisions, a key aim of the Future of Finance project at CFA Institute, we've assembled a panel of leading investment practitioners to discuss the issue in our inaugural online forum, moderated by Jason Voss, CFA. Our distinguished panelists include former Ewing Marion Kauffman Foundation chief investment officer Harold Bradley; investment consultant and blogger Tom Brakke, CFA; Marret Private Wealth President Margaret Franklin, CFA, a former chair of the Board of Governors of CFA Institute; and Legg Mason Investment Counsel chief investment strategist Robert Hagstrom, CFA.
The discussion will run from 15–19 July 2013. If you'd like to share your perspective or pose a question for our panelists, scroll to the bottom of this post and leave us a comment. We'll do our best to incorporate your thoughts into the discussion.
The Panel
Harold S. Bradley (@HSBtheThird)
Harold S. Bradley recently retired after more than five years as chief investment officer for the Ewing Marion Kauffman Foundation, where he was responsible for investing the $1.8 billion globally diversified, multi–asset class portfolio. While at Kauffman, Bradley and his colleagues published three noteworthy papers. He coauthored "Choking the Recovery" (2010) with Robert Litan. The paper discussed modern trading and market making systems, high frequency trading, likely causes of the Flash Crash, and possible systemic risk issues raised by the trading and settlement of ETFs. A subsequent paper called "Canaries in the Coal Mine" (2011) examined the rise in settlement “fails” for ETFs and the possible risks to investors in turbulent markets. Bradley and colleagues published a paper called "We Have Met the Enemy . . . and He Is Us" (2012) that analyzed available data on the long-term performance of venture capital funds and raised questions about current institutional investment practices. Bradley worked for almost 20 years as an equity trader, portfolio manager, and group CIO for American Century Mutual Funds.
Tom Brakke, CFA (@researchpuzzler)
Tom Brakke began his investment career with IDS Financial Services (now Ameriprise), and during his fifteen years there was an analyst, portfolio manager, director of research, creator of new investment products and systems, and founder of the hedge fund unit. Subsequent to that, he was the professional advisor to the Carlson Funds Enterprise of the MBA program of the University of Minnesota and served as a consultant for the independent research portion of the Global Research Analyst Settlement. Brakke provides consulting services to investment organizations and institutional investors, specializing in decision-making processes and the effective communication of investment ideas. He also writes extensively about the industry, on his own websites and for other publications, and is one of “The Experts” for the Wall Street Journal forum on wealth management.
Margaret Franklin, CFA (@MargFranklin)
Margaret Franklin is the president of Marret Private Wealth Inc., a division of Marret Asset Management. Franklin has more than 20 years of institutional and private client investment management experience. She has worked at Barclays Global Investors, State Street Global Advisors, and Mercers in senior positions. In 2002, she moved from the institutional side of the business to work with private clients. Franklin is the former chairman of the board of governors of the global CFA Institute, is a past president of the Toronto CFA Society, and is a CFA charterholder. She has a BA in economics from McMaster University.
Robert Hagstrom, CFA (@RobertGHagstrom)
Robert Hagstrom, CFA is chief investment strategist at Legg Mason Investment Counsel and the author of the New York Times best-selling The Warren Buffett Way. He is also the author of The Warren Buffet Portfolio: Mastering the Power of the Focus Investment Strategy; The Essential Warren Buffett: Timeless Principles for the New Economy; NASCAR Way: The Business That Drives the Sport, and The Detective and the Investor: Uncovering Investment Techniques from the Legendary Sleuths. Robert’s new book is titled Investing: The Last Liberal Art (second edition) published by Columbia Business School.
Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.
26 Comments
Patient passive investors.
“I have little confidence even in the ability of analysts, let alone untrained investors, to select common stocks that will give better than average results. Consequently, I feel that the standard portfolio should be to duplicate, more or less, the DJIA.”
Ben Graham (Warren Buffett's mentor) in 'The Memoirs of the Dean of Wall Street' (1996).
Investing involves tortoise-like steady returns; Speculation involves hare-like volatile returns.
Investing is based on Income and Sustainable Growth; Speculation is based on a private Capital Appreciation expectation minus the Sustainable Growth.
Investing involves sober evaluation of the safety of principal; Speculation does not.
Investing makes every effort to limit the downside; Speculation does not.
Investing relies on the world basically functioning as it has and continues to function; Speculation relies on the world changing to look like your unique prediction.
Hello Lance,
Thank you for adding your views to the flow of the conversation. Thank you also for following; I hope that it has been interesting to you.
With smiles,
Jason
Old macdonald had a hedge e i e i o
http://www.foa.co.uk/admin/tiny_mce/jscripts/tiny_mce/plugins/filemanag…
The Commodity Futures Trading Commission in the US (“CFTC”) defines a speculator as: “a trader who does not hedge, but who trades with the objective of achieving profits through the successful anticipation of price movements”…The benefits of speculation are fourfold: aid in price discovery; facilitate risk transfer; increase liquidity; and smooth out pricing anomalies in correlated markets.
Hi Roy,
Your contributions to the discussion have been valuable - thank you for continuing to feed information into the conversation.
With smiles,
Jason
How do upcoming value investors like me find work in this industry? Everyone likes to hire by reference only! Any suggestions?
My parting shot.
http://www.aima.org/download.cfm/docid/E9031A27-E978-4009-85EA1A8D325DA…
"During the French Revolution such speculators were known as agitateurs, and they were beheaded." Michel Sapin, former French Finance Minister, on speculative attacks on the Franc.
Hello Hardik,
What an analyst has to offer to an employer is largely abstract and creative thinking skills. These skills are intangible and difficult for recruiters to assess. That's why businesses tend to recruit from the same schools decade after decade: reliability of the candidate. This is also why they prefer people who have experience. You see, they are seeking to make tangible what is difficult to assess otherwise.
So to get your initial employment you must focus on providing concrete evidence that you have these skills. Getting a CFA charter is one powerful way of making your skills and commitment to the industry concrete for a prospective employer.
When I began my career I created a website that included: examples of my own personal research on companies, book reviews, a list of my skill set, and so forth. This will sharpen your own skill set.
Track how your recommendations do by noting the prices of assets on the day that you recommend them and then how you do over time. You MUST be honest with yourself, otherwise you won't learn anything. This is more for you than for your future employer. Markets provide a valuable feedback mechanism for assessing your skill set. The beautiful and terrifying thing about investment management is that the results of your performance are measured objectively. You either did well for people or you did not.
I have a friend who took a similar approach as me to getting work. He sent his research reports to investment firms every single month for two years and eventually got a job interview. By doing this process he taught himself to be an analyst.
Another tip is to read, read, read, read. Read investment texts. Read texts on geopolitics. Read texts on mergers and acquisitions. Read economic texts. And most of all read the news every single day and begin to develop an opinion about the news and how it affects different countries, industries, businesses, and individuals. The most important skill for any investor is: understanding information. Who understands information the best does better. Who understands information the best and acts decisively on that information wins the day.
Spend some time figuring out who you are as an analyst. This is critically important. Why? If your natural strengths as a thinker make you a good trader then you will be very frustrated working at a deep value, long-term focus money management firm. You want to develop skills that accentuate your existing talents and skills that compensate for your shortcomings.
Expect this process to take a lot of time.
Hope that helps,
Jason
Thanks Jason. I am awaiting my CFA results. But that's great advice. Will surely keep everything you said in mind.
Personally I use a mixture of Hyman Minsky and Graham & Dodd.
An investment should earn its return from it's own income/cashflow stream. Roughly equivalent to Minsky's defintion of hedge finance. The main characteristic is that the return comes from the asset itself, so unlike Graham future growth can be reasonably considered (though growth is very hard to successfully project).
A speculative investment will provide a return only assuming a change in external factors not instrinsic to the asset itself. Mainly, an increase in the pricing multiple / decrease in discount rate / increase in the cost of carry. (commodities, venture capital, a lot of buyout transactions, etc)
A ponzi asset produces no significant cashflow or benefit and can only generate a return if a thrid party purchases it a higher price. Think of art, wines, tullips, etc, but even conventional assets classes can become ponzi assets if the pricing gets completely out whack with the underlying (the dot-com bubble comes to mind)