Once upon a time...pioneer merchants wanted to start big businesses, but the problem was that this required a substantial amount of capital that no single merchant could provide on their own. As a result, the merchants began to partner with one another by combining their savings to form joint-stock companies where each partner was awarded individual shares as co-owners.
Alas, the first paper stocks were issued in 1602 by the Dutch East India Company!
This created a platform for owners to buy and sell their shares (stocks) amongst each other.
This business model provided a gateway for struggling business owners to raise capital. The marketplace of trading stocks became such a big hit that it began to spread to other countries such as Portugal, England, and Spain. The need for an organized marketplace became evident as the volume of stock trading increased.
In 1773 stock traders took over a coffee house in London, changed the name to the Stock Exchange, and the London Stock Exchange was born! Eventually, a U.S. stock exchange was founded in Philadelphia in 1790. Fast forward 27 years later and the New York Stock Exchange was founded on the Manhattan streets of Wall and Broadway.
As time progressed, stock traders began to separate themselves into two distinct categories known as the intelligent investor and the speculator, which sparked the beginning of the most significant World War of business minds ever known, and the war is still ongoing till this day!
The constant tug and pull of the stock market, the ups and downs, the turbulent fluctuations, the back and forth between excitement and fear, the raging bull vs. the sluggish bear, and on and on it goes...
As with any war, there are winners and losers. Some prosper over the long term while others endure complete financial ruin when aiming for short-term gains and digging themselves into a hole too deep to ever recover from.
It must be noted that a person who buys a stock is not automatically classified as an investor. A person buys a stock either as a speculator or an investor; One or the other, period.
The mind of the Speculator
The Speculator will acquire stocks that typically have a 50/50 chance of going bankrupt or succeeding.
The speculator expects to make abnormally high returns while taking on a substantial amount of risk with little to no margin of safety in place.
Emotions primarily drive the speculator's investment decisions rather than sound fundamental analysis.
Emotionally unstable speculators
The speculator relies on media headlines to chase after the next hot stock.
The speculator buys when stocks are rising (following the crowd) and sales when stocks are dropping in value (usually induced by fear).
The speculator wants to make fast money, and he or she typically believe that they possess magical powers of being able to time the market.
The speculator may profit over the short term but rarely do they achieve a lifetime of positive returns from their investments.
The speculator makes bold predictions about when and where the market is heading.
The speculator does not consider the intrinsic value or the actual net worth of a company when buying stocks.
When buying the next hot stock, the speculator forgets to ask "how much?" until after they have suffered substantial losses in the marketplace.
The speculator's investment philosophy can in many cases be equated to the individual who spends their hard earnings on lottery tickets in hopes of getting rich overnight.
The mind of the Intelligent Investor
The intelligent investor will acquire stocks that have a high probability of delivering returns over the long-term based on a careful fundamental analysis of the actual business.
The intelligent investor seeks to generate incremental/gradual returns over the long-term to utilize compound interest (The Immense Power of Compound Interest) while minimizing the risk of capital as much as possible.
The intelligent investor buys stocks based on sound fundamental analysis while leaving emotions out of it.
Emotionally stable intelligent investor
The intelligent investor does not rely on media headlines to influence their investment decisions nor do they chase after the next hot stock. Instead, the intelligent investor adheres to a strict set of principles that he or she will not violate no matter how attractive a stock may appear to the masses.
In other words, the intelligent investor possesses the characteristic of self-discipline.
The intelligent investor aims to buy stocks at a discounted rate, and the intelligent investor might sell when stock prices are overinflated by speculative trading.
The intelligent investor is not interested in fast money or short-term gains.
The intelligent investor does not make bold predictions about where and when the market is heading.
The intelligent investor takes into consideration the intrinsic value and the actual net worth of a company before buying stocks.
The intelligent investor never forgets to ask "how much?" when buying a stock because the intelligent investor understands that the purchase price will dictate the overall rate of return over the long-term.
The intelligent investor's investment philosophy can be compared to a medical doctor's approach to preparing for surgery. An ethical medical doctor will conduct careful analysis and risk assessment before performing an operation on a patient to minimize the chance of failure as much as possible. The intelligent investor approaches the marketplace in a similar fashion.
Which one are you?
The distinctions between the speculator and the intelligent investor simply boil down to a difference in philosophy.
We are not talking about overly complicated long-range financial calculations here. We are not talking about one's ability to deploy the comprehension and the use of fancy Wall Street jargon. We are merely talking about a difference in mindsets which means conflicting interests between the speculator and the intelligent investor.
Many speculators falsely believe that they are intelligent investors. Take a hard look at your current and previous investment behaviors and identify which side you are on. If you are indeed a speculator, I highly suggest that you change your philosophy to mimic the behavior of the intelligent investor.
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Disclaimer: Hudson Wealth Management, LLC (HWM) is a FINRA registered investment adviser firm. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and HWM's fee schedule. The information provided herein is for illustrative purposes only and does not constitute personalized investment advice, recommendations or solicitations to hold, buy or sell any investment or security of any kind. All images and return figures shown are for illustrative purposes only and are not actual customer or model returns. Past performance does not guarantee future results.
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