Are You an Investor—or a Speculator?

My grandson recently asked me if he should invest in gold. I asked him why he thought gold was an investment.

I believe the most reliable path to wealth is owning businesses, not specu­lating on price fluctu­a­tions. There’s a big difference between investing in a company with a proven track record and hoping for a surge in the value of gold or cryptocurrency.

While the prices of gold and cryptocur­rency shift with supply and demand, a business is driven by people working with purpose—to create products, adapt to markets, and generate profit.

Financial assets like gold or cryptocur­rencies do not change and adapt. They are not capable of making a profit. Their value depends entirely on how much other people are willing to pay for them at any given time.

Buying company shares makes you a business owner. Buying a corporate bond makes you a lender to that business.

But when you purchase gold, cryptocur­rencies, or art, you own an asset you hope will appreciate—without any real idea if it will. There is no revenue projection to impact its value. You are merely specu­lating on a favorable movement of the asset’s price in the future.

Gold … has two signif­icant short­comings: neither of much use nor procre­ative. True, gold has some indus­trial and decorative utility, but the demand for these purposes is limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.

- Warren Buffett, letter to share­holders, 2011

In his great investment book The Intel­ligent Investor, Benjamin Graham explains how to identify a specu­lator. He explains that “the specu­la­tor’s primary interest lies in antic­i­pating and profiting from market fluctu­a­tions while the investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.”

On any given day, there are dozens of TV commer­cials touting the purchase of gold. I recently saw one of these ads proclaiming that the price of gold had quintupled since 2000. In fact, the ad continued, gold’s price had risen 50% in just the last ten years!

Though these claims were factual, I was amazed they were meant to encourage viewers to buy gold now.

A true investor under­stands that an artifi­cially inflated price does not reflect real value. Has the price of an asset gone straight up for ten straight years? Regardless of the under­lying funda­mentals, that asset has probably had all the genuine value wrung out of it.

Indeed, it isn’t value that rises with price: It’s risk. This is common sense to the investor—and heresy to the speculator.

When gold was languishing near $250 in 1999, down from $850 in 1980, many specu­lators were buying red-hot dot​.com IPOs without concern for their ballooning prices. The higher and faster the price of something rises, the more value the specu­lator perceives in it. FOMO (Fear of Missing Out) is the speculator’s watchword.

And what about gold—that unshakable inflation hedge which has quintupled its price in the last 45 years? Well, at $2,500 per ounce, gold is actually down by about 20% in real, inflation-adjusted terms from its peak in 1980—the last time the specu­lators went absolutely mad for it.

Are you an investor or a specu­lator? An investor seeks favorable outcomes over time by practicing proven values like patience and disci­pline. A speculator—also known as a trader—jumps around, just trying to be on the right side of a trend. At the end of the day, an investor is consis­tently deploying his capital to serve his long-term financial goals, and a specu­lator is simply attempting to “beat the market” by being right about some aspect of it more often than they are wrong.

These realiza­tions lead to a crucial tactical conclusion. The more frequently you alter your portfolio—entering and exiting the market, switching sectors—the lower your returns are likely to be. The less often you change your portfolio—because it’s the vehicle for your most signif­icant life goals rather than a bet on market trends—the better your returns are likely to be.

Successful investing rarely happens by “making moves” with your money. In fact, the best move you can make is usually making no move at all.

Insights:

• The speculator’s primary interest lies in antic­i­pating and profiting from market fluctuations.
• The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.
• Gold, at $2,500 per ounce, is down about 20% in inflation-adjusted terms from its last peak in 1980.