“The individual investor should act consistently as an investor and not as a speculator.” – Benjamin Graham
This quote has been attributed to Ben Graham, but I’m not sure if its from TII… regardless, it’s both very true & worth analysis.
There are 4 key definitions in this statement which we need to dig into in order to understand the meaning in this quote:
- Individual. A lot of people think incorrectly about themselves. They perceive themselves as a “human being” as opposed to an institution. While this is correct in the physical universe in which we all live & breathe, in the parallel investment universe, the human / individual is simply another investment vehicle. It can borrow and invest money, hold assets and even run a business as a sole trader. Most people think to themselves “I’m just a small guy, a little fish….” They forget that ultimately, humans own or control everything. Viewing yourself as an investment vehicle expands your thinking about what you can actually achieve financially. Tracking your net worth on a simple Excel spreadsheet and regularly updating it to reflect changes in market conditions is a key financial skill every individual should practice to help them understand and gain insight into, and control of, their financial life.
- Investor. There is no such thing as a long term investor. An investor is a long term thinker & a long term actor by implication. To invest is to not speculate – the terms are mutually exclusive sitting as they do at opposite ends of the spectrum. Investors primarily make money from yield, earnings, dividends, distributions or income from assets. An investor will look to what the asset produces over time to assess its performance and value the asset in the first place. What is also of importance to an investor is the quality of those earnings. Earnings quality is determined by certain characteristics of the asset. In the case of productive land it is location (for rental properties) and output (for farms) that is the key competitive advantage. With shares in companies which derive their value from underlying businesses, it’s the moat surrounding that business in its respective market that is the key competitive advantage. Investors understand competitive advantage of different assets & for the most part will value the asset based on yield before considering the offer price.
- Consistently. The importance of this word cannot be overstated. If there is one personal quality that can lead to investment success, its consistency. Specifically, the consistent buying of high quality assets over time regardless of all market conditions – and dividend or distribution reinvestment if that facility is available. John Bogle was an advocate of this approach particularly with broad based index funds in the investors home currency & market. Home field advantage was a big thing to him. Discipline breeds consistency. Disciplined buying and disciplined re-investment over time can lead to extremely satisfactory investment returns. In Australia, the tax privileged individual who can think & invest in an institutional way is often the most successful type of investor.
- Speculator. A speculator is a person or other entity who seeks to sell something for more than what they paid for it. Speculation is the process which the speculator engages in. Speculation is different to trading. Trading is where the trader purchases items of trading stock (or inventory) to sell in the course of a business he or she or it is carrying on eg . There is nothing wrong with speculation in an open legitimate market. This approach absolutely has its place. Its only dangerous when people confuse speculation with investment. Its also very hard to consistently speculate profitably after fees, costs & taxes are taken into account. Speculative assets typically yield zero as they tend to sit on the other end of the yield-growth spectrum.
Maximising your after tax outcomes from investment or speculation requires timely, accurate & savvy tax advice. To discuss your circumstances, call or email Chris today at chris@solveaccounting.com.au