“Men are anxious to improve their circumstances, but are unwilling to improve themselves; they therefore remain bound. The man who does not shrink from self-crucifixion can never fail to accomplish the object upon which his heart is set. This is true of earthly as of heavenly things. Even the man whose object is to acquire wealth must be prepared to make great personal sacrifices before he can accomplish his object; and how much more so he who would realize a strong and well-poised life." James Allen
One cold morning, I was sitting at my favorite coffee house, having my morning dose of java. When out of the corner of my eye I noticed an older man, reading a newspaper and sipping on a cup of coffee. Suddenly he rolled his newspaper up, and slammed it against the table, "no one knows what this damn stock market will do." I quietly thought about the words he had abruptly spoken. Was he correct? “ The stock market’s only reason for existing is to separate a man from his money,” he railed. As I sat there, I thought about Bernard Baruch, the stockbroker and sugar speculator, who said, “the main purpose of the stock market is to make fools of as many men as possible.” Jeremy Renner, an actor stated, “I will never be in the stock market. It's just gambling. I'm a gambler, but I'll gamble on the practicality of things.” After all, was the old man’s statement a fact or was this the ranting of a man who seem to be frustrated with his inability to accurately predict the stock market? Surely he knows that people win daily in the stock market, both speculators and investors. It was as if he thought that the stock market were playing a cruel trick on him. However, I must admit I have heard similar statements by many for years. I guess it is true, that what we don't understand, we criticize.
Investing vs. Speculating
What is the difference between investing and speculating? This question has been taken on by many in the past, however, let's look at the two. Investing is purchasing an asset for a period of a least a year; when risk has been calculated to alleviate the potential of a total loss, with a commensurate return in mind. Speculation assumes the risk of losing 100% of funds or assets in pursuit of out-sized return, for a time period of less than a year. Benjamin Graham, the author of “The Intelligent Investor”, defines “an investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” Mr. Graham went on to say, “We must prevent our readers from accepting the common jargon which applies the term “investor” to anybody and everybody in the stock market… in the easy language of Wall Street, everyone who buys or sells a security has become an investor, regardless of what he buys, or for what purpose, or at what price, or whether for cash or on margin. Compare this with the attitude of the public toward common stocks in 1948, when over 90% of those queried expressed themselves as opposed to the purchase of common stocks. About half gave as their reason “not safe, a gamble,” and about half, the reason “not familiar with.” Mr. Graham continued, “The distinction between investment and speculation in common stocks has always been a useful one and its disappearance is a cause for concern. We have often said that Wall Street as an institution would be well advised to reinstate this distinction and to emphasize it in all its dealings with the public... What we have just said indicates that there may no longer be such a thing as a simon-pure investment policy comprising representative common stocks—in the sense that one can always wait to buy them at a price that involves no risk of a market or “quotational ” loss large enough to be disquieting. In most periods the investor must recognize the existence of a speculative factor in his common-stock holdings. It is his task to keep this component within minor limits, and to be prepared financially and psychologically for adverse results that may be of short or long duration.
Two paragraphs should be added about stock speculation per se, as distinguished from the speculative component now inherent in most representative common stocks. Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook. More than that, some speculation is necessary and unavoidable, for in many common stock situations there are substantial possibilities of both profit and loss, and the risks therein must be assumed by someone. There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are: (1) speculating when you think you are investing; (2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose.” To understand the difference between the investor and the speculator gives us a glimpse inside the mind of the old man. Investing is a discipline and requires a disciplined approach where a true commitment to research and study is required. It is not merely a hunch, hope or a wish for a return, but a step by step process.
If you have built castles in the air, your work need not be lost; that is where they should be. Now put the foundations under them. —Henry David Thoreau
As a former athlete, I love the sport of basketball; the competition, the combination of skill, grace, coordination, and force captivate me. The words the old man spoke reminded me of how I felt the first time I picked up the ball and attempted to put it into basket, “no one could possibly know how to do this consistently”. It was incredibly frustrating, and often I would kick the ball as hard as I could, only to retrieve it and try it again. I soon understood that unless I developed some systems that I would adhere to consistently, I would have many more frustrating days ahead. Once I made a shot, I had to follow the same mechanics over and over again. I had to practice it day after day until I became disciplined in the shooting process. Some days were better than others, but I couldn’t focus in on one good day or bad day, I had to remain disciplined to the process. I noticed that if I concentrated on my bad days, I would become timid and reluctant to pull the trigger. If I focused on my good days, I would become over confident and begin taking shots that were low percentage shots, shots that I had not practiced. The trick was to never get too high or too low, concentrate on my craft, remaining disciplined to the process. Over time I became better and better at it. I eventually received a scholarship to play basketball and later played professionally. I was known to be a good shooter but the best percentage I ever shot from the field in a season was 55%. Hardly 100%, but it was good enough to be considered a good shooter. However, I had a few games over my career where I was perfect from the field, others when I barely shot 10%, but over the long haul, I was a 50% shooter. The way I always looked at it is, no matter how well I shot or if I shot poorly, at the end of the day I was pretty sure I would end up shooting around 50% from the field.
I wondered did the old man in this story, see that he had no need of knowing how the stock market would react. What is most important is how he would react. He needed to accept the dream castles he had built in the air required a foundation under them. Could he see the forest from the trees? His insights on the stock market appeared to be centered in his outcomes. I wondered, did he have a wider perspective of the market place? Did he have a process that he followed? Was he committed to the process? Did he understand how uncontrolled emotions could have a negative affect on the outcome of the process? Did he know he must discipline his emotions, to provide balance? The more I thought about it, I realized that he is not alone, all of us at some point will need to be reminded of this. The trees give one point of view and the forest gives another. If we run away with only one of these views, we can be sure we will most likely misdiagnose the situation. However, if we can identify both, the trees and the forest and understand the relationship between the two, in addition, understand how both relate to the world, then we would have a more balanced diagnosis of the situation.
This reminded me of a story I heard many years ago, about a college student:
Dear Mom and Dad:
Since I left for college I have been remiss in writing and I am sorry for my thoughtlessness in not having written before. I will bring you up to date now, but before you read on, please sit down. You are not to read any further unless you are sitting down. Okay?
Well then, I am getting along pretty well now. The skull fracture and the concussion I got when I jumped out of the window of my dormitory when it caught fire shortly after my arrival here is pretty well healed now. I only spent two weeks in the hospital and now I can see almost normally and only get those sick headaches once a day. Fortunately, the fire in the dormitory and my jump were witnessed by an attendant at the gas station near the dorm, and he was the one who called the Fire Department and the ambulance. He also visited me in the hospital, and since I have nowhere to live because of the burned-out dormitory, he was kind enough to invite me to share his apartment with him. It's really a basement room, but it is kind of cute.
He is a very fine boy and we have fallen deeply in love and are planning on getting married. We haven't got the date exactly yet, but it will be before my pregnancy begins to show. Yes mother and Dad, I am pregnant. I know how much you are looking forward to being grandparents and I know that you will welcome the baby and give it the same love and devotion and tender care you gave me when I was a child. The reason for the delay in our marriage is that my boyfriend has a minor infection which prevents us from passing our premarital blood tests and I carelessly caught it from him.
I know that you will welcome him into our family with open arms. He is kind, and, although he is of a different race and religion than ours, I know your often-expressed tolerance will not permit you to be bothered by that.
Now that I have brought you up to date, I want to tell you that there was no dormitory fire, I did not have a concussion or skull fracture, I was not in the hospital, I am not pregnant, I am not engaged, I am not infected and there is no boyfriend in my life. However, I am getting a D in Calculus and F in Chemistry and I want you to see those marks in their proper perspective.”
Your loving daughter, Susie
We can complain because rose bushes have thorns, or rejoice because thorn bushes have roses.” ― Abraham Lincoln
Voluntary blindness is caused by a flaw in one’s thinking. It is a distorted perspective centered around an over emphasis on one’s own thinking and experiences. Many of us start with a premise and look to find information to support that premise; instead of gathering information and looking at things from perspectives and allowing the data to build the premise. Most of us lock in on what we see and understand and somehow conclude that it is the end of the matter. We put our vision above all others, and we do this voluntarily. We cause our own blindness by the confines of our own limited thinking and experiences. We forget that what we thought was true at 20 becomes much different at 30 and 40, 50… Robertson Davies a Canadian writer stated, “ A truly great book should be read in youth, again in maturity and once more in old age, as a fine building should be seen by morning light, at noon and by moonlight.”
As we continue to collect more diverse experiences and perspectives the things we see as true, change. We all must work to eliminate our own blind spots by being open to additional information and perspectives than our own.
“It is a narrow mind which cannot look at a subject from various points of view.” ― George Eliot
I sincerely hope that the older gentleman (from the coffee house) will someday understand that there is no real harm in being a novice investor, the problem occurs when you stay that way. The stock market is no arbitrary creature that does what it wants when it feels like it. It is tied to the human experience. It has its norms, its frustrations, its wins, its losses and sometimes it can be moody or irritable. But like us at some point, it will calm and abide by more predictable rules of growth and progress. If we understand this, stay disciplined, calm and sober while keeping in mind the big picture. We too can in the end, win at the game of investing as we often do in the game of life.
