The Unconventional Conventional, Part XV
Updated: Aug 6, 2019
Welcome back. Today, more on what Financial Literacy means to me. And hopefully leading to a better understanding of these terms for you, the individual investor, and then the advisor, so that we can all make better decisions about our finances.
When I think of knowledge, I want to be able to put it to good use. After all, knowledge without action is useless. I mean why would you spend time becoming knowledgeable about something and then not use the knowledge toward a worthwhile cause? The difference of course being that by acting with confidence on something, it will improve one’s life or lifestyle versus inaction or suffering the consequences of action taken without a reasonable understanding or knowledge leading to disappointment.
Today, I want to bash “investing” and the terms associated with the meaning and in particular the behaviour behind the word “investor” as opposed to the word, the meaning of the word, and actions associated with “speculating” and “speculator”.
My Oxford dictionary has once again opened it’s pages to offer support in our quest for knowledge by providing meanings for the words invest and investment. Accordingly, the first meaning for the word “invest” is to “put money into financial schemes, shares or property with the expectation of making a profit” and the definition of “investment” is 1) “the action of investing”, and 2) “a thing worth buying because it may be profitable or useful in the future". The word “speculate” or “speculator” are to me a better indication of the actions taken by most so called “investors”. Just for arguments sake, my trusty dictionary defines the word
“speculate” with two relevant meanings, 1) “form a theory without evidence”, and 2) “invest in stocks, property or other ventures in the hope of financial gain but with the risk of loss”. The only real difference in the two meanings is the last few words in the definition of “speculate” being, “but with the risk of loss”. So, it seems that a loss is a part of speculating, which may be the result of forming theories without evidence. So why do “investors” then also create losses? Because they act like speculators.
Based upon my observations of the actions taken by individuals, the true investor takes the time to gain some real knowledge about the asset considered for ownership whereas the speculator is more concerned with just the price. An investor will not lose money when something drops in price or value because they will not sell. If they liked the asset at $10 per unit they would love it at $2 a unit because you can buy 5 times more of a quality asset that may be experiencing negative perceptions by the market. Losses arise from the lack of
knowledge about the value of the asset being acquired or held and the action taken is usually the result of a negative swing in the price without consideration for the overall quality of the asset.
To conclude, a simple lesson from Buffett then, “Buy what everyone is selling and sell what everyone wants to buy”.
Next week the definitions of “risk” will be explored and more importantly how the institutions exploit the language of “risk”.
Copyright 2013 Richard M. Kiernicki. All Rights Reserved.
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