It happens every day of the year, but once the markets start getting volatile, it gets worse and worse. It’s the media description of who moves the market.
The blame is always on investors. But that is false. The media never mentions the true culprit: speculators.
The short-term swings in the stock market, are however rarely if ever caused by investors. In fact, I might say they are never caused by investors.
Of course, it is a truism that most people who think they are investing are really speculating.
So what is the difference between investing and speculating?
I’ll admit it’s an age-old question with no definitive answer. But let’s look at two.
An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.
—Security Analysis, Benjamin Graham and David Dodd, 1934.When I buy a stock, I don’t care if they close the stock market tomorrow for a couple of years because I’m looking to the business — Coca-Cola, or whatever it may be — to produce returns for me in the future from the business… Speculation, I would define as much more focused on the price action of the stock..
— Warren Buffett
A simple explanation we can say is that investors look at the company whose stock they are purchasing, and speculators look at the stock.
And what’s with the why?
Although recent volatility was blamed on interest rate fears, the likelihood of rate increases was always real and was always expected. It could very well have been external, seemingly unrelated influences that brought about a sell-off. The assignment of cause is as much a speculation as any other.
Mentions.
What is the ratio of mentions of investors vs. speculators?
A quick Google search of the prevalence the two terms, investors and speculators at both the New York Times (nytimes.com) and Wall Street Journal (wsj.com).
(Unfortunately, as of this writing, the tool at the New York Times that allows historical search of terms in its archives was not up.)
Mentions at both sites, per Google search:
| investors | speculators | |
| The New York Times | 297,000 | 20,200 |
| The Wall Street Journal | 672,000 | 5,230 |
So between 14 to 128 times more mentions of investors to speculators. I surmise this does not match behavior of activity in the markets. In fact, it may very well be the reverse. (Of course, a little more refinement of terms might change the dynamic slightly (“invest” vs. “speculate”, “investment” vs. “speculation”), but it would not change the overall relationship between mentions.)
Where speculators are at least acknowledged to exist
The commodities markets are places where speculation is assumed and acknowledged. I would posit that it is rare to assume that people buying or selling commodities (commodity futures) are investing. Either they are producers (or consumer entities) attempting to hedge risk, or they are speculators attempting to gain an advantage. Sometimes they are euphemistically referred to as “traders.”
Other volatility culprits
That active fund managers all compete to out-do each other is an exercise in mass psychology. Most seem to be more focused on besting their peers than to manage their customers’ money prudently. As a result, when the going is good, risk increases, all in search of an edge over other managers’ results. When things turn down, they frantically trade, often dumping securities, in order to be “less bad” than their competitors.
Program trading, where computer programs determine what and when to buy and sell, seems to me another form of speculation. I would think maybe somewhere there is one program trading software project that takes into account fundamentals of the companies it is trading, but that seems highly unbelievable. So I believe all program trading is speculation.
And the “innovation” of high-frequency program trading only accelerates whatever movement exists. So let me state emphatically: All high frequency-trading is speculation.
None of these activities are based on the underlying business of the companies whose stock is being traded.
What people do, what people say
Since many people think they are investing when they are really speculating, media and news reports reinforce the idea that actively trading stocks is investing when it is not. The usual human condition of people believing they are doing one thing when really doing something else….
So I would consider that if media and news reports were a little more pointedly truthful, we may be able to change the view of what goes on during times of volatility.
If the general public was told “today’s market decline was due to speculators’ fears about interest rates” instead of “today’s market decline was due to investors’ fears about interest rates” then we maybe a light bulb would go on, and the average person might say “Oh, speculators? I’m not one, so I’ll ignore this,“ instead of thinking they must trade.
What do you think?
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