Two Herds of Investors

Two Herds of Investors

In the investing world, there are two herds of people.  There is the investor herd and there is the speculator herd. Let’s start with some simple definitions.  The Father of Value Investing, Benjamin Graham, in his book, The Intelligent Investor defines the difference as follows:  “The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. 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.”

While I will no doubt do an injustice to Ben Graham by stating this another way, here goes: Investors invest with confidence that in the long run, their beliefs will be proven correct and speculators “invest” with the hope that over the short-run the market will keep going up without much thought beyond that.  What is interesting about these two herds is that virtually everyone believes they are part of the investor herd, when in reality the majority of people fall into the speculator herd.

Physical Products Vs. Investments

Perhaps, this is best exhibited through an example.  Imagine you’re in a store (I’ll let you choose which store) and while you’re in the store, all of a sudden, like magic, every single item in the store goes on sale for 30% off.  If this was the investment world, the speculator herd would immediately leave their shopping cart in the middle of the aisle and start screaming “Get out!  Get out while you still can!” while running out of the store pushing each other into the bushes.  All the while, the investor herd now has the store all to themselves and will be able to take advantage of the great sale.

When we look at this example from a physical product perspective, the scenario seems ridiculous.  And it is ridiculous.  However, this is exactly what occurs every time there is a market correction.  Just watch the fund flows for evidence.

There is a saying that “Stocks are the only thing people don’t want to buy on sale.”  At least that’s the case for the speculator crowd.  But, why is that?

Respond Vs. React

True long term investors tend to respond to market movements, while speculators react to market movements.  Aren’t those the same thing?  At its core, to respond means to act with careful consideration and thought.  To react means to act without thought or consideration.  One is a mindful response and one is done in haste.  Typically, reacting tends to be a defensive move while responding tends to be done with reasoning.  In investing, few things could be more important than this.

The importance of behavior on a portfolio cannot be overstated.  The market will eventually have a significant decline (or sale).  This is a matter of when, not if.  Last time this occurred, did you react or respond?  When it happens again, which herd do you see yourself in?  Will you view it as an opportunity to purchase quality companies at discounted prices or view it as the apocalypse du jour and go running out of the store?  Your financial future likely depends on your answer.

 

 

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