An old Wall Street adage says that “speculators who die rich, die before their time.”
And if you look at the Forbes 400 List, it’s filled with people who achieved great wealth by investing — not speculating.
So, why would you ever want to speculate?
Before I understood the difference between investing and speculating, I made stupid mistakes.
I bought penny stocks when I was 18 years old and thought I was investing. I quickly learned that a company drilling for oil in Wyoming and trading for $0.03 a share was not an investment
Ben Graham — Warren Buffett’s mentor and teacher — defined investing this way:
An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.
That’s why I never invested a nickel in bitcoin or those other silly cryptocurrencies.
Because you don’t need to be a rocket scientist to see that bitcoin is a speculation…
Greater Fool Theory
This recent Wall Street Journal article confirmed what I’ve been saying all along: Bitcoin has no actual economic function. In fact, only 10% of bitcoin transactions make up “real value.”
And with no economic function, there’s no way to properly analyze bitcoin. So, it’s not an investment. Simple, right?
Now, investing in stocks is a totally different animal.
When you buy a stock, you’re buying a piece of the business. You can figure out the underlying worth of the business, and then see where the stock price is trading.
The time to buy the stock is when the price is trading considerably below the worth of the business. Because the stock price follows the fundamentals of the business.
When someone buys bitcoin, though, they’re not buying it based on any underlying worth — because there isn’t one!
For several years, I’ve asked people who supposedly know a lot about bitcoin: “How do you figure out the right price to pay?”
Is $65,000 an attractive price? Or is $35,000 too expensive of a price?
You wouldn’t believe the silly responses I got … like, “Bitcoin is worth the total amount of the internet.” I still don’t know what the heck that even means!
Bottom line: There’s no underlying worth, so it’s all a guess.
That’s why I still haven’t received an answer that makes sense and never will … because bitcoin is being traded based on the Greater Fool Theory.
The theory says that prices go up because people are able to sell overpriced assets to a “greater fool,” regardless of their valuation.
So, when I hear someone say they’re “investing” in bitcoin, I cringe. The Real Talk is that anyone in bitcoin isn’t investing, they’re speculating.
And like all speculations, this one will end. When it does, a lot of naive folks who bought bitcoin, thinking they were investing, won’t be having a happy day.
Value Is What You Get
People are willing to piss their money in the wind by gambling, speculating and doing other stupid things. That was never my cup of tea.
I work hard for my money and want my money to work hard for me. And I know you do, too.
So, it’s never made sense to me to risk money in hopes that a bigger fool would buy it for more, or that the roulette ball would fall on black.
I’ve found it much easier to make money by buying stocks when they’re selling for less than the underlying worth of their businesses. And then, I sit on my butt and wait for the stock price to follow the growth of the business.
That’s why I always make it a habit of getting more value than I paid for.
Who doesn’t? It’s why I love going shopping at Costco. I don’t know of another store where I get more value for my money.
Buying stocks at a price that represents a great value is a great way to make money in the stock market. Because at the end of the day, price is what you pay, and value is what you get.
Founder, Alpha Investor
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