Investing Versus Speculating

The concept behind a stock investment is the expectation of a return, over the long term, comprised of dividends and increased corporate earnings. It is an investment in the future of a company. As I have indicated in prior posts, there is too much risk involved in selecting companies to invest in - and the only way to eliminate the risk of the selection process is to invest in every corporation (i.e. own them all). In fact, more than an investment in "a company", in actuality this is an investment in the economy of an entire nation (be it the United States via an index fund that owns all publicly traded domestic corporations or internationally through an international index fund).

By definition, over long periods of time, the value of a stock will always equal the dividend + corporate earnings (from 1900-2007 this amounted to an annual 9.5% return based upon a 4.5% dividend and 5.0% increase in corporate earnings).

However, the important "lesson" to be learned here is the distinction between the value of corporate stock over time (i.e. dividend + earnings) versus the short term fluctuations in stock price in the stock market (wall street). The price of any one stock - and the stock market as a whole - varies day by day (indeed minute by minute) and those variations have little, if anything, to do with the intrinsic long term value of the corporate earnings and dividend return. Rather those price fluctuations represent buying and selling by wall street speculators - defined as people who "invest" in stocks not because of the inherent value of dividends and earnings over time, but rather upon the expectation that the price of a particular stock will go up (or down). They are gambling on their expectation that the price will change (up or down) over a set period of time (whether that time frame be one day, week, or two years). The defining common feature is their focus on stock price as opposed to investing in corporate growth (earnings).

I want you to be an investor, not a speculator. Unfortunately the only way to invest in a corporation is through the stock market (i.e. indirectly by investing in a mutual fund which then uses your money to place a purchase of the stocks through the stock market). This is a necessary evil. But do not ever lose sight of the distinction between yourself versus the majority of the people "investing" in stocks. You are not investing in stocks. You are investing in corporate America, and buying stocks to do so. Speculators care only about the stocks and the stock prices. You, on the other hand, are investing in the long term success of corporate America upon the belief that 30-50 years from today the value of corporate America will be far greater than it is today (i.e. that our economy will continue to grow over the long term). The only way to own corporate America is via stocks. But you are not "gambling" on short term price movements of those stocks like the speculator.

Your focus is on one thing - accumulating as many shares of corporate America as you can over a life time. Ignore the current share price on wall street and, if you do look at the share price, be happy when the price is down because that means you are buying at a lower price that you would otherwise pay. But, at the end of the day, the current price really doesn't matter because you are interested in the price some 30-50 years later which will dwarf the prices (highs or lows) you see today.