Monday, November 26, 2007

Speculator or Investor? Does It Matter?

Speculator bad, investor good. That at least is the cliche.
The investor, we are told, invests in solid companies or bonds for the long-term dividends and appreciation, refusing to churn his or her money with constant buying and selling. The penultimate investor is Warren Buffett, who famously buys and holds stocks for decades, and who also famously eschewed speculating in tech stocks during the go-go 1990s dot-com bubble.

But Buffett also speculates--that is, buys positions not for decades but for months or a few years. He has speculated on the dollar and recently dumped his position in one of China's national oil companies which he'd established a few short years ago.

If a speculator bets on the price of silver or oil or the dollar, are they really doing the work of the Devil? Interestingly, rich folks are allowed to put their money in quant funds and hedge funds, both of which churn the money through whatever markets offer the best return: in other words, pure, unadulterated speculation.

So is the real difference between the investor and the speculator is the wealthy get to place their money with professional speculators, while us working stiffs/debt serfs are corralled into "buy and hold" (and historically low return) investments?

There is another angle, of course, to speculation versus investment; the speculator may be short the market (betting a market declines), and may also be using borrowed or leveraged money--in other words, playing with a much higher level of risk than the "buy and hold" investor.

On the other hand, the "buy and hold" investor who bought Cisco Systems for $81 in early 2000 has lost 3/4 of their money, once inflation is factored in. Was buying and holding CSCO a lower-risk bet than short-term speculation? Perhaps in the sense that it was unlikely to drop to zero, but from peak to trough it did decline by almost 90%. Was this a significantly lower risk than the purest short-term speculation? Perhaps, but perhaps not; maybe the "buy and hold" investor invites as much or even more risk than the prudent speculator.

Maybe lambasting speculators is a form of envy; we too would love those fat returns. Put another way: if a regular, non-elite stiff manages to speculate successfully and make a few bucks to offset his/her shrinking paycheck and buying power, then shouldn't that person be applauded for offsetting his/her declining purchasing power via wise money management?

I wrote this past weekend on the unparalleled opportunity our society offers; and one opportunity is the open market in currency, commodities, stocks, bonds and futures/options. Yes, failure and loss are part of any market; there are no guarantees of success or profit. If there were, then we'd all be billionaires.

With that said, let's look at a chart of the Dow Jones Industrial Average. As a personal opinion, not as investment advice, it seems to me that the bad news may be setting up a Bull Run to the end of the year. Yes, the economy is sliding into recession, but so what? The institutional money managers need to get a good green "up for the year" rally going, and perhaps we should look at what the pros are doing. (Recall that the Market is never truly tethered to economic reality.)

In the contrarian view, since the news has been uniformily bad for weeks, the market may be poised to rally huge. Maybe, maybe not; the market rarely conforms to the majority expectation.

With that in mind, let's look at oil, that favorite of both investors and speculators alike. Here is a chart of the USO ETF (exchange traded fund) which tracks the price of crude oil.

Please go to to view the charts.

There are technical hints here--for one, a decline/divergence in the MACD even as price continued climbing--which suggest oil's leap to $100 is sputtering. If traders/investors believe oil is about to shoot beyond $100 to, say, $120, we'd expect to see them buying up oil producers, like Anadarko Petroleum.

But as this chart reveals, APC has dropped from its recent high even as oil has continued rising. That suggests buyers aren't quite as confident in oil's continued rise as they were earlier.

Disclosure: just so there are no undisclosed positions, I should note that in mid-August I bought call options on APC, betting it would rise, which returned a nice profit as APC rose. Now I own put options, or bets that APC will decline in the month ahead.

Just to reiterate: this is personal opinion, not investment advice. See HUGE GIANT BIG FAT DISCLAIMER below. One of my interests is the stock market, and so I jot down personal views on it from time to time, always disclosing any positions I might have in securities I mention.

Do I think the U.S. economy is healthy? Heck no, but again, in my own idiosyncratic view, markets are not connected to reality. They are only connected to the emotions and views of the investors/speculators.

Thank you, Stephen T., ($20), for your thoughtful contribution to this humble site. I am greatly honored by your readership and support. All contributors are listed below in acknowledgement of my gratitude.

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