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John Engle
John Engle
Articles (525) 

Can Investors and Speculators Coexist?

An age-old battle rages on

April 04, 2019

For generations, investors and speculators have often been portrayed as warring tribes. Indeed, the feud long predates the advent of modern securities analysis ushered in by Benjamin Graham. Published in 1885, “American Securities” proves the enduring nature of the conflict. Authored by William Mason Grosvenor, an early pioneer of economic journalism, the book continues to resonate well over a century after its publication.

According to Grosvenor, investors and speculators cannot hope to coexist because they desire fundamentally different markets:

“The speculator and the investor cannot live in the same market. They are creatures to whom essentially different elements are absolutely necessary, and can no more live together than a fish can live on the land or birds can live in the sea.”

Grosvenor’s arguments may seem slightly dated to the contemporary reader in some regards, yet his thesis still offers valuable food for thought.

Defining the investor

Grosvenor’s definition of an investor is extremely rigid:

“The investor buys in order to get an income from his money invested. The thought of selling at an advance never controls him; in fact, one may say, it never comes to the investor as such. It is only when the investor is more or less tempted to become for once, wholly or in part, a speculator, that he thinks of selling at a profit. As an investor, why should he sell that which yields to him a satisfactory return on the cost?”

According to Grosvenor, a true investor’s only interest is income. In other words, investors buy securities or properties in order to realize stable incomes in the form of dividends. (In Grosvenor’s day, stock buybacks were illegal.) This definition may seem strange to most investors reading today. Most self-described value investors have at least some interest in realizing gains from stock sales. Even Warren Buffett (Trades, Portfolio), famous for his buy-and-hold strategy, frequently engages in purchases on the basis of capital appreciation, not simply income.

Defining the speculator

When it comes to speculators, Grosvenor’s definition should be more familiar to today’s audience:

“The speculator, on the other hand, thinks only of selling, and not of the income which a property may bring him while he holds it. The anticipated profits from an advance in price so far outweigh any possible gain from the property, as a wise investment, that the latter consideration has no weight in his mind.”

In Grosvenor’s view, anyone who buys stock they think is cheap in the expectation of selling at a higher price in the future is a speculator. Rock-ribbed value investors might agree that speculators are overwhelmingly focused on a payout via price appreciation. They would probably also agree that such market actors are not wise investors. Yet, they are unlikely to agree investors must be myopically focused on income.

A tale of two markets

Grosvenor wrote investors and speculators cannot coexist because their preferred markets are diametrically opposed to each other:

“The investor wants a steady market, if any, with as little fluctuation in prices as possible, and that little governed by actual appreciation in the value of property. But the speculator wants, above all things, rapid changes in prices, and changes which the general public will not readily foresee. To him those constant fluctuations are the very breath of life, which to the investor are, above all things, undesirable and to be dreaded.”

Perhaps there is some truth in the notion that, were prices highly stable, investing for income could be deemed the sole form of “real” investment. But that is not the market in which we live. Nor, in truth, was it the market in which Grosvenor lived. Markets are not stable or predictable and never have been.

Investing for income makes sense most of the time, but it is hardly the sole form of investing. Value investors can legitimately invest in stocks they consider beaten down with the expectation that market sentiment will eventually price in the information they have ascertained. Indeed, that is usually the end goal of value investors in almost any instance.

Verdict

Grosvenor pined for a market in which securities do not rise in price, even as the underlying value of their assets grow. That is unrealistic. A better approach to value investing comes from understanding that the mispricing of securities is usually temporary. Once the market’s valuation of a security comports with that of the investor, the investor should move on to identify similar opportunities.

While his views are a bit dated, and arguably unrealistic in a world of fluctuating prices and market cycles, Grosvenor’s work is still worth a read.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

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