This week, I am involved in an online discussion on the topic of “What is the difference between investing and speculation?” It is the first effort of its kind by the CFA Institute, as part of its Future of Finance initiative. The other panelists are Harold Bradley, Margaret Franklin, and Robert Hagstrom (as I say, three luminaries and one puzzler); Jason Voss is the moderator.
You can follow the conversation throughout the week. Already there have been a variety of interesting ideas and questions. Len Costa did a summary posting about the forum; you can submit your questions for the panelists there.
The chart above is based upon some of my submissions (starting here), about the question of initial price (in a valuation sense) in determining whether something is a “speculation,” including:
“It is January 2000.
“Dot-com stocks are going up in leaps and bounds. Most of them have no earnings, many of them don’t even have revenues to speak of, but are bleeding cash. They are valued based upon their promise and perhaps the number of ‘eyeballs’ that their sites attract. Were those that bought the stocks investing or speculating?
“At the same time, money was flooding into large growth stocks (including many of the most famous, high-quality names), via index funds, active managers, and individual investors, driving them to historic valuations and (by all evidence) very low expected returns. Investing or speculating?
“I dare say that a lot more money was lost in the ‘investing’ of the second case than the ‘speculation’ of the first.”
Above you can see the performance of each of those parts of the market; big value stocks are included for comparison. Of course, to complete the picture, you’d want to have some measure of valuation. Pick your favorite one (forward, trailing, CAPE, operating, GAAP, only-the-good-stuff); they all showed that buying things for premium prices was the game of the day. (Chart: Bloomberg terminal.)
A few years after the time shown above, “the endowment model” became all the rage. (Investing or speculation?) In the latest essay on the research puzzle, I review Robert Maynard’s opposition to that approach and his words in praise of convention.