With all of the news surrounding the meteoric rise of so-called Meme Stocks, I thought it would be a good idea to ground myself by rereading The Intelligent Investor.
In the first chapter, Benjamin Graham, mentor to Warren Buffett, makes a clear and important delineation between an investment and speculation, warning of the catastrophic impact the latter can have on one’s pocket book.
“Outright speculation is neither illegal, nor immoral, nor (for most people) fattening to the pocket book… And everyone who buys a so-called “hot” common-stock issue, is either speculating or gambling.”– Benjamin Graham, The Intelligent Investor
It’s tantalizingly easy to fall to the allure of potential high returns when you hear someone making 10,000% on their initial investment from an insanely volatile stock such as GameStop (GME) or the newest popularized item, like bitcoin.
Graham teaches that an intelligent investor looks for potential buy opportunities in companies you are confident in. The financial industry terms it “bullish” when you think a stock will go up and “bearish” when you think a stock will go down. “The intelligent investor realizes that stocks become more risky, not less, as their prices rise… The intelligent investor dreads a bull market, since it makes stocks more costly to buy. And conversely, welcomes a bear market, since it puts stocks back on sale.”
I don’t know about you but, GME being up nearly 2,300% YTD near its peak in January doesn’t sound like a sale or a buying opportunity to me.
Instead of speculating my hard earned money during the GME craze on failing businesses such as GME or AMC, I listened to the book praised by Warren Buffet, the greatest investor of our generation, as “by far the best book on investing ever written” and kept on the lookout for buying opportunities. Many firms were forced to free up capitol to buy GME, or other heavily shorted companies, by selling other stocks. This created a significant dip in stock prices from companies that weren’t making news headlines.
The S&P 500 sat at around 3860 points as of January 26th, the day before GME hit the news headlines and fell to 3700 points only 3 days later on January 29th. This dip was the green light for me to invest the cash reserves I had saved into some stocks I had on my watchlist that I was bullish on long-term. As of writing this article on February 8th the S&P 500 has recovered and risen to 3907 points while GME went from $483 a share at its peak to hovering around the $60 mark or an 87% decrease. The S&P increase may not seem all too significant but if you invested $10,000 on January 29th within a week you are looking at a healthy $525 increase on your initial investment.
My takeaway from experiencing the latest hysterics from Wall Street is unless you’re doing your due diligence and researching in great detail or running complicated algorithms the best practice of an intelligent investor is to leave the speculation to the professionals, or the ones waiting for their account balance to be wiped out in one fell swoop. Instead, as an intelligent investor, it’s best to decide to buy stocks based on their long term potential, not sporadic and unpredictable rises.
For other sound finance principles, here are 3 essential reads for your financial literacy education.
**This is a guest post by Connor Chew for The Finance Project.