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How Wall Street Works Against Speculators

Mark Twain put forth the idea that there are two times in a man’s life when he should not speculate: when he can’t afford it and when he can. In the world of investment and stocks, it is important to distinguish between what an investor is and what a speculator is. The difference between the two manifests itself in the outcome of one’s stock portfolio – investors, who operate under a long term mindset, reap more benefits. In an era where more and more youth are investing in the stock market, it is important to educate the younger speculators and hopefully alter their mindset into one of an investor.

Investors exchange stocks under the impression that the modern day prices reflect the values of these stocks. They think that in the long run price fluctuations of securities represent developments in the business, and as a result of these developments they either earn or lose money. Speculators, on the other hand, buy and sell stocks based on whether or not the price of these stocks will rise or fall. The judgement of a speculator is based on prediction of the general public’s expectations of the stock, and not in the fundamental stock itself.

In looking at the fundamental elements of a business, one must first understand the business. Today, many of us are too caught up trying to invest in businesses that are far too complex for us to understand. While this may be okay for anyone with a large appetite for risk, it is not a wise decision as an investor. Warren Buffet, for example, refrains from investing in fashion companies because he is unable to predict future fashion trends, or even biotech companies because he does not thoroughly understand them. This is why the majority of his investments are in the technology sector – he sticks to what he understands.

Another quality of investors is that they have a long term mindset. Speculators are obsessed with predicting prices of stocks within the next few weeks, whereas investors buy a stock and plan to have it for ten, twenty years. Regardless of whether one is doing a good job as an investor, Wall Street profits. They profit from the brokerage commissions that are collected after each transaction, regardless of whether the investor himself profits or makes a loss. This financial motivation is exactly why stock brokers often encourage short term trading in non-discretionary accounts, and undermine the success of transitioning from a speculator to an investor. Wall Street simply does not care about your individual success, but you should.

Simply analysing stock prices is not enough when investing in a company. While seeing the charts go higher and higher fuels consumer confidence, this does not indicate that the stock is actually going to increase further. There is a point (there always is) where the stock will balance out and begin to fall. This is known as a stock being undervalued, which is exactly when one should invest in it.

During the COVID-19 pandemic, the stock market took a crash. Companies like Hertz declared chapter 11 bankruptcy, during which their stock was no longer available for investment. Since August, their share price has doubled. Investing in companies that are undervalued at the moment in anticipation that their value will increase in the future is the key to long term trading. Buying a stock and checking on it every day is useless, because its value will only increase marginally. But buying a stock and leaving it to grow over the course of a few years is far more promising. Even if the value of the stock falls in the course of a few months, an investor would not sell. Instead, he would allow price fluctuations to take their course and trust that the charts would begin to rise.

Your wealth is valuable and your financial security is not something to bargain. Being a speculator and having a short term mindset in the world of stocks will not get you very far. Instead, read up on the companies you want to invest in. dig deep into their values, their ethics, and their future plans. Investing money that you can’t afford to lose will only cause distress, because reaping the best benefit takes years. Investing this money in the short term may simply lead to marginally higher profits, and likely losses.

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