Investing versus speculating
02 March, 2016
We've all felt a little like Alice over the last while. There have been moments when we've questioned the sanity of the share market, and moments when we've had our sanity questioned. Share prices have whipsawed on fleeting sentiment often driven by little more than the latest headline. Understanding the difference between investing and speculating is key to capitalising on these conditions.
As investors we establish the worth of a company by focussing on its ability to generate profits, or "earnings power". Earnings power evolves gradually with changes in the company's markets, and its competitive position. Consequently the worth of a company is relatively stable in the short term, and changes steadily over the long term.
In contrast speculating starts with a focus on share prices. Over the short term share prices are driven by people's appetite for risk which, being a human emotion, can be volatile. With little understanding of the companies issuing the shares he owns, the speculator explains changing share prices in terms of stories which rely more on headlines than reasoned analysis.
Over February our portfolio companies issued performance reports. To our delight most of them have strengthened their competitive positions and grown their earnings. Share prices over the period were generally volatile. This gave us great opportunities to add to holdings in winning companies like Bursons, Regis Healthcare and Technology One. And after a long and patient wait, we got to buy a new holding in Henderson Group at an attractive price. We welcome the opportunities afforded by the madness of the market precisely because, unlike Alice's Cat, we believe in the sanity of our investment process.