Introduction – GameStop and AMC
In this video I am going to look at GameStop and AMC, this is all about the speculation/feeding frenzy instigated on Reddit. There has never been a better opportunity utilizing GameStop and AMC for me to illustrate the difference between investing versus speculating.
There is a critical difference between investing versus speculating. The venerable Ben Graham father of value investing put it this way: “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
Stated more directly, investors focus on the intrinsic value of a business driven by its fundamentals and cash flows. In contrast, speculators focus on price action, especially in the short run. Therefore, the greatest distinction between investing versus speculating is thinking about the business versus thinking about the price. Importantly, price is not a synonym for value. As Ben Graham’s student Warren Buffett stated: “price is what you pay value is what you get.”
The key point here is that distinguishing speculation from investing is not an exercise in morality. In other words, there are no value judgments. The key point is to make sure that the investor recognizes whether they are speculating or investing. Investors should not delude themselves into believing that they have safety of principal and a built-in adequate rate of return when they are focused on price action. Go ahead and speculate if you might because speculation has sometimes paid off. Original speculators in GameStop literally got rich over a very short period of time. On the other hand, speculators coming in a little later got hurt badly. Always proceed with your eyes wide open. If you want to gamble, then gamble. If you are more conservative, invest. But always know which is which and what you are doing.
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Disclosure: No positions at the time of writing.
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