Speculating vs. Investing

February 26, 2021

Over the past several weeks, significant volatility in the share price of video game retailer GameStop dominated news headlines. The shares began to soar at the end of January when investors united on social media platforms to drive the stock price higher (an outcome that was possible given the company’s relatively small size and limited float). Amazingly, the stock would eventually reach a high of more than $480 per share – 25 times higher than where shares had traded at the beginning of the year. But the gains proved short-lived. As of February 23rd, GameStop trades at $44 per share – down by more than 90% from the highs reached on January 28th.

At the time of this writing, speculative trading has resumed. Ultimately, the GameStop saga serves as a timely reminder about the importance of adopting a long-term investment strategy, as well as the risks associated with short-term speculation. Taking a speculative approach is in some ways akin to gambling. You may get lucky from time to time, but that’s not a thoughtful and proven strategy for compounding wealth. At The Fiduciary Group, we believe in the importance of growing wealth strategically, using best practices that have helped generations of clients achieve their financial goals since our firm’s inception in 1970.

When we decide to invest in a stock, we do so based upon a detailed analysis of a company’s historic financial results, as well as reasonable assumptions of what the next 5-10 years might look like. This process is no different than how you would approach the decision to buy a small business. The same principles apply when buying minority interests (shares) of a public company.

Over the long-term, the stock market has delivered compounded annual rates of return of 8-10% per year. In order to achieve the results delivered by the market, investors need to ride out periods of market volatility and resist the temptation to resort to speculation and short-term decision making.

At times, it may be tempting to jump on the speculation bandwagon, but that approach is unlikely to result in lasting investment success. Instead, we recommend that you consult with your advisor to develop a long-term plan that will put you in the position to achieve your goals.

Want to learn more about strategic ways to grow your investment portfolio? Please reach out to us for assistance.