Speculating vs. Investing

Sapient Investment Committee

February 19, 2021

For the past month we’ve watched the drama unfolding around the video game retailer, GameStop, as millions of (mostly) non-professional investors from the online discussion board Reddit.com appeared to band together to pump up the price of company’s stock in a scheme that captured national attention.[1] GameStop’s 5-year stock chart below illustrates its dramatic rise, along with its subsequent fall.

Chart Source: Google Finance

There were a variety of themes and participants involved in this story, but broadly speaking a band of Reddit.com forum members were buying GameStop’s shares in an effort to push up the price as high as possible; meanwhile, a few large hedge funds were making bets that the price of the stock would fall lower than where it started the year – these hedge funds lost billions of dollars as the price of GameStop’s stock rose rapidly.[2] Some in the media billed it as a classic David vs. Goliath moment in the markets.[3] The wake created by the flurry of activity in this one stock sent ripples across equity markets, dominated financial news headlines for multiple days, and caught the attention of politicians as well as regulators, with the SEC having signaled their intentions to investigate the matter further.[4]

One could write at length about the finer details of this real-life drama, covering more arcane investment terms like margin calls, clearing houses, and gamma squeezes, as well as newer Reddit.com terms like tendies, YOLO call options, and diamond hands.[5] In fact, there is talk that multiple movies and TV shows are already in the works.[6] Many thoughtful commentators have already endeavored to reconstruct the GameStop story, and we do not intend to replicate nor substitute their efforts. Instead, we view this as an opportunity to highlight critically important differences between speculating and investing, hoping to illustrate why Sapient regularly engages in one of these activities but not the other.

Understanding the difference between speculating and investing is important and also challenging, in part because the two are often used interchangeably by market commentators. We think stockbroker-turned-author Fred Schwed Jr. said it best in his famous 1940 book, Where are the Customers’ Yachts?:

Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.

We believe another reasonable way to differentiate between the two comes down to time horizon and focus: investing puts risk management first and tends to be focused on the long-term (years rather than months), while speculation puts profits first and tends to be focused on the short-term (months, days, or sometimes hours). The table below does a nice job of illustrating a few other important differences between investing and speculating.[7]

The reason this distinction is important for Sapient and our clients is that we are in the business of wealth management, planning, and preservation. Many of you are aware of our “Win By Not Losing” approach to portfolio construction, which places a premium on risk management and thorough due diligence of all investment selections by the Sapient Investment Committee. Simply put, speculative investments don’t make the grade. We recognize that fortunes can be made in speculative pursuits like the GameStop stock frenzy last month,[8] cryptocurrencies,[9] or even at the roulette table.[10] However, far too many fortunes are also lost in these same pursuits, an unacceptable outcome to us as fiduciaries and advocates for our clients.

We realize there is always a small degree of speculation interwoven into any form of investing, as the future is and will remain uncertain. This is true not only for more volatile assets, like stocks, but even for cash holdings which are fully exposed to inflation, a less transparent risk that destroys value over the long-run. This is why Sapient continues to design client portfolios with a focus on risk management first, targeting more stable compounded growth and positive real returns above the rate of inflation over a full-market cycle.

All of us at Sapient thank you for allowing us to serve you, and we whole-heartedly embrace our responsibility to steward your investment capital with great care.


1. https://www.theatlantic.com/ideas/archive/2021/01/why-everybody-obsessed-gamestop/617857/

2. https://markets.businessinsider.com/news/stocks/short-sellers-sitting-on-19-billion-of-losses-on-gamestop-data-shows-2021-1-1030020684

3. https://www.nytimes.com/2021/01/27/business/gamestop-wall-street-bets.html

4. https://www.npr.org/2021/02/01/962946809/sec-acting-chair-unpacks-the-gamestop-reddit-robinhood-wall-street-debacle

5. https://www.techtimes.com/articles/256459/20210128/diamond-hands-emoji-rocket-trading-lingos-reddit-group-r-wallstreetbets.htm

6. https://www.theverge.com/tldr/22268952/gamestop-stock-stonks-reddit-wallstreetbets-movies-tv-shows-hbo-netflix

7. https://www.usfunds.com/investor-library/frank-talk/investing-vs-speculating-why-knowing-the-difference-is-key/#.YCrJICRKiUk

8. https://www.reuters.com/article/us-retail-trading-roaringkitty/famed-gamestop-bull-roaring-kitty-is-a-massachusetts-financial-advisor-idUSKBN29Y0AF

9. https://www.inc.com/joel-comm/who-is-bitcoins-biggest-loser.html

10. http://www.collegeinsider.com/5-biggest-and-fascinating-roulette-wins-recorded-in-history

Although the statements of fact and data in this report have been obtained from, and are based upon, sources that the firm believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitutes the Firm’s judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Past performance is not a guarantee of future results.

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