Invest, Don’t Speculate

Before you buy shares of a mutual fund as the stock market sets new highs, a check of your emotions and your motives may be in order.

Are you truly investing your money, committing it to a promising situation that promises to pay a decent return over time - or are you speculating, hoping to ride the market wave?

The distinction is a very important one, for each individual fund customer and for the financial markets as a whole.

If most of the 30 million or so people who own funds now are bona fide investors, then they presumptively have helped provide the U.S. and world economies with valuable long-term capital in return for the hope of generous rewards.

But critics argue that a significant number of fund owners, especially among the newcomers in the ranks, may prove to be speculating, not investing, whether they realize it now or not.

Sooner or later, the skeptics say, the stock market and the fund industry will undergo a shakeout that scares a lot of the “hot money” away, maybe bringing an unhappy ending to the story of the fund boom.

But as vague as the terms investor and speculator may sound, fund managers say clear distinctions can be drawn. For instance, they say, when an investor and a speculator each look at the same stock, the investor focuses on the present and possible future value of the underlying company, while the speculator tends to be preoccupied with the stock’s price.

“The term ‘investor’ denotes a long-term supplier of capital,” says Charles Royce, president of New York-based Royce Funds family. “In contrast, a speculator is one who takes opportunistic risk in hopes of generating quick profits.

“In essence,” Royce writes in the funds’ latest semiannual reports, “investors expect to get paid by the correct assessment of underlying business fundamentals, whereas speculators count on others (often referred to as greater fools) to buy them out profitably.”

Nobody argues that investors always win and speculators never do. Indeed, one problem faced by people who consider themselves investors is the verdict on their work, as rendered by the markets, is always being influenced by the ups and downs of speculative psychology.