I enjoy reading a lot and Gerald M Loeb's renowned book ,while an oldie, is still very much relevant today as it was then. In the 2nd Chapter of his book he spells out the place speculation has in surviving and thriving in the investment arena
Speculative Attitude Essential
By Gerald M Loeb
From the Book
The Battle for Investment Survival (1932)
People expect too much of investment. They think, incorrectly, that they must always keep their money “working”.
If investment were merely what most people think it is – just buying something for income- fortunes would be extremely easy to establish by simply letting the money compound itself.
……………………Investment is far more complicated than just getting money value back with interest or at a profit. When the prices of things one buys are going down, the principal danger of loss is selecting a bad risk or paying too much for it. If we were sure prices would fall, cash itself would become an ideal investment.
But when we fear prices will rise, then the problem becomes not merely increased, but multiplied. Mr Vanderclip illustrated this point in a dramatic way, too. He showed that if an investor had placed $1,000 in a savings back in 1900 and had allowed it to accumulate at compound interest, he would have had $2,000 in 1920. However, according to Mr Vanderlips’s calculations, the investor would have had to add from his pocket another $1,000 in order to buy exactly as many goods as could have purchased during the 1900 with the original $1,000 deposit.
That is the greatest threat to successful preservation of capital – the varying purchasing power of money. There are many other threats, such as taxation, regimentation (including rationing), war, new inventions, political changes, and revolutions. The weather and shifts in mass psychology (such as social media) both have very great effect.
No, the hope of the average investor cannot in practice be realised. The preservation of capital should be looked upon as something that normally cost a price. It should not be regarded as merely incidental to a rental or profit.
Indeed, should some super-solvent agency agree to preserve the buying power of capital for a substantial length of time at the stated fee per annum, informed people would embrace the plan enthusiastically if they felt there was any real possibility of the agency staying solvent.
The number of individuals possessed of the necessary flair for combating the obstacle to successful investment and possessed of the necessary drive to cultivate his ability thought education, experience, and the right connections is comparable to the proportion similarly successful in other fields requiring a like background. Really top-flight investors are no more frequent, proportionately, than capable Army Generals, Navy admirals, doctors, scientists, lawyers, artists, composers and musicians. Some individuals can invest and speculate sufficiently better than the average to show an overall profit. Many who lose only a portion of their spending power are, in fact, doing better than most.
The purpose of this and subsequent chapters is to help the hardheaded few to make profits, which cannot be done without the acceptance of the forgoing logic as the first step.
A very clear definition of the investor’s objective is equally necessary. To achieve success, once must set the investment goal very high. Not only that but the goal must also be a speculative one, for only there lies safety –paradoxical as that may seem. The buyer must not merely seek the repayment at some future time of the dollar capital invested. Nor can he concern himself excessively with income, in whatever form it may be obtained as an incident of ownership while the investment is held.
The programme must be aimed at obtaining a sufficient profit to offset the average losses sustained in all investment, the inevitable personal errors of judgment, the effect of currency depreciate and taxation, and the unexpected necessity of having sometimes to close out an investment earlier than originally planned.
Definitions make dry reading, but it is essential that we have a clear conception of the financial terms which are so often loosely used and which are basic to our present subject. In the first place, we are limiting our concern in these discussions to the proper handling of capital in the form of securities or cash.
The problem of preservation of capital is that of storing for future use today’s excess spending power, in such a way that it can be reconverted to usable funds at any time without an overall loss.
“Investment” is fundamentally an effort to obtain, in addition, a rental from others for the temporary use of capital.
“Speculation” means using the capital in such a manner that it’s spending power is not only persevered but also increased, through the realization of profit in the form of dividends, or capital gains or both.
Successful investment is a battle of financial survival.