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‘What’s the difference’ I hear you saying. The best way to start this conversation is to define each term.
A speculator is involved in speculation. Speculation as defined by Dictionary.com is:
‘engagement in business transactions involving considerable risk but offering the chance of large gains, especially trading in commodities, stocks, etc., in the hope of profit from changes in the market price. ‘
An Investor makes investment(s). Investment is defined by Dictionary.com as:
‘the investing of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.’
Read those definitions again. What’s the difference? One appears to be much riskier than the other and includes ‘trading’, which suggests very short holding periods. This activity is attempting to derive a profit from ‘market price’ movements.
The other seeks return from, among other things, ‘income’ or ‘interest’. This suggests a longer term holding period and is focused on deriving income from the investment and has nothing to do with price movement.
Peter Thornhill, author of Motivated Money used a great analogy recently in a presentation he gave at a conference I attended. He asked the question, “Would a business owner sell their business every year just to restart it? Or would they build that business up so they could derive an income from it year after year after year?” I’ve paraphrased that quote but I hope you see his point. It is this: If we continually buy and sell shares we miss out on the opportunity to receive the income that the business pays out to its shareholders in the form of….. dividends.
I believe that as an Investor we must buy assets and allow those assets time to give us a return in the form of income. Before I go on I need to define two more terms: Asset and Liability. I prefer a very simple definition of both:
Asset – Something that puts money in your pocket or doesn’t cost you anything to hold.
Liability –Something that costs you money to hold or takes money out of your pocket.
Therefore, I believe that we should focus on the INCOME an investment provides us whether that be shares or property. By focusing on how much your portfolio returns each year in income you care less and less about its value. Getting income from your investment is, in my opinion more important than having it go up in value. Why? Income enables you to do things: Buy stuff, go on holidays, pay for your kids education, re-invest, etc.
There is much more to this approach to investing but hopefully this has got you thinking. This approach is one that I believe in strongly and I build my clients portfolios around it. The long term benefits are well known and very compelling. Whether you are retired and living off your assets or a wealth accumulator building your asset base, it’s important that you invest for income.
To find out more or to book a consultation please contact our office on 02 8004 0592.