17th Mar 2021 by Cormac Naughten

Investment Rather than Speculation

Wall Street

“There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market to-day has happened before and will happen again.” - Edwin Lefevre, Reminiscences of a Stock Operator


As the person who heads up MASECO’s discretionary investment management arm, which allows other wealth managers, advisers and private banks to access our US/UK investment expertise, this classic book and the quote from it have come to mind over the last year as I read a variety of articles about the “meteoric” recent rise of trading activity by individual retail “investors” and the reasons for this activity.  It has been variously attributed to boredom during lockdown sparking new interests - with plenty of time to develop them, the role of social media and influencers and even sports gamblers at a loose end acquiring a taste for betting on stocks as an outlet when sporting events were initially suspended during Lockdown Part I.  Others point to it as a “gamification” of investing with inexperienced investors following contributors to forums such as Reddit or copying the trading strategies of the “Popular Investors” at online brokers such as eToroTM.

But this conflates speculation with investing when the two are quite different.  When other advisers and their clients come to MASECO, they are looking to invest rather than to speculate.  They are looking to benefit from capitalism through part ownership of businesses (equities) or lending capital in return for a fixed rate of interest (bonds).  The anticipated return is a combination of capital growth and income with the level of return governed by the degree of risk that the investor is prepared to take.  This requires patience, whereas the speculator is focused on the short-term with the expectation of a significant gain.  The speculator often faces a substantial risk of a total loss of funds.

The protagonist of “Reminiscences..” was trading in the late nineteenth and early twentieth centuries.  Still, the human desire for a quick and easy buck with minimal effort and outlay will always be with us.  Long before the influencers of social media appeared, inexperienced investors had convinced themselves that they could be successful day traders during the Dot Com Boom and throughout the late nineties and noughties the growth of online brokers trading in Contracts for Difference (CFD) in equities or foreign exchange (FX) had much the same effect in encouraging new investors.  In terms of gamification, many of these trading firms directly linked themselves to (probably) the world's favourite game - football.  The last decade witnessed multiple European Champions League football teams signing sponsorship deals with such firms – Barcelona and IronFX, Plus 500 with Atletico Madrid and Atlanta and in the English Premier League FX Pro variously sponsored Fulham, Watford and Aston Villa.  The fact that many Premier League teams are now sponsored in some way by betting firms is, I am sure coincidental!

MASECO’s approach to investment is not based on entertainment or short-term excitement. It is about long-term results. Our investment philosophy is grounded in evidence-based sources of return verified through decades of academic research and implemented using risk modelled portfolios with quantifiable expected returns as opposed to chasing short-term returns with RobinHood, CFDs, or FX.  These expected returns provide a foundation that allows advisers to model assumptions for their clients’ future cash flows and meet their wealth planning requirements.

This investment methodology is something that we work hard at and the results of it can be measured every quarter when we send discretionary managed clients their latest performance reports.  If clients choose to speculate, these results can also be measured.  The UK regulator, the Financial Conduct Authority (FCA), requires FX and CFD firms to do so – eToro‘s risk warning on their website (as at 15 March 2021) informs readers that 67% of retail investors who trade CFDs with them lose money, as do 75% of retail investors when trading spread bets and CFDs with one of the industry leaders - IG Index. We believe using an evidence-based investment approach moves the percentages in our favour rather than against us. Ultimately, that is what prudent investors are trying to do over the long term.

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Use of information: 

Nothing in this document constitutes investment, tax or any other type of advice and should not be construed as such. 
The investments and strategy noted in this document may not be suitable for all investors and making available the information in this document is not a representation by MASECO that any investment strategy is suitable for any particular client. 
This document is provided for information purposes only and is not intended to be relied upon as a forecast, research or investment advice. 

Risk Warnings: 

All investments involve risk and may lose value.  The value of your investment can go down depending upon market conditions and you may not get back the original amount invested. 
Your capital is always at risk. 
Although the information is based on data which MASECO considers reliable, MASECO gives no assurance or guarantee that the information is accurate, current or complete and it should not be relied upon as such. 

Performance: 

Past performance is not a reliable indicator of future results. 

MASECO LLP (trading as MASECO Private Wealth and MASECO Institutional) is a limited liability partnership registered in England and Wales (Companies House No. OC337650) and has its registered office at Burleigh House, 357 Strand, London WC2R 0HS. The partners are Mr J E Matthews and Mr J R D Sellon; Mr D R B Dorman, Mr H Q A Findlater, Mr T Flonaes, Mr N B Tissot, Ms A L Solana. Telephone calls may be recorded for your protection.
MASECO LLP is authorised and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and is an SEC Registered Investment Advisor in the US.
 

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