Brad Feld

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Investment vs. Speculation

Mar 02, 2009

As I read the Berkshire Hathaway 2008 Annual Report, a thought kept popping into my mind that had also come up over and over again while reading Bogle’s Enough: True Measures of Money, Business, and Life.  “Be an investor, not a speculator.”

As a venture capital investor, I have a long term time horizon on my investments.  Since I’m investing very early in the life of a company, I’m usually an investor for five or more years.  Sometimes I’m an investor for over ten years.  I’m rarely an investor for less than a year, although it happens occasionally.

I don’t invest directly in the public markets and I haven’t for a long time.  Periodically I end up with a public company stock as the result of the sale of a company I’m an investor in to a public company, or via that mythical thing called an “IPO”.  In these cases, I have a very specific strategy for exiting my position in the public company over time. 

I do have public market exposure, primarily through a combination of index funds (and equivalents) and some hedge fund investments with friends.  However, I pay zero attention to this on a daily, weekly, or monthly basis.  When I look at the aggregate performance over any meaningful period of time, it is irrelevant when compared to my performance as a VC and angel investor.

When I reflect on this, I realize that I spend 99.9% of my time as an investor and 0.01% of my time as a speculator.  Whenever I realize that I’m in a speculative thought process (such as noticing the Dow on CNN on the ubiquitous airport TVs), I immediately try to stop.  My goal is to spend 100% of my time as an investor.

Not surprisingly, there’s a huge amount of noise going around the system about speculation that is masquerading as investment.  Worst, the two get conflated on a regular basis in the context of what the government should be doing (e.g. incenting “investment” when they are merely either "incenting speculation” or “encouraging speculation”).  Of course, the endless stream of talking heads in the media don’t help this distinction.

When I read Buffett or Bogle, the distinction between investment and speculation is painfully clear to me.  I believe that much of the pain the global financial markets are feeling right now is a direct result of speculation.  As a result, I’m trying to come up with some simple parables for “investment vs. speculation.”  For example, “if you don’t understand what you are investing in, it’s speculation.”  Or, “if your time horizon is less than two years, it’s speculation.”

One of values I’ve always adhered to is that “I’m an investor, not a speculator.”  Now that the government is deeply in the mix, I think we need to spend a lot more “system time” thinking about how to incent and motivate investment, and how to avoid speculation.