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There's an old quip about traders who become investors: A trader becomes an investor so that he can avoid booking a loss on a trade that goes sour.
The humor in the quip is that time is associated with investing, and that over time a losing trade will miraculously turn into a winning investment. To be sure, longer holding periods are associated with investing, but time is not the distinguishing factor.
Trading is mostly speculation; that is, speculating on the expected movement of a security's price. Speculating has a derogatory ring for many investors … and even to some traders.
It shouldn't. Anticipating security price changes is a legitimate profit-seeking pursuit. I frequently speculate that security prices will change based on my rational analysis. (Many of my colleagues at Wyatt Investment Research do likewise.) Most of my speculating occurs over short time frames, but longer time frames (over a year) are not unusual.
Here's the thing: When I speculate, I know that's what I'm doing. A speculation, or a losing trade, never morphs into an investment. In other words, I stay disciplined to my speculating objective.
I also stay disciplined to my investing objective. Investing is first and foremost about cash flow. By that, I mean cash that flows to you, the investor. I'm referring to dividends, master limited partnership distributions, interest, and rent payments.
Only securities and assets that are expected to deliver predictable periodic cash to investors are rightfully called investments. When I invest, I'm always buying a cash-generating security or asset.
[As an aside, I've been asked about Berkshire Hathaway (NYSE: BRK.a). Is it a speculation or an investment? Because Warren Buffett has repeatedly said he has no intention of paying a dividend on Berkshire stock, I have to call it a speculation. The apparent paradox is that most of the companies that comprise Berkshire’s holdings are legitimate cash-flowing investments, but the cash doesn't flow to Berkshire “investors.”]
I do more investing than speculating. In fact, one of my services – High Yield Wealth – is a pure investment service. Every security in the High Yield Wealth portfolio is an investment, because every security delivers reliable periodic cash flow to its owner. (The portfolio itself yields over 7.2%)
I'll admit that I frequently give price targets when recommending an investment in High Yield Wealth. But that price target is based on expectations of rising cash flow or a change in market attitude toward the investment. Price targets are at best a secondary consideration. Cash flow to the investor is always the primary consideration.
In fact, if an investment in the High Yield Wealth portfolio were to eliminate its cash payout, that investment would be sold. I wouldn't mentally slot it into a “speculation” category in my mind in the hope of avoiding a loss.
Investing is a time-intensive endeavor, which is why time is associated with investing. Time is required to accumulate cash and to benefit from periodic increases in cash flow. That said, it's cash, not time, that is the defining factor. (Over time, many investments in the High Yield Wealth portfolio have increased their cash distributions.)
Maintaining the distinction between investing and speculating is key to becoming a successful investor or speculator. Investors and speculators get into trouble when they commingle the two: discipline is lost, analysis is forgotten and the endeavor turns into an exercise based on self-deception and wishful thinking.
Because this is the time of year when we instinctively take stock of ourselves and search for improvement, this is the perfect time to remind ourselves of our goals when we enter the market.
Successful investment builds wealth, as does successful speculating. But the two are mutually exclusive. A person can either invest or speculate; he can't do both simultaneously. To do otherwise is to turn a legitimate business pursuit into a money-losing hobby.
Editor's note: When I first considered a high-yield investing strategy, my goal was to devise a portfolio that yielded between 6% and 8% annually. To be sure, that's a worthy starting point. But years from now, I should expect to own a portfolio that yields 25%, 50% and even 100% on the cost basis of many of the investments in that portfolio.
If you would like to learn how you can boost the yield of your portfolio… and earn bigger monthly payouts… then consider taking a free, 30-day trial to our income service, High Yield Wealth. You’ll discover exactly how we are built our cash-cranking portfolio and get access to every special report and investment recommendation. Click here to try High Yield Wealth, free.