Identify Your Investment Speculation Gene

Physician's Money Digest, September 2006, Volume 13, Issue 9

Few physicians understand the important role ofpublic speculation as it relates to the success orfailure of their various retirement plan investments.The understanding of public speculation inthe stock market is critical to your success or failureas a stock market investor. We all remember the massivepublic stock market speculation in 1999 and2000, only to see those same public speculators sellout their stocks after September 11.

Public Speculation

The obvious question comes up: Why did peoplebuy stocks at the top in 1999 and 2000 only to besellers at the bottom by 2001 and 2002? The answerlies in the understanding of public speculation, whichis further rooted in our ingrained human nature. Itseems that we all have a speculation gene hardwiredinto our DNA that makes us buyers at the top andsellers at the bottom. As amazing as this sounds, Ican tell you that having worked with literally thousandsof individual investors over the past 26 years,this speculation gene is a fact within our brains. Assuch, and most importantly, public speculation isboth a risk and an opportunity for investors andmust be understood.

Successful investors I've observed over the yearsoperated with at least a practical knowledge of howpublic speculation affected their investments. Whatdid successful investors do differently? The answerlies along the following lines:

  • You must define yourself as an investor and nota speculator
  • Speculators only buy when stocks are up
  • Investors generally buy when stocks are down
  • Investors are the only winners in the long run
  • Speculators will ultimately lose
  • Speculators have a short-term time horizon fortheir holdings
  • Investors buy for the long run. Long-term holdingis the mark of a true investor. Think in terms of3-to 5-year holding periods.

Stock Selection

So what is the practical answer? How does thisknowledge benefit you and your IRA or pension planaccount? Public speculation is only about half of theequation. The other half is stock selection, includingfinancial analysis of balance sheets and income statements.To make a consistent profit you must get bothhalves of this equation correct. In structuring a portfoliowith a high probability of success, you must diversifyacross many quality and growing companies, buywhen the stocks are down, hold for the long term, andsell when the investors once again speculate in yourstocks. Using this approach, you can increase yourchances of achieving a comfortable retirement.

Stephen K. Vaughen is the owner and principal investment advisor/money manager of Pacific Investment Advisors LLC, investmentadvisor representative, and a Series 66 licensed investmentadvisor. Pacific Investment Advisors LLC is a California limited liabilitycompany and an SEC-licensed registered investment advisoryfirm. He welcomes questions or comments at 866-693-6463, 805-955-0650, or svaughen@pacificadvisors.biz. For more information, visitwww.client.pacificadvisors.biz.