This terrific story/post by @SahilBloom reminded me of a blurb from our Q1'20 investor letter.

Here's a little THREAD on the difference between INVESTING vs. SPECULATING...

https://twitter.com/SahilBloom/status/1325827589173374979

1) About 400 years ago, the first formal stock exchange was established in Amsterdam, which made it far easier to transfer ownership in public companies at the going market price. Everyday people could participate in the compounding machine of the market economy.

2) While this opened up opportunity for more people to share in prosperity of businesses, formation of the stock exchange reinforced some of human nature’s more primitive & less desirable qualities, such as: greed, jealousy, herd behavior, & desire to get rich quick by gambling.

3) The formation of stock exchanges quickly divided participants into 2 camps: investors & speculators. Investors take ownership in companies to participate in the growth in earnings power & dividends of a company. They view themselves as owners of companies not renters of stocks

4) Alternatively, speculators do not care about where the price of a stock is trading relative to its intrinsic value but where they think other people think the price of a stock will be next quarter or year.

5) They price stocks based on their expectations of what they think other people’s expectations are likely to be. It’s a zero-sum game with few, if any, consistent winners.

6) The South Sea bubble of 1720 is probably one of the most prototypical examples of speculation. The South Sea Company was a British joint stock company that was granted a monopoly to trade with the islands in the “South Sea” and South America.

7) There was no realistic prospect that trade would take place given Britain’s involvement in the War of Spanish Succession and Spain & Portugal controlled most of South America. It was actually a scheme based on persuading people to swap government debt for shares in the company

8) Officials were incentivized to talk up the share price with persuasive salesmen spreading enthusiasm and high expectations for the value of potential trade in the New World, causing a buying frenzy.

9) The stock price increased from about £100 to £1,000 in less than a year but left many investors ruined when shares quickly cratered back to £100. Not even Isaac Newton, considered one of the brightest scientists in history, was immune to these all too natural human tendencies.

10) He participated earlier in the bubble and cashed out with 100% profit as market prices went to what seemed to be unjustified levels in his opinion. However, as prices continued to advance,

11) the pain of not participating in easy profits resulted in him investing what is estimated to be much of his fortune near the peak of the bubble. Upon the subsequent crash, he ended up losing nearly everything.

12) Newton famously said, “he could calculate the motions of the heavenly bodies, but not the madness of people.” If one of the smartest people in history isn’t immune to these emotions,

13) we do not even want to tempt ourselves by trying to buy things simply based on the belief that we know where the price of shares will trade tomorrow. Speculation is a crowded game of mass psychology that distorts the investing process & which even geniuses are susceptible to.

14) We’ve seen countless examples of people give in to these temptations. Once one becomes more and more concerned with where stocks are going to trade next, they are getting farther away from thinking as a business owner and more like a speculator.

15) For the truly long-term investor, all that matters in investing is where the price of shares is trading relative to the intrinsic value of the company, not whether shares will move up or down tomorrow or next week.