Speculating on Investment, Or Investing in Speculation?
The two words "investment" and "speculation" are to some synonymous, to others diametrically opposed. I find myself in the latter camp, though the confusions and conflations these two terms suffer makes it difficult to say the least even to articulate what about the differences should be emphasized. I guess I'll first let a supposed expert discuss the difference. Take it away, Albert_H._Wiggin, former president of Chase National Bank, being interrogated by Ferdinand Pecora:
MR. PECORA. When you hear that a person is going to invest in securities, what does that convey to you?
MR. WIGGIN. That they have money to use, that they want to use it in a way that will give them an income return.
MR. PECORA. And when you hear that a person is going to speculate in the stock market what does that convey to your ind as indicating what kind of operation it is?
MR. WIGGIN. They they [sic] are planning to make purchases and sales hoping to make a profit.
MR. PECORA. Hoping to make a profit by resale at a higher figure?
MR. WIGGIN. Rather than income from the investment; yes.
MR. PECORA. Well, now, when [Mr. Pecora outlines a company that engaged in a three-party deal known as a "syndicate" investigated by the commission], did it contemplate going into a speculative transaction or an investment transaction?
MR. WIGGIN. I do not consider that it was an investment, that it was intended as an investment, and I do not think they regarded it as a speculation. I think they regarded it as a temporary purchase, but not done for the purpose of speculation.
MR. PECORA. As a temporary purchase, did you say?
MR. WIGGIN. As a temporary investment.
MR. PECORA. As a temporary investment, do you say?
MR. WIGGIN. As a temporary investment, I would say.
MR. PECORA. They did not make that investment for the purpose of getting income from it particularly, did they?
MR. WIGGIN. No; I think they intended to turn it over.
MR. PECORA. They expected to turn it over within a short period of time at a profit?
MR. WIGGIN. They hoped to do so.
MR. PECORA. And the period of time within which they expected to turn it over at a profit was originally fixed in the agreement among the participants as 60 days, a 60-day period.
MR. WIGGIN. Whatever it was.
MR. PECORA. Well, the exhibit that has been put in evidence shows that. I am now referring to exhibit no. 9 of this date.
MR. WIGGIN. Yes.
MR. PECORA. That was a speculative operation, wasn't it, which was contemplated in behalf of the syndicate at that time, as distinguished from an investment operation?
MR. WIGGIN. Possibly. I think speculation is a very difficult term to describe. I think whether it is a speculation or not is dependent upon the wealth or capital of the person doing it, whether they can afford to stay with it. There are a great many things that enter into the definition of speculation.
(Stock Exchange Practices. Hearings before the Committee on Banking and Currency Pursuant to S.Res. 84 and S.Res. 56 and S.Res. 97, aka the Pecora Commission Report, p. 176, highlighting mine. Note: Links to a PDF file; also, page numbers in PDF are different than those of the report. I use the page number here found in the report.)
"There are a great many things that enter into the definition of speculation." While true, I think Mr. Wiggin was trying to dodge the answer. After all, several less than flattering actions on his part were revealed during Pecora's investigation, including the fact that he shorted the stock of Chase National Bank . . . while he was president of Chase National Bank! To admit that his participation in the syndicate trading operation was a speculative venture would be to admit to speculation as opposed to investment, something which carries a bit of a negative connotation.
Ah, but here's the thing: If I put money into stocks, am I investing that money? Or am I speculating that the resale value of the stocks will improve? After all, for the stocks to produce value outside of their resale price I would probably have to hold them for quite some time and hope that the dividends eventually exceed my purchase price. Seriously, who does that anymore? When it comes to stocks, most of us hold them for a few years, tops.
That makes us all speculators on the market. If we own a company stock and do not hold it for the dividend value alone, we are speculating. That's a reality we should all confront.
So, if no one invests in company stocks anymore, what is an investment? Ah, now we're getting into interesting territory. Investments should be physical, not just places to speculatively park excess money so it doesn't lose value through inflation. How about building something?
A few years ago, bradhicks noted that the Works Progress Administration under President Roosevelt produced wildly practical investments simply by hiring the unemployed and having them build, as much by hand as possible, stuff. Some of the buildings, like National Guard Armories, can still be found today:
I saw an article a while back (citation lost, sorry) by an architecture student who'd gotten curious about what ever happened to all those National Guard armories, so he got some grant money and went on a national tour. And what he found was that in almost every single rural town in America and even in most suburbs, those "ridiculously over-built" armories were the first truly solid building ever built there. And because they were "ridiculously over-built," they're still in use. A few are grocery stores or other businesses. Some are schools or community centers. Most are police stations or city halls. Almost all of them double as emergency shelters for the town during natural disasters. So the student did some math to figure out, using standard construction techniques and assuming standard maintenance costs, and assuming that we would have built something to do those jobs some time between then and now, what it would have cost some of those counties to have done without those buildings. And compared that to what it cost them and their descendants in federal tax money to support the WPA and to pay off its debts. The WPA actually made money on its most "useless" projects.
You can take almost any WPA project from the 1930s that was widely mocked as a pointless waste of money; nearly all of them paid every penny back in long-term savings to the taxpayers, in taxes paid by people who learned their trade on those projects who would have otherwise stayed on the dole, or both.
A solid building proves an investment. A piece of paper? Unless it pays dividends and you plan to keep it for generations, not an investment. In fact, why don't I show a picture of a real investment?
Thousands of years ago, people farmed rice in river valleys. The hills they left alone. Rice must be flooded, after all, and water runs off hillsides. Then, who knows why, some industrious worker had some time as the rice was growing and thought to take a shovel or similar digging implement and start leveling layers of the hills nearest his paddies by cutting into the hillside, stacking rocks in retaining walls about half-way through, and filling the dug earth back into the rock wall, making a level area suitable for flooding where once there was a slope. After backbreaking work, another paddy emerges. The farmer could grow more rice and thereby offer his family and himself greater food security! Another year between planting and harvest, another layer of hillside, another paddy emerges. Over hundreds of years the surrounding hills are transformed into productive farms. Thousands of years later, they will still produce.
That's an investment.
And that's the kind of thinking in which we should all be engaged. How can you or I or anyone take excess revenue and, instead of betting on pieces of paper like contestants in a beauty contest, create an investment that will work? For that to work, we need to push for changes to law. We need to get away from this old get-rich-quick mentality and demand returns not for bond or stock trading but for solar panel installations, for wind turbines, for who-knows-what the next generation of non-fossil burning energy will become. We need to rebuild our older towns, get people living once again close enough to the store to walk the groceries home. We need to abandon the suburbs like old shares of Washington Mutual or Lehman Bros. before some retro hipster once again thinks a cul de sac might be a cool place to live.
Sooner would be better, simply because we as a nation are running out of the go-juice that makes economic activity - you know, investment - a possibility. Every drop of gas that enables the construction of a structure that allows us in the future the freedom to not use another drop of gas . . . that is an investment.
MR. PECORA. When you hear that a person is going to invest in securities, what does that convey to you?
MR. WIGGIN. That they have money to use, that they want to use it in a way that will give them an income return.
MR. PECORA. And when you hear that a person is going to speculate in the stock market what does that convey to your ind as indicating what kind of operation it is?
MR. WIGGIN. They they [sic] are planning to make purchases and sales hoping to make a profit.
MR. PECORA. Hoping to make a profit by resale at a higher figure?
MR. WIGGIN. Rather than income from the investment; yes.
MR. PECORA. Well, now, when [Mr. Pecora outlines a company that engaged in a three-party deal known as a "syndicate" investigated by the commission], did it contemplate going into a speculative transaction or an investment transaction?
MR. WIGGIN. I do not consider that it was an investment, that it was intended as an investment, and I do not think they regarded it as a speculation. I think they regarded it as a temporary purchase, but not done for the purpose of speculation.
MR. PECORA. As a temporary purchase, did you say?
MR. WIGGIN. As a temporary investment.
MR. PECORA. As a temporary investment, do you say?
MR. WIGGIN. As a temporary investment, I would say.
MR. PECORA. They did not make that investment for the purpose of getting income from it particularly, did they?
MR. WIGGIN. No; I think they intended to turn it over.
MR. PECORA. They expected to turn it over within a short period of time at a profit?
MR. WIGGIN. They hoped to do so.
MR. PECORA. And the period of time within which they expected to turn it over at a profit was originally fixed in the agreement among the participants as 60 days, a 60-day period.
MR. WIGGIN. Whatever it was.
MR. PECORA. Well, the exhibit that has been put in evidence shows that. I am now referring to exhibit no. 9 of this date.
MR. WIGGIN. Yes.
MR. PECORA. That was a speculative operation, wasn't it, which was contemplated in behalf of the syndicate at that time, as distinguished from an investment operation?
MR. WIGGIN. Possibly. I think speculation is a very difficult term to describe. I think whether it is a speculation or not is dependent upon the wealth or capital of the person doing it, whether they can afford to stay with it. There are a great many things that enter into the definition of speculation.
(Stock Exchange Practices. Hearings before the Committee on Banking and Currency Pursuant to S.Res. 84 and S.Res. 56 and S.Res. 97, aka the Pecora Commission Report, p. 176, highlighting mine. Note: Links to a PDF file; also, page numbers in PDF are different than those of the report. I use the page number here found in the report.)
"There are a great many things that enter into the definition of speculation." While true, I think Mr. Wiggin was trying to dodge the answer. After all, several less than flattering actions on his part were revealed during Pecora's investigation, including the fact that he shorted the stock of Chase National Bank . . . while he was president of Chase National Bank! To admit that his participation in the syndicate trading operation was a speculative venture would be to admit to speculation as opposed to investment, something which carries a bit of a negative connotation.
Ah, but here's the thing: If I put money into stocks, am I investing that money? Or am I speculating that the resale value of the stocks will improve? After all, for the stocks to produce value outside of their resale price I would probably have to hold them for quite some time and hope that the dividends eventually exceed my purchase price. Seriously, who does that anymore? When it comes to stocks, most of us hold them for a few years, tops.
That makes us all speculators on the market. If we own a company stock and do not hold it for the dividend value alone, we are speculating. That's a reality we should all confront.
So, if no one invests in company stocks anymore, what is an investment? Ah, now we're getting into interesting territory. Investments should be physical, not just places to speculatively park excess money so it doesn't lose value through inflation. How about building something?
A few years ago, bradhicks noted that the Works Progress Administration under President Roosevelt produced wildly practical investments simply by hiring the unemployed and having them build, as much by hand as possible, stuff. Some of the buildings, like National Guard Armories, can still be found today:
I saw an article a while back (citation lost, sorry) by an architecture student who'd gotten curious about what ever happened to all those National Guard armories, so he got some grant money and went on a national tour. And what he found was that in almost every single rural town in America and even in most suburbs, those "ridiculously over-built" armories were the first truly solid building ever built there. And because they were "ridiculously over-built," they're still in use. A few are grocery stores or other businesses. Some are schools or community centers. Most are police stations or city halls. Almost all of them double as emergency shelters for the town during natural disasters. So the student did some math to figure out, using standard construction techniques and assuming standard maintenance costs, and assuming that we would have built something to do those jobs some time between then and now, what it would have cost some of those counties to have done without those buildings. And compared that to what it cost them and their descendants in federal tax money to support the WPA and to pay off its debts. The WPA actually made money on its most "useless" projects.
You can take almost any WPA project from the 1930s that was widely mocked as a pointless waste of money; nearly all of them paid every penny back in long-term savings to the taxpayers, in taxes paid by people who learned their trade on those projects who would have otherwise stayed on the dole, or both.
A solid building proves an investment. A piece of paper? Unless it pays dividends and you plan to keep it for generations, not an investment. In fact, why don't I show a picture of a real investment?
Thousands of years ago, people farmed rice in river valleys. The hills they left alone. Rice must be flooded, after all, and water runs off hillsides. Then, who knows why, some industrious worker had some time as the rice was growing and thought to take a shovel or similar digging implement and start leveling layers of the hills nearest his paddies by cutting into the hillside, stacking rocks in retaining walls about half-way through, and filling the dug earth back into the rock wall, making a level area suitable for flooding where once there was a slope. After backbreaking work, another paddy emerges. The farmer could grow more rice and thereby offer his family and himself greater food security! Another year between planting and harvest, another layer of hillside, another paddy emerges. Over hundreds of years the surrounding hills are transformed into productive farms. Thousands of years later, they will still produce.
That's an investment.
And that's the kind of thinking in which we should all be engaged. How can you or I or anyone take excess revenue and, instead of betting on pieces of paper like contestants in a beauty contest, create an investment that will work? For that to work, we need to push for changes to law. We need to get away from this old get-rich-quick mentality and demand returns not for bond or stock trading but for solar panel installations, for wind turbines, for who-knows-what the next generation of non-fossil burning energy will become. We need to rebuild our older towns, get people living once again close enough to the store to walk the groceries home. We need to abandon the suburbs like old shares of Washington Mutual or Lehman Bros. before some retro hipster once again thinks a cul de sac might be a cool place to live.
Sooner would be better, simply because we as a nation are running out of the go-juice that makes economic activity - you know, investment - a possibility. Every drop of gas that enables the construction of a structure that allows us in the future the freedom to not use another drop of gas . . . that is an investment.