Investment is fundamentally different from speculation

May 2, 2022
by Noriyuki Morimoto

What separates investment from speculation is rationality of judgment and conservatism. But investment can easily fall into speculation, as it is much more difficult to be rational and conservative than it is to be emotional.

Investments rarely result in losses as long as they remain strictly within the framework of rational value judgments and logical analyses of investment values. Of course, if the investment carries a market price, temporary valuation losses are inevitable, but that is not a fundamental loss.

Real losses as an impairment of value are often not due to rational investment decisions, but to the inclusion of some speculative element.

A rational investment decision is one that calculates value based on conservative assumptions. This is the basic factor of investment. Price expectations involve a speculative element. Originally, in the investment world, the key discipline was not to predict. An investment is a judgment of value, never a price expectation. Price projections are speculation.

Mere price fluctuations cannot be the basis for investment decisions. Fluctuations in value can be talked about, but not fluctuations in price. Price fluctuations are a condition of the transaction and must be accepted. It cannot be subject to control in investment decisions. Retention of value and avoidance of impairment to value are elements of investment decision and subject to investment management.

The determination of whether a decline in value is happening behind the decline in price is an important investment judgement. If there is no decrease in value behind the drop in price, then it would be a true investment opportunity. Investing is to make judgments solely on value and to take actions based on price conditions.

Acting based solely on price fluctuations, without looking at value fluctuations, is speculation. Speculation is a gamble, so the winning rate is 50%. In fact, it is often lower than 50%, because the folly of psychological behavior intervenes.

Investment, however, is a science. Therefore, the rate of return implied in the value analysis of the investment will be realized in the time frame implied in the value analysis. The important thing is not to be distracted by the noise of price fluctuations along the way.


[Category /Investment Philosophy]

Noriyuki Morimoto
Noriyuki Morimoto

Chief Executive Officer, HC Asset Management Co.,Ltd. Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (now Willis Towers Watson) in 1990.