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Strategies & Market Trends : ZenWarrior's Trading Paradise -- Ignore unavailable to you. Want to Upgrade?

To: p40warhawk who wrote (346)	4/4/2001 12:26:58 AM
From: TimbaBear	Read Replies (1) \| Respond to of 2462

P40...I hope you don't mind me entering into this little discussion on what constitutes investment. First, I believe one has to understand the concept of "risk". If you define any form of risk as "gambling", then it won't only be the markets that you'll be out of, it will be most things worth achieving in life as well. If, however, you define risk as a "chance of loss that is quantifiable", then a whole new arena opens up. Gambling is part of that arena, but is reserved for those risks which we assume over which can exercise no control, or don't wish to take the time or effort to quantify. Money put into a CD at a bank has risk. It has the risk that the bank will become insolvent(mostly offset by FDIC), if it does become insolvent, there is the risk that FDIC won't be solvent(mostly viewed as negligible because the US Govt. has never defaulted), there is the time-value of money risk that is incurred if the bank is insolvent and the FDIC takes a long time to settle claims(during which the money is likely not earning anything), there is re-investment risk when the CD matures(what if the interest rates are lower then?), etc. We assume these risks when we buy a CD and assign a value to them which is the premium in interest rate we are paid over the lower risk T-Bill rates. For higher returns on our invested capital, we must turn elsewhere and identify and evaluate and try to quantify the risks of each of these alternatives as well as estimate the potential reward for assuming those risks. We do that when we buy our home vs. renting; when we buy a car vs. public transportation or leasing; when we buy bonds, or equities instead of leaving the money under the mattress in in the savings account. I have certain money that is set aside for "growing it". I am purposely not using the word "investing", because that word may be limiting the options I have for employing that capital. But I will "employ the capital" in whatever endeavor meets my standards for acceptable risk assumed for potential reward to be gained. When using the equities markets for the employment of that capital, I might be "investing" part of it(say by purchasing a stock that has a dividend and potential for growth); I might be speculating with it(say by buying or selling options); I might be hedging it in a way that caps both how much I can make and how much I can lose(like arbitrage or spreads); or speculating by taking short term positions that seem to be a reasonable assumption of risk for the potential short term reward(swing trades and shorts). But I have to think of it as "employing capital", that helps me keep some of the subjective stuff out of my thinking. Some folks(Graham and Dodd) think that if one does not fully quantify all risks and purchase only those securities that have a "reasonable margin of safety", that one is not investing, they are speculating. Other folks have other definitions. I have found that I have had to be rigorously honest with myself and determine what it is that I do. I suspect that we all have that question to answer. Timba