STREET DOGS

From Howard Marks at Inside Investing: The word “speculation” is commonly applied to risky investments. And the word “risky” is usually used by the masses to describe investments in assets of low quality or uncertain outlook.

On the other hand, “safe investment” is commonly associated with assets of high quality and/or those with a positive outlook. However, because of these desirable characteristics, so-called “safe investments” usually sell at high prices. And high prices have the potential to turn high-quality assets into risky investments.

The more insightful investor knows that “high quality” and “favourable outlook” are in no way synonymous with “good investment” and certainly not with “safe investment”. Rather than quality, the greatest determinant of a safe investment is cheapness. Buying high-quality assets at high prices can be risky.

Low-quality speculations are usually looked down upon. But widespread derision usually results in low prices, which can make for high return potential. Thus buying low-priced low-quality assets can be very rewarding. They may be called rank speculations when they’re made, but they’re often relabelled astute investments when big profits are harvested.

John Maynard Keynes said “a speculator is one who runs risks of which he is aware and an investor is one who runs risks of which he is unaware”. What did Keynes mean? So-called “speculative” assets are usually the subject of low expectations on the part of the investing crowd. If those expectations are exceeded, profits can result. But high-quality investments are often premised on lofty expectations. When that occurs “investments” can turn out to have carried “risks of which the investor was unaware”. By his standard, I’d much rather be an intelligent speculator than a conventional investor.