Investing in a public company is essentially an act of prediction. It’s predicting that in the future, the company’s stock price will increase compared to the price it’s bought at now.
To some extent, the world operates on rationality. Effects happen because of causes. Therefore, the act of predicting in investing should also be based on rationality, in this case, business rationality. After all, a company is a business entity.
Predicting using business rationality means depending on how well the company can generate revenue in the future. This ability comes from its resources, past track record, including the people making decisions and running the company.
Predictions that don’t rely on business rationality, in my opinion, fall into the category of speculation. Speculating on what others will do, where their actions aren’t always based on business rationality. Speculating on macroeconomic conditions, commodity prices. Such speculation isn’t only done by the public but can also be done by management in running the company.
The difference between prediction and speculation is sometimes very thin. An investor should frequently ask themselves.
The subtle difference between prediction and speculation
When analyzing the performance of a public company’s business, an investor may think they are making a prediction when, in fact, what they are doing is speculation.
This occurs when the investor tries to predict the improvement in a company’s business performance based on various conditions such as management promises, ongoing expansions, or improvement initiatives planned by the company. However, all the information provided by the company may only be speculative if the company lacks the ability to execute or realize what they have promised and planned.
A company may promise to increase sales, but the products they sell may not be well-known or may not even be the preferred choice of their target market. Meanwhile, the company lacks a clear marketing strategy or marketing budget. It could be said that the company is “speculating” when they make promises and predictions. Investors who blindly follow the company’s promises and predictions without conducting independent analysis are also engaging in speculation instead of prediction.
To avoid such scenarios, an investor must return to their circle of competence in understanding the company they are analyzing. Without having a circle of competence, an investor can easily be swayed by the promises made by the company’s management.
Leave a Reply