Winning the wrong game

“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” Thus did Benjamin Graham, the godfather of value investing, distinguish between the ‘business’ of investing and the ‘game’ of speculation. We don’t think Graham was casting moral judgments upon speculators, so much as simply trying to codify the nature of capital allocation and define some of the ground rules. We have no problem with shorter term speculation either, and indeed we incorporate it within our bespoke managed account  service in the form of systematic trend-following managers. We would argue that there are, in essence, only really two ways of attempting to secure enhanced returns versus the market itself with any reasonable chance of success: value investing, which we would define briefly as “obtaining superior cash flows cheaply”, and momentum investing, or exploiting the various price trends manifest in markets, but doing so without any concern as to underlying valuation during the process, albeit incorporating a defined algorithmic approach and a selection of standardised rules in the context of price evolution, position sizing and risk management. Pretty much everything else, we would argue, comes down to gambling.

Winning the wrong game