Have you ever wondered whether you’re investing wisely or simply speculating?
Charles Mackay observed, “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”
His words resonate powerfully, especially when we examine the timeless lessons of history.
In the 1630s, “Tulip Mania” gripped the Netherlands. Rare tulips, prized for their vibrant colours, became symbols of wealth and status. Prices skyrocketed—some bulbs sold for more than a house. Speculators traded feverishly, often without seeing the flowers. Then, the bubble burst. Confidence vanished, prices collapsed, and fortunes crumbled overnight.
This cautionary tale highlights the critical truth that speculation and investment are not the same. Both may rise in value, but the difference lies in their foundation.
Investments generate cash flow. A rental property earns income, a machine produces goods, and a business creates profit.
Speculations, like cryptocurrencies rely entirely on the hope that someone will pay more for them in the future. But what if no one does?
Of course, speculation can yield significant rewards if you play the game well. When it comes to investing, however, fundamentals are everything.
The key to profitable investing lies in buying assets below their true value. However, sometimes paying a premium for quality assets is inevitable, but the returns often make it worthwhile.
But here’s the challenge: how do you assess the intrinsic value of something like cryptocurrency?
How can you ensure you have a margin of safety—a buffer that protects you from overpaying for cryptocurrencies with whimsical names such as fart coin, a rare Thai hippopotamus coin and grey squirrel coins?
I am not joking, those coins’ values have skyrocketed since Trump came to power.
These are the questions every serious investor must confront.
Cryptocurrencies spark passionate debate. Advocates see them as hedges against centralised corruption.
They are not without vulnerabilities such as overissuance, concentration of power among crypto whales and the lack of intrinsic value.
Not to mention the crypto scams and pump and dump schemes.
Even Bitcoin, hailed as the pioneer of decentralised currency, is largely controlled by a few major holders, including its enigmatic founder, Satoshi Nakamoto, and U.S. institutions.
They are the first movers who benefit from buying it early.
History is littered with examples of unregulated systems collapsing under their own weight.
Take the era of unregulated banks, over issued currencies, rampant inflation, and catastrophic bank failures.
As Friedrich Hegel remarked, “The only thing we learn from history is that we learn nothing from history.”
The patterns are clear. When greed eclipses common sense, prices soar. Fear of missing out drives reckless behaviour. People worry more about being left behind than about losing money. But speculative booms are short-lived.
In the end, only value rooted in real utility endures the test of time.
This isn’t a new phenomenon—it’s part of human nature. The drive to explore the new is vital for progress, but it comes with a tradeoff.
So, how do you avoid the traps of speculation? It’s simple: take care of the risks, and the returns will take care of themselves.
That’s what matters in the long run. Because in investing, as in life, wisdom isn’t about following the herd—it’s about knowing when to walk your own path.
Awet Ghirmay, Head of Investment Research
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Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
