The investment management industry is based on the premise that smart, hard-working managers with cutting-edge technology can outperform “the market.” Although it seems intuitive that this approach would produce positive results, the evidence indicates differently.
The legacy of financial innovation was the subject of a recent panel discussion, where three leading practitioners assessed some of the most widely debated innovations of our time, including high-frequency trading, dark pools trading venues, and the Dutch auction model for initial public offerings.
How do speculation and investment differ? Meanings of the terms in the professional money management industry reflect popular usage.
Hyman Minsky has become famous in the aftermath of the financial crisis for his characterization of the three phases of markets – hedge finance, where the borrower can repay interest and principal out of cash flows; speculative finance, where cash flows can repay interest but not principal, and therefore need to roll over any financing; and Ponzi finance, where cash flows cannot pay either principal or interest and therefore must either borrow more or sell assets to support those costs.
What is the difference between investing and speculation? At first, you think the answer is simple because the distinction is obvious — that is, until you actually put pen to paper and try to answer the question.
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