There Are Those Who Know What They Own. And There Are Speculators.

When most people here the words “conservative investor” they think of somebody who owns more bonds and less stocks – bonds being associated with lower risk of loss.

But there is a better definition of the conservative investor and it was offered up by Andy Redleaf (mathematician, formerly of Whitebox Advisors and now at X Cubed Capital Management) many years ago, where Redleaf contrasts the conservative investor and the speculative investor:

To us, the fundamental difference between the conservative investor and the speculative investor is that the conservative investor knows what he owns, while the speculative investor hopes that what he owns will become something else, the child, the man; the acorn, the oak; the brilliant coined term, the ubiquitous parlance.

There is nothing wrong with being a speculator, so long as the investor knows that's what he is. The great disaster is for the investor to believe he is conservative, to believe he knows what he owns, only to find out that he has been speculating all along, because he is actually invested in something else. Early RMBS investors may have believed they were investing in a pool of reasonably secure, reasonably alike mortgages when in fact they were apparently invested not just in mortgages but in the capacity of the United States housing market to grow at an artificially enhanced rate with no regard for real asset values in perpetuity.1

We believe it is critically important to know what you own. So count us “conservative.”

When our entrepreneur clients come to us with new opportunities from their networks (which we love), our first questions are: do you know this industry well? And/or do you know the key people well?

If the answer to both questions is no, it doesn’t automatically mean that the client should not proceed, but it does mean that the investment is a speculation (no matter how promising it may appear) and should be sized and treated as such.

And if we go to our entrepreneur clients with new opportunities from our networks and research, we must be able to answer the questions ‘do we know this business/industry/strategy well? Do we know the key people well?’ with a resounding yes.

Do our clients know the situation well? And/or do we know the situation well? The answers to these questions determine if we are working with an investment or a speculation.

Knowing what you own does not ensure success. But it DOES enable perseverance when the business/industry/strategy is faced with uncertainty or problems (real or perceived). This is particularly true in public markets where price action can temporarily divorce from value which in turn can challenge investor willingness to remain invested. Knowledge and keen understanding of the underlying asset is the antidote.

There’s nothing wrong with speculation per se. As Redleaf noted, what matters is being clear about what is an investment and what is a speculation.

Redleaf used RMBS (residential mortgage-backed securities) from the mid-2000s as an example of broad investor confusion about investment versus speculation. Some of those securities were poorly underwritten, not adequately collateralized, and purchased with inadequate due diligence. Holders of those securities suffered permanent losses in the wake of the Global Financial Crisis.

Another more recent but less obvious example was the purchase of highly rated but very low yield bonds in 2020 and 2021. But bonds are always conservative, aren’t they?! Not true. Any asset – even those deemed highest quality – is prone to loss when purchased at high valuations. And for bonds, high valuation translates to low yield, and bond valuations were very high in 2020 and the first half of 2021! As a result, the trailing 5-year return as of 6/30/2025 (i.e. total return for the period 7/1/20 – 6/30/25) for the widely followed Bloomberg U.S. Aggregate Bond Index2 was -0.7%. In other words, a dollar invested in the index 7/1/20 was worth about 96.5 cents on 6/30/25. 

Doesn’t sound like a disaster? Now look at inflation over that same five-year period3: 4.6% annualized. In other words, maintaining one’s purchasing power required turning a dollar into $1.25 (leaving taxes aside). The difference between the bond index return and inflation, equivalent to more than five percentage points per year, amounts to an enormous loss of purchasing power in just five years! Maybe not a permanent loss in nominal terms, but effectively a permanent loss in real terms. So no, bonds are not always low risk. In fact, in 2020 they were a speculation.

Are you conservative? Or a speculator? Be clear about where you stand so you can stay away from “the great disaster.”

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1. https://capitalallocators.emlnk1.com/lt.phpx=3DZy~GE4UFiiD50t0Q~KUuad2aIjv_bzkekzYqXLU6Ga5XCrzUy.zuh01o2pkNI~kfYwX5fGKU

2. https://www.ishares.com/us/products/227787/ (see Performance, Average Annual Returns as of 6/30/2025, and refer to row “Benchmark (%)”)

3. https://www.bls.gov/data/home.htm#prices (as calculated by Bluestone Financial Advisors, LLC using BLS data)

The views expressed represent the opinions of Bluestone Financial Advisors as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.

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Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website. www.adviserinfo.sec.gov   Past performance is not a guarantee of future results.