Investment versus Speculation

Are you an investor or speculator? Or are you a speculator thinking that you are investing? Over the years I’ve heard people say things like, “I’m going to play the stock market. I’ll gamble a few hundred dollars on this stock. If I get lucky I can retire soon.” When talking about stocks, I never mention the words “play” “gamble” or “lucky”. Those words belong in a casino not when you are investing your hard-earned money.

There is a big difference in investing versus speculating, Benjamin Graham did an excellent job explaining the difference in his book “The Intelligent Investor”.  Benjamin Graham the father of value investing was Warren Buffett’s teacher and mentor at Columbia University. Graham felt that the difference between investing and speculating was so important that he dedicated an entire chapter to this topic, and made it the first chapter in his book.

In the book “The Intelligent Investor” Graham describes the difference between investing and speculating as: “An investment operation is one which, upon through analysis promises safety of principle and an adequate return. Operations not meeting these requirements are speculative.”

Wall Street and the media are to blame for the misconception; they falsely label anyone buying stocks as an investor. In reality you are not an investor if you buy stocks:

-          because a friend or co-worker gave you a “hot” tip

-          without doing any research

-          without any knowledge of the company you are buying

-          because you think you can get lucky and make some quick money

-          because everyone else is buying stocks

I am guilty of each and everyone one of the above, I started buying stocks in 1999 during the high technology bubble, and I believed that I was investing. In truth I have no idea what I was doing; instead I was “following the crowd” and thought I could make some quick money. All that changed when the market crashed and I started doing some research so that I would not make the same mistakes again.

An investor is one who:

-          understands how the company they are considering purchasing makes money

-          protects themselves from losses by purchasing quality companies when they are undervalued

-          ignores the media noise touting the latest “next big thing”

When considering a stock for purchase, don’t think of it as a piece of paper (a stock certificate), think of it as buying ownership in a company. If you had the money would you buy the entire company? If not, then reconsider why you are buy shares in this company.

Jason Zweig said it best: “People who invest make money for themselves; people who speculate make money for their brokers. And that, in turn, is why Wall Street perennially downplays the durable virtues of investing and hypes the gaudy appeal of speculation.”