There’s a thin line between being an investor and being a speculator. Which are you?
If questioned about their investing/speculating orientation, most people would reply “Of course I’m an investor!”, wondering why you would even ask such a question.
It gets interesting when you ask them on what distinguishes an investor from a speculator and then watch as they rack their brains to come up with an explanation.
This is by no means an unusual reaction, but rather a phase everyone has been through. One would expect your average investor to be more aware of the difference between investing and speculating.
One reason for these blurred lines might be the categorization of the term “investor” being applied to every stock market participant. This was in contrast to the term “investor” that was applied solely to bonds as an asset class in the early part of 20th century. These two extremes were held without any consideration to the relationship between an asset’s underlying value in relation to its market price.
What is an Investor?
Even after over almost a century years, the following definition of investing provided by Benjamin Graham and David Dodd in “Security Analysis” remains true.
“An investment operation is one which, upon through analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
The above statement isn’t bulletproof, being phrased in such a way that brings up more questions than answers. For example, how much is an “adequate return”, how long is the holding period, how through should a “through analysis” be?
Here lies the magic of the above statement. It’s framed in such a way that it’s applicable to the public from the standpoint of an individual; to serve as a guide for your investment journey.
Investors and Speculators Share The Same Goal
Consider this hypothetical situation: a stake in a public company may be both an investment as well as a speculation for two different people. What is the difference between the two?
A factor to consider would be that individual’s rationales behind his or her purchase. For example, was it backed up by fundamental data and does it have a positive expected return over your investment horizon?
Either way, speculators are still a crucial part of the financial system. Without speculators, how then would value investors find value stocks seeing as everything would be at fair value?
And in the end, the ultimate goal of both is the same – increasing their portfolio’s value and making more money.