There’s a thin line between investing vs. speculating. Which are you?
If you asked someone about their investing/speculating orientation, most would reply “Of course I’m an investor!” and wonder why you would even ask such a question.
But things get interesting when you ask them the difference between an investor and a speculator. 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 goes through. You’d expect the average investor to be more aware of the differences between investing vs. 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” which 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?
Over a century later, 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? What does a “through analysis” involve?
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: a stake in a public company could 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 would value investors find value stocks since everything would be at fair value?
In the end, the ultimate goal of both is the same – increasing their portfolio’s value and making more money.
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