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Are You a Speculator or Investor?

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speculativeinvestmentinfood It turns out that there is a very thin line separating speculation and investing.

According to Wikipedia, “speculating is the assumption of risk in anticipation of gain but recognising a higher than average possibility of loss. The term speculation implies that a business or investment risk can be analyzed and measured, and its distinction from the term investment is one of the degree of risk. It differs from gambling, which is based on random outcomes.”

Also it turns out that there is no time frame to speculation. So I can buy and hold a stock for 10 years and it can still be a speculative investment. Especially if it is highly risky. Like SIVs (Special Investment Vehicles), Lehman’s Minibonds Notes, DBS High Notes etc

At the same time, speculation actually helps out in the real economy. It spreads the risk for the producers as speculators may buy say, corn crops in advance and the famer will be more willing to plant more corn crops and have more money to develop his land with advance money from the speculator.

The side effect of speculation was observed in the last financial meltdown in 2007-2009 where huge speculative positions in mortgage markets caused a build up in a property bubble which imploded with drastic consequences.

However, if you refer to “The Intelligent Investor” by Benjamin Graham, he puts the difference between an investor and a speculator into quite clear and distinct terms. He says:

“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

And in the first chapter after introduction, he spends a whole chapter differentiating between the two and defining what an investor is. He classes these people as speculators:

 

People who short stocks Every non-professional who operates on margin (using leverage)
Everyone who buys a “hot” common stock issue (ie your IPOs) Involved in trading in the market- ie high turnover of stocks in a short time

In the book, Graham also states that speculation is not illegal nor is it morally wrong. In fact he states that there is an element of speculation in every investment.

Without bearing some sort of risk, there isn’t any returns to speak of.

However, if you look at what happened in the housing market in United States, where ordinary people had two or three mortgages at its height and thinking that ever higher prices it will go on forever, you will be maybe draw parallel with what is happening in Singapore and Asia?

So what are you? More investor or more speculator?

 

Sources:

1. Wikipedia on Speculation versus Investment

2. The Intelligent Investor by Benjamin Graham

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7 comments:
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Createwealth8888 said...
April 13, 2010 at 9:01 AM  

Comparsion: Gambling,investment and speculation

http://createwealth8888.blogspot.com/2009/09/gambling-investment-speculation.html

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Royston said...
April 13, 2010 at 9:14 PM  

Hey there,

I've thought about this before as well...happens that i also wrote a post looking at investors vs traders ;)

http://thegameplan81.blogspot.com/2010/03/investors-vs-traders.html

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Lemizeraq said...
April 14, 2010 at 9:44 PM  

Hi Createwealth8888,

Thanks for visiting :) Read your article after you have posted the comments. Interesting site you have.

Glad to see that you read the Intelligent Investor too and used it as a basis for your article.

Lemizeraq

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Lemizeraq said...
April 14, 2010 at 9:48 PM  

Hi Royston,

Thanks for visiting. How is it that both you and Createwealth8888 know I am posting this?

You must have a long list of words to get Gooogle Alert on :)

Read you post too, and I believe i share you sentiment about investing for the long term.

Lemizeraq

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Polite Market said...
April 15, 2010 at 8:10 PM  

Investor also speculate, eg by buying and holding a share, they speculate that there will be good profit for the coming years. Investor also assume higher risk, eg if you inject a big capital to open a restaurant.

Speculator also invest. They invest their money to get a return.

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Lemizeraq said...
April 19, 2010 at 10:52 PM  

Hi Polite Market,

Thank you for visiting. Yep, the line between investor and speculator is thin. But a speculator is willing to bear slightly higher risk for higher returns.

Lemiz

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Royston said...
April 26, 2010 at 9:58 PM  

Hi Lemizeraq ,

I've added your blog to a list of Singapore Investment Bloggers...

http://sginvestbloggers.blogspot.com/

Would be great if you can link back to the site as well!

Cheers,
Royston

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