Financial Freedom SG

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:

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