Let’s Be Honest: Are You an Investor or a Speculator?
With the stock market seemingly setting all-time highs every day even as bond prices crumple, this is a crucial time to clarify the difference between investing and speculating.
Unfortunately, that distinction — often credited to the great investment analyst Benjamin Graham — has never been entirely clear.
Every asset is an investment in some people’s hands and a speculation in others’. So it isn’t what you buy, but rather why you buy, that determines whether you are investing or speculating. In his classic 1934 book “Security Analysis” and again in “The Intelligent Investor” (1949), Graham wrote: “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory [or ‘adequate’] return. Operations not meeting these requirements are speculative.”
I used to regard that description as definitive, but I began to see its flaws a few years ago. Can any analysis ever be thorough enough to “promise” safety or a positive return?
The traditional view, dating back at least to the 19th century, is that an investor buys to capture a predictable long-term stream of cash flow, while a speculator buys to harvest a short-term change in price.Comment: Click on the image above for larger. On the right is Mark Wahlberg from The Gambler . On the left is the Speculator. In the middle is the planter who patiently waits. Several have asked about my own investing strategies. Here goes:
- Basically the speculator is the gambler but the gambler may just not care.
- I try to "treat every nickel like a manhole cover"
- I don't pay an investment advisor so right there I am saving myself 1% (or more). And I figure that I could be an investment advisor and I care more about my assets than another.
- About "my assets" - they really are The Lord's. All came from Him - I must glorify Him. A practical outcome of this is that I do not hoard and I do not invest in companies such as tobacco stocks (although their returns are attractive as in MO or BTI)
- The aforementioned The Intelligent Investor by Benjamin Graham is the definitive read.
- I do not Day Trade. Never have. I doubt I could make $$ doing it. I regard it as gambling
- I rarely trade any stock short term
- I don't trade Options. I've thought about it and have investigated it but have not and doubt I ever will.
- If I don't understand what I am buying I pass on the investment
- I research the company sufficiently to know something about it. I have many examples but here is just one. We think Cracker Barrel is a great restaurant and we have stock in it.
- I explain it and "sell" the investment to my wife. She has to agree.
- It has to, there are exceptions such as BRK-B, pay a dividend.
- I have to have some confidence that the equity will continue to pay a dividend.
- Diversification: No one stock dominates. Although we are heavy into several stocks such as ED, JNJ, MMM, and KMB
- I don't need to beat another investor. I'm not in a contest with another
- I hope to have a combination of dividends + some growth. I'm happy with 5%
- I am not looking for spectacular returns - sounds like speculate
- I buy and hold
- I try to live humbly (I have a 10 year old car with just about 100,000 m and a 15 year old truck)