Let’s dive on investment vs speculation.
Book ‘The Essential Buffett’
In book ‘The Essential Buffett‘, author Robert G. Hagstrom Jr. summarized the difference between investors and speculator from top investment gurus as below.
Keynes
- Investing is the activity to forecast future reward of assets.
- Speculation is activity to forecast market psychology
Graham
- Investing is, based on reasonable logic, discreet analysis, secure your principle and win satisfied reward.
- Satisfied reward is subjective.
- Discreet analysis means diligently analysis existing info, get conclusion based on related principles and correct logical decisions.
- Analysis steps: (1). description, (2). comments, (3). choose.
- Any activity not meet above requirements is speculation.
Buffett
- Investors care about assets (including company).
- Speculators focus on forecasting price changes independent on company.
- Insist the difference between investing and speculation, don’t mixed up.
- Knowledge helps to make the difference between investing and speculation.
The commonarity
The commonarity from these three invesment gurus, they all agree:
- Speculators are more interested in guessing future price.
- Investors ‘know’ future price performance is tighly coupled with asset’s economic situation.
Fred Schwed’s opinion
The most insight say
In the book of “Where Are The Customers’ Yachts?” by Fred Schwed Jr. he wrote “Speculation is an effort, probably unsuccessfully, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.”
Other comments in his book
- Investors and speculators have a habit of wanting to know about the future. The demand is supplied by Wall Street — with full faith in their ability no less — which conveniently fuels transactions. The realistic answer — “I don’t know” — is also the hardest response to get (and give) to any questions about the future.
- The typical speculator sees stocks as ticker symbols and pieces of paper to play games with, not businesses with factories, workers, and products. It’s the inability to see things for what they are that leads to extraordinary risktaking and ruin.
- “What do you think of the mentality of a man who goes down to Wall Street with very little and wins, by speculation, thirty millions, none of which he has yet lost? My own considered opinion is that he too is pretty much a loony. In order to make his second unimportant million he had to risk his first precious million.” Like Buffett’s take on risking what have and need for what you don’t need.
- There will always be a few speculators who make money year after year just like there are always a few coin flippers who luckily hit on a long streak of heads. The longer it goes on, the more they both — speculator and coin flipper — believe they have some hidden skill.
- There’s a fine enough line between speculation and investing that the differences aren’t always obvious. One obvious difference is speculation attempts to get rich quick, investing attempts to get rich slow. The chance of success improves with the lengthening time horizon.
Keynes’ opinion
Keynes’s quote
In another post I made many years ago, “John Maynard Keynes, Investment master“, quoted Keynes in this regard:
- About forecast, he said “We simply don’t know.”
- “In the long run we are all dead,”
- There are two major uncertainties in the market: speculation and the animal instincts of human nature, that is, people’s “involuntary impulses”. They are not determined by basic rationality and knowledge, and cannot be calculated by mathematical formulas.
- “Successful investing is anticipating the anticipations of others.”
- “Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic.”
It is impossible to make money by speculating
John Maynard Keynes believed that speculation was dangerous and unlikely to bring wealth. He also believes that speculation is the result of “liquidity,” or the ability to buy and sell assets easily. Keynes believed that this ability made speculation easier, which in turn led to a disconnect between prices and values.
Here are some of Keynes’s comments on investment versus speculation:
Speculation is dangerous
Keynes believed that speculation was a dangerous and unlikely path to wealth. He thought that speculators had to predict the behavior of other speculators, which was difficult.
Speculation is a result of liquidity
Keynes believed that liquidity, or the ability to easily buy and sell assets, made it easier to speculate. He thought that this could lead to businesses being treated like pieces of paper and investors guessing where prices would be.
Anticipatory trading is harmful
Keynes believed that anticipatory trading, such as selling market leaders on a falling market and buying them on a rising one, was harmful. He thought that this could lead to investors incurring heavy expenses and developing an unsettled state of mind.
Investing in equities is investing in real values
Keynes argued that investing in equities was investing in real values instead of money values.
Benjamin Graham’s opinion
Definition
In Benjamin Graham’s great stock investment book “The Intelligent Investor“, Chapter one, he wrote: “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
Investor vs. speculator
Graham believed that investors are long-term thinkers who analyze investments carefully and look to buy assets at prices below their intrinsic value. Speculators, on the other hand, are active traders who look for short-term gains and minimal losses.
Risk
Graham believed that speculation carries the risk of permanent loss of capital and that the majority of people lose money doing it. He also cautioned against speculating when you think you are investing, or when you lack the proper knowledge and skill.
Buffet’s opinion
Quoted from Buffett: “There is nothing at all conservative, in my opinion, about speculating as to just how high a multiplier a greedy and capricious public will put on earnings.”
Buffett’s above comment just like John Bogle advocated: “Speculation passion is not sustainable, only dividends and earnings could sustain.”
Closing words
In book of ‘Reminiscences of a Stock Operator‘, Jesse Livermore wrote: “there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.”
Speculators want possibility, and investors want is value.
Related articles
- “Investing is a game of chance“
- “I would rather be vaguely right than precisely wrong“
- “What are the risks investors should face up to?“
- “The uncertainty in investment“
- “Investment vs speculation“
- “How big a factor does luck play in investment success?“
- “Invest success depends on less chance of making mistakes“
- “John Maynard Keynes, Investment master“
- “Imitating great investors is the fastest and most effective way“
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