Investment and speculation are two very different activities, but in the stock market, the thin line between the two is frequently crossed and seldom clearly defined. A lack of understanding the differences between these two processes usually leads to speculators calling themselves investors, which is a bad label.
Generally speaking, investors make an investment based on sound judgment and look to profit from a business’ cash flows for the long term. Speculators, on the other hand, are seeking to profit from short-term market movements and require a different temperament to long-term focused, business-orientated investors. Accidentally falling into either category can be a costly mistake. To help ensure you do not make this error, I have gathered together some quotes from great investors who try to outline the differences between investment and speculation.
The difference between investment and speculation
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” ”• Benjamin Graham, "The Intelligent Investor"
“People who invest make money for themselves; people who speculate make money for their brokers.” ”• Benjamin Graham, "The Intelligent Investor"
“Speculation leads you the wrong way. It allows you to put your emotions first, whereas investment gets emotions out of the picture.” ”•John Bogle
“Speculation is only a word covering the making of money out of the manipulation of prices, instead of supplying goods and services.” ”•Henry Ford
“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, 10 and 20 years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you are not willing to own a stock for 10 years, don't even think about owning it for 10 minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value.” –Warren Buffett (Trades, Portfolio)
“Speculation, I would define, as much more focused on the price action of the stock, particularly that you buy or the indexed future or something of the sort. Because you are not really, you are counting on, for whatever factors, could be quarterly earnings, could be up or it’s going to split or whatever it may be or increase the dividend, but you are not looking to the asset itself. And I say the real test of how you, what you’re doing is whether you care whether the markets are open. When I buy a stock, I don’t care whether they close the stock market tomorrow for a couple of years because I’m looking to the business, Coca-Cola or whatever it may be to produce returns for me in the future from the business. Now if I care whether the stock market is open tomorrow then I say to some extent I’m speculating because I’m thinking about whether the price is going to up tomorrow or not. I don’t know where the price is going to go.” ”•Warren Buffett (Trades, Portfolio)
“There is intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unintelligent. Of these the foremost are: (1) speculating when you think you are investing; (2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose.” – Benjamin Graham
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