Investing vs. Speculating

Investing vs. Speculating

It is probably a good idea to explain what is “investing” and how do we distinguish “investing” from “speculating”. We can define investing as a method of purchasing assets in order to gain profit in the form of reasonably predictable income (dividends, rental, interest) and/or appreciation over the long term. It is definition of the time period for the investment return and the predictability of the returns that often distinguish an investment from a speculation. An excellent analogy from the first Superman movie comes to mind. When the evil Luthor bought land in Arizona with the idea that California would soon slide into the ocean, thereby quickly producing far more valuable beach-front property, he was speculating. Had he bought such land as a long-term holding after examining migration patterns, housing construction trends and the availability of water supplies, he would probably be regarded as investing – particularly if he viewed the purchase as likely to produce a dependable future stream of cash returns.

At this point we should remember that just to stay even, our investments have to produce a rate of return equal to inflation. It is thus clear that if we are to cope with even a mild inflation, we must undertake investment strategies that maintain our real purchasing power; otherwise we are doomed to an ever-decreasing standard of living.

“It’s good to have a special price to pay for the future and it will pay you in return, in the exact way you would wish to be paid.” (Auliq Ice). New York Penn Station. Photo by Elena

Investing requires a lot of work, make no mistake about it. And even if you trust all your funds to an investment adviser or to a mutual fund, you still have to know which adviser or which fund is most suitable to handle your money. Armed with the information contained in many books about the matter, you should find it a bit easier to make your investment decisions.

Most important of all, however, is the fact that investing is fun. It’s fun to pit your intellect against that of the vast investment community and to find yourself rewarded with an increase in assets. It’s exciting to review your investment returns and to see how they are accumulating at a faster rate than your salary. And it’s also stimulating to learn about new ideas for services and products, and innovations in the forms of financial investments. A successful investor is generally a well-rounded individual who puts a natural curiosity and an intellectual interest to work to earn more money.

Advice for Investors

Many people say that the individual investor has scarcely a chance today against Wall Street`s pros. They point to techniques the pros use as “program trading” or “portfolio insurance”. They read new reports of mammoth takeovers, leveraged buyouts, and the highly profitable activities of well-financed arbitrageurs. All this suggests that there is no longer any room for the individual investor in today`s institutionalized markets.

Nothing could be further from the truth. Everyone can do as well as experts, and perhaps even better. In fact, over the past thirty years or so we have become accustomed to accept the rapid pace of technological change in our environment. Innovations, such as microwave ovens, cable TV, cellular smartphones, medical advances from organ transplants and laser surgery to nonsurgical methods of treating kidney stones and unclogging arteries have materially affected the life we used to live.

Financial innovation over the same period has been equally rapid. In the 1970s we did not have money market funds, automatic tellers, NOW accounts,  tax-exempt funds, index mutual funds, floating-rate notes, S&P index futures and options, zero-coupon bonds, , trading techniques such as “portfolio insurance” or “program trading”, just to mention a few of the changes that have occurred in the financial environment.

Burton G. Malkiel. A Random Walk Down Wall Street, including a life-cycle guide to personal investing. First edition, 1973, by W.W. Norton and company, Inc.