The Difference Between Investing and Speculating
January 9th 2008 12:22
What makes an investor and what makes a speculator? Is there a difference between them? These questions could have many answers depending on how we feel about it.
Both investors and speculators make some money bets on some sort of financial instruments, both run calculated risks and, eventually, also make gains and losses overtime. You would be excused to think that, at bone level, the difference between investors and speculators is semantic only.
Yet, I think that there is a difference. I will use two people about whom I know something to illustrate this point. They are Warren Buffett and George Soros.
Soros is the prototype speculator. You just have to read his book “The Alchemy of Finance” to know that. He thinks in terms of exploiting circumstances to make as much as possible an immediate gain. He interprets economic events and makes predictions based on his theory of reflexivity, then moves his finance mass to match it. He goes through all sorts of financial gymnastics on a daily basis and the history of his speculating activities is quite tortuous. Maybe not surprisingly, when he wins, he wins great and when he loses, he loses also great. What matters, I suppose, is that at report date he has made his money and can show it.
After this, would you have difficulty in qualifying Soros as a speculator?
Buffett is the antithesis of Soros. Buffett picks businesses that have long term significance as indicated by their intrinsic value and which are for sale for a low price. He looks into the business proposition, its management and its financial situation. And, typically, Buffett buys when others sell. He then associates himself with the business for the long run, being that he has declared to hold some stocks such as Coca-Cola Co. for life. As proved by his business history, his association with his invested businesses has been beneficial to these.
After this, and in opposition to Soros, would you have any difficulty in classing Buffett as an investor rather than a speculator?
There is, additionally, one simple though that to me illuminates much of what the difference between an investor and a speculator is: an investor buys a business for a decent price and expects it to increase in value; a speculator buys for a high price and also expects it to increase in value.
Obviously, if markets fall suddenly as they sometimes do, the speculator is immediately whipped out while the investor might survive, and perhaps buy more.
Both investors and speculators make some money bets on some sort of financial instruments, both run calculated risks and, eventually, also make gains and losses overtime. You would be excused to think that, at bone level, the difference between investors and speculators is semantic only.
Yet, I think that there is a difference. I will use two people about whom I know something to illustrate this point. They are Warren Buffett and George Soros.
Soros is the prototype speculator. You just have to read his book “The Alchemy of Finance” to know that. He thinks in terms of exploiting circumstances to make as much as possible an immediate gain. He interprets economic events and makes predictions based on his theory of reflexivity, then moves his finance mass to match it. He goes through all sorts of financial gymnastics on a daily basis and the history of his speculating activities is quite tortuous. Maybe not surprisingly, when he wins, he wins great and when he loses, he loses also great. What matters, I suppose, is that at report date he has made his money and can show it.
After this, would you have difficulty in qualifying Soros as a speculator?
Buffett is the antithesis of Soros. Buffett picks businesses that have long term significance as indicated by their intrinsic value and which are for sale for a low price. He looks into the business proposition, its management and its financial situation. And, typically, Buffett buys when others sell. He then associates himself with the business for the long run, being that he has declared to hold some stocks such as Coca-Cola Co. for life. As proved by his business history, his association with his invested businesses has been beneficial to these.
After this, and in opposition to Soros, would you have any difficulty in classing Buffett as an investor rather than a speculator?
There is, additionally, one simple though that to me illuminates much of what the difference between an investor and a speculator is: an investor buys a business for a decent price and expects it to increase in value; a speculator buys for a high price and also expects it to increase in value.
Obviously, if markets fall suddenly as they sometimes do, the speculator is immediately whipped out while the investor might survive, and perhaps buy more.
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