“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
Example of Investment and Speculation
An investment is buying an asset with intrinsic value that has cash flow and/or physical asset value. Speculating is buying something in an expectation of future price appreciation based on the belief that price will go higher based on others buying it or it becoming valuable or creating cash flow in the future.
Investment
Investments are stocks in companies that make profits and have assets, real estate, businesses, and cash flowing assets.
Speculation
A speculation is a bet on a stock that currently doesn’t make money but should become profitable in the future. Also buying a crypto digital asset believing that people will want to buy it from you at a higher price at a later date is a speculation. Speculators buy based on price action and the potential for higher prices based on market psychology not underlying financial numbers.
Investing Examples
Buying a stock that pays a dividend is an investment.
Buying a stock that has a low price that doesn’t accurately reflect the future discounted cash flows of the underlying company or asset value.
Buying a real estate property to rent out to tenants that creates cash flow that is greater than the mortgage debt payment.
Speculating Goal
The goal of a speculation is to buy an asset with a higher probability of going higher than the entry level and exit at a higher price. Or the inverse sells short with the expectation to buy back at a lower price level. The speculator’s goal is to make money on the price action on the chart based on technical analysis or market psychology not intrinsic fundamental value.
“If somebody had told me my method would not work, I nevertheless would have tried it out to make sure for myself, for when I am wrong only one thing convinces me of it, and that is, to lose money. And I am only right when I make money. That is speculating.” – Jesse Lauriston Livermore
