The difference between investment and speculation

Plants

Investment and Speculation.

People usually describe any buying or selling of a security on Wall Street as an investment REGARDLESS of the security price, what he/she is buying and does the buying comes out of any fundamental research and basis.

“An investment operation is one that can be justified on both qualitative and quantitative grounds.”
Security Analysis

One should invest a lot of thought on any investment he wants to make before putting any penny into work. First and foremost one should think about himself. What kind of volatility can you endure? Are you the type of person that can endure a 10% drop in one day? Or even 40 or 50%? We can see those trends in stocks that their business model is somehow depended on a third party (E.g. The FDA). Those stocks can “drop or pop” over approval or refusal for a new medicine they produce, or over a bad or good results in clinical trials for researches they conduct.

So keep this in mind.

The next step is to find the right company, if you don’t have the time to do your research; the best thing to do is to invest in INDEX FUND.
Index funds are the best way to achieve diversity and if history can serve as any indication over the long term
, this investment can achieve you financial freedom overtime. I urge you to read Tony Robbins’s new book “Unsheakable” which explains a lot about this method.

If you have the time to do your own research on the business and be a stock picker, first start by reading the 10K report. Check who runs the company, check the quarterly earnings. Every little detail you can acquire about the company’s margins and its dividend history is helpful. It’s also very important to check if the company is going through a litigation processes, if yes what are the reasons.

But above all, you have to understand the business. So you will have the ability to analyze and “Forecast” what this business will do in 10, or 20 years from now.
You must put the reason or the reasons, of why you have decided to invest in this company in the first place in front of you. It might be the powerful brands the company owns, or some other factors that form the company’s “moat”. And you ought to check if the company loses one of these factors and eventually loses its moat.

For this part i will advise you to go even deeper and read the bible of value investing:
“Security Analysis”
and to also read “The intelligent investor” which both of them writtin by Benjamin Graham.

You can check out this link too:
https://www.cnbc.com/video/2016/09/22/warren-buffetts-5-best-investing-tips-on-cnbc.html

The speculation:

It’s generally based on public opinion and on how Wall Street view a security. Without any Quantitative basis, the speculator buys shares of the company XYZ just because he thinks that the company might produce higher income and earnings sometime in the future based only on high hopes.

Usually those stocks are accompanied with a beautiful story of changing the world and designing the future and being revolutionary. But in the dot com bubble a lot of companies went public, carrying a beautiful stories with them. And now they are perished.

I feel that I must talk about this, Two months ago i criticized the cryptocurrencies and i still do (you can read my former article “Schizophrenic Partner”). I’m a supporter of financial solutions and innovations, I just think the whole billions that are plowing into the Bitcion and other cryptocurrencies aren’t justified by any qualitative or quantitative grounds, people are pumping money like crazy. Only because of the “beautiful story” the cryptocurrencies are carrying with them and some because they know that their friends just made 10 times their money (or more in the case of Bitcoin). And they want to join the party too, and that’s my friends is how a bubble is formed.

When the greatest minds of investing and Economics such as Warren Buffett, Robert Shiller and Howard Marks state the same concerns and say that some of the Cryptocurrencies are in a bubble, you better listen or take their words into consideration. All of them have warned about former bubbles in the markets years before they bursted. Now you tell me is this an investment or pure speculation (or maybe insanity)?

Consider your investments very wisely and don’t participate in those bubbles to make money just try to avoid them.

Advertisements