CFA Institute asks: “What is the difference between investing and speculation?”

In a post on CFA Institute’s “Inside Investing” blog, Robert Hagstrom asks of people, “What is the difference between investing and speculation?”  Well, lo and behold, I addressed this very issue in my book, The Intuitive Investor: A Radical Guide for Manifesting Wealth, on pages 85-86.  Here is what I had to say:

“There are a million ways to make money by investing.  And the results of investing are measured objectively, not subjectively.  It doesn’t matter if you are nice to other people or if you go to church on Sundays.  What matters is whether you make money or not.  That said, there is a huge difference between speculators and investors.

“Speculators are similar to gamblers.  Gamblers rush to make money.  Their time scale is often extraordinarily short, extending out only to the point where they no longer have any money, or have lost enough money to scare them into stopping their gambling.  Gamblers obsess about big money and care little about risks.  In fact, many gamblers are attracted to gambles with the highest risks.  Gamblers often convince themselves they are different from everyone else.  Gamblers often do not have a plan when they gamble because they are in it for the visceral and immediate rush.  Gamblers are subject to their emotions.

“Unfortunately, many people who purchase interests in investments behave the way gamblers behave.  People frequently make investments based on rumor, momentum, and speculation hoping to ride the wave of extreme fortune.  With the fortune in hand the speculator believes that he will be happier.  There is nothing wrong with any of this, as long as the speculation is serving the speculator.  However, a speculator is not an investor.

“An investor is a careful investigator looking to uncover opportunities, account for risks, and purchase business interests where returns exceed risks over a preferred investment time horizon.  The primary difference between investors and speculators is consciousness.  Investors are more cognizant of their choices than speculators because they take full responsibility for their choices.  Additionally, investors bring to bear all of their personal power and capabilities to find that rarest of things: the excellent investment opportunity.”

In other words, the essential differences are time scale preference (long- vs. short-term), behaviors (i.e. the purpose of engaging in the activity), desired outcomes, methods (investigation vs. guessing), and, of course, the degree of consciousness of the two parties (engaged vs. visceral).

I couldn’t have been more public in my opinion!

With smiles!

Jason