What is an investment?
What is speculation?
What is the difference between investment and speculation?
If you are looking for answers to above questions then you have come to the right place.
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Now lets get back to our article on Investment and Speculation.
The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants enjoy triumphs. Nothing sedates rationality like large doses of effortless money.
An investment approach is one which, upon through analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.
The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.
The man who bought United States Steel at 60 in 1915 in anticipation of selling at a profit is speculator. On the other hand, the gentleman who bought American Telephone at 95 in 1921 to enjoy the dividend return of better than 8% is an investor.
The line I draw in the sand is that if an asset has cash flow or the likelihood of cash flow in the near term and is not purely dependent on what a future buyer might pay, then it’s an investment. If an asset’s value is totally dependent on the amount a future buyer might pay, then its purchase is speculation.
Basically, it’s subjective, but in investment attitude you look at the asset itself to produce the return. So if I buy a farm and I expect it to produce $80 an acre for me in terms of its revenue from corn, soybeans etc. and it cost me $600. I’m looking at the return from the farm itself. I’m not looking at the price of the farm every day or every week or every year. On the other hand if I buy a stock and I hope it goes up next week, to me that’s pure speculation.