Investing vs Speculating 2 comments

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Ah, the age-old debate. Investment is good and speculation is bad, say the fundamentalists. Investment is slow and speculation brings fast results, say the traders. Are the differences between the two really that clear-cut?

I picked up two books at Kinokuniya book store some time back, both Wiley Investment Classics. One of them was titled "Art of Investment", the other "Art of Speculation". Guess what, the former was a book primarily on charting analysis, while the latter had analytical chapters on how to read accounting statements, performing due diligence and buying troubled companies.

There is a well-known derisive comment (probably made by traders) that "an investment is a speculation gone wrong". While I think that it is an unfair statement given that many well-known investors adopt long-term perspectives with respect to their share purchases, there is nonetheless something we can learn from this statement, which is that if you buy a stock, be prepared to hold it for longer than you expect and hence make sure you are comfortable with its long-term prospects before you hit the buy button. That is investment thinking that a good speculator could adopt. On the other hand, an investor looking to hold long-term should still be keenly aware of the price that he buys at; a 10% difference in price which could exist in a short-term swing between the top and bottom of a stock's short-term trading range could make a significant difference to his final return on the stock. So a knowledgeable timing of his purchase (perhaps at a key price support level, adopting speculator lingo) would be wise.

Ultimately, the market player who can combine, balance and internalise the essences of investing and speculating is more likely to consistently make profits.

References:
(1) The Art of Investment (by Alec Ellinger,John Cunningham)
(2) The Art of Speculation (by Philip L. Carret)