Investment vs Speculation: What you need to know?

by | Jan 19, 2018 | Investment Basics | 1 comment
Investment vs Speculation: What you need to know?
Suppose there are two people – Rohan and Rahul, who wants to buy a milk distribution business and both have several options available in their locality. However, both Rohan and Rahul, follow a different approach.
Rohan goes and visits the owner of the business. He discusses the business- how it works, how are the sells, how much profit the business generates in a year, how many vendors they have etc.
Next, Rohan studies the financial statements of the company. He analyses the assets and liabilities of the companies balance sheet. Then, he studies the year wise revenue and profit generated by the business through the Income statement. He also looks at the net cash flow of the business from the cash flow statement.
Overall, Rohan analyses the business for weeks and comes to a decision of buying that business.
On the other hand, Rahul heard from somewhere that the prices of milk are going to rise in the future. In order to not miss the opportunity, he buys some milk distribution business with expectations that the milk prices will rise soon and he will make good profits from his business.
What do you think? Who will get better and consistent returns from his investments? Rohan or Rahul?
Yes, you are right. !! Rohan!
Why? That’s what we are going to discuss in this post.
The difference between investment vs speculation is amazingly described by Benjamin Graham, the father of value investing, in his book “THE INTELLIGENT INVESTOR”.
Here is a quote from the book about investment vs speculation:
“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
According to Benjamin Graham, there are three equally important elements which should mutually exist in an investment:
On the other hand, speculations are those which doesn’t go through proper analysis, do not consider the safety of principle and expects inadequate returns.
Also read: The Intelligent Investor by Benjamin Graham Summary & Book Review
Speculating is nothing new to the financial world. For generations, people have been speculating in casinos, horse-race or gamble among each other in expectations to make quick high returns.
People speculate in the stock market because it is exciting and sometimes can be rewarding.
Nevertheless, most of the wealth created by speculations are temporary and moreover, non-repetitive. In most of the cases, this happens only when the people get lucky. But, are you?
Also read: 6 Reasons Why Most People Lose Money in Stock Market
Just like casinos or horse racing bets, the share market is also not made to profit the common people.
If you take the case of any casino, it is made in such a way that the house always wins and snitches the money from the majority of the people (if you do not count few of the lucky ones).
In a similar manner, the stock market is also made in such a fashion that if you are speculating in the market, the winners are always the brokers, stock exchange or the 5% of the intelligent investors.
peter Lynch quotes stocks are not lottery tickets
Most people think that the best way to test of an investment technique is simply to find out whether it “worked” or not.
If it worked, then people conclude that their investment technique was ‘right’, no matter how dumb or dangerous that investing tactics was.
Nevertheless, for building a wealth over the long term, you need a reliable technique. Just because it ‘worked’ this time, doesn’t guarantee its future performance.
Being temporarily ‘right’ won’t help you much over the long term if your technique is not sustainable.
Also read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?
Both investing and speculation involve risk and reward.
However, the investors are interested in making returns with the safety of their investments and hence reaches to their decision only after a proper analysis. On the other hand, speculators care more about profits, ignoring analysis, safety, and adequate return expectations.
If you want to get consistent returns from the market then you should start investing instead of speculating.
Speculating in the stock market is the worst way of accumulating wealth.
If you are new to stocks and want to learn how to invest in Indian stock market from scratch, then here is an amazing online course: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enrol now and start your share market journey today.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting
Hi Kritesh
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