Jul

16

I have been thinking a lot about the difference between investing and speculation. In my opinion they both rely on other people's action to hopefully change the price of things you have an interest in in the favorable direction. Investing relies more on them agreeing over time with your perception of their value, and usually over the relatively longer time frames, and speculation on them moving the price in your direction for any reason, and usually over a shorter time frame. Clearly the two intersect where realizing value is concerned, but the difference in time frames seems the most important.

I'm wondering if anyone else has any different definitions/distinctions.


Comments

Name

Email

Website

Speak your mind

3 Comments so far

  1. Jeff Watson on July 16, 2012 3:53 pm

    A similarity of both investors and speculators is that they are both looking for a greater fool. http://en.wikipedia.org/wiki/Greater_fool_theory

  2. Nick Pribus on July 16, 2012 7:11 pm

    One should start with Merriam Webster because the question of what is investment and what is speculation is a matter of semantics and context. Particularly informative are the synonyms.

    Speculate – The assumption of unusual business risk in hopes of obtaining commensurate gain

    Synonyms: adventure, chance, crapshoot, enterprise, flier (also flyer), flutter [chiefly British], gamble, throw, venture

    Investing – to commit money in order to earn a financial return

    Synonyms: advance, back, bankroll, buy into, buy stock, devote, endow, entrust, infuse

    The question of time is of importance, but it seems the level of risk is even more important.

    A friend at a local Chicago prop shop tells me they trade with little risk which runs contrary to my perception of prop shops, hedge funds, and HFT outfits as speculators. It would seem well placed trades making markets, stat arb, and other advanced hedge strategies are more akin to investing than speculation because they take small cuts of large volume without leaving much to chance. Maybe no different than my local grocer peddling lettuce at two dollars that he bought for one.

    In that sense maybe what we traders do in the markets at all ends of time and risk are neither investment nor speculation but rather skill. That which defines the traders outcome is skill like a grinder on the poker circuit making a living at the hold’em table because poker really is not a game of chance.

  3. Bastiaan Agtereek on July 25, 2012 1:53 am

    I personally think that speculation (in contrary what the word assumes)dictates more discipline, know-how. I mean if you have an dividendyield of lets say 5%, low risk like Coca Cola? You’ll have to wait (but with the volatility last decenia)you’ll get your chances. Maybe due to above nowadays speculation and investing is more like the same. The little players speculate more while they have less knowledge, the bigger players invest more while they have maybe toomuch input. It should be the other way around.

    Don’t know about speculating with the VIX, but it seems that i think you call it a straddle with put and call options (LEAPS) must be a winner. Volatility in bigger or lesser degrees is the only constant in the market which is given. A major trigger in the landscape of investing or as you wish speculation can be a ban on HTF trading which in my simple mind lowers volatility in ‘normal’circumstances but ‘excelerates’widens volatility in panic situations. Due to the hybrid nature of the beast, they’ll overcome and adapt to circumstances (like everyone else should, but you know skill, info; the picture). Maybe the next president of the U.S. brings things forward to the G7/20.

Archives

Resources & Links

Search