Are you a speculator or an investor?
Is it important? What's the difference?
As I mention to any one even the slightest bit interested, my opinion is that successful investment always has been and always will be about the search for assets that are cheaper than their current price.
An investment generates a cash flow that can be evaluated for its predictability of it continuing and then discounted appropriately to account for the risks involved.
We can then calculate our opinion of that investment's worth.
If we think the investment is substantially worth more than the market does, we buy it! If we think the investment is worth less than the market does, we sell it!
Speculating is nothing remotely similar.
Speculation is the buying or selling of an asset on the forecast of a future price change of that asset.
My 'tongue in cheek' definition of a 'forecast' is a guess about the future made by an educated and experienced expert.
My point is that an educated guess is still a guess. While no one can predict the future, anyone can make a guess about the future.
As a result, the ability for that person to distinguish between investment and speculation becomes critical to their financial success.
As such, here are a few examples of speculation: Have you ever done any of these?
1) Buying a company that has no or negative earnings.
If the company cannot currently generate a profit, it cannot be an investment. We can only speculate that they will make enough money in the future to compensate us for the risk of buying it.
2) Trading.
A trader is interested in quick changes in prices and is therefore always a speculator.
They have no interest whatsoever in the fundamental value of the securities or commodities that they are trading and are only interested in the relationship of the current prices compared to their speculation of what those prices will be in the future.
3) Precious objects.
A gold mining company is an investment because it's a business that could be generating cash flow and profits.
Buying gold bullion is a speculation because bullion does not generate any earnings or income.
Buying gold bullion is exactly the same as collecting other precious objects like residential homes, diamonds, wine, art or antiques. They are only valuable because fashion and custom has speculated that they are valuable. They do not have an income source.
At one time, saffron, beaver pelts and tulip bulbs were also collected as prized possessions and used as currency. What is their value now that fashions and customs have changed?
4) Technical Analysis.
Technical analysis, whatever and however used, is only a forecast tool for someone to predict the future. It is not a fundamental analysis of an investment.
5) Trend or momentum following.
The proponents of trend following or momentum investing are the essence of speculators.
Momentum seekers are only interested in identifying and buying assets that are going up because they are forecasting that they will continue to go up.
Is it important? What's the difference?
As I mention to any one even the slightest bit interested, my opinion is that successful investment always has been and always will be about the search for assets that are cheaper than their current price.
An investment generates a cash flow that can be evaluated for its predictability of it continuing and then discounted appropriately to account for the risks involved.
We can then calculate our opinion of that investment's worth.
If we think the investment is substantially worth more than the market does, we buy it! If we think the investment is worth less than the market does, we sell it!
Speculating is nothing remotely similar.
Speculation is the buying or selling of an asset on the forecast of a future price change of that asset.
My 'tongue in cheek' definition of a 'forecast' is a guess about the future made by an educated and experienced expert.
My point is that an educated guess is still a guess. While no one can predict the future, anyone can make a guess about the future.
As a result, the ability for that person to distinguish between investment and speculation becomes critical to their financial success.
As such, here are a few examples of speculation: Have you ever done any of these?
1) Buying a company that has no or negative earnings.
If the company cannot currently generate a profit, it cannot be an investment. We can only speculate that they will make enough money in the future to compensate us for the risk of buying it.
2) Trading.
A trader is interested in quick changes in prices and is therefore always a speculator.
They have no interest whatsoever in the fundamental value of the securities or commodities that they are trading and are only interested in the relationship of the current prices compared to their speculation of what those prices will be in the future.
3) Precious objects.
A gold mining company is an investment because it's a business that could be generating cash flow and profits.
Buying gold bullion is a speculation because bullion does not generate any earnings or income.
Buying gold bullion is exactly the same as collecting other precious objects like residential homes, diamonds, wine, art or antiques. They are only valuable because fashion and custom has speculated that they are valuable. They do not have an income source.
At one time, saffron, beaver pelts and tulip bulbs were also collected as prized possessions and used as currency. What is their value now that fashions and customs have changed?
4) Technical Analysis.
Technical analysis, whatever and however used, is only a forecast tool for someone to predict the future. It is not a fundamental analysis of an investment.
5) Trend or momentum following.
The proponents of trend following or momentum investing are the essence of speculators.
Momentum seekers are only interested in identifying and buying assets that are going up because they are forecasting that they will continue to go up.
