What separates an investor from a speculator?
Of course they look different. While an investor is generally calm and composed, a speculator is mostly agitated!
Anyways, the serious answer is – It’s not what they choose to buy but how they choose it.
At one price, any stock could be a speculation; at another (lower) price, it can become an investment.
And in the hands of different people, the same stock – even at the same price – could be either a speculation or an investment. It all depends on how they understood it and how honestly they assessed their own limitations.
As per the father of value investing, Benjamin Graham, the following three attributes make you an investor and their absence make you a speculator:
1. Thorough analysis
Investing requires hard work. It requires you to do thorough analysis of companies whose stocks you are looking to buy. Just buying because someone advised you is purely speculation.
While it definitely pays to take advice from an intelligent financial advisor, the point is that in that case you also need to do a thorough analysis on which advisor is really trustworthy and would not lead you into trouble after he’s taken care of his commissions.
The underlying fact is that this world is full of bad companies and unethical advisors. It’s your responsibility to be thorough in your analysis as to where you’d be comfortable putting your money. Remember, it’s your money and you’ve worked hard at earning it. So be very careful.
2. Safety of capital
The two, and only two rules of investing are:
- Don’t lose money
- Don’t forget the first rule
So, as an investor, the safety of your capital must be your primary goal. Of course you will be lured into stocks by stock market experts who will promise huge capital appreciation over the next few months or years, just don’t give in to such overt claims.
Remember your only goal of investing in stocks must be to maintain your purchasing power in the long run, and for this, you must ensure the safety of your capital.
3. Adequate return
For Graham, an ‘adequate’ or ‘satisfactory’ return meant ‘any rate or amount of return, however low, which the investor is willing to accept, provided he acts with reasonable intelligence’.
Now you may ask, “However low? Who’s willing to accept a low return from stocks? Isn’t investing in stock markets all about earning high returns?”
Yes, dear investor, you have a very valid question.
But the paradox of ‘adequate return’ is that when you aim for adequate return (after having used reasonable intelligence while buying stocks), you will end up with an outstanding return.
Look at Warren Buffett who has been aiming for 15% annual return over many decades. His current track record suggests that his run rate stands at 20.2% annual return over a 46 year period.
Now how much does a 20% annual return amount to over 46 years?
Well, it’s enough to multiply Rs 100 invested in 1964 to Rs 4.9 lac today!
Isn’t that adequate?
So, given the above discussion, who do you think you are – an investor or a speculator?
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