“An INVESTMENT operation is one which, upon thorough analysis, promises safety of principal and an adequate return.” Graham writes. Speculation operation meets none of these.
On the question of Investment vs Speculation, I turn to Graham because he addresses the differences between them on the very first page of his book, The Intelligent Investor. The above is quoted from his writing in the book. Based on this definition, there are three components to investing: thorough analysis, safety of principal, and adequate return. Graham adds, “Operations not meeting these requirements are speculative.”
To this, I would add: (1) Any contemplated holding period shorter than a normal business cycle (typically 3 to 5 years) is speculation, and (2) any purchase based on anticipated market movements or forecasting is also speculation.
Given what I’ve already addressed regarding Value Investing (its focus on individual company analysis to determine intrinsic value, the margin of safety concept, and its success over the long term), it certainly meets Graham’s definition of investing.
The distinction between investment and speculation is important for a reason Graham cited in 1949 and remains true today: “. . . in the easy language of Wall Street, everyone who buys or sells a security has become an investor, regardless of what he buys, or for what purpose, or at what price. . . .”The financial media often refers to “investors” taking profits, bargain hunting, or driving prices higher or lower on a particular day. “When I hear about such actions, I attribute them to speculators, not investors.” – Sources from intelligent investor by Benjamin Graham.
