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Do you 'Invest' or 'Speculate'? - Views on News from Equitymaster
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  • Apr 6, 2009

    Do you 'Invest' or 'Speculate'?

    Most use the term 'investment' in the most casual of ways without ever giving its usage a second thought. It ends up becoming an all inclusive word that can mean any and everything that relates to putting you money at work.

    But not the erudite Benjamin Graham. One of the reasons why he was so good at what he did is he that he had a preference for getting into the minutest detail of everything that was of any importance in the world of investing. And of course, the word 'investment' itself would be the most logical place to start. So what did he mean investment to be?

    After giving some thought to the common usage of the term, he concluded that when people say investment they can mean either of the following three things:

    • The first relates to putting money in a business. One would 'invest' Rs 1,000,000 to open a grocery store.

    • The second usage of the term usually ends up meaning a host of different things within the field of finance. In the master's own words, "It is a convenient omnibus word, with perhaps an admixture of euphemism-i.e., a desire to lend a certain respectability to financial dealings of miscellaneous character."

    • The most important distinction of the third usage of the term is when the word conveys investment as opposed to speculation. Thus 'investment', in this special sense of the word, is good for everybody and at all times. On the other hand, speculation could be good or bad, depending on the situation and the person who is speculating.

    It thus follows that it would be important for anyone engaging in any financial activities to know whether he/she is investing or speculating.

    In light of all such things, Graham proposed one sacrosanct definition of investment -

    "An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative."

    It would be of immense benefit to have a discussion about each part of this definition in greater depth. First is the usage of the term 'investment operation' rather than 'investment' itself. This is because it would be unsound to think of a security (stocks, bonds etc) as by itself possessing investment merit. That is because its price would frequently be an essential element such that a stock may have investment merit at one price level but not at another. 'Thorough Analysis' means, the study of the facts in the light of firm and pre-established standards of safety and value. Though there is no escape from the fact that the 'safety' sought in an investment can never be absolute or complete. The word actually means protection against loss under all normal or reasonably likely conditions. Where analysis indicates that there is a high chance of loss which must be accepted, that would be a speculative situation. Within the term 'satisfactory return', 'satisfactory' is a subjective term and can cover any rate of return, however low it might be, which the investor is willing to accept whilst acting with reasonable intelligence.



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