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Investment or speculation?

Dec 15, 2008

Many are attracted to the lure of making money. That pushes them to do things they donít completely understand. Take participating in F&Os for example, which is nothing more than gambling. But the possibility of the money that can be made along with experiencing someone else making a fast buck in the same (out of pure luck) is convincing enough for most people to try their own hand at it. The crux of the matter here is that people can become willing to put in their own money into something that they donít fully understand, just by getting influenced with what people around them are doing. Another example of the same phenomenon is the arcane CDOs (Collateralized Debt Obligations), which had no dearth of buyers just a while back, in spite of their complexity and the fact that people did not know details of what they were buying.

In comparison, here's someone with a different attitude. An attitude which has held him in good stead during the roughest of times, and helped him keep away from some of the most amazing mass delusions of our times. From the technology bubble to the current credit crisis and everything that came before that. Here's a look at the essence of the psyche that helped him navigate the rough and sometimes blinding seas of the investment world-

"I am out of step with present conditions. When the game is no longer played your way, it is only human to say the new approach is all wrong, bound to lead to trouble, and so on. On one point, however, I am clear. I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean foregoing large, and apparently easy, profits to embrace an approach which I don't fully understand, have not practiced successfully, and which possibly could lead to substantial permanent loss of capital." - Warren Buffett (In a letter to his partners in the stock market frenzy of 1969)

Externally it might seem that an expert investor like Warren Buffet might be prescient enough to know what is right and what is wrong beforehand. And thus has been able to avoid extraordinary events that have taken most other investors by surprise. But as is evident from his own words mentioned above, the truth can be as simple as having the resolution to not put your money into anything that you don't fully understand yourself. Irrespective of what people around you are doing, or how much money they seem to be making from it.

And if you find yourself doing something like that, you are risking crossing that fine line between investment and speculation.

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