Wednesday, 10 February 2010

There is ALWAYS a Speculative Component of Stock Investment. There is no sure thing.

There is no sure thing.  There is always risk in stock market investing.

Risks are inherent in buying stocks and the investors should have a clear idea of these risks when buying.

These risks are inseparable from the opportunities of profit that they offer.  Both of these must be allowed for in the investor's calcuations.

Investors should be aware of this speculative component of investing.  This should be distinguished from stock speculation explained below.

It is the investor's task to keep this speculative component of investing within minor limits and to be prepared financially and psychologically for adverse results that may be of short or long durations.  There is no way around this market effect.

Speculative Component of Stock Investment vs Stock Speculation

There is always a speculative component of investing when you buy and hold. 

However, this speculative component of investing should be distinguished from stock speculation.

Benjamin Graham, in his texbook, Security Analysis, attempted a precise formulation to distinguish the difference between investment and speculation.

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

This is what he wrote on speculation.
  • Some speculation is necessary and unavoidable, for in many common stock situations, there are substantial possibilities for both profit and loss, and the risks therein must be assumed by someone.
  • There is intelligent speculation as there is intelligent investing.
  • There are also many ways in which speculation may be unintelligent:
  1. speculating when you think you are investing;
  2. speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and
  3. risking more money in speculation than you can afford to lose.
  • Every nonprofessional who operates on margin (investing with money borrowed from your broker with your shares as collateral) should recognize that he is ipso facto speculating.
  • And everyone who buys a so-called "hot" stock is either speculating or gambling.


Benjamin Graham recognised that speculation can be a lot of fun while you are ahead of the game.  He advised those who want to try their luck at it, to put aside a portion -- the smaller the better -- of your money in a separate fund for this purpose. 
  • Never add more money to this account just because the market has gone up and profits are rolling.  (That's the time to think of taking money out of your speculative fund.)
  • Never mingle your speculative and investment operations in the same account, nor in any part of your thinking.

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