Investments and Speculations: Similarities and One critical difference.

Financial-market participants can be divided into two groups,

• investors and 
• speculators.

Similarly, assets and securities can often be characterised as either

• investments or 
• speculations.

Both typically fluctuate in price and thus appear to generate investment returns.

But there is one critical difference:

Investments throw off cash flow for the benefit of the owners; speculations do not.

The return to the owners of speculations depends EXCLUSIVELY on the vagaries of the RESALE MARKET.



Examples:

Investments, even very long-term investments, will eventually throw off cash flow:

• A machine makes widgets
• A building is occupied by tenants who pay rent
• Trees on a timber property are eventually harvested and sold.

By contrast, speculations, like collectibles, throw off no cash flow; the only cash they generate is from their eventually sale.  

• The future buyer is likewise dependent on his or her own prospects for resale.
• The value of collectibles, therefore, fluctuates solely with supply and demand.  
• Collectibles have not historically been recognized as stores of value, thus their prices depend on the vagaries of taste, which are certainly subject to change.
• The apparent value of collectibles is based on circular reasoning: people buy because others have recently bought.  This has the effect of bidding up prices, which attracts publicity and creates the illusion of attractive returns.  Such logic can fail at any time.