Regarding the differences between investment and speculation, there are various debates online. But from my understanding, these articles do not hit the nail.
For example, some people think that investment is a positive-sum game and speculation is a zero-sum game. But we all know that buying and selling stocks are zero-sum games, but can we say buying and selling stocks are not an investment behavior? Some articles believe that the level of risk is different. The risk of investment is relatively large, and the risk of speculation is relatively small; others believe that investment needs to study fundamentals, while speculation does not. I think none of these points aim at the nature of the problem.
Similarities between investment and speculation
1. It has nothing to do with value propositions
Investment and speculation are essentially operations that estimate the future value of financial instruments. This is a pure financial act. Taking the real estate speculation group in China's property market in recent years as an example, it cannot be considered that it is unethical to invest in real estate because their speculation has pushed up prices to a certain extent. Therefore, investment and speculation are essentially human financial behavior, regardless of right and wrong.
2. Profit from spreads.
Both investment and speculation are for profit, and profit is achieved by buying low and selling high. Some people arbitrarily believe that it is nonsense that the profit is the investment and the loss is the speculation.
3. Both require deep studies to profit
Both investment and speculation must find a profitable buying point and selling point within a certain period of time. In complex financial markets which is full of uncertainty, to find these buying and selling points, you must have a pair of smart eyes. Such as Buffett and Livermore, their brilliance is based on in-depth research on the stock market, but the specific methods adopted are different. It is important to distinguish that without doing any research, it has no difference with gambling if trading only based on personal feeling of ups and downs.
The difference between investment and speculation
1. Different focus
Investment focuses on "capital", that is, the intrinsic value of assets. In the stock market, the value of stock depends on the value of the company behind it. The investment basis of value investors is to hold the stock assets with good performance for a long time, and the stock returns rise with the increase of the company's value. Therefore, the company value analysis and stock pricing are the two cornerstones of value investment, all around the asset value.
The focus of speculation is "opportunity", that is, market fluctuation opportunity. Speculators are good at catching the short-term changes in asset prices caused by fluctuations. Most of them don't care about the intrinsic value of assets. They embrace all kinds of factors that cause market fluctuations, such as black swan, war, disaster, etc. They dance with the wave, fight fast and withdraw quickly with great flexibility..
2. Different time periods
Investment requires a long period of time. Enterprise management is a long-term process. Short-term macroeconomic data, economic policies, emergencies may cause fluctuations in the company's stock price. But from a long time dimension, the internal value of an enterprise is determined by its own management level and its business area.
Speculation requires a short period of time. The stock market is a complex system, no one can accurately predict the specific trend of the stock market. So the longer it takes, the greater the uncertainty for speculators. Speculators need a keen intuition to capture the fleeting opportunities of the market. For example, the speculators in the futures market need to judge not only the fluctuation period of the market, but also the correct direction of the fluctuation, which puts forward very high requirements for speculators, so the financial products in the futures market are mostly short-term.
3. Different profit stability
Investors are looking for stable and cost-effective assets. The internal value of an enterprise and the pricing of stock valuation are governed by regular patterns. If investors use this pattern to guide their investment, they will be able to obtain stable investment returns in a long time. Time is the patron saint of investors. Even in the extreme situation of the subprime crisis in 2008 and the stock market crash in 2015, investors can survive. Graham, Buffett, Munger, Karaman and Fisher, the big winners and winners of the stock market, are outstanding examples of constant response to changes in the stock market.
Speculators, on the other hand, are the few who can laugh last in the stock market. Of course, there are also prominent speculators in the capital market, such as Soros, who claims to have "defeated the Bank of England". Outstanding speculators win more by talent and luck, which are scarce in the capital market. Speculation is like walking a tightrope with your eyes covered. Even if you feel better and are more skilled, a tiny mistake may break you into pieces. Most of the speculators, who are known as the God of stocks by the shareholders, fail to laugh at the end, even though their speculative career has flashed a mythical dazzling light. Livermore, the father of speculation, accurately predicted the great bear market in 1929. He made $100 million in that market, but then began to invest a lot in 1932. As a result, he lost everything in two or three years.