Investing vs Speculating
What are the definitions of investing and speculating?
Here's what I've found:
"An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." -Ben Graham
"The individual investor should act consistently as an investor and not as a speculator. This means that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money's worth for his purchase." -Ben Graham
"The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell." -Ben Graham
"...An investment operation in my view is one where you look at the asset itself to determine your decision to lay our some money now to get some more money back later on. So you look to the apartment, house, you look to the stock, you look to the fame in terms of what that will produce. And you don't really care whether there's a quote under it at all. You are basically committing some funds now to get more funds later on through the operation of the asset.
Speculation, I would define, as much more focused on the price action of the stock, particularly that you buy or the indexed future or something of the sort. Because you are not really, you are counting on, for whatever factors, could be quarterly earnings, could be up or it's going to split or whatever it may be or increase the dividend, but you are not looking to the asset itself.
And I say the real test of how you, what you're doing is whether you care whether the markets are open. When I buy a stock, I don't care whether they close the stock market tomorrow or for a couple of years... Now if I care whether the stock market is open tomorrow then I say to some extent I'm speculating because I'm thinking about whether the price is going to go up tomorrow or now.
And then gambling I would define as engaging in a transaction which doesn't need to be part of the system..." -Warren Buffett
According to Buffett and Graham, would value investing be the only strategy where you're truly investing?
repost, sorry
Link to original? I searched but I didn't find anything that was this same discussion.
Sorry, I didn't mean this discussion had already been posted, I just accidentally re-posted when I was trying to edit my comment.
Well first, I'd say yes, value investing is the only strategy where you're truly investing, but with the caveat that "Value investing" is a really broad category and that statement doesn't mean much and there's many different ways to follow a "value" strategy and make money. In the broadest sense value investing is just buying an asset for less than what it's worth. And if you are buying an asset for a price greater than what it's worth, then that is clearly not a rational investment strategy. At that point you're relying on a "greater fool" to come and buy the asset from you at a higher price than you paid. The only way you make a return is if someone is even more foolish than you are. Thus, you're relying on other market participants in order to make money and that's not investing.
Like I said though, value investing is a really broad category as I understand it. I'm only a junior in undergrad so take what I say with a grain of salt of course. I would say there's two principals everyone in the value world agrees on, the first being to "margin of safety" - since your calculation of fundamental value is always going to be somewhat flawed, you should only buy a stock/business when it's trading well below what you believe to be fundamental value, not 5-10% below. Second, the view of "Mr. Market" - never to look at movements in stock prices for information about what a business is worth, and to view the stock market as solely a mechanism to buy/sell when you want to [although Soro's view of reflexivity might challenge the "Mr. Market" perception a bit, and Klarman acknowledges this in his book but believes it to rarely be a big issue]. But then there are plenty of different "disagreements" or different sub-strategies.
Even if you look at Buffett, his strategy over his career has changed and deviated somewhat from what Ben Graham advocated. Graham largely advocates buying very, very cheap businesses with a strong focus on book value; for example there's the holy grail of the "net-net" where a company is trading below the value of its current assets - total liabilities. It's hard to imagine such an opportunity even existing in the market, but back in the 1930s when Graham was writing, there obviously wasn't the amount of information available today and in particular, stocks of smaller companies were much less liquid than they are today and harder to trade.
As you can imagine, such businesses are not necessarily great businesses. But this is how Buffett made money in the 50s-60s. If you listen to Buffett today, he's more focused on buying "great businesses at mediocre prices" than "mediocre businesses at great prices."
Seth Klarman, another value investor, seems to be more focused on the "really cheap" philosophy. If you signup for a guest account at valueinvestorsclub.com and look at some of the ideas there, I'd say they largely fall into the "really cheap" philosophy as well.
Thanks for the write up. I'm a big fan of Klarman and am currently reading a lot about him.
You wouldn't consider growth investing a viable investing strategy? With growth investing, you're buying a stock that may have high price to earnings and price to book ratios but you believe in the long term potential of the business and its growth prospects.
I would agree that you're focusing more on the asset than the price, but it doesn't "promise safety of principal and an adequate return" as Graham says.
Thanks for contributing though, and please point out if I'm wrong. I'm still at an early point in the learning process.
I would think that as long as a) the future projections of the business you make in coming up with fundamental value are well-supported and conservative, and b) you purchase only at a substantial discount to what you come up with as fundamental value, then it still falls within the "value" space. But I think that in these cases, because of how uncertain the future is, you'd demand a higher margin of safety than you would for a company with well-established earnings power.
^ Based on that, would distressed securities be considered value / overall investing?
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