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What Is the Difference between Investing and Speculation?


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Guest longinvestor

Great post. Marks comments are great, as are Keynes!


I'm reminded of Buffett's letter which was sent to his shareholders (& later published by Forbes, 1999); Here is what I remember about that letter:


InvesTING is putting money aside today to get MORE back in the future. The operative word is MORE. You could very well get LESS in the future, a LOT LESS, like Zero and since the likelihood of getting MORE back is unknown and probabilistic, risk is entirely determined  by your own understanding of the business you're investing in. Not by something called BETA which is calculated from price swings. Most people think they understand a business, worse, think they understand a lot of businesses, like the entire market or an entire industry segment. This is not Investing and therefore Speculation.  Buffett on the other hand understands a few businesses, very well and since he understands them well(meet their first three criteria), is willing to wait for a long time for the business to meet their fourth criterion of "How much should I pay" to get MORE back in the future.


The times Buffett Invested, he has made money and those times where he speculated he lost money (Airlines). It's all based on understanding and being intellectually honest about the understanding. Difficult for most people, who tend to torture reality to meet their biases.

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