Do you know the difference between investment and speculation? If you are to achieve your financial goals, this is one of the most important concepts to grasp. In his canonical work, *The Intelligent Investor, *Benjamin Graham gives the following definition:
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting those requirements are speculative”. (p.18)
To be absolutely clear, here is Graham’s breakdown of the terms used in the above definition:
- Thorough analysis means “the study of the facts in the light of established standards of safety and value”.
- *Safety of principal *signifies “protection against loss under all normal or reasonably likely conditions or variations”.
- Adequate return *refers to “any rate or amount of return, however low, which the investor is willing to accept provided he acts with reasonable intelligence” (Security Analysis, *1934 ed., pp.55-56).
Now Graham also asserts that there are certain times where speculation may be appropriate, but that the key mistake to avoid is unintelligent speculation which falls into these categories:
- Speculating when you think you are investing.
- Speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it.
- Risking more money in speculation than you can afford to lose.
Be honest with yourself, are you speculating or investing?