Investing versus speculating
I am currently reading ‘The intelligent investor’ by Benjamin Graham. I picked up the book after it was heavily recommended by most websites and the investment expert Warren Buffet, himself. Though the book is extremely heavy with its reference to the wall street and dated stock examples, Graham’s principles are solid and timeless.
Starting 2017, I started ‘investing’ in the stock market. A particular myth that got busted right in the beginning of my read was the fact that I haven’t been an investor until now. I’ve been a speculator.
An investor calculates what a stock is worth, based on the value of its business. A speculator gambles that a stock will go up in price because somebody else will pay even more for it. As Graham once put it, investors judge “the market price by established standards of value,” while speculators “base their standards of value upon the market price.” For a speculator, the incessant stream of stock quotes is like oxygen; cut it off and she dies. For an investor, what Graham called “quotational” values matter much less. Graham urges you to invest only if you know you would be comfortable owning a stock even if you had no way of knowing its daily share price.
Specualating is a casino-like game where the house is bound to win. The house here is the stock exchange and the losers are the speculators. Investing is a unique kind of casino-one where you cannot lose in the end, so long as you play by the rules that put the odds squarely in your favour.
The above lines point to the fact that investment requires some real homework. Back of the envelope calculations and random recommendations are a recipe for disaster.
Starting tips-
As a speculator who wants to turn to the path of intelligent investing, getting initial help is not a bad idea.
- Hiring an adviser/taking a stock market course that helps you understand the basics of investing along with reading books that explain the basics of investment and stock market is a good first step.
- Another good tip to initial investors is to not invest heavily in the initial stages. 10–20% of savings is a good start (with the remaining 80% locked in an FD/SIP).
- Recommendations aren’t a bad idea but make sure to limit the number of people you are taking advice from.
Here’s to accepting that we’ve been speculating all along. Here’s to beginning the long journey on the road of intelligent investing.
