Sunday, November 21, 2010

Investment versus Speculation

Today there is but a thin line that differentiates an Investor from a Speculator. According to Benjamin Graham - The Father of Value Investing -
An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting this requirement are speculative.
The most important point of this definition is "Investment promises safety of principal and an adequate return".

Now take for example a Short seller. Is he now an investor or is he a Speculator? A short seller is one who borrows shares of a company and sells them with a hope that the prices of the shares will fall and he would be able to buy back the shares at a lower price and return them. The difference in the price is the return he gets. If the price of the share increases, he loses. Now where do you see any investment happening? Where is the principal he is investing and what is he investing his money in? What is the difference between this short seller and a punter betting on a horse who he feels will win?