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Speculating vs. Investing

by SMD 


I’ve just been reading an interesting story on Mack Cuban’s BlogMaverick site called What’s an investor? In it he discusses the difference between pure speculating and investing. Here’s his definition of the two:

The difference between the two is very simple. If you spend the money and the only way you can earn a return on that money is by selling whatever it is you have purchased. You are speculating.

If you give your money to a person or company, and that money is used directly to create commerce or to create an asset that will be used in commerce and if there are profits from that commerce that can be returned to you as a result, that is an investment.

He lists a bunch of examples of each but the bottom line is that Mark feels that it is better for the economy and [he hints at going as far as saying morally] to invest rather than speculate.

Personally I’m a little skeptical of billionaires suggesting what is best for the economy. I think Mark sincerely cares, but what he misses is that it is often a poverty mentality or the pure lack of money or financial education that cause people to speculate or even gamble rather than to invest. To suggest that tax breaks for investing and penalties for speculating would change anything is dealing with the issue in the wrong place.

If Mark Cuban wants to fix the economic bubbles and damage to the economy caused by the greedy speculation then I think he should offer financial education programs for kids and get healthy core financial concepts started before we thrust people into the workforce without a clue how the world really works.

Robert Kiyosaki goes into the difference between being a speculator and investor in his book Who Took My Money. He tells a story of a cattle rancher and dairy farmer to illustrate his point. The cattle rancher raises a calf and then takes it to market to be slaughtered: at which point he gets paid and hopefully realizes a profit. This is the speculator’s model. The dairy farmer buy a cow and sells the milk for years, more like a dividend paying stock or cash flow rental property. This is the investor’s model. I know Robert’s books have certainly had a major influence on me and my understanding of the difference between investing and speculating. In the world of finance the naive speculators and gambler are often the ones getting slaughtered.

Nothing wrong with either approach in my mind, but the investor probably does provide more benefit to society as a whole and it is probably the more sound financial strategy.

My favorite time frame for holding a stock is forever.” Warren Buffet

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Comments

One Response to “Speculating vs. Investing”

  1. MarthaJ on September 17th, 2013 6:15 am

    A quote from the legendary businessman Steve Forbes “Everyone is a disciplined, long-term investor until the market goes down” comes to mind….

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