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The debate over who qualifies as an investor versus a speculator has been ongoing for a long time. Historically, the term “speculator” has carried negative connotations, often associated with dishonest maneuvers aimed at financial gain. In contrast, people view “investment” as a modern term that represents innovation, entrepreneurship, and the savvy accumulation of wealth. Investors are commonly perceived as intelligent, creative individuals who actively seek opportunities to enhance their financial capital.
Perceptions and Exaggerations
Although people often view investing and speculating differently, the line between them isn’t as clear as it seems. Both involve using money to make more money in the future, but they use different methods and levels of risk. It’s not fair to think of speculators as less ethical or noble than investors. In fact, the difference between the two is not very important in practice, even though some people might take offense at being called a “speculator.” I’ve chosen to briefly touch on this topic to point out that investors and speculators are more similar than they are different, even though telling them apart can sometimes be hard.
When searching online for the difference between an investor and a speculator, you’ll encounter various attempts to delineate them. However, a common thread across these definitions is the use of qualifiers like “usually,” “often,” and “mostly.” This implies that even the definitions are carefully crafted to allow for exceptions and recognize the subjectivity of these strict distinctions.
It’s reasonable to suggest that whether someone is labeled an investor or a speculator, their primary goal is fundamentally the same: to make money. Both groups acquire assets in hopes that their value will increase, allowing them to sell at a profit. There’s no debate here; the objective is clear and shared.
Common Assets
Furthermore, both investors and speculators trade the same types of assets without distinction. It’s inaccurate to say, for example, that speculators primarily deal in stocks and real estate, while investors focus on bonds, precious metals, or cryptocurrencies. In reality, all assets are accessed and utilized by both groups without preference. Some self-identified investors see bitcoin as a viable long-term investment, believing it could become a global currency in the future. Conversely, there are traders who engage in frequent transactions over minor price fluctuations in stable assets.
Market Timing
The supposed distinction that speculators engage in market timing while investors do not is also misleading. Both groups analyze asset price movements to determine optimal transaction times. For instance, one popular strategy among investors, known as value investing, involves identifying temporarily undervalued, stable companies—an approach championed by renowned investors such as Warren Buffett and detailed in Benjamin Graham’s great work, “The Intelligent Investor”. This strategy, at its core, involves timing the market based on perceived undervaluations, much like speculators do.
Nobility vs. Self-Interest
Some argue that investors are motivated by a somewhat noble desire to support ventures they believe in. For instance, when investing in publicly traded companies, these investors may purchase shares out of admiration for the company and a wish to aid its growth. They may feel like co-owners, emotionally invested in the company’s successes and challenges, and hopeful for its prosperous future. In contrast, speculators are often viewed as having purely selfish motives, concerned only with the profit potential and indifferent to the company’s actual success.
This perspective assumes we can know what motivates someone to hit the buy button—is it altruism or self-interest? Is the investor truly selfless, or is there an underlying selfish motive? It’s interesting to consider whether this purported nobility would endure through tough times, such as a series of negative financial reports that cause the stock to plummet. Would the investor remain loyal, or would they revert to a more speculative mindset, prioritizing their financial return over company loyalty?
Investment Duration
Additionally, people often distinguish between investors and speculators based on the duration of their investments. Long-term commitments typically define an investor, whereas short-term engagements suggest someone is a speculator. However, the ambiguity of what constitutes “long” and “short” makes this distinction tenuous. Is it two years, five years, or ten years that separates an investor from a speculator? If an elderly individual bought shares in IBM, Apple, and Coca-Cola 35 years ago and held onto them, we might label him an investor, perhaps imagining him as a Warren Buffett-esque figure in modest attire and an old car. On the other hand, a 20-year-old making numerous daily Bitcoin transactions might be quickly classified as a speculator.
Consider the strategy of growth investing, which focuses on purchasing shares in high-growth companies. These companies typically follow an S-shaped growth curve—if they succeed. Their journey shows significant variability and uncertainty, especially in the early stages of development. They hover on the brink, with their futures oscillating between becoming stable, successful entities or facing bankruptcy.
A diligent investor engaged in growth investing must closely monitor these companies’ progress, reassessing their investment after each quarterly report to decide whether to stay the course or adjust their strategy. Labeling this type of investing as mere speculation could provoke strong objections from many in the investment community. These market participants proudly identify as investors and commit to this dynamic and involved investment approach.
Risk tolerance
Risk tolerance often serves as the final argument for those determined to clearly differentiate between investors and speculators. Conventionally, people view investors as more conservative, favoring lower-risk assets and diversifying their portfolios extensively and securely, while they perceive speculators as thrill-seekers, willing to dive into highly risky ventures and tackle the most daunting challenges.
However, I find this rigid classification based solely on one’s risk preference to be overly simplistic. I’ve encountered individuals who engage in rapid, high-stake cryptocurrency trading, yet they manage their risks prudently and diversify their investments astutely. Conversely, I’ve spoken with people who have held a single stock for decades—often shares issued by their employers as part of their compensation—and consider themselves committed, long-term investors, regardless of the substantial risks involved in such concentrated holdings.
Are these individuals truly investors, or are they unwitting speculators? If we equate high risk with speculation, then, by definition, they would be speculators. The danger of “putting all their eggs in one basket” is considerable. But labeling them based on their acceptance of risk does little to aid their understanding of investment strategies. Rather than stereotyping them, it would be more beneficial to discuss the risks they’re taking, the importance of diversification, and the potential advantages of investing in a broad range of index-tracking funds.
This illustrates the complexity and, at times, the absurdity of trying to neatly categorize individuals based on their investment behaviors. It’s evident that a more nuanced approach is necessary—one that considers individual circumstances and provides constructive guidance rather than rigid labels.
If we really must
Before concluding this article, let’s address the urge to define clear categories within the financial landscape. We can agree that financial maneuvers betting against the success of a business or asset—like shorting or using options—are distinctly speculative. Shorting, or taking a “short position,” involves betting that the asset’s price will decline, allowing the speculator to profit from the fall. Similarly, options trading, a method used to speculate on future price movements of assets, often plays out as a “zero-sum game.” In a zero-sum game, one party’s gain is exactly balanced by another’s loss; there are no net winnings distributed amongst the participants. In other words, it is not a win-win game.
On the other hand, if we need to assign labels, we can rightly call those who invest in a company before it goes public, “investors”. These individuals genuinely support a company’s development, contributing significantly to its early success and future growth. This form of engagement promotes the advancement of new ventures. It aligns with traditional views on investment, focusing on aiding and participating in business growth rather than merely profiting from market movements.
Beyond Labels
The need to classify individuals as either speculators or investors within the context of financial investments is fundamentally pointless. It’s as arbitrary as labeling someone short or tall, brave or cowardly, smart or stupid. Context and perception can dramatically alter these classifications. For instance, someone might see me as tall, cowardly, and smart in one situation, and short, brave, and stupid in another, but I remain the same person. This reflects how labels can change based on someone’s intentions to insult or compliment.
Similarly, negatively calling someone a speculator or dismissively referring to them as an investor—as if one holds inherent moral superiority over the other—does not change the essence of their actions or their self-perception. The idea that someone could definitively label you as an investor or a speculator based on a quiz with a handful of questions is not only strange but also humorous. What does it matter if at times your behaviors align more closely with traditional investing and at other times with speculation? Flexibility, adaptability, and openness to what you deem beneficial are far more critical than conforming to rigid, arbitrary standards.
In discussions within investment circles, it is far more beneficial to focus on financial strategies, approaches, diversification, discipline, planning, innovation, curiosity, and visionary thinking than to dwell on this pointless split.
And one last thing I’ll end with. Let me give you a definition of an investor. We can describe an investor as someone who strives to improve, educates themselves, and shows interest in everything that makes them a better person. He does not spare time and money to be an investor in the development of his personality.
