Investing should never be confused with speculating.
The most important words ever written about investing are:
“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”
Graham’s clear distinction between investing and speculating is critically important because it is highly counter-intuitive, and often misunderstood. An example best exemplifies the difference:
Buying the stock of companies like Allegheny Technologies, Live Nation, or Body Central, after considerable research to establish limited downside risk, is an example of investing.
For a more detailed example see the valuation section of our report on Allegheny Technologies (ATI).
Buying the stock of Apple, Google, General Electric, or Proctor & Gamble, no matter how much research you do, is most likely an example of speculation. Obviously these are not bad companies, it is the fact that their valuation’s almost never permits you to buy the stock at a price that limits downside risk. Perhaps at the bottom of the tech bubble you could have found Apple at a value price, or even GE at the worst moments of 2008-9 might have been a true investment. However 99% of the time the stocks of these household names are just too expensive.
The remainder of this website will demonstrate exactly how to find, research, and manage a portfolio of value stocks. There are plenty of other places to learn how to speculate in Apple and Google.
Speculation is an enjoyable, highly social, and thoroughly engaging activity, that we recommend individuals should participate in with a very small percentage of their net worth. However, speculation must never be confused with the hard work needed to find investments that promise and adequate return and safety of principal.
|<< List of Key Principles||Key Principle No. 2 >>|