One of the first reactions people have when I told them I am an investor and I teach the basics somebody needs to have before become one, I hear very often this:
"It sounds very cool, but investing is not for me. I know a guy who tried it and lost all of his money."
When I hear such a sentence, I instantly know that this person's friend was not investing.
He was speculating.
And, although it looks like semantic, there is a huge difference between investing and speculating, and not knowing it is a surefire way to lose money on the financial market.
In this article, we will analyze the difference between investing and speculating and see how it can be useful for you.
What is a good definition of investing for you?
Take a few minutes to think about it.
(Please, really take a few minutes. That is the time where if this were a video, I would say “pause the video and think about it”.)
Ok, now let’s see what the Oxford Dictionary is saying about it:
How is that, close enough to what you thought was a good definition?
Well, now I have bad news for you: this definition of investing is wrong.
This definition puts on the same level a guy who is buying a lotto ticket and the one who is carefully analyzing a company before buying some of its shares.
To put it simply, it considers investing and speculation the same thing.
Look what happens when, on the same dictionary, I look at the meaning of speculation:
So, for the Oxford dictionary, investing and speculating are almost synonyms.
In the case of speculation, it puts an emphasis on the losses, while when investing on the gains, but that’s it.
This is the first reason because people lose so much money on the financial markets.
They think they are investing in some products where the risks are visible and under control, only to find out that they were speculating and putting too much of their capital at risk for no good reason.
That's why it's important to upgrade the definition of investing and differentiate it clearly from speculation.
Here is one definition I like:
Investing is a process that protects and grows your net worth over time so that you can reach your financial goals and sleep well at night.
As you can see, the definition got a bit more complex than it was before.
I added a few keys concepts:
If you are not sure if you have been investing or speculating so far in your life, I prepared a table which shows the main differences between the two of them.
And the best part?
If you have the right investing process in place, the chances of losing money are going down, almost to zero.
I said "almost" because there will always be timeframes when some of your investments will be down in value.
But with the right investing strategy you will be able to endure (or even take advantage) of these situation while sleeping well at night.
And, at the end, you will have more money that you started with.
Want to know more about it?