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Investing or Speculation? What is the difference and why it matters

December 1, 2019

People have different ideas about what investing means.

For somebody, you need to be extremely wealthy if you want to invest some money.

For some others, investing is a loser game where you will end up losing your money.

Finally, for somebody else, investing is a way to protect and growth your capital.

I am a proponent of the last one, obviously, and with this blog I want to show you why.

To begin with, let's start with something that looks easy: the definition of investing.

What is a good definition of investing for you?

Take a few minutes to think about it and give your best shot.

Write it down somewhere, possible.

Done?

Great! Now let’s see what is the definition of "invest" in the Oxford Dictionary:

Close enough to what you thought?

If that's the case, I have bad news for you: this definition of investing is wrong.

I don't care that is taken from the Oxford Dictionary.

This definition put on the same level the guy that is buying a lotto ticket with one who is carefully analyzing a company before buying some of its shares

Which means it puts investing and speculation on the same level.

Look what happens when on the same dictionary I look for the meaning of speculation:

For the Oxford dictionary, investing and speculating are almost synonyms.

In the case of speculation, it put an emphasis on the losses, while when investing on the gains, but that’s it.

Both investing and speculation are seen as a way to put some money somewhere today and get out more money tomorrow.

And this is the first reason why people lose so much money in the financial markets.

They take a lot of risks buying financial products they don't understand, and they think they are investing.

Instead, they are speculating and gambling their money, hoping that Lady Luck will come and rescue them.

Before talking about anything else, we need to find a better definition of investing and differentiate it clearly from speculation, so there will be no room for mistakes.

Here is one that I like more:

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, this definition is a bit more complex than it was before.

I added a few key concepts:

  1. Investing is a process: it’s not about getting lucky once, it’s consistently doing the right thing (or at least trying)
  2. Investing is about protecting your net worth in the first place. First, you play defense, then you can focus on offense;
  3. Investing is about finding the right level of risk for you, and avoid to be ruined (lose all your money) at all costs;
  4. Investing is about having a long term perspective, and not trying to get rich quickly.

If you are not sure if so far you have been investing or speculating, I prepared a table which shows the main differences between these two concepts.

Investing is deeply connected with planning and be aware of your overall financial situation.

You don't need to have a super-detailed plan (an easy version of it can stay on a napkin), but it needs to be there any time you are buying a financial product.

If you can't answer the question "Why am I buying this financial product?" and you don't have a different answer from "I want to make more money" you are speculating, even if you think that you are investing.

And, because you are not a professional trader you don't know the rules of speculation and you will just end up giving money away to the people who are more expert.

So, at least at the beginning of your investing path, stay away from speculation and focus on creating a good plan and a solid process for your investments.

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