• Arne

How to separate investors from speculators and why it matters

Are you an investor or a speculator? Unfortunately, only a few people know the difference. That is, the media often uses both terms to describe someone who puts his money in the stock market. If you want to be serious about finding your place in the finance world you need to know the difference.

Broadly speaking, a speculator is someone who buys a security because of a change in its market price. The speculator constantly looks at the stock markets in general and at the price of the security in particular. In most cases, the speculator does not care about the price he pays for a security. He only presumes it will go up even more, because of positive future outlooks, increase in dividends, increase in quarterly earnings or something else. Hence, speculators tend to follow the simple rule: buy a stock when the price is low and sell when it is high. Warren Buffett, the most famous investor of all time, comment on this behavior:

"The dumbest reason in the world to buy a stock is because it's going up."

On the other hand, an investor is someone who buys a security because of the business and the future returns it provides to him. He does not care about the stock markets being open or not. Instead, he focuses on the fundamentals of the business itself. He knows how to read financial statements and from where else to gain valuable insights about the business and its management. Additionally, an investor always focuses on the price he pays for an investment. He knows the very same asset can be a speculation or an investment depending on the price he pays for it.

If you want to get serious about speculation it is also fine - you just should never mix it up with investing. You need to be aware that you are more gambling with your money. There is a change that you get incredibly rich on short time, but it would be out of pure luck and borderline behavior. He can also lose all your money. However, if you want to get serious about investing you need a profound level of financial education to be able to determine a great investment. Otherwise it is just speculation, because of your lack of knowledge.

As an investor you should see the stock exchange as a shopping mall. The best buys are those products you find at a corner close to the floor where no one looks at anymore. What is placed in the store windows instead draws everyones attention, but the price is simply too high to make it a rational buy.