The Intelligent Investor - Chapter 1 Investment versus Speculation

"Knows the price of everything, and the value of nothing." - Oscar Wilde

The Intelligent Investor - Chapter 1 summery

What do we mean by "investor"? throughout this book the term will be used in contradistinction to "speculator". As far back as 1934, in our textbook Security Analisys, we attempted a precise formulation of the difference between the two, as follows: "An investiment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operation not meeting these requirements are speculative."

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Now our concern is of the opposite sort. We must prevent our readers from accepting the common jargon which applies the term "investor" to anybody and everybody in the stock market...

The distinction between investment and speculation in common stocks has always been a useful one and its disappearance is a cause of concern. We have often said that Wall Street as an institution would be well advised to reinstate this distinction and to amphasize it in all its dealings with the public. Otherwise the stook exchanges may some day be blamed for heavy speculative losses, which those who suffered them had not been properly warned against. Ironically, once more, much of the recent financial embarassment of some stock-exchange firms seems to have come from the inclusion of speculative common stocks in their own capital funds. We trust that the reader of this book will gain a reasonably clear idea of the risks that are inherent in common-stock commitments-risks which are inseparable from the opportunities of profit that they offer, and both of which must be allowed for in the investor's calculation.

What we have just said indicates that there may no longer be such a thing as a simon-pure investment policy comprising representative common stocks - in the sense that one can always wait to buy them at a price that involves no risk of a market or "quotational" loss large enough to be disquieting. In most periods the investor must recognize the existence of speculative factor in his common-stock holdings. It is his task to keep this component within minor limits, and to be prepared financially and psychologically for adverse results that may be of short or long duration.

Two paragraphs should be added about stock speculation per se, as distinguished from the speculative component now inherent in most representative common stocks. Outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook. More than that, some speculation is necessary and unvoidable, for in many common-stock situations there are substantial possibilities of both profit and loss, and the risk therein must be assumed by someone. There is the intelligent speculation as there is intelligent investing. But there are many ways in which speculation may be unitelligent. Of these the foremost are: (1) Speculating when you think you are investing; (2) Speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose.

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