Are You Investing - Or Speculating?

 


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Have you considered the possibility that what you've termed “investing" might be more accurately described as plain and simple speculating? If you adopt that approach, you'd probably have more reasonable expectations about the money you'll make - and realize that nearly any investment is in reality a speculation.

The words “investment" and “speculation, " are erroneously used interchangeably.
The words are often misused and misunderstood. Even worse, sometimes people will consider a financial opportunity safe when it's called an investment (real estate being a typical example), when in reality, that so-called investment is actually speculation. The mortgage-banking crisis, the Wall Street bailout, and its worldwide ripple effect are good examples that drive that point home.

Wikipedia, that online resource where definitions are part of a wide-open digital landscape in constant flux, offered this definition of speculation: “The process of selecting investments with higher risk in order to profit from an anticipated price movement. "

If speculators are considered bigger risk-takers than investors, then what do you make of gamblers? Here's the difference: The shrewd speculator uses logic and research data to identify the most promising profit opportunities in the marketplace. He understands the complexity and unpredictability of the market-or any game that involves risk capital, for that matter-and studies the underlying forces that cause the market to swing either up or down.

In short, the shrewd speculator takes a calculated risk. On the other hand, the gambler-whether a player in the financial markets, casinos, racetracks or sports arenas-is either a casual, compulsive or professional gambler. His behavior is the key: The compulsive gambler, driven primarily by emotions, tends to just jump in and out, looking to beat the house for a quick and easy gain. This type of gambler tends to play hunches and leap without looking.
In contrast, the professional gambler makes a living using mathematics to analyze games of chance. The tools he uses can include probability, expectation and game theory.

The “safe investment" is a myth

It can be confusing trying to distinguish between investment and speculation in any financial transaction, including commodities, mutual funds, stocks, bonds, real estate or business deals. This confusion hinders your ability to calculate what the true expectations of return should be. It could cause you to overpay for an opportunity and take unnecessary or even irrational risks.

Understanding that investment is a myth is vital when deciding where to commit your capital. In the long run, the decisions you make today will affect your potential to create wealth in the future. If you're looking for a place to put your money with dreams of a high return, we caution you to consider the effect of herd mentality and how it has led to ruin for so many - not only in recent days but throughout history.

You need to learn how to spot the common-sense danger signs, and remember that if something sounds too good to be true, it most likely is. That way you won't read your own story when someone writes about the next bubble to burst. Just think about the havoc created by real estate bubbles, Wall Street meltdowns, bank failures, and bailouts and that imaginary box labeled “investment" vanishes in a puff of smoke.

Essential: A well-planned strategy

None of this is meant to discourage you from speculating-far from it. But if you decide to go along for the ride on the next market uptick, have a well-planned exit strategy beforehand. And a thorough understanding of the bigger picture, so you'll have reasonable expectations and a better handle on what you're actually doing with your money.

And we encourage you to take some risk. There are plenty of good examples of successful speculators and risk-taking innovators who knew where to look for opportunities. And just as many heartbreaking accounts of ill-fated investors who were quick to buy-in but failed to make a timely departure.

Keep your eyes wide open, though. And treat your results as a return on speculation. If you
start from the standpoint that it's all speculation, you'll be less likely to take irrational risks, have fewer unpleasant surprises, and have more reasonable expectations.

Co-authors Jose D.Roncal and Jose N. Abbo share some 50 years of senior executive experience in international business, finance and economics. Both have authored numerous articles on business strategy, finance, accounting, capital markets and the global economy. For more on the authors and their book, The Big Gamble: Are You Investing or Speculating?, visit: http://www.financialspeculation.com/

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