With the recent run up in both the stock market and the real estate market, it’s now become quite en vogue to call oneself an investor. Those who have sold their home for a profit are calling themselves investors, even when it’s the only piece of real estate they own. Others believe they’re investors because they have seen their 401k balances increase.

My concern is that what many are now calling investing is nothing more than speculating. We frequently hear stories of those that have bought properties in the so-called “hot” markets hoping to flip them for a grand profit. There is also no shortage of hot stock tips. If that’s not enough, you’ve probably at one time or another seen those ads on TV trying to get you to “invest” in gold.

So what separates an investor from a speculator? Benjamin Graham, who could be seen as Warren Buffett’s mentor, has this to say in his book, The Intelligent Investor:

“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

Two words here stick out to me: “thorough analysis”. So many people these days have no idea what they’re invested in much less have done a thorough analysis of these investments. Some will argue that they invest in Mutual Funds because the fund manager does the analysis for them. This can be true, but I still believe that no one cares about your money as much as you do.

Another point Graham makes here is that investments “[promise] the safety of principal and an adequate return.” This probably had something to do with Warren Buffett’s formulation of his Rule #1 of investing: Don’t Lose Money. (Remember that a 75% loss is only offset by a 400% gain.)

Speculation does have its place, but we need to recognize the difference between speculation and investing.

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