"Investing" vs "Speculating"

Out-to-Lunch said:
If an omniscient being whispered the correct answer to this question in your ear, what would you do with that information?
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Absolutely nothing. Mostly just trying to have a thoughtful conversion and hear what people think on something I read and thought was interesting.
 
Active investing is knowing what you are doing by using research and analysis. Passive investing is by indexing and speculation is investing and not using research and analysis. Active investing think Buffett, passive think Bogle, speculating think casino.
 
The difference is diversification and holding time. Most of us equities are well diversified or index funds, hence no individual stock risk, and held for years through market ups and downs, hence no timing risk.
 
surprising said:
Read a book recently where the author made the claim that if you buy stocks, you aren't investing, you are speculating. It kind of makes sense. We buy stocks with hopes that they go higher, and then we sell for a profit.

However, if you buy bonds (and perhaps bond funds), you are literally investing in the company. You are providing capital directly to a company that it uses for building or maintaining the business. Again, makes sense, especially since bond holders get first pick of the leftovers during a bankruptcy, and shareholder's potentially lose everything.

So it all makes sense, but doesn't leave me with a good feeling knowing that majority of my net worth is considered 'speculating.' What do others think?
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From the dictionary: invest in stocks, property, or other ventures in the hope of gain but with the risk of loss.

Thus, both stocks and bonds are speculative.
 
Ah, this thread is still alive. In the interim I saw somewhere a suggestion that speculating is buying an asset for anticipated appreciation above what the underlying growth fundamentals of the asset would suggest. Or something like that. So I guess if you're buying into a bubble (think crazy-high P/E ratio) it's speculating; otherwise, it's investing. Go figure.
 
surprising said:
Read a book recently where the author made the claim that if you buy stocks, you aren't investing, you are speculating. It kind of makes sense. We buy stocks with hopes that they go higher, and then we sell for a profit.

However, if you buy bonds (and perhaps bond funds), you are literally investing in the company. You are providing capital directly to a company that it uses for building or maintaining the business. Again, makes sense, especially since bond holders get first pick of the leftovers during a bankruptcy, and shareholder's potentially lose everything.
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This is silly. And backwards.
A stock is a partial ownership of the company. You are literally investing in the company.
A bond is you loaning money to the company. You have literally ZERO ownership in the company, you have just loaned them some money.
 
surprising said:
Read a book recently where the author made the claim that if you buy stocks, you aren't investing, you are speculating. It kind of makes sense. We buy stocks with hopes that they go higher, and then we sell for a profit.

However, if you buy bonds (and perhaps bond funds), you are literally investing in the company. You are providing capital directly to a company that it uses for building or maintaining the business. Again, makes sense, especially since bond holders get first pick of the leftovers during a bankruptcy, and shareholder's potentially lose everything.

So it all makes sense, but doesn't leave me with a good feeling knowing that majority of my net worth is considered 'speculating.' What do others think?
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There do seem to be some differences in how different online dictionaries define those terms, but this book author's understanding is a legitimate one that points to one useful way of understanding them. But it's not right to categorically say buying stocks is one and buying bonds is the other.

Bond investing is only investing if you buy an actual bond when it is issued by the company. If you buy or sell bonds on the secondary market, that is speculating.

Similarly, if you buy stock from a company when it issues shares, that is investing. When you buy existing shares on the stock market, that is speculating.

Now, if your goal is to avoid poverty in your old age, rather than to prop up the economy or help this or that company meet its goals, then the distinction between speculating and investing that this author points out is not important. What matters is risk and returns. Investing in a bogus fly-by-night company run by dishonest or incompetent people will not help you attain your goal. Speculating on the stocks of strong, well-run companies would normally work much better for you.
 
surprising said:
Read a book recently where the author made the claim that if you buy stocks, you aren't investing, you are speculating. It kind of makes sense. We buy stocks with hopes that they go higher, and then we sell for a profit.

However, if you buy bonds (and perhaps bond funds), you are literally investing in the company. You are providing capital directly to a company that it uses for building or maintaining the business. Again, makes sense, especially since bond holders get first pick of the leftovers during a bankruptcy, and shareholder's potentially lose everything.

So it all makes sense, but doesn't leave me with a good feeling knowing that majority of my net worth is considered 'speculating.' What do others think?
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Stock are more than hope. You can assess the underlying fundamentals of the company. There is some history as well. If you want to only invest in bonds, fine, but I call BS that buying stocks is just speculation and hope.
 
engineernerd said:
There do seem to be some differences in how different online dictionaries define those terms, but this book author's understanding is a legitimate one that points to one useful way of understanding them. But it's not right to categorically say buying stocks is one and buying bonds is the other.

Bond investing is only investing if you buy an actual bond when it is issued by the company. If you buy or sell bonds on the secondary market, that is speculating.

Similarly, if you buy stock from a company when it issues shares, that is investing. When you buy existing shares on the stock market, that is speculating.

Now, if your goal is to avoid poverty in your old age, rather than to prop up the economy or help this or that company meet its goals, then the distinction between speculating and investing that this author points out is not important. What matters is risk and returns. Investing in a bogus fly-by-night company run by dishonest or incompetent people will not help you attain your goal. Speculating on the stocks of strong, well-run companies would normally work much better for you.
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Not to beat a dead horse but I think you are totally wrong...

VERY few people have the ability to buy stock on a IPO... and even bonds sold are rarely that much to the public...

And how are you speculating buying a bond in the open market? It has a schedule of payments and an end date... those are set... no speculation involved... and I would never say you are speculating if the company can pay it back...
 
surprising said:
Read a book recently where the author made the claim that if you buy stocks, you aren't investing, you are speculating. It kind of makes sense. We buy stocks with hopes that they go higher, and then we sell for a profit.

However, if you buy bonds (and perhaps bond funds), you are literally investing in the company. You are providing capital directly to a company that it uses for building or maintaining the business. Again, makes sense, especially since bond holders get first pick of the leftovers during a bankruptcy, and shareholder's potentially lose everything.

So it all makes sense, but doesn't leave me with a good feeling knowing that majority of my net worth is considered 'speculating.' What do others think?
Click to expand...

I believe the distinctions between stocks and bonds in the book, and the definition of "speculating" are just wrong.

You said that per the book, only bonds "provides capital directly to a company that it uses for building or maintaining the business." In reality, stocks do that too! If a business issues shares of stock, the money from people buying the stock goes straight into the business. You are still "literally investing in the company," because you are buying a share of ownership in the company.

Of course, if you SUBSEQUENTLY buy shares of stock that someone else is selling, that doesn't give the company any more money, but you can also buy bonds that someone else previously bought and is now selling, which similarly doesn't give the company more money either. In both cases, the distinction the book is trying to make about what (stocks vs bonds) gives vs doesn't give a company more money is not accurate.

Buying the two are just investing in the company in different ways - one as an owner and the other as a creditor. But in both cases, you need the company to do well in order to make money for you.

As for "bond holders get first pick of the leftovers during a bankruptcy," - bond holders do get paid before stockholders, but they don't get "first pick" - they get 4th pick. The order of payments is 1) various company expenses, 2) secured debts (such as mortgages), 3) employee wages, 4) unsecured debts (such as bond holders), 5) stock holders. By the time it gets to the bond holders, there may be very little left of the company's assets. If you invested (for example) $100,000 and get back 5% or $5000, this isn't much better (and probably doesn't feel much better) than getting back 0.

In a follow-up post, you said, "I think the author was just stuck on the literal meanings of the words [speculating vs investing]". But what is the literal meaning of speculating or speculative? To me, it means, "financially risky". If you are trying to say that bond investing is not speculative/risky, you are totally ignoring the issue of bond ratings.
Bond credit rating - Wikipedia
This web page even uses the word "speculative" for every bond grade below a certain point in the ratings. All bond grades carry some risk, but risk above a certain point (in bonds graded below a certain point) is considered "speculative". With some grades, it goes beyond "speculative" to terms like "highly speculative" and "extremely speculative".

If you don't think that buying bonds can be speculative, I challenge you to invest 100% of your money in so-called "junk bonds" and report back about how your investments perform. I think you will find them to be VERY speculative = risky. You probably were not thinking about junk bonds in your post, but I do believe this destroys the idea that bonds are an investment whereas stocks are speculative.

As others have said in this thread, the best way to minimize investment risk (i.e. speculative investments) is to diversify one's investments, by buying index funds or similar types of diversified products.
 
WhenIsItTime said:
From the dictionary: invest in stocks, property, or other ventures in the hope of gain but with the risk of loss.

Thus, both stocks and bonds are speculative.
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Using the term "speculative" or "speculation" to describe what most of us here call "investing" is more of a semantics argument so YMMV.
 
Both bond and stock are speculating in terms of risk of losing money. When your tolerance level is above bond volatility but not okay with stock volatility, bond is investing and stock is speculating. Once you can tolerate stock volatility, stock also is investing. Volatility is not risk!
 
engineernerd said:
... Bond investing is only investing if you buy an actual bond when it is issued by the company. If you buy or sell bonds on the secondary market, that is speculating.

Similarly, if you buy stock from a company when it issues shares, that is investing. When you buy existing shares on the stock market, that is speculating. ...
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TOTALLY WRONG.

If I buy a new issue bond or a bond on the secondary market I'm buying a set of contractual cash flows. It doesn't matter if the recipient of my purchase is the issuer or a bondholder.

Same thing, but less clear in the case of stock.
 
"Speculation" is an easy and curt insult, to be hurled against any investment-strategy that we deem to be flippant, unstable, ill-conceived, or otherwise discomfiting. To speculate implies likely to lose, but if winning, to do so illegitimately. But there is a germ of sense. Something is speculative if there is no historical, conceptual or mathematical reason for it to prosper. Betting on the VIX, for example, is a speculation. Holding stock is probably not. One of those internet-based digital token things - I mean those grimacing apes smoking cigars - that is speculation. And so on.

There is another complication. A legitimate long-term investment, if held too briefly, can become speculation. An S&P 500 index fund, the grand-daddy of the staid and serious, becomes speculative, if held say for 1 day.
 
Betting red or black at the tables is speculative. Investing in the stock market (preferably via index funds) is not speculation IMHO but YMMV.
 
Personally I think it is a spectrum and I find it interesting that many seem invested in their view of where each falls on the spectrum. Here's a couple relevant quotes.

"Everyone who makes a decision in the absence of complete information about the future consequences of all available opportunities is a speculator. So everyone is a speculator." Paul Heyne – The Economic Way of Thinking (as quoted in Practical Speculation).

"An investor risks 100% of their money in the hopes of receiving a 10% gain. A speculator risks just 10% in anticipation of earning 100%." Doug Casey, The Speculator as Hero – Daily Reckoning 11/2/2005
 
winyaz said:
Personally I think it is a spectrum and I find it interesting that many seem invested in their view of where each falls on the spectrum. Here's a couple relevant quotes.

"Everyone who makes a decision in the absence of complete information about the future consequences of all available opportunities is a speculator. So everyone is a speculator." Paul Heyne – The Economic Way of Thinking (as quoted in Practical Speculation).

"An investor risks 100% of their money in the hopes of receiving a 10% gain. A speculator risks just 10% in anticipation of earning 100%." Doug Casey, The Speculator as Hero – Daily Reckoning 11/2/2005
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Baloney again...
 
To ILike...

You missed a good number of people who get paid prior to bondholders...

Taxes... they are up there
Lawyers... yep, same...
DIP (IIRC) loans... loans given to companies that enter BK...

I am sure that there are others...

I remember on BK that I dealt with and bondholders were 11th...
 
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