Investment Vs Speculation

(Intelligent Investor Chapter Breakdown)

Hi All! I only recently got into investing about 2 years ago, and along my journey I got lots of helpful advice, learned concepts and read up more about stocks and companies. One of my go to sources is Intelligent Investor by Benjamin Graham, an American economist dubbed the “father of value investing”, however the book can be quite the heavy read and I found myself taking way longer to read and understand it than most books. I know a few acquaintances and family of mine who also struggle with harder concepts when it comes to investing, because lets face it, there is quite the learning curve when it comes to subjects like these and veteran communities can be a little less than patient with newbies. So I am writing this chapter breakdown in words and ideas I could understand and I hope any readers can too, if you have any opinions or comments you would like to share, you can reply down below or dm me directly.

This chapter has Benjamin splitting people in the market into two categories and lists traits he thinks defines both groups. He has a clear bias towards one group, however I find his comparison quite true. I think in this day and age with the retail trading market booming, a lot of people should pay attention to these two definitions and decide which one they want to be so they can better follow their roles.

Chapter 1: Investments vs Speculation
Investors vs Speculators. Investors use analysis and collect information to make an educated decision on buying a financial instrument that will return its principal value and a decent profit. Speculators make financial decisions based on emotional conviction. For the longest time in history investing was associated with speculative trading of common stock, due to the fact that the majority of the public were unfamiliar with common stock and companies.
Common stocks were deemed risky due to historical crashes, even though analysis at the time showed that stocks were deeply undervalued. Institutional investors must adequately educate the public on the difference between investing and speculation or they risk being the cause of market crashes
Even the best investment strategies will have some degree of speculative factor in it, investors cannot hope to completely erase that but do their best to minimise the speculative nature of their strategies.
The risky nature of speculation is sometimes necessary. Speculators who gambled on the long shot sometimes raised the capital for companies to be able to achieve said long shot goals. Even in basic trading there is speculative risk. Buyer is buying on the risk that the stock won't go down, and the seller is selling on the risk that the stock won't go up.
Avoid misinterpreting your speculation as investing, speculating in a professional desire to make money, using more money than you can afford to lose in speculating is bad.
Using margin or buying stocks that are popular is a form of speculation as well, and should be avoided or kept to a playful, casual, minimum
Ratios that the Defensive investor must keep is that his bond allocation must never be smaller than 25% or more than 75%. When the stock market is high,(bull market), consider lowering your stock allocation and increasing bond allocation, when stock market is low (bear) and there are a lot of attractive stock prices, then consider reversing the ratio.
Bond heavy during bull, stock heavy during bear.
Stock dividend returns should be ideally similar returns to that of bond yields at the time.
Stocks as opposed to Bonds, have the ability to protect your money against large scale inflation.
A high rate of advance doesn't necessarily mean a continued bullish return but could very well mean a powerful market correction in the other direction
However long term bonds can fluctuate in the event of interest rate changes. At times the changes in the bond market did not match up with the changes in the stock market, indicating a deeper underlying issue.
1960 to 1970. Disproved the notion that during inflation periods, stocks outperform bonds.
Stocks give returns in the form of dividends and income not distributed to shareholders being reinvested, leading to stock appreciation.
These stock returns must be contrasted with bond returns, and if bond returns are similar or higher, then stocks are not worth their risk
Stocks because of their underlying insecure nature cannot guarantee protection from hyper inflation,
The bull market between 1949 and 1969 showed a market valuation that was far more than the growth in actual company earnings and dividends, which shows investor sentiments can move markets more than actual underlying values
The defensive investor can never predict events that cause market booms or crashes
Defensive investors, strategy means more often than not, they will not beat the average of market returns
Investors cannot hope to make guaranteed predictions so they should avoid hot stocks and instead go for financial analysis
An investor may choose 1 of 3 approaches, buying an ETF, using the services of an investment banker, dollar-cost-averaging into a stock
Aggressive investors must hope to attain these better than average returns by 3 ways; shorting stocks when the market turns. Training stocks for profit on the belief that earnings reports or events will cause volatility, long term trading by buying a company expected to have promising financial results in the long run
Short term analysis can prove fallible because the results of this year being analysed is also being analysed by other investors so you will compete with them with your investment, to break above, one needs to invest with a long term analysis that most investors do not employ
The investor must follow policies that are reasonably sound and avoid popular rhetoric on wall street
It is common for stocks to be undervalued due to mass prejudice and severe lack of fundamental understanding.
But due to this fact, investing in and undervalued stock can end up a long and protracted investment venture, waiting for the market to finally realise the stock’s potential
Now with more competition and eyes on the market there is far less obvious opportunities for value investing, but not zero.

Today the market is really competitive, and to find value deals will be like finding needles in a haystack, if you wish to do so, one must put in the work and research, if one does not have the time, DCA into an S&P500 ETF will do, an speculators who want to beat market returns must be okay with only gambling within their means and adopting only a healthy moderation of risk.

I might write another post for cautious investors who want to invest but are getting cold feet each time, and incorporate Benjamin's bond-to-stock ratio that actually might help you feel more comfortable with investing your money. Let me know in the comments.