Investment Vs Speculation: How to Invest
The situation today in India is that only 2% Indians put money in Stocks, and even fewer are Investors. Most people in the Indian stock market today are Traders or Speculators. This at a time when stocks are one of the best investment avenues available. In this article I would like to explain what the difference is between Investment and Speculation, with the aim of getting more people to start investing in stocks. There is a lack of investment knowledge in India, which I would like to change.
What is an Investment?
"An investment operation is one which, upon thorough analysis promises safety of principle and an adequate return. Operations not meeting these requirements are speculative." - Benjamin Graham
When you make an investment, you must make sure that there is a promise of your principle amount invested being safe. You can get this promise of safety with stocks only when you buy stocks with a long-term perspective and with thorough analysis of the company. Yes, analysing a company is not so easy for 'know-nothing' investors. Even I don't know how to analyse a company, yet. But having a long-term perspective is not difficult. And this is what I would like to stress - please invest for the long-term (>5 years) and keep investing periodically (SIP). Invest in mutual funds as they would do the company analyses for you. Only then will you stop worrying about stock market crashes and stock charts, and start becoming an Investor. This is specially relevant for IITians as they shouldn't spend their time hooked on to the stock market, they should spend their time changing India.
Sadly, most people playing in the stock market today are speculators with a time frame of a trade being a couple of days, even less. These speculators/traders are looking to get rich quick, make a quick buck. Why else would people put money in a stock with the aim of taking it out in a few hours. And in here lies the risk that most people refer to when talking about the stock market. It is for you to decide, whether you want to become an investor or a speculator.
The Temperament of an Investor.
It's important for an investor to have the stomach for stock market swings. An investor is someone who did not take out her money in the recent market crash in June. She is someone who waits for such crashes, and then invests big. To see your money go down by 30% or more and still manage to get a good night's sleep takes special courage.
An investor is one who expects only an adequate rate of return on his investments, and his financial goals are based on this expectation. When he buys a stock or a mutual fund, he intends to hold it for at least 3-5 years. I am slowly learning to not check the stock market everyday, and not constantly monitor my portfolio.
Does "Investing" work?
So, is 'value investing' for the long-term effective? The second richest person in the world today is Warren Buffett. When asked what his ideal time-frame for an investment is, he said "a lifetime". Warren Buffett has not made any software, he has not inherited his money, all he did since he was 25 was to invest. He has held on to some companies since he bought them, never selling, and intends to keep holding them. He, my friends, is the best investor in the world, averaging a return of 21.9% per annum over the past 50 years.
P.S.
To get started in investing, I suggest you read some books first. Some good suggestions are:
- Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money--That the Poor and Middle Class Do Not! - Robert T. Kiyosaki
- The Warren Buffett Way - Robert G. Hagstrom
- The Intelligent Investor - Benjamin Graham
When you make an investment in land, you stick with it for at least 5 years, even more. For me an investment in the stock market is no different. In the real estate market, is there a tracker that tells you the price of your property each day? Do you try to find out the value of your property every day? No. Stop looking at the stock market graph every minute. Look at it only to find the right time to invest - after a crash.
3 comments:
"Why would this person take care of your needs at the cost of his? He would first take care of himself, and then if something is left over would he look towards you"......... its win-win dude....employer takes care of employee for the job done
"She is someone who waits for such crashes, and then invests big."
Disagree. You've just described market timing.
The true difference between Investing and Speculation is Investor buys for the purpose of owning a stock or anything, Speculator buys with no intention of owning it. Although both of them do solely for money anyways. It is far better for average person to buy Index funds than mutual funds, as MF dont outperform markets in long term and charges enormous fees!!!
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