An Investment operation is one which, upon thorough analysis, promises safety return of principal (amount invested), and an adequate return. Operations not meeting these requirements are speculative
Dubai (PRWEB) February 17, 2013
Hamed Mokhtar, Managing Director of Fortress Financial Services, recently gave a presentation on investing in US Equities at Dubai’s Capital Club in which he described the fundamental differences between stock “investors” and “speculators. While the two terms are often used interchangeably when describing individuals that purchase stocks, these two groups of people are motivated by drastically different investment strategies and goals, with the former focused on purchasing a stock at a discount to its intrinsic value, while the latter gamble on price fluctuations within the market. Benjamin Graham, the author of the Intelligent Investor, describes “An Investment operation is one which, upon thorough analysis promises safety return of principal (amount invested), and an adequate return. Operations not meeting these requirements are speculative.” Investors secure returns through improvements in long term performance of a company, while speculators take advantage of daily changes in the bid/ask price of an equity.
Speculators will typically invest in a “hot” stock or “hot” industries, attempting to ride the wave of price increases caused by increased volume and demand for the equity. Investors, on the other hand, will identify and analyze the financials of a company, determine what the true market value of the stock is worth, and only acquire it if the current price is trading well below this true value price. According to Benjamin Graham, "there are two possible ways to take advantage of the recurring wide fluctuations in stock prices, by way of timing or by way of pricing." The investor will take advantage of both, taking advantage of a bear market or pessimistic conditions contributing to the depressed value of a particular stock, and then sell that stock when its value climbs.
When acquiring stocks, speculators typically follow the herd mentality, accumulating positions after stocks have already begun to rise significantly, while investors take the opposite approach, only buying when an equity is undervalued and selling when it is overvalued. While speculators help create volatility, they also create tremendous opportunities for investors. Speculation is inherently more risky than investing, as investors are primarily concerned with protecting their principal, making them inherently more risk averse. As John Emerson states, when one purchases an "undervalued" stock, risk is directly correlated to the investor's ability to properly discern the underlying value of the stock. In other words, the risk is consummate to an error in calculation. On the other hand, risk for the speculator is directly correlated to the short-term volatility (price movement) of the stock. In other words, risk is consummate to improper timing.