Investment vs. Speculation

As I read the Berkshire Hathaway 2008 Annual Report, a thought kept popping into my mind that had also come up over and over again while reading Bogle’s Enough: True Measures of Money, Business, and Life.  “Be an investor, not a speculator.”

As a venture capital investor, I have a long term time horizon on my investments.  Since I’m investing very early in the life of a company, I’m usually an investor for five or more years.  Sometimes I’m an investor for over ten years.  I’m rarely an investor for less than a year, although it happens occasionally.

I don’t invest directly in the public markets and I haven’t for a long time.  Periodically I end up with a public company stock as the result of the sale of a company I’m an investor in to a public company, or via that mythical thing called an “IPO”.  In these cases, I have a very specific strategy for exiting my position in the public company over time. 

I do have public market exposure, primarily through a combination of index funds (and equivalents) and some hedge fund investments with friends.  However, I pay zero attention to this on a daily, weekly, or monthly basis.  When I look at the aggregate performance over any meaningful period of time, it is irrelevant when compared to my performance as a VC and angel investor.

When I reflect on this, I realize that I spend 99.9% of my time as an investor and 0.01% of my time as a speculator.  Whenever I realize that I’m in a speculative thought process (such as noticing the Dow on CNN on the ubiquitous airport TVs), I immediately try to stop.  My goal is to spend 100% of my time as an investor.

Not surprisingly, there’s a huge amount of noise going around the system about speculation that is masquerading as investment.  Worst, the two get conflated on a regular basis in the context of what the government should be doing (e.g. incenting “investment” when they are merely either "incenting speculation” or “encouraging speculation”).  Of course, the endless stream of talking heads in the media don’t help this distinction.

When I read Buffett or Bogle, the distinction between investment and speculation is painfully clear to me.  I believe that much of the pain the global financial markets are feeling right now is a direct result of speculation.  As a result, I’m trying to come up with some simple parables for “investment vs. speculation.”  For example, “if you don’t understand what you are investing in, it’s speculation.”  Or, “if your time horizon is less than two years, it’s speculation.”

One of values I’ve always adhered to is that “I’m an investor, not a speculator.”  Now that the government is deeply in the mix, I think we need to spend a lot more “system time” thinking about how to incent and motivate investment, and how to avoid speculation.

  • Speculation is when you buy a stock in the hope that some other sucker will come along and buy it off you at a higher price.

    • I think you can substitute pretty much any word for “stock” in that sentence.  How about house, car, horse, art?

    • I think you can substitute pretty much any word for “stock” in that sentence.  How about house, car, horse, art?

      • yep. Anything that askews appreciation of the item for relying on another sucker is speculation whether art, horses, cars, housing, people, wine etc.

        • Scott Shapiro

          how about all those baseball cards that used to be worth something until liquidity through ebay finally arrived!

          • @simon..I totally agree with u…about speculation

            And investment means long term always according to me..but i do not about others..

  • the govt is destroying the economy and is making sound investment impossible. ironically astute speculation becomes critical to wealth savings when govt intervenes to discentivize savings and labor, the foundation of a sound economy and thus rational investing.

    the only solution is to reform of govt. most people are still of the mindset that this is dangerous and not a good idea; i.e. "talking about politics is bad for business." lol. rest assured the folly of such thinking will become painfully obvious in time, if it is not already.

  • Harry DeMott

    Nice post. We've built up a system out there that basically encourages speculation in the extreme – from the talking heads at CNBC to the newspapers printing the "big stories" without any fundamental research behind them – to research analysts who are now effectively paid to generate commissions. In fact, we have a whole series of brokers who live and die by speculation – you would hate to be Warren Buffet's broker – only the occasional massive trade (well perhaps that wouldn't be too bad) Speculation isn't going anywhere – so the government should increase incentives to take longer term positions in markets. Unfortunately – we seem to be heading in the wrong direction on this one.

  • Investors focus on value, speculators focus on price.

  • Phil Sugar

    How about anytime you rely solely on an Excel model to make an investment decision, you are speculating not investing. I'm constantly amazed at how much faith some of my cohorts (from a program that combines business and engineering degrees) place in these sheets. These are the guys that came up with these CDO's.

    Even venture investors…don't get me wrong you have to have a model but its just that a model of a business. But when that is all that someone looks at it makes me shake my head. I'll put one up and somebody will have a detailed question about a year three number (I refuse to do five years period) and I'll say fine change one number and their head explodes.

    I think Excel in the wrong hands worse than Powerpoint because people actually make financial decisions (I'm not bashing MS here it could be 123 and Harvard Graphics)

    My favorite quote is from Paul Johnson at Forbes: "The lesson we must learn from the 2008–09 crisis is the vital importance in business, not least in banking, of simplicity. Next to honesty it is the most important virtue, and the two are usually connected. Unfortunately, many people–whose brains and ingenuity are not matched by judgment–have a passion for complexity, and electronic technology makes it easy for them to indulge that passion. The clouds of almost impenetrable complexity they create conceal bad judgment, incompetence, unconscionable risk-taking and sheer dishonesty"

    • Great points.  While I have Excel on my computer, I only use it to look at financial statements, budgets, and cap tables.  I never use it when making investment decisions, nor do I really care about financial models in early stage companies.

    • Great points.  While I have Excel on my computer, I only use it to look at financial statements, budgets, and cap tables.  I never use it when making investment decisions, nor do I really care about financial models in early stage companies.

  • Not really appropriate in this context, but an old favourite is: 'an investment is a speculation gone wrong'.

  • Hi Brad. Is it fair to say that speculation=momentum and investing=value ?

  • I like James Grant's definition: "An investment is a speculation to the extent that its success is contingent on a forecast of uncertain events"

  • I picked this one up in school, of all places, but it's quite exactly right: "Buy intrinsic value. Sell hopes and dreams."

  • Brad, I've been thinking about the same subject quite a bit recently and agree with your post and many of the comments here. On anything like this its always helpful to me to go back to early thinkers. Graham, as ever, is insightful here.

    I'll paraphrase – An investment is something that, based on thorough analysis promises safety of principal and an adequate return, anything else is speculative.

    While dated by the notion of safety of principal, if you insert "acceptable risk", you have a great working definition.

  • Brad, thoughtful as always. As someone who likes to think I do more investing than speculation, it's extremely difficult to stay mindful of the distinction at a time like this when we're being marked to market by the tick and, unfortunately, doing better than the competition is no guarantee of avoiding redemptions as investors clamor to make themselves whole by selling their winners to offset far too many losers.

  • That’s an interesting characterization that certainly helps underscore the distinction between the two.

  • Eh – I don’t like that definition.  If I “invest” in a startup company, the success of this company is by definition “contingent on uncertain events” that happen in the future.  Theoretically, this can be recast as my “forecast of uncertain events” and my confidence in the leadership team and the founders to create a positive outcome in this scenario.  Egads – in two sentences I’m already tangling myself up in my own words. 

  • Brad,

    I tend to get into this debate a lot because I fall on the other side of your argument. The only difference I see between investment and speculation is semantics. I can speculate on the long term risk and reward of an angel investment just as I can invest in a public stock, ETF, or currency for an hour or a week. Ultimately, you are making an assessment of risk vs reward for the given time horizon. Regardless of what you call it, if you are not weighing the potential risk and reward, regardless of what you call it, you are destined to fail asymptotically speaking.

    I will close with my favorite quote on the this topic:

    "If you bet on a horse, that’s gambling. If you bet you can make three spades, that’s entertainment. If you bet cotton will go up three points, that’s business. See the difference?"
    -Blackie Sherrod

  • In my opinion, with private, venture-backed companies you're investing in future value creation. This is where relatively "certain" things like the team and product come in. There's also the speculative aspect of the "uncertain events," like market condition.

    What Warren Buffet does with public companies is invest in grossly undervalued companies (determine your estimate of value, then half that, and if you can buy it for that price, do it). His "certain" thing is his assessment of intrinsic value.

    In both cases you want to make sure there's a large enough cushion in there to cover the uncertain events.

    I don't think it's either/or; there will be a bit of speculation in both VC and public investing. A true "investment" with 0% speculation would be arbitrage. But your goal should be to invest in primarily "investments" with minimal "speculation." When valuations rise (like Facebook's $15B) and your cushion between intrinsic value and the amount you're paying decreases, the amount of speculative return you're hoping for is increasing.

    (I think I'm stretching this, trying to apply a public market definition of investment/speculation to private markets.)

    Brad: If you haven't read it already, I suggest you pick up James Grant's "Mr Market Miscalculates." It's a collection of articles over the past 10 years from his Interest Rate Observer. That's where I got the original definition above.

    • Thx – I just grabbed Mr. Market Miscalculates for my Kindle.


    I have been thinking about this for a long time as well. Wrote about it a while back: [

  • the mysterious h

    These are all mindless semantics. If the only difference is the term of the commitment then investment and speculation are the same thing from a moral point of view.

  • Preston

    I define an investment as capital put at risk where I expect to be able to add value and therefore influence my ultimate return. Speculation is where I put capital at risk where I have no influence over the ultimate return but believe that the operators are better than average or economic trends will go in my favor. Neither is inherently good or bad, short term or long term.

  • Three cheers for your use of "incent" vs. "incentivize."

    I wonder whether the difference between speculation and investing is a bit like the difference between pornography and art according to Supreme Court Justice Hugo Black: I don't know how to define it, but I can tell the difference when I see it.

  • Investors (and entrepreneurs) build things. Speculators are hoping to hit it rich quick. I think that more attention has to be put on those who start and build companies in our society…not just those who ride in, manage the IPO (or other such event that throws off money), and take a lot of cash home.

    Why our society, that was built by entrepreneurs, has let the glory go to the spoilers is beyond my understanding. The real businessmen and businesswomen who are growing companies, and thus creating jobs and wealth, should be the ones we praise daily.

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  • George Stubos

    One of my first mentors said “you make money when you buy”. Hope is the enemy, whatever purchase is made in expectation that it will rise in value is the essence of speculation. The challenge is to find what to buy that is worth more than you are paying for it. This is where all the work and patience comes in. Some of the best values are illiquid, private companies that few investors on an individual basis can participate. The housing bubble is really hurting the current generation of home owners out of the most likely long term equity plays widely available. It’s just a damned shame.

  • Tim

    Brad, fantastic topic. There is so much brainwashing from the established financial community hyping stock speculation that most people simply don't understand that buying and selling (speculating on) stock is a losers game. This is the primary reason I got out of the finance world and got into high tech entrepreneurial companies. While I believe that you are a true investor, I think many VC's are speculators.

  • Jeff

    I think they cannot be separated. Investing will always contain a certain amount of speculation. VC's invest in startups which involve HUGE amounts of risk and speculation compared to say a dividend yielding utility company security which as we know now is not "risk free" either. Additionally VC investments are not liquid like stock so you have to factor in that risk as well. Thousands of variables have to come together at the exact right time for a VC investment to work and provide a return to its investors.

    That's why we are seeing so many investors selling their non-liquid VC/PE ownership stakes on the secondary markets as it is the only way to get your money out.

    At the end of the day there are pros and cons to private vs public investments. In times like these though when things get rough that 5-7 year VC investment horizon may just be a longer nasty ride to the bottom then those who were able to bailout.

    Overall, In the current environment I think there is ONLY speculation.

    • Jeff – I guess I completely disagree with your conclusion that “in the current environment I think there is ONLY speculation.”  I think that – in this environment (and in any environment), investment is what’s needed.  Now, I realize that is based on the premise that there is a difference between investment and speculation, which based on your first sentence indicates that you don’t think there’s a difference.

  • Brad, I am sure you know this, citing Buffet as you do, but for the benefit of your readers. Buffet practices a type of investing called "Value Investing" which he learnt at the feet of the master – his mentor Benjamin Graham who wrote "The Intelligent Investor" and was the father of the school of Value Investing. Value investing basically talks about buying a dollar for fifty cents and selling it for $1.50. "All" that is really required to do this is by understanding the actual book value of a company by analysis of its assets, cash flows etc..and then waiting until an opportunity occurs to buying the company for a significant discount of its true value. The time to do this is when the market is irrationally pessimistic. The time to sell is when the market is irrationally exuberant. This is why Buffet always says he is fearful when others are greedy and greedy when others are fearful. Anyway, the first chapter (forgive me – it might be the second) of Graham`s book is a clarication of terms and particularly about the distinction between Investing and Speculation. That book was written in the 1930s!!!! It is quite illuminating/depressing to see that with all the "Talking Heads" in the financial media nothing has much changed in terms of getting people to understand this basic semantic distinction. Well done for turning the light onto this issue and making the point that perhaps the ramifications of the misunderstanding have resulted in bringing us to where we are today.

    • Thanks for calling out Benjamin Graham and Buffett's great fear / greed quote. I have a dice on my desk that says "Buy" / "Sell" / "Hold" on it. It's currently turned up to "Buy" given everyone's fear!

  • Phil Sugar

    I think the difference between speculation and investment is what motivates you when you buy.

    If you're buying the management, the idea, the market position you are investing

    If you're just buying the security you are speculating.

    As for the government trying to give an incentive for one versus the other I think the best you can hope for is that they try to set a level playing field.

  • Hello Brad
    I enjoyed this Post very much, their are many good comments made hear by the readers. Again, nice job

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  • Thank you very much for this post. It is wonderful to see such a reasonable investment philosophy being promoted by an actual investor. If the majority of "investors" in this country were actually investing rather than speculating, our economy would still be able to boast the innovation and resilience of a bygone era.

    The one silver lining I see to our current economic situation is that we are starting to wake up to the idea that new business is the foundation of a strong economy. The dominant investment philosophy of immediate profit and short term exits has encouraged limited life span business models by refusing to support long term growth. Thank you for standing apart.

    As a young entrepreneur with a long term business model, it is very encouraging to see that at least one investor is still looking for businesses they can be proud to be a part of for many years.

  • Strom

    The investor/speculator divide is a distinction without a difference for most. As an investor in publicly traded securities, your access to relevant information is limited, imperfect and accessible to everyone at the same time. Why do you think it is so difficult for fund managers to consistently beat the market? Just because a person has long term intentions doesn't mean that their investment decisions are somehow more intelligent. Just because a person is focused on fundamentals rather than price action, doesn't mean that what they think is important actually will be. Without some kind of edge or advantage, you are a speculator no matter how many hours you spend reading Value Line.

  • Some times Investor, can be said speculator. I think all we life or business he a risk, so the investor or specultor is the same, but may how we look that. Thanks . We do our live as a investor

  • You are an investor? What is the difference? In both cases you risk money in favor of return. In the long run, your goal is to see a rise in price nothing else: if your profit is negative then you are simply a "sucker" even if value of company is high! Value of a company is a social construction — it is a virtual representation of price that is usually wrong.

  • i added everyone whos posted their ID# here.

  • Eric The Ron

    Investments have returns–they make money. Speculation is gambling on price appreciation–e.g. trading in currency or commodity futures. These things don't have any returns–and if they do that isn't why you're trading them. Stocks and bonds may be speculative if the only reason for buying them is to trade on price changes, especially price changes not related to improvements in the prospects or value of the business.

    But any speculation can also be a hedge, which is a valuable exercise. There's the old saw "buy 10% in Gold to hedge your bond portfolio against inflation". Whether this really works or not, if that's why you're buying the gold then this is a hedge, not merely the speculation a Gold purchase would otherwise be.

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