Ben Graham often explained the difference between investors and speculators.
An investor looks for investments that provide safety and a solid return. A speculator tries to profit off market moves.
Edwin Lefevre had a similar view. Though, he added a third option for good reason. He separated gamblers from speculators because he saw a pattern of gambling emerge during bull markets.
Here’s how he defined each following the 1929 crash:
The careful investor should seek expert advice, for he must subordinate income to safety… No living man can, vision what effect unpredictable changes in politics, in social readjustments or in technological processes may have on any business or on any government. It follows that even the most careful of investors cannot altogether eliminate the element of chance or the peril of change from his operations. At best, he reduces them to a reasonable minimum.
It behooves him and no one else to do his own studying and to pick the right adviser with the same care he uses to pick his lawyer or his physician. Going to the wrong investment banker is one of the risks he runs. Remarks about careless or dishonest or ignorant bankers and about dangerous demagogues may be justified, but the same holds true of shysters and quacks.
The investor today is better protected than ever before in our history, and he should have learned something from the depression. But nobody can guarantee him against loss, nor is he freed from the responsibility of studying his own problem instead of leaving it to a dealer’s say-so. It has never been easy to be a wise investor, but it has always been easy to be careful.
A speculator bets on probabilities. His decision to buy or sell securities is apt to be based on his knowledge of his own business or on his judgment of such conditions, political, industrial, financial or commercial, as normally affect market values. It makes him willing to take greater chances than the true investor, because he is looking not for an assured income but for a profit. He is backing with dollars the accuracy of his observation and the soundness of his deductions. He does not overlook possible accidents. He considers both trade statistics and human nature.
In the last bull market, more than one speculator who knew that prices were much too high, nevertheless carried stocks past the initial danger points — not because of earnings or past records but because of his reading of the bull-fever thermometer. Other equally clear-sighted men sold stocks short in 1928 or 1929 because prices were dangerously inflated. They also were right, but they went broke because they were right as to facts and wrong as to time; and being right too soon is as unprofitable as being right too late or being wrong at any time.
There remains the third class: The gamblers — the margin traders during bull markets, chiefly the general public. They are the most numerous and the most reckless. No matter what laws are passed, or what safeguards are provided, or how the game is played, they are bound to lose, because their motive is wrong. They buy stocks for one reason only — to sell at a profit. They are not true speculators — or professionals, like the floor traders — because their hope is not the result of study or experience but of wishful thinking, of listening to customers’ men or to lucky friends. Their reasons for buying are apt to be excuses for gambling. They think that taking big risks entitles them to big profits.
What contributed to the huge losses of thousands of Americans during the crash? For one thing, they were playing another man’s game. They were bent on getting something for nothing. Then again, they overtraded. The bait has always been easy money…
Knowing which of the three above you fit into is a good start. The difficulty is in staying the course.
Graham repeated the differences between investors and speculators often because he knew that people confuse the two during bull markets. They become risk-seeking rather than risk-averse. Any price will do.
Investors act more like speculators — or worse, investors and speculators act like gamblers. Disaster follows those who claim to be something they’re not.
The risk that investors act like speculators or both act like gamblers is ever-present in bull markets. Of course, it’s human nature to chase easy money. And it’s easy to slip from investor to speculator or gambler and believe nothing has changed simply because you’re making money. In the end, it rarely pays off. You trade long-term plans for easy short-term gains, which turn into losses in the ensuing collapse.
The lesson is to stay in your lane. Stay disciplined. Investors should stick to investing, speculators to intelligent speculation, and gamblers should stick to the casino.
The Newest Era in Wall Street, Saturday Evening Post
- You Can Make Any Piece of Data Look Bad if You Try – TKer
- 4 Things Poker Taught Me About Investing – CityWire
- Hypertakeflation and the Sportification of the Fed – Kyla’s Newsletter
- A Conversation with Josh Wolfe: Macro, Mentors, Motivation – The Manual
- Edward Chancellor: Interest, Capitalism, and the Curse of Easy Money (podcast) – M. Faber
- Family Fortunes – Net Interest
- We Don’t Have a Hundred Biases, We Have the Wrong Model – Works in Progress
- History Rhymes: Nobody Wants to Work Anymore – Klement on Investing
- An Oral History of Superbad – Vanity Fair